Cerner Corporation
Q4 2019 Earnings Call Transcript
Published:
- Operator:
- Welcome to the Cerner Corporation Fourth Quarter 2019 Conference Call. Today's date is February 4, 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 certain of our acquisition or other collaborations. Actual results may differ materially from those indicated by the forward-looking statements. Please see Cerner earnings release, which was filed with the SEC today and posted to the Investors 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 financial measures discussed in the earnings 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:
- Thank you, Delim, and good afternoon, everyone, and welcome to the call. I'm joining the call from a client event, so I'll start the call with a few comments, then hand it over to the team in Kansas City, including our CFO, Marc Naughton; Chief Client Officer, John Peterzalek; and EVP of Strategic Growth, Don Trigg. 2019 was an important and productive year for Cerner. We began the year by introducing a new operating model to refine our operational organizational alignment to enhance our client focus and to accelerate scalable innovation to make Cerner easier to do business with. We also initiated a company-wide transformation focused on operating efficiencies, business simplification, portfolio management and refining our growth strategy to position Cerner for long-term profitable growth. Further, we enhanced our governance through the addition of 4 strong Board members, who along with our existing members have been invaluable as we work through our transformation. Our 2019 progress is reflected in our fourth quarter results, which included good performance across all key metrics including exceeding our adjusted operating margin target and delivering record free cash flow. We also returned $1.4 billion of capital to shareholders in 2019 through our share buyback program and our first 2 dividend payments, all reflecting our commitment to delivering value to shareholders. Also significant in 2019 was the announcement of a multifaceted collaboration with AWS and Amazon. We view this relationship as an enabler to many of the growth strategies we've discussed on previous calls including Cerner's development of a cognitive platform and our evolution to become the Software-as-a-Service health care IT partner. Leveraging the powerful combination of Cerner technology, the AWS infrastructure, their artificial intelligence and machine learning capabilities, we expect to create next-generation user experiences and innovations to deliver more predictive patient-centric care. Now before turning the call over to Mark, I'd like to discuss Cerner's position on the topic of interoperability, data security and privacy. For several decades, Cerner has been a trusted steward of health information and a leader in the pursuit of data interoperability. We've seen a vocal proponent of -- we have been -- excuse me, a vocal proponent of the 21st Century Cures Act and look forward to continuing our work with the ONC, with clients and with other key stakeholders to ensure a secure flow of information across disparate systems and health care entities. We do this because it's the right thing to do, and I'm reminded of it today, I started my career at Intermountain Healthcare, and this is where I spent the day today talking with other leaders about the future of health and care. And we talked a lot about the fact that health care is too important to stay the same. And I love the chance to get together and collaborate with other organizations like Intermountain, who are working to help people live the healthiest lives possible.
- Marc Naughton:
- Thanks, Brent. Good afternoon, everyone. Before I begin, I did want to cover the most important numbers from the weekend, which are 31 and 20, reflecting the 11 point win for the Super Bowl Champion, Kansas City Chiefs. Go Chiefs! Now I'll cover our Q4 results and future period guidance. This quarter, we delivered all key metrics at or above our guidance. I'll start with bookings, which were $1.665 billion in Q4, exceeding the high end of our guidance. This is down from Q4 '18, which was the second highest bookings quarter in our history. Full year bookings were $5.99 billion, which is down from $6.721 billion in 2018. Decline in Q4 and for the year was primarily due to a decline in long-term bookings related to us being more selective on our outsourcing contracts, as we've discussed throughout the year. We ended the quarter with a revenue backlog of $13.71 billion, which is down 10% from a year ago, primarily due to the termination of a RevWorks agreement that I discussed on our Q3 call. Also recall that our backlog calculation of the new revenue standard excludes revenue from contracts with termination clauses, even though such clauses are rarely exercised. When you combine the expected revenue from our backlog and the additional revenue expected from contracts not included in our backlog, our revenue visibility remains at nearly 85% over the next 12 months.
