Cerner Corporation
Q2 2020 Earnings Call Transcript

Published: 29 Jul 2020

[Operator:]

Welcome to Cerner Corporation’s Second Quarter 2020 Conference Call. Today’s date is July 29, 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 solution, 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; the expected benefits of our acquisitions, divestitures or other collaborations; and the expected impact of the COVID-19 pandemic. Actual results may differ materially from those indicated by the forward-looking statements. Please see Cerner’s earnings release, which was furnished to the SEC today and posted to the investor section of cerner.com, and other filings with the SEC for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. A reconciliation of non-GAAP to GAAP financial measures discussed in this earnings release – call can also be found in the Company’s earnings release. Cerner assumes no obligation to update any forward-looking statements or information except as required by law.

[Brent Shafer:]

Thanks very much, and good afternoon, everyone. Thank you for joining the call. Like most of you, we're doing this call from remote locations today. So please bear with us through any technical challenges. Hopefully, we won't have any. I'll spend a few minutes providing my thoughts on the business and current environment, before handing the call over to CFO, Marc Naughton; our Chief Client and Services Officer, John Peterzalek; and our President, Don Trigg, for more on the numbers in marketplace commentary. While COVID has hurt our clients financially by significantly reducing elective procedures and other margin contributors, Cerner’s intense focus on supporting them through the pandemic has enabled us to strengthen and extend client relationships and actually help plan for their post-COVID recovery. As an example, we recently announced the expansion of our Banner Health relationship to include Cerner’s Revenue Cycle Management solution. With 28 hospitals in six states, Banner is one of the country’s largest health systems, and we’re very proud to grow our relationship with them. In addition to clarity, alignment and focus, COVID has also produced a real burst of innovation as Cerner teams delivered critical, quick-turn projects. Our Lights On Network analytics solution released more than 15 new reports and dashboards in 45 days; we stood up a new version of our cloud-based CareAware solution to support the Center for Disease Control on a national scale in just 72 hours; and we developed and deployed new syndromic and surveillance reporting to support clients in a matter of hours. The flexibility and commitment we’ve shown our clients has been inspiring, and Cerner solutions are helping caregivers respond to the crisis and plan for recovery from its impacts. In many cases, COVID is helping our clients to actually re-imagine new, post-COVID business models that reflect the increasing importance of comprehensive data and network strategies. You’ll hear more from Don about the forces of change impacting health care. Cerner’s flexibility is largely the result of our ability to execute and deliver on our transformation efforts. We have made meaningful progress on cost-optimization and business simplification initiatives that will drive efficiencies and ultimately make it easier to do business with Cerner. Tomorrow marks an important milestone – the one-year anniversary of our agreement with Amazon/AWS. The pandemic has underscored the value and relevancy of this relationship. Cerner recently deployed the innovative, AWS cloud-based Cerner Command Center, that’s a tool that provides realtime data and predictive analytics that enable health systems to monitor and more effectively manage critical resources such as bed utilization, ICU occupancy, and staffing levels. Launched in January, Cerner Command Center is already helping health systems like Northern Light Health, Cook County Health and Hospital System and Christiana Care Health Services, and I’m pleased with the considerable interest that is coming from other clients in this tool.

[Marc Naughton:]

Thanks, Brent, and good afternoon everyone. I am going to cover our Q2 results and share our updated views on the remainder of the year. This quarter we delivered strong bookings, but revenue came in slightly below our expectations, primarily driven by some low margin items being impacted by the pandemic more than we expected. This was offset by expense control and we delivered earnings at the high-end of our guidance range. We have adjusted our revenue guidance to reflect the lower Q2, a more current view of the COVID impact going forward, and the anticipated sale of our remaining RevWorks services business. We also tightened our full-year earnings outlook while maintaining the same midpoint. Overall, we are pleased with our results and outlook given our prior guidance was provided in the early stages of an unprecedented environment. Now, I’ll go through our Q2 results, starting with bookings, which were $1.34 billion, down 6% from second quarter 2019, but above the high end of our guidance range primarily due to strong levels of managed services bookings in the quarter. We ended the quarter with a revenue backlog of $13.66 billion, which is down 9% from a year ago primarily due to the termination of a RevWorks outsourcing agreement that we discussed last year, as well as the lower level of bookings in the first half of this year. Our backlog revenue, combined with other contracted revenue that is excluded from the ASC 606 backlog definition, still provides visibility to more than 85% of expected revenue over the next 12 months. Revenue in the quarter was $1.33 billion, down 7% from Q2 of 2019, driven primarily by the Q4 of 2019 exit of the RevWorks outsourcing contract and the impact of the pandemic. Revenue was $10 million below our guidance range, with the impact of COVID contributing to lower levels of technology resale and reimbursed travel. We also had less third-party services, licensed software, and transaction processing revenue during the quarter. As I mentioned, these are primarily lower margin revenue streams, so the impact on earnings was limited and we were able to offset it with expense control. I’ll now go through the business model detail and year-over-year growth compared to Q2 of 2019. Licensed Software revenue in Q2 was $152 million, down 23% from a record high $197 million in Q2 of 2019. While we expected licensed software would be down this quarter, it did come in a bit lower than expected as strong growth in our SaaS offerings was offset by a decline in traditional license software.

