Cerner Corporation
Q4 2014 Earnings Call Transcript
Published:
- Operator:
- Welcome to Cerner Corporation's fourth quarter 2014 conference call. Today's date is February 10, 2015, 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 expenses, product development, new markets or prospects for the company solutions and plans and expectations related to the acquisition of Siemens Health Services. Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements may be found under Item 1A in Cerner's Form 10-K, together with the company's other filings. A reconciliation of non-GAAP financial measures discussed in this earnings call can be found in the company's earnings release, which was furnished to the SEC today and posted to the Investors section of cerner.com. At this time, I'd like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed, sir.
- Marc Naughton:
- Thank you, Alex. Good afternoon, everyone, and welcome to the call. I'll lead off today with a review of the numbers. Zane Burke, our President, will follow me with results, highlights and marketplace observations. Mike Nill, Executive Vice President and Chief Operating Officer, will discuss operations. Neal Patterson, our Chairman and CEO, is traveling. Jeff Townsend, Executive Vice President and Chief of Staff, will be at our Investment Community during HIMSS and looks forward to providing an update on our rollout of solutions at Intermountain Healthcare and our strategic alignment with them that we believe