- 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 bookings ahead of our guidance range for the quarter, driven by strong contributions across multiple segments such as investor owned, academic and IDNs. We also had good contributions from revenue cycle solutions and across our strategic growth businesses, which Don will discuss. Consistent with recent quarters, we had a lower level of long-term bookings compared to last year, which drove the decline in overall bookings. For the quarter, the percent of bookings coming from long-term contracts was 29% compared to 38% in Q4 of last year. Long-term bookings for the year represented 28% of total bookings compared to 36% last year, with this decline in long-term bookings driving total bookings down for the year. Bookings excluding long-term contracts increased slightly for the full year. Looking at the broader marketplace, many of the same trends continued to play out during 2019, with health care cost growth outpacing the economy; elevated levels of industry consolidation; rising consumer expectations around cost, convenience and service; and the continual gradual evolution of reimbursement models adding to pressure on providers to lower costs and advance their risk-based strategies. These forces are contributing to an overall challenging macro environment. Providers are simultaneously seeking to grow key service lines, drive operational efficiencies to make money at Medicare rates and build out the competencies required to take and effectively manage risk and participation in value-based reimbursement models. Information technology is seen as an enabler of these efforts, which represents an opportunity for Cerner. At the same time, the lower-margin nature of provider businesses can make it difficult to fund required investment, make it important for solutions and services to have a clear return on investment. As we look at 2020, we see solid opportunity both in our installed base as well as continuing to gain new clients. This opportunity is reflected in our pipeline, which is up year-over-year for both new business and opportunities for sales back into our base. In our base, we are focused on getting our clients current while also filling out their Cerner solutions suite with a focus on increasing penetration of revenue cycle solutions and solutions supported by our CareAware and HealtheIntent platforms. Our CommunityWorks pipeline remains strong, and we have opportunities outside of our traditional provider base in areas such as state government, employer and long-term post-acute care. We also have opportunities to continue growing the presence of our EHR-agnostic CareAware and HealtheIntent solutions beyond our EHR base. Moving to our federal business. We continue to advance both our VA and DoD projects. On the VA project, Cerner, along with our VA and our partners, remain focused on initial operating capability, or IOC go-live. We have completed initial integration validation and are doing a significant amount of training and site preparation activities ahead of the scheduled go-live in March. Looking beyond the initial go-live, we also expect to go live at additional IOC sites in 2020 and continue to just steadily scale our work to provide additional value and capabilities to VA in the upcoming quarters. As Marc mentioned, we expect to leverage the AbleVets team as these activities ramp throughout the year. We're also making good progress on DoD. We successfully completed the code upgrade during the quarter and kicked off the Coast Guard project in 2 additional deployment waves. Go-lives for these waves are slated for late 2020. With that, I'll turn the call over to Don.
- Donald Trigg:
- Thanks, John. Good afternoon, everyone. Our strategic growth organization launched in 2019. Our ambition was a simple one
- Operator:
- . Our first question comes from Robert Jones from Goldman Sachs.
- Robert Jones:
- I guess, Marc, just to go back to some of your comments, you highlighted 4% growth ex AbleVets addition and less the revenue cycle service contract that you guys exited. I guess, just out of curiosity, as we frame the year and understanding that 2020 has been put aside as kind of a transition year, how much of that remaining growth came from federal? And then, clearly more importantly, and I know we'll hear more in March, maybe just some of the major building blocks that as you think about returning to profitable growth in the future? What are the pieces we should be at least starting to frame out as we think about growth beyond 2020?