[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. We delivered solid bookings given the circumstances, exceeding the high-end of our guidance range. While this did not translate to revenue upside given the mix of bookings, it does feed our backlog and create visibility going forward. This mix is evident in the higher level of long-term bookings at 32% of total compared to 22% a year ago, reflecting strength in managed services. While the pandemic did impact the volume of new footprints, we were very competitive where decisions were made, winning several new CommunityWorks footprints. We continue to see activity with larger systems, including a noteworthy win against our primary competitor at Wisconsin-based Marshfield Clinic. We had solid bookings across our strategic growth businesses, reflecting the relevance of these solutions as hospitals cope with the pandemic and continue with their long-term strategies. Additionally, we continue advancing our revenue cycle footprints with another strong bookings quarter. This was highlighted earlier this month as we announced a continued expansion of our strategic relationship with Banner Health adding our revenue cycle solutions. Another positive related to revenue cycle is the relationship we recently announced with R1 as part of the expected divestiture of our RevWorks services business. This puts our clients in good hands from a revenue cycle services standpoint while allowing Cerner to focus on the continued advancement of our solutions. Additionally, we are working with R1 to bring an integrated offering combining R1’s tools and services capabilities with our solutions, and we believe will further strengthen our revenue cycle value proposition. Moving to a federal. Like a vast majority of our clients and healthcare in general, DOD and VA have been on the frontlines of combatting COVID-19. While this has required us to adapt to virtual interactions, less intrusive user engagements and limited on-site activities, we continue to make significant progress on both programs. On April 18, the Federal Electronic Health Record Modernization program office, DOD, and VA launched a joint health information exchange, enabling a seamless, secure exchange of health information among each department and their expanded network of community partners. Since the launch, more than 2,000 hospitals, 8,000 pharmacies, 33,000 clinics, 1,000 labs, 800 federally qualified health centers and 300 nursing homes across the country have access to VA and DOD patient information. Later this year, DOD and VA expect to connect to the CommonWell Health Alliance, which will add an additional 15,000 providers to their network. We continue work with the VA and DoD to update the go-live schedules for the impact of the pandemic. While revised go-live dates have not been announced for the VA, we continue to move forward with the VA centralized scheduling solution go-live and our first VA program go-live. On the DOD side, as part of the Leidos Partnership for Defense Health, we are making significant progress working virtually to advance the program and have activations scheduled in coming months, including a U.S. Coast Guard pilot site. Now I’ll discuss the broader marketplace and how we are executing in this environment. As discussed last quarter, while the pandemic 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 continue, and in many cases, accelerate their strategic plans and Cerner is an essential part of their strategy plans.. We continue working very closely with our clients as they manage the challenges of response and recovery. To date the impact of the pandemic is playing out close to how we anticipated it would when we talked last quarter. Q2 had very little activity early in the quarter, then activity increased towards the end of the quarter. We are closely monitoring the financial and operational impact of the pandemic, including the recent surge in cases; and at this point we believe our outlook is achievable. Overall, both Cerner and our clients have adapted to different ways of doing business. We have modified our sales and service delivery approach, and our clients have been receptive. We have shifted to virtual interactions for most contracting activity, demos, open houses, and road-mapping sessions. On the project side, our professional services organization performed well in mitigating the impact of the pandemic. As mentioned on our last call, we shifted to doing as much work as possible remotely in the early stages of the pandemic. Our clients were supportive and quickly adapted to this approach, as traditionally onsite events, inclusive of go-lives were done completely virtual. As re-opening occurred, we have shifted, where possible and feasible, to a hybrid model combining limited onsite presence with the virtual capability. This approach is proving to be effective, and given the ongoing travel restrictions, we plan to continue this approach for the foreseeable future. Over time, I expect our onsite presence will increase from current levels, however, I believe the hybrid model will continue, resulting in overall less travel than before the pandemic. This will be more efficient and cost effective for Cerner and our clients. In summary, I am pleased with our execution in the second quarter, and I believe we are well positioned to deliver against our forecast in the second half of the year. With that, I’ll turn the call over to Don.