- Marc Naughton:
- Yes. No, this is Marc. I think from a -- certainly, as we look at the year and trying to get apples-to-apples will be a little bit challenging in 2020 -- '20. We're going to do our best job to do that. It's a little bit why we try to talk a little bit about organic growth. I think if we get back to the overall view of top line growth, we've talked last year about kind of that being the 6% to 9% range. Clearly, the outsourcing selectivity and certainly the Adventist contract could impact that. And I think as we look through that, that's probably 100 basis point potential impact, which would put you some place in a 5% to 8% top line growth level, I think that's certainly something that we would expect to be doable for us. I think from the things that are going to continue driving, certainly, federal will be part of that growth as that contract, the VA contracts ramps its way up to $1 billion a year of annual revenue. That's $250 million or so of additional annual growth in revenue that's just coming out of the VA contract, depending on the time period. So that's certainly a good driver. And then strategic growth is obviously another area that we're expecting to see growth out of, that will take the -- to $500 million to $600 million business it is today and continue to grow that at strong growth rates. We also look at the opportunity that we have just within our existing base business. So our core business, the opportunity to sell revenue cycle solutions back into that base, the ability to go attack the white space, all of those are things that we think, overall, are elements that contribute to us having overall top line growth. And that really, all of those things I've talked about are primarily organic. We've talked in the past that we also expect there to be a level of inorganic growth for us and some M&A that will support primarily the opportunities in strategic growth. And depending on the size of those opportunities and the size -- the revenue impact they bring, that certainly could be accretive to those -- to the top line growth that we've talked about. But certainly, as we go -- get to HIMSS and can have a little bit more time with everyone, we'll try to take you through a more detailed view of strategic growth and the elements of those businesses and how we've got the opportunities for growing the top line, kind of just in the range that we've traditionally discussed. But I think to your point, we have talked about 2020 being a reset year. We are looking at opportunities to divest certain things as we do our portfolio management. That's going to negatively impact revenue. The M&A will positively impact revenue. And what we'll try to do on a quarterly basis is kind of give you an update as to where we're going. Obviously, we'll be giving you quarterly guidance if there's any adjustments. But right now, we think the guidance we provided for the year is really solid.
- Robert Jones:
- No, Marc, I appreciate all that. I guess just a quick follow-up on your comments then would be around those potential further divestitures and potential M&A. Are those contemplated in the 2020 guidance? Or is this kind of best case of what we know today is just where the business stands?
- Marc Naughton:
- Yes. The way we did our guidance was basically kind of on a same-store basis, so it does not contemplate any of the divestitures. It does not contemplate any of the M&A potential activity because that's still, as of today, something to be determined. We think it's going to be more effective as those items occur that we can talk about them at that point. Keep in mind that the AH, if you will, divestiture or that RevWorks business going away is by far the largest item that was on the list. Those items after that would be smaller items. So whether they even impact the overall guidance, to a great extent, will be something we determine at the point they occur. But right now, the guidance is based on current course and speed, and then we will adjust as we -- as anything comes up in that space, one way or the other.
- Operator:
- Our next question comes from Kevin Caliendo from UBS.
- Kevin Caliendo:
- I know you don't guide for bookings for the full year, but given the shift away from LT service bookings, when do you think it's reasonable for you to assume you can return to year-over-year bookings growth? And when I look at the ones you guide, is there any additional content waiting for the shift? Or do you view the year-over-year long-term bookings compares already normalize entering the year?
- Marc Naughton:
- Yes. I mean, I think, clearly, we don't guide beyond the Q1 because we do want to be pretty accurate relative to our guidance. I think as you -- the solid results that we delivered in Q4, actually delivering above our guidance range, with the opportunity based on some opportunities to pull things in to the quarter based on some of the timing of our clients and their year ends, that is going to impact Q1 a little bit because those things would have normally been landing in Q1. But I think we're still normalizing for some of the outsourcing elements in the bookings. So I think for 2020, while it's kind of a year for resetting the top line from a growth perspective, I think it's fair to say that the bookings, we'll get through the full year of 2020, and then we should get some pretty comparable bookings to be able to do apples-to-apples growth thereafter. But Q1 is still being impacted by the more focused view of anything that we're going to do on the services side that might be in the outsourcing space.
- Kevin Caliendo:
- And one quick follow-up, if I might. So we were reading that a VA Deputy Secretary was let go yesterday, and I guess he was the one who was technically in charge of VA implementations. I was wondering if you had been in contact with them, with leadership over there since that decision was made. Is there any concern or any issues about timing or potential bottlenecks for the implementation of the VA contract?
- John Peterzalek:
- Yes, this is John. I won't comment specifically on that activity, but what I would say is that both the veterans, VA, the modernization project, they have significant bipartisan support. And the fact that there are changes in political activity, it's not a surprise or unexpected. And from the beginning of this project, we took great effort in making sure that we had broad support throughout The Hill, the VA, veterans groups and other constituents and supporters to ensure when things like this do happen, or political activity occurs, it doesn't impact where we're going. So we don't anticipate any impact from that, and we think that our broad base of support is incredibly solid, and we're just going to continue on.
- Operator:
- Our next question comes from Charles Rhyee from Cowen.
- Charles Rhyee:
- Maybe you want to touch on -- I think, at the beginning, you guys talked about the interoperability rules, the final rule is right expected soon. Any thoughts on sort of the -- I know there were some concerns, particularly on providers around compressed time lines or perceived compressed time lines for implementation. How do you view those challenges? And what is -- what would you talk -- I guess, say, about your preparedness to help clients to work through that? And any thoughts on maybe seeing a phased implementation schedule put in place instead?
- Donald Trigg:
- Yes. So this is Don. I think, first and foremost, just to echo Brent's comments. This is a space that we've been very vocal on and pushed aggressively on for a number of years. So we have a lot of, I think, personal passion around interoperability, semantic interoperability and what this space needs to look like for patients and providers and payers. So that's first and foremost. I think, secondly, we feel like we're very well positioned to meet the implementation time lines that are being discussed, both from a technical and a nontechnical business perspective. We'll obviously finalize those strategies as the final rule comes out and they're completely understood, but we think they're manageable and that we're well positioned to do that. And I think, finally, just to reiterate some of the framing on the call, we think there's going to be a ton of business opportunities associated with these elevated rates of data liquidity. So when I think about the types of things that we're doing to enable our strategies around Medicare Advantage, alternative payment models like bundled payments and BPCIA, the opportunity to think through the technical strategies required to help provide our organizations make those business models work, we think create tons of opportunity for Cerner, and frankly for the industry as a whole.
- Charles Rhyee:
- Great. And maybe if I could just follow on, in terms of sort of the strategic -- the new model that you're working on. I'm not sure if I might have missed it, but I didn't hear any mention of Lumeris. Just curious on an update on how that partnership's working.
- Donald Trigg:
- Yes. No, I appreciate it. We think we're making a ton of progress there, and I'll tether back to the comments I just made. So first and foremost, really, the thing that was -- one of the things that was super exciting to us was to take the methodology, sort of the best-in-class methodology of Lumeris for Medicare Advantage, our technical capabilities and their service expertise and use it to bring a total solution offering to the market. In terms of progress made around that, we were very excited to use HealtheIntent as a foundational platform for running a provider-sponsored plan, focused on MA, and we over-attained against those IP milestones over the course of 2019, and now we're deploying the solution as part of the go-to-market strategy for Lumeris and Cerner. And again, just to come back to the topic around information sharing, if you think about the 4-star MA plan that Lumeris runs in the St. Louis market, 14 different practices, high degrees of technology, heterogeneity and how do you think about elevated rates of data liquidity, both to drive through your strategies for activating that network as well as integrating their best practice capabilities into the last-mile workflow of the physician, it's nicely complementary to the regulatory trends that are playing out. And we think it represents one of several very big business model opportunities for us going forward.
- Operator:
- Our next question comes from Ricky Goldwasser from Morgan Stanley.
- Rivka Goldwasser:
- Going back to the revenue growth guidance and some of the comments, Marc, that you made. So first of all, just to clarify because I might have missed it. I think at some point, you said 5% to 8% is doable for longer-term revenue growth, and I just tried to understand the building block there. That's one. Second of all, I think you highlighted that the VA is a long-term revenue opportunity, so I just want to make sure that we hear it right that you expect it to grow, that $250 million that you mentioned beyond the term of the initial contract. And then lastly, as we think about the potential divestitures that are not included in this guidance range that you provided us today, who's making the decision? Is this a decision that you are making based on the margin mix? Or is this something that the client, when the contract is up for renewal, decides to not renew? I just -- just if you can just clarify why is this taking such a long time to make the decision of what contracts are being divested or not?