[Don Trigg:]

Thanks John. I had chance to spend the afternoon yesterday with a Chief Executive and leadership team of one of our leading health system clients. We dove into COVID response. We dialogued on revenue recovery. We talked about what both tell us about the chance to rethink the future of care delivery in their region and nationwide. The current pandemic continues to showcase the very best in our frontline caregivers. At the same time, it also illuminates the lack of an integrated system of health and care focused on the person. We still lack a unified Health Network Architecture. These systems and data gaps decrease access to care, increase complexity of care and complicate the delivery of what was described by the team yesterday as the essential need for one patient experience. As entrepreneurs, we are excited about the opportunity to solve these challenges. As our late founder Neal Patterson framed, healthcare is a system in name only and Cerner’s technology and data solutions hold the promise to change that. Our product and larger platform vision operate at three levels

[Operator:]

Thank you. Our first question comes from Sean Dodge with RBC Capital Markets. Your line is now open.

[Unidentified Analyst:]

Hey, good afternoon. This is Tom Kelliher on for Sean. Thanks for taking the questions. Going on the VA implementation, can you give a little more color on what types of projects are still active? And how long this can sort of background work continue before the on-site work becomes essential? I'm still assuming that some of this work can be done simultaneously rather than sequential as sort of a catch-up when these travel restrictions are completely lifted?

[John Peterzalek:]

Yes. This is John. I'll address a couple of those issues. So the background work can continue and is continuing, and we're preparing for the first go-live and subsequent go-lives as well. And we're already making plans to be able to go on site. So we're working on everything from testing protocols and other things. So that we are able to go-live. The exact dates of those, while not public, have been proposed, and we should be hearing something sometime in the near future more publicly about when those go-lives occur. But I'm actually very pleased with how we're making progress in this sort of hybrid environment of virtual and limited on site. And we continue to progress as we would in any other project, given the types of restrictions they have, particularly around travel. But I see that moving forward and we've already made plans to when we can go on site, how we'll activate and continue on.

[Unidentified Analyst:]

Nice one, thank you. And then just one real quick, and you don’t spend a lot on R&D and kind of the past it sounds like there is some opportunities to rationalize or re-focus some of those spend. How much of this has been done kind of what do you think the right amount is going forward from here?

[Marc Naughton:]

Yes this is Marc. We're an innovation company. So our widget, our strength is to invest in R&D. So most of work hasn’t been necessarily focused on reducing R&D. A lot of this has been focused on how can we maintain current levels in R&D without increasing it, but deliver significantly more innovation from that spend. Certainly the hiring of Jerome as our CTO is a great step in that direction. We continue to work on the processes and how we develop and certainly with the monetization efforts we’re doing relative to our platform. Current less than levels that we have, I think, is something we want to maintain. But I think for us the goal to figure out how we can get an even bigger bank for the buck and how we can get to market more quickly with our solution. So we over time as that doesn’t grow relative to rest of the revenue we’ll get some margin expansion opportunities. But I don't see us drastically cutting our innovation and the money we spend on R&D.

[Unidentified Analyst:]

Okay, that’s helpful. Thank you very much.

[Operator:]

Thank you. Our next question comes from Elizabeth Anderson with Evercore. Your line is now open.

[Elizabeth Anderson:]

Hi, good afternoon guys. Thanks for the question. You talked a bunch about the demand environment as you seeing it. But as you are looking forward, are you seeing any differentiation between places where COVID has sort of had a recent uptick versus not, or are there any differences in terms of – do you think about in terms of like size of customer who are sort of able to look more longer term at this point versus not? Or would say that your demand environment is fairly even all around?

[John Peterzalek:]

This is John. If I understand your question correctly, I think it wouldn't come as a big surprise that where there's COVID surges and where there's not there’s different priorities in terms of what our clients are working on in the near term. And those surge activities that have been occurring in different parts of the county and different parts of the world. Now as a general statement, and I mentioned it in my set of the comments is that this is not stopping healthcare distracts. The initiatives that were going on, the strategies that are the broad healthcare environment we’re embarking on they are still incredibly relevant if not more relevant in the new world. So strategies that have been placed out in most clients in regardless of where they are, frankly in the U.S. or around the world, they wouldn’t continue the strategies and in many cases advance them more quickly. They are big part of the recovery. So yes they will be individual cross shifts as surges occur in different spots, but broadly people remain focused and they want to advance their strategies.