- Marc Naughton:
- Sure. First of all, the 5% to 8% was really just discussing the long-term growth we kind of provided last year at HIMSS of 6% to 9%, with a little bit of 100 bps haircut based on the lower amount of outsourcing activity that's going to happen. So we're going to be -- as I indicated, a little bit earlier, at HIMSS we'll be taking you through that long-term growth rate, what that looks like, where it's coming relative to our core businesses, our strategic growth businesses, our federal businesses, so you'll be able to see how it lays out. And then we'll give you some more details as to the strategic growth businesses that underpin all of those growth assumptions. So our goal is to lay out a very clear path that kind of falls within that range, with the opportunity to over-attain depending on what we do from an M&A perspective. Relative to the VA contract, when we first talked about it being a $10 billion contract and it's a 10-year contract, the math would say that's $1 billion a year. Obviously, there's a ramp-up period. And when we talk about it -- and when we talked about it, we said it ramps up over a 4-year period, growing about $250 million a year until it gets to the $1 billion. So my reference to that $250 million increase was basically the revenue we're going to be ramping up to in that contract that gets us to the $1 billion run rate. We have talked about the opportunities to certainly sell more of our solutions and services to the VA, which could increase the $1 billion to a bigger number. But certainly, the $250 million I reference is just kind of current course and speed, ramping up the projects, doing more and more in implementations and how that drives that revenue stream forward. So nothing new there. That's just really reiterating what we've talked about. It's another piece of the growth puzzle that is -- we talked about and does drive a good amount of growth. And finally, on the divestitures, AH was a little bit of an anomaly in that space. That was really a business we're looking to kind of decide whether we want to be in or not. They were our largest client in that outsourcing. So that was more of a client contractual agreement. Going forward, it will be much more of us reviewing relative to our portfolio management, relative to our growth options for the business, where do we want to focus our attention. In those areas that we don't want to -- don't think are the growth areas for the company we want to focus on, we're going to consider divesting as one of the options. We'll consider divesting. We'll consider partnering. There are a variety of things that we'll consider. But those divestitures will be, in many cases, of an existing business. It won't be a specific client relationship that will be unwound in some way. It will be an existing business that we will basically go out to market and look for opportunities to say, here's this asset. It's something we're willing to let go. And some of these assets have significant value. So I think -- and from a why-is-it-taking-so-long standpoint, there is a lot of work we've done in our portfolio management to decide what are the key things we want to drive as we talked, that work really was a lot of the 2019 work and really was kind of finalizing as we ended the year. And certainly, some of these activities on divestitures are already underway, and ideally will be things that we can share with you in the very near future.
- Operator:
- Our next question comes from Jeff Garro from William Blair.
- Jeffrey Garro:
- I want to ask a little bit more about the AWS partnership and maybe putting aside the very important work around migration and those long-term benefits of efficiency and lowered TCO for our clients, more curious on the consumer experience innovation side and what type of milestones, either IP milestones or bookings-related milestones that we can look for in 2020 from that partnership.
- Marc Naughton:
- Yes. It's a great question, Jeff. Thanks. So let me talk to kind of multiple pieces of it. Just in terms of one, the framework for the relationship, I think, one of the things that we were excited about from an AWS and Amazon perspective was not just the opportunity to think through technical migration to the public cloud but to really think about broader opportunities around the Amazon relationship and what it would look like, in particular, to leverage their deep competencies around the consumer. Coupled with their strong interest in being part of the health care ecosystem. So that was a, I think, a design feature of the relationship. And I think we've been very happy with our opportunity to kind of engage with them and to look at key strategies around approach, whether those are publicly disclosed activities around how they think about their employee population and some of the things that they're doing in concert with JPM and with Berkshire portfolio of companies or acquisitions that they've made around capabilities like PillPack. So we've had good visibility to that. We think it's an exciting piece -- potential piece of the relationship and an important part of how we want to think about making the partnership work going forward. Secondly, from a technical perspective, I talked a little bit about the fact that HealtheIntent has really been a tip of the spear, if you will, relative to the migration to the public cloud. Most of that work will be completed in the first half of the year. CareAware, similarly, is part of that early strategy and path. And I think we've been very transparent in terms of saying that the time frames around Millennium will be more elongated. Finally, in terms of what this is going to look like in terms of targeted bookings or revenue impact I think there's businesses within strategic growth that are very excited about the potential pull-through impact relative to revenue. I would say our consumer and employer businesses in particular have a lot of energy here and have been real drivers around the strategic collaboration, but we're probably not at a point in the life cycle of the dialogue where I can put out a revenue target or a bookings target that we would feel confident we could hit or over-attain.