[Brent Shafer:]

Yes, I’ll just say one more think, which is rather than geography if we were to think about it relative to business model and mix, obviously, organizations that have provider sponsor plans and are taking first dollar risk clearly have had differentiated performance relative to their peers. And I think that’s one of the reasons why we’re excited about the capabilities that we built off healthy intent, the partnership with Lumeris we think strategies around risk will have a tailwind Around them as we kind of get to that after COVID window and people start thinking about business model strategy go forward.

[Marc Naughton:]

Hey John this is Marc. What about the Cures Act? Have you seen benefit from that client base?

[Don Trigg:]

Yes, absolutely. I mean, I think there's a set of things that are having uniform impact on kind of the financial health of our clients. And they start with the fact that the stimulus dollars have had big and important impacts for those organizations. And I think most organizations would anticipate that there will be additional stimulus dollars coming forward, given the essential role that they've play over the last 90 plus days. And then I think beyond that obviously very focused to John's point on durable revenue recovery, elective surgery recovery, and their hotspot dynamics do play a role relative to the realities of what that does or doesn't look like.

[Elizabeth Anderson:]

That's very helpful. And then just as a follow-up question, just the tenth of your – some of your recent revenue cycle management wins at Banner and elsewhere, could you talk about what people were particularly interested in terms of the solutions that you guys can provide either sort of new additions, or the integration with the core network, or whatever the case may be that would be helpful? Thanks.

[Don Trigg:]

Yes, it’s a great question. So one of the things which clearly as top of mind right now for every healthcare organization is how they think about front end access management. So strategies around how you engage the consumer, make it easy for them to think through registration and scheduling, help them think about that on a virtual basis increasingly. So I talk about touch-less registration, that’s the framework that that I'm discussing. So the front end is a major area of focus and emphasis. And to John's point, it's one of the things that we're excited about around the R1 relationship. They have some capabilities like tonic for intake that we think will have big, big impact there. So that's a real focal point today. And then obviously from a Banner perspective beyond the front end, they are really looking for that opportunity for that integrated front, middle and back and our ability to deploy that. And we to Marc's point plan on delivering that from a solutions perspective and in some cases complemented by the capabilities of our R1 as we think about the blend of technologies and services required to derive the financial metrics of our organizations.

[Elizabeth Anderson:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from Kevin Caliendo with UBS. Your line is now open

[Adam Noble:]

Hey it’s Adam Noble in for Kevin. Thanks for the question. I just want to talk about some of the kind of virtual go-lives or hybrid go-lives that you talked about. To what extent do you think those will really become the norm in the future? And beyond reimbursed travel, how could a more virtual go-lives impact your revenue margins for those applications – for that implementation?

[John Peterzalek:]

Adam this is John I’ll answer that note in a general context as it relates to the go-forward. And I mentioned a little bit in our – in my comments, is that an absolute, virtual, purely virtual go-live it’s actually gone pretty well. But the more complex the go-live is the more difficult it is to get some of that stuff. So I believe that moving forward that we are going to be in this hybrid model, where we don't bring as many people on site. And we're able to use our virtual capabilities, or remote capabilities, or centralized capabilities to support these go-lives with fewer people on site. And they worked really well. The ones that we've done both in a virtual – purely virtual that we did early in the quarter, they went very well, the ones that we've done in hybrid model, they've been working very well, as well. And the context with the cost is travel is always a big part of the cost, both for our clients, as we scope these projects out. And being able to limit that will not only be more cost effective for our clients, but frankly, it should allow them to purchase more capability as well.

[Marc Naughton:]

Yes, this is Marc. When you think about it, when we travel an associate, they're traveling a half day out and a half day back, so they kind of in essence bill four days worth of time. If they're doing work virtually, we can get a full five days work. So that's a 25% increase in their productivity. So if we continue to leverage the virtual nature, once again, to John's point, there are things that we have to go on site for that. If we're doing 85% to 90% of work remotely, as opposed to the 60% we were doing, that's all at a much higher efficiency and therefore overall total cost and higher margin. So those are the things that at least in that business for me are somewhat the exciting opportunities from a virtual world.

[Adam Noble:]

Great. And as a follow-up question, could you remind me what the revenue contribution of any that you guys get from your Amwell telehealth partnership? And given the major surge in telehealth demand, have you considered restructuring that relationship or finding more direct ways to participate in the telehealth market, similar to some of your EMR competitors?