- Jeffrey Garro:
- Great. That's very helpful. One quick follow-up, maybe on the technical side on HealtheIntent and CareAware in this first half migration. Maybe just some more specifics around where the benefits are for Cerner with those migrations and where the benefits are for clients.
- Marc Naughton:
- Yes. Well, first of all, I think just the ability to be able to stage and think through the migration to the public cloud has had a real value proposition for us as we try to think really comprehensively about not only the technical components but also how we have this conversation with our clients, how we think about innovation potentials in concert with our provider clients as part of the dialogue and the approach. In terms of benefits, I think there are clear and demonstrable benefits that our clients are going to see. There's a performance -- system performance benefit that's very real. There is a benefit around latency and how we think about the path to near-real time data assets that I think could be very important around strategies like hospital operations. And I think this is also relevant as we start thinking about growth opportunities like cybersecurity where clients need our competency and expertise around how they manage hybrid environments with on-prem and cloud. So I think real benefits that we're deriving from a performance perspective, from a data and utilization of the data against business strategy and some really interesting, from my perspective, conversations around capability that we have that create white space opportunities for growth.
- Operator:
- Our next question comes from Sean Wieland from Piper Sandler.
- Sean Wieland:
- So on the restructuring costs that you're talking about Marc, you said 2020, your restructuring costs are going to continue. Can you quantify the impact that these costs are to the operating margin that you're forecasting, both in 2019 and 2020?
- Marc Naughton:
- Well, the operating -- the restructuring costs that we're incurring that are the restructuring costs currently are being adjusted out of earnings, so our adjusted earnings, there is 0 impact on that, and that is the number on which we have based our operating margin targets.
- Sean Wieland:
- Okay. And then -- that's helpful. And then a quick clarifying question. You said you're going to move almost all your hosting clients to AWS, first half of '20. That's consistent with what you've said, but does that impact the revenue or profitability cadence throughout the year? Or are you going to be backfilling that with government tenants?
- Marc Naughton:
- Well, for the most part, the -- moving to AWS, the primary impact is freeing up hardware and space in our data center, and that will absolutely be used to support our federal clients as well as other clients we have that are hosted by us and on a Millennium platform. All of these devices are basically interchangeable relative to the various architectures we use. So that will be the savings is the impact on capital.
- Operator:
- Our next question comes from Sean Dodge from RBC Capital Markets.
- Sean Dodge:
- Maybe staying with the platform modernization for a moment. Understanding that the entire project's going to be a multiyear effort, and ultimately long-term positive for margins, can you give us a little more insight into the impact it will have on margins in the interim? The investments you're going to have to make as part of this, can you put some bookends around how big, how much? Are they going to be consistent or chunky? And are there efficiencies you're going to be able to garner in the meantime that'll help offset some of it? Or is this something where the margin lift really doesn't come until the entire project is done?
- Marc Naughton:
- Yes, this is Marc. As John kind of went through the -- each time we move an element to AWS, there is some savings garnered. So certainly, from a -- as we move HealtheIntent, being able to manage that in the AWS environment, it has a savings on the people it takes for us to run those environments in our data center. So there are -- they are incremental. They aren't significant, but they are incremental. The investment we're going to make relative to our cloud investment on the other platform, primarily Millennium, that's part of our R&D expense, right? Part of our portfolio management goal is to free up dollars that we're spending on things that we don't see as long-term growth opportunities, and put that into some of the things that are going to be growth opportunities such as the cloud environment. We are still actually going through the exercise and the process of deciding exactly what the path to modernization is going to entail, exactly what's going to move in exactly the timing, so it's a little bit hard for me right now to give you an idea of what those dollars are. But our expectation is that much of that work is going to get funded out of our normal R&D spend, that will be focused on those efforts as opposed to potentially some other efforts on things that we're going to not be moving forward with. So there is -- that's -- it's going to be a refocus of it, so we're not going to garner some of the savings that we might have from some of those divestitures, although we will get -- gather some. But we shouldn't have a large influx of costs relative to this effort. And it will, as Don said, be a period of time before that gets there. Now once we get there, the benefits are significant. We've got well over $100 million of annualized costs for hosting our clients in our data center just from software that we run them on in our data center that we won't need to use when they go to the cloud. There will -- the advantages of running a single version of the software in the cloud is a significant decrease in the costs we have for supporting our clients. They will get a much better experience, so your clients' stack goes higher, so the appetite for more solutions goes higher. So those are harder to quantify at this point other than the actual cost savings from sublicensed software. But I think for the most part, that's the goal. Those benefits aren't going to happen in the next 2 or 3 years. That's -- we have to get through a lot of work, and we'll be able to give you more of an update on that as we do our work to make -- to identify the path forward. But it isn't something I think is going to be a big expense impact. But the benefits will be a little bit longer-term relative to margin improvement. And that's one of the things we've kind of talked about is, we've got our path, we delivered '19. We have our path to 2020. How do you keep delivering thereafter? You continue on the optimization. And then the next iteration is going to be basically platform-based that you bring these other additions and other opportunities to increase operating margins.
- Sean Dodge:
- Okay. That's great. And then maybe on margins more broadly, you're still expecting to exit 2020 around the 22.5% level. You said maybe even a little bit better. I think you touched on it briefly in the prepared remarks, but could you just walk us kind of quickly through what you see being the primary levers or buckets of opportunities you can take out to get you from the 20% you just printed to something north of 22.5% in the next four quarters?
- Marc Naughton:
- Yes. I think the key to remember is, a lot of what we did in '19 really started impacting us late in the year, right? It really -- there's margin improvement from Q3 to Q4 was significant. So -- but we have in place over 50% of the actions we need to go drive the margin uplift for 2020. The next set of things that are going to happen are going to happen toward the end of 2020 as we do things based on location of associates and things like that, that will drive kind of some of those next year benefits for us. So the reason that Q4 and 2020 will be a little bit of a, back-end-loaded once again is because those are the next tranches, and it takes time and effort to go get those in place. But I would point out that, basically after Q1, we'll be delivering about 250 basis points of margin improvement each quarter year-over-year, Q2, Q3 and Q4 and basically for the full year. So that level -- those margin improvements are the continuation of what we put in place in '19, then delivering on the next phases that occur in 2020. Just to clarify, before we get to the next question. My comments around 5% to 8%, it seemed like there's a little bit of confusion on people that talk about that comment. I'm just trying to -- the indication that I was trying to portray is that if you took our previous 6% to 9% target and lowered it for the impact of outsourcing, it would reduce the range by 100 basis points. So I was just doing math, and subtraction is one of the skills I do have, and we basically were taking those down to the 5% or 8%, just based on what our prior view was and kind of what the impact of the outsourcing that we've talked to you about is. But certainly, at HIMSS, we'll give you a more detailed view of what we think the right answer is and how do we get to that right answer. So I just want to clarify that because there's a little bit of confusion.
- Operator:
- Our next question comes from George Hill from Deutsche Bank.
- George Hill:
- This might be one for Don. I know Don, historically -- this is an interoperability question. Historically, interface management has been an attractive part of the business with pretty good margins. And as we think about kind of changing interoperability regulations, that will probably create some opportunities, but can you talk about how much business risk there might be to parts of the legacy business?