[Don Trigg:]

This is Don. So I think one, we think about virtual health more broadly than just our partnership with Amwell. So we're really thinking of to John's construct, what is the mix of virtual and physical activity that’s going to make up strategies around the person, the enterprise and the health network. So we have big strategies and investments in that space. And we think it will be a meaningful contributor to top line. In terms of the Amwell partnership, as I indicated, at the network level, we feel very good about that partnership and the capabilities that we've been able to take to the market around it. But I think we have a broader view of what the opportunity looks like around virtual. And we think some of those opportunities will be in higher acuity settings, like e-hospital and e-ICU where our CareAware platform becomes particularly differentiating.

[Adam Noble:]

Great. Thanks for the questions.

[Operator:]

Thank you. Our next question comes from Lisa Gill with JP Morgan. Your line is now open.

[Anne Samuel:]

Hi, it's Anne on for Lisa? Just not on the VA, given some of the delays with the VA, do you see that impacting the timing of your target for return to 5% to 8% growth?

[Marc Naughton:]

Yes, and this is Marc. Clearly 2020, as we've talked about, is a reset year for the top line, right. We've just basically over the last kind of six quarters divested $330 million worth of revenue. So we're really rebasing the organization, focusing on the things that we think have high growth potential and can drive operating margins. So I think from an overall revenue to point to any particular business we continue to be on track relative to that, I mean, we saw that as a fairly important part of our growth, and that is delivering as very close to what our expectations were, and the ones that we shared with investors. So I think that continues to contribute. But when you look at getting to the kind of the organic growth rates we've talked about, you've got to kind of – we got to get through 2020 that kind of rebates and reset our revenue. But all the things that Don was talking about, the focus that COVID is creating and the capabilities we have in our client base some of the strategic growth initiatives really compliment that. I think we are well set up to continue growing. Once we get kind of the comparables watch through from these divestitures which have all been done, been a focus for us through the first half of the year really getting those things taken care of. Ideally, we're going to be able to in the second half of the year, looking for opportunities. We still like the opportunities of looking for potential acquisitions that we think can really leverage and drive forward some of our initiatives, particularly in the strategic growth area. And that will obviously contribute to some of the inorganic elements of growth. But I think, overall, we're kind of asking investors, hey, let us get through 2020 and let's get you a good exit revenue number and then we'll lay out the growth strategies from there. But we should be consistent with what we've talked about, because we don't see anything in the business or in the environment that changes our top line growth strategies, or expectations, or the operating margins and growth opportunities we've seen.

[Anne Samuel:]

That's really helpful. And then maybe to your point on the strategic growth, are you finding that the disruption in the marketplace is opening up any potential opportunities for M&A or new partnerships?

[Brent Shafer:]

Anne it’s a great question. So I talked about some of the areas inside the strategic growth side of the business that have real traction and trend. I think in particular, we've been very excited about the communication and hospital operations capabilities off of CareAware. Very excited about the dialog that's playing out around our consumer capabilities and consumer framework and see some interesting other pockets of growth in areas ranging from behavioral health to what we're doing in the workforce health place. All of which have been catalyzed by dynamics around COVID. So that’s the first thing I would say. The second thing I would say is, build by partner strategies or dimension of how all of those organizations think about going to market and interestingly, we think that Cerner as a destination location for partnership has really been accelerated over the last 90 days. These earlier stage companies don't have the same access to provide our clients who are focused on COVID and they're looking for opportunities with Cerner as a means by which to create access to provide our client base. And then obviously as Marc suggested, we're going to opportunistically think about acquisition opportunities contextual for those strategies and if they can be catalytic and help us move further faster, those are things that we're going to look at in terms of deployment of capital, not only in the second half of the year, but going into 2021.

[Anne Samuel:]

Very helpful, thank you.

[Operator:]

Thank you. Our next question comes from Rivka Goldwasser with Morgan Stanley. Your line is open.

[Rivka Goldwasser:]

Yes, hi. Thank you. So clearly a lot of uncertainty around COVID, but maybe you can help us with just giving a little bit more color on what are the underlying assumption for trajectory of COVID that are embedded in the low end of the revenue guidance range?