- Donald Trigg:
- Yes. It's a good question, George. I think -- I think we're pretty comfortable that, that business -- I mean, you're right, it's relatively small, and it does have a good margin profile. I think we're relatively comfortable that the things that we've been doing on SMART on FHIR enablement and our code program, mean that the net impact is de minimis. And I think more to my earlier point, we think it's actually enabling to some of the bigger swing business strategies that we're advancing inside strategic growth. So while I can't perfectly net that out for you, I think we look at it and say it inures to our advantage into the upside relative to where we want to go from a top line perspective.
- George Hill:
- Okay. That's super helpful. And then, Marc, maybe just 2 quick number follow-ups. Can you talk about -- can you give maybe any color around the CapEx guidance for 2020? You talked about the number coming down from the $471 million in number in 2019, maybe just something about that. And is any share repo assumed in the 2020 EPS guidance?
- Marc Naughton:
- Yes. I think that from a CapEx perspective, you could take $100 million out of that number. It would be kind of the range that we would expect as we look at 2020 for CapEx based on our buildings being slowed down or basically being completed. And I think the repurchase, we obviously have $200 million scheduled for Q1 to complete our 12-month. And I think going forward, certainly, our capital allocation, we'll look at investment M&A opportunities and other things relative to the use of capital. But I would think at least $200 million a quarter of repurchases would seem to be kind of a base amount that we would then adjust relative to what our M&A is. Why don't we take one last question?
- Operator:
- Our last question comes from Eric Percher from Nephron Research.
- Eric Percher:
- A question on federal contracts. And I know that early in the uptake, you've had third party service. That appears to be weighing on the margin. As we think about 2020 versus 2019, does that level of third-party support remain about stable? Or is there any increase or decrease?
- Marc Naughton:
- Yes, this is Marc. For 2020, it will be about the same. We continue to leverage our partners in that space. Clearly, AbleVets was one example of us working to bring a larger workforce quickly inside Cerner that we can then move to focus on the VA. As some of the -- as we work through their existing projects, which are relatively short-term and get them on the VA. That will allow us to bring that down, but that's probably more of a 2021 event at this point.
- Eric Percher:
- That's helpful. And then last, on the ex U.S. 3% growth last year, as you look to 2020, I don't think that was part of the items you ticked off on growth opportunity. But what is your perspective on growth ex U.S.?
- John Peterzalek:
- This is John. I said I think it will be consistent with previous years. There's still a lot of opportunity outside the U.S. in the form of new business, new regions, countries and those type of things, which we will look at, pursuing each one of those opportunities that make a decision. But similar to the U.S., we're also doing portfolio analysis on non-U.S. as well. So we're going to look to be -- follow the same process and become much more focused and outside the U.S. as well. So we may see both ups and downs outside the U.S. as well.
- Marc Naughton:
- Hey, this is Marc. I want to thank everybody for participating. One last comment, there still might be a little confusion about our long-term top line growth target. The 5% to 8% I mentioned is absolutely something I think we can deliver. Absolutely. And in fact, I think there's upside to that. So I think the number -- something closer to the 7% range is probably more reasonable. But once again my point is, we really want to take you through it in detail, show you what the building blocks are, so you're not just blindly putting a number in, but the 5% to 8% level is a level that I have a great deal of confidence in. So with that, I want to thank you for attending this afternoon and look forward to getting together with you at HIMSS on March 10. Until then, have a good evening.
- Operator:
- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Other Cerner Corporation earnings call transcripts:
- Q3 (2021) CERN earnings call transcript
- Q2 (2021) CERN earnings call transcript
- Q1 (2021) CERN earnings call transcript
- Q4 (2020) CERN earnings call transcript
- Q3 (2020) CERN earnings call transcript
- Q2 (2020) CERN earnings call transcript
- Q1 (2020) CERN earnings call transcript
- Q3 (2019) CERN earnings call transcript
- Q2 (2019) CERN earnings call transcript
- Q1 (2019) CERN earnings call transcript