[Marc Naughton:]

Yes, this is Marc. I think that as we look out across our client base, we look at our – do our fairly rigorous forecasting activities that we do on a quarterly basis. That gives us a view of what we think the business is going to do. It includes backlog, it includes projects that we think we're going to be able to go work on. It includes all of those elements relative to the time. And so I don't know that there's anything – certainly, we would – don't have built into our expectations that there's going to be a second wave of COVID, that's going to shut everybody down. And that basically, they're going to go back into the mode of responding and not being able – not being in a recovery mode that most of our clients are in now. With the Cures Act and with the reinvigoration of some of the elected procedures they're a little bit back on track to some extent at this point. So I don't know if there's any specific COVID. We're not doing percentage points, we're not doing those types of activities. If there's something that's material, that impacts our client's abilities to focus on the projects and the things that we're bringing to bear, yes that could impact us. And that's one of the things we're talking about when we tell you. But that this is an environment that's got a lot of change. The thing we do have is 85% of our revenue plus comes out of our backlog or highly recurring revenue. So for us we've decided we're going to give guidance because we think we have a decent view of the business. Once again, COVID puts a bigger, bigger risk range to that. But we think it's important that we can give people a view of what that looks like from a guidance perspective. So I don't know that there's anything specific. And really when you look at our – when you look at our revenue, there's some very little specific to certain healthcare volumes. So the real impact of increase in COVID is the focus of our clients in being able to move forward on things that are in our forecast and that we are expecting to land. So, I can be any more precise because we're not tracking and saying if these cases go to this number, then our revenue is going to go to this number. They are just not the tight coupling that that you might be expecting.

[Rivka Goldwasser:]

No, but it's helpful, because I think the point is that it's about the second wave. And then just in terms of clarification and we talked about 32% of contracts coming from long-term. Is this just kind of like the nature of the current hospital spending environment where they are less focused on near-term projects, it's just that it has increased versus the strategic focus, right on moving away from these long term contracts? So is 32% just either reflection of current environment, or is this more of kind of like steady state that we should expect going forward as well?

[Marc Naughton:]

Yes, just from a percentage really 32% is a little bit higher than the year ago quarter.

[Rivka Goldwasser:]

Yes.

[Don Trigg:]

But 30% is pretty consistent if you look across everything, but in the year ago quarter, you would see it in the upper 20s or around 30%. So I don't think it happens. And John, if you want to comment just on some of these longer term bookings they include an expansion of most of the relationships.

[John Peterzalek:]

My comment would be that the longer term and expansion are very complementary that almost without exception, that when you do an expansion, it's inclusive of new solutions, it's inclusive of new capability, as well as the extension of the current capability. So it's not one or the other, they're very comparable.

[Rivka Goldwasser:]

Thank you.

[Operator:]

Thank you. Our next question comes from Steve Halper with Cantor Fitzgerald. Your line is now open.

[Steve Halper:]

Hi, just a quick housekeeping question, on the cash flow statement, there was an acquisition for $35 million, could you just tell us what that was.

[Marc Naughton:]

Yes, no, it was a cybersecurity company that we acquired. We can see that as an opportunity, we already offered those services through our professional services organization. But we think in the current environment security has always been a big focus and us being able to bring on resources that have contacts in that, particularly contacts outside of our client base, where we can extend that service capability beyond our existing clients was something that was attractive to us. So pretty small, therefore not other than beyond the cash flow statement, it's not really something that we can talk about a lot. But it's enhancing our capabilities inside the security space.

[Steve Halper:]

That was clear. Thank you.

[Operator:]

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

[Michael Cherny:]

Hey, thanks so much for the details so far. Maybe the hole at that string a little bit more from a future basis. I don't know if it was John or Don, you mentioned some of the dynamics regarding capital deployment going forward. Is there anything about COVID and the response that your customers are doing to COVID that potentially opens up various different avenues in terms of acquisitions you might want to pursue in order to build out your service capabilities while also driving that incremental growth that's part of the long-term plan?

[John Peterzalek:]

That's a great question. I guess I would say kind of tethering to my earlier comments, I'd started start by saying all of the areas that we've made capital allocation and bets in the strategic growth space are things that we like. And we felt like we’re supported by macro trends that were playing out prior to COVID. So most of them, I would say have seen acceleration as part of kind of pulling forward those secular trends that were already playing out. So we loved the BH space before we think it's going to be an area of growing crisis and focus going forward. The employer space was probably one that we took a real, hard look at in terms of how to think about and focus that business. Again, that's an area where that relationship between employer and employee has never been more relevant and where that dialogue has never been more real time, so interesting dynamics there. And then certainly back over on the provider side of the business, interesting traction and trend around the acute assets from a CareAware perspective. The healthy intent space we think is interesting. This probably isn't the time when I'm going to stand up a provider sponsored plan, I'm trying to work through a pandemic and crisis setting. But we think that's one on a three-year basis that looks pretty interesting to providers as they really step back and say, what's it look like to take more control over my top line revenue and my go-forward business strategy. So I think, each of them have individual dimensions around them, but I think in the main, because they were tethered to larger macro trends that were playing out, we feel like most of what's playing out there has been accelerated. And then finally, just to kind of reiterate what I said earlier, absolutely if there's an opportunity for us to accelerate those strategies through acquisition, in an area like cyber, then we're going to look to do that. And we've got to set up business leaders in space that are absolutely capable of integrating those acquisitions and using them to scale their larger growth strategies.

[Michael Cherny:]

And just as a quick follow-up to that, Marc, you mentioned the capital availability you have, obviously the balance sheet has long been one that's been very clean. Is there any thought or any openness to more exploring utilization of the balance sheet in the event that something more sizeable, whether it's an internal investment or a potential acquisition would come along?

[Marc Naughton:]

Sure. I mean, part of our strategy was, have dry powder available, right? So we do have a strong balance sheet. We've traditionally done kind of smaller tuck-in acquisitions. Lumeris was a larger investment that we made similar to what Don was talking about is an area that we see as growth, provider sponsored plans. But I think we are well situated given our balance sheet to be able to start looking at some things that might be more sizeable. As most of you know doing any M&A that size transaction moderately increases the difficulty. So doing things that can have a big impact on our growth and certainly help leverage some of our existing thoughts. So I think the things that Don was talking about, I think, certainly one of the additional things he would probably certainly put on that list would be the data space. Once again we're looking for things that we can acquire. The issue for millennium, we don't want we're going to innovate on millennium that create our own modernization. But where we can invest is primarily in the things – in Don's area, in the strategic growth. And Don, I don't know if you want to talk, hit the data topic just a little bit to give him some ideas.

[Don Trigg:]

Yes, it's another good example, I think, of where COVID has been interesting in terms of reinforcing of thesis. So if you look at the release of information side of that business, from an organic perspective, how to do virtual and touchless release of information for legal and life insurance, workmen's comp, it's got a lot of traction and trend around it. I think more interestingly to Marc's point from a learning health network perspective, the team setting up a structure around that with under 40 participating organizations in the first half of the year. I mean, very impressive against that full year goal achieved at the mid year. And what that tells me is that these organizations are thinking about data and analytics contextual for what's playing out with COVID. Many of them see interesting opportunities to advance research strategies around it to participate in research economics. And those are things that aren't going to be unique or point in time to COVID, there are things that are going to absolutely accelerate on a multi quarter basis. And if we could do an acquisition in that space and use it as a way to catalyze some move forward, we would.

[Operator:]

Thank you. And our next question comes from Jeff Garro with William Blair & Company. Your line is now open.

[Jeff Garro:]

Hi, good afternoon. Thanks for taking the questions. A couple of quick ones from me. Managed services were mentioned a couple of times as a positive bookings area in the quarter. So I'm curious, what's driving demand for what I would expect is mostly hosting and how we should view that as a positive long-term indicator for a platform modernization?

[Brent Shafer:]

So in terms of managed services, it is – there is hosting involved in that, but there's other things involved in it as well as we surround most of our solutions with some type of managed services. So in many ways I view expansion and extension of managed services directly related to expansion and extension of solutions. So for me, it's an incredibly positive thing. We need to run care for and support all solutions we put out there.

[Marc Naughton:]

And this is Marc, to the extent the element is hosting, it's definitely a positive indication of when we're moving to the cloud, right, because in essence, our hosted solutions are a private cloud for those clients who are using it. So they are used to having someone else handle all of that and do the work and be able to depend on that infrastructure at a very high level of reliability. And we have that reputation in the industry well-earned. So it is definitely a positive as we go forward to more of a cloud-based opportunity in the future.

[Jeff Garro:]

Great. That makes sense. And the second one from me is probably for John, just curious if there's any change in client receptivity to SaaS offerings versus licensed software that would require larger capital expenditures given the current environment for providers.

[John Peterzalek:]

Yes, I won't speak to the capital side, but I will speak to the receptive side. I think that there is a lot of interest in SaaS offerings. It's sort of a pay as you go type of model. And what clients are really interested in is just being very specific and intentional for what they use and how they use it. So, yes, I think the SaaS business model or the SaaS offering, which we do offer many of our solutions in that model, is attractive and allows people to consume what they use.

[Marc Naughton:]

Yes. I'd just remind people that half of our license revenue today is SaaS still.

[Jeff Garro:]

Great. Thanks for answering the questions guys.

[Brent Shafer:]

Sure, thanks.

[Operator:]

And our next question comes from Eric Percher with Nephron Research. Your line is now open.

[Eric Percher:]

Thank you. Thank you. Marc, did you give any number for COVID impacts similar to the $30 million, I believe you had projected something around $95 million last quarter?

[Marc Naughton:]

I do not recall if I did.

[Allan Kells:]

Hey Eric, this is Allan. There's really – it's difficult to give a precise number, but I think our point is that we essentially flowed through for the rest of the year, a similar impact and looked at our forecast a little bit differently for things like reimbursed travel that was less than half of what we had projected and adjusted for that. So for the most part, I'd say other than taking out the sale of the rest of our RevWorks business, the rest of the change is largely COVID, inclusive of the amount we missed Q2 by relative to our guidance.

[Eric Percher:]

Got you. That’s helpful, we can back into that. And then Marc, the areas of weakness you've seen, it doesn't feel like anything that would necessarily tell us any changes in the way backlog or bookings convert into revenue, but as you've thought it through the risks to plan, how do you think about what might be meaningful in terms of changing the book-to-bill?

[Marc Naughton:]

Yes, I think that certainly as we move forward and kind of re-settle 2020 keep in mind that any historical bookings have – many of them have a chunk of RevWorks sales in them, right? So those are things we're not doing now. So you're going to have a little bit of a challenge with comparability of bookings in terms of the booking ratio. But clearly, once we've kind of we work our way through 2020, we're going to have to be growing bookings at or above the rate of which we're growing revenues. I mean, that's just – that's given. And I think you are taking away the appropriate point is the adjustments we're making here to are the things that are a little bit more tactical, little bit more quarter up type of bookings rather than some of the 12-month sales cycle type of things that we have. And based on our pipeline, based on what we're seeing the opportunities are still there. Clients are as excited or more excited about what they can get from us and what that does to help them deliver care than we've seen. I mean, it's continued to be an active environment. Clearly our caution is that COVID is going to impact things, and we're trying to give you our best view. But our view is based on backlog, based on the hard mechanics of doing a pretty rigorous forecast. Once again, you can't foresee everything clearly in Q2, we didn't see the tech resale will go significantly lower. And certainly we didn't see that reimbursed travel was going to fall off a cliff completely as it did. So still things that are being impacted. Even the federal business is going to be impacted at some point by the COVID, but based on our current view what we expect to deliver we're on track for that. So our plan is based on our best view and our guidance is based on our plans. So that's the best we can provide at this time.

[Eric Percher:]

Thanks, that's helpful, particularly the federal commentary. Thank you.

[Marc Naughton:]

Why don't we take one more question?

[Operator:]

Thank you. And that question comes from George Hill with Deutsche Bank. Your line is now open.

[George Hill:]

Hey, good afternoon guys. And thanks for sneaking me in under the wire. I'll let Marc and Don kind of tag team this one. I guess, one of the macro themes of the COVID environment has been telemedicine. I guess, from a telemedicine perspective can you talk about the demand that you are seeing from your clients. I guess is this something that you guys feel like you have to own? And maybe talk about the build versus buy approach to it? I know you guys have the relationship with well. And just I guess kind of talk about how I remember when we used to come out to Kansas City, when we could still fly, we would do the pop health visits and talk about centralized patient monitoring centers initiatives there. Just trying to think about, I guess, how you guys are bridging, what was the prior view of that business? What is the future view of that business as it relates to telemedicine post-COVID? I know that was complicated. But thank you.

[Don Trigg:]

Nice and some good questions, George. Maybe I'll start and if Marc wants to amplify on it, he can. But first and foremost, I think, this concept of a virtual health system or system of health is one that's been sort of central to the thinking of the company for a long time. You're right, we've had strategies both in low acuity settings that we've experimented with over the years. We've had strategies tethered to intensivist dynamics around virtual Inet and other strategies in the space. So I think we have a pretty informed view, in my opinion, about what it takes to deliver on the provider supply side and what the expectations around clients are going to look like. Having said that you've got an accommodative administrative environment relative to tele, a major shift in reimbursement, shifts in licensure, those things are all playing out. And I think organizations are experimenting with a lot of different strategies. So it would be very typical for John and I to have conversations with the client and for them to have multiple telehealth strategies that they are pursuing in the current environment. At the end of the day, what we think that ends up netting out to George is

[George Hill:]

Okay. I'll check on that. Thank you guys.

[Brent Shafer:]

Thank you. Well, I want to thank everyone for their time this afternoon. Once again, please be safe and take care of yourself and your families. Good afternoon.

[Operator:]

Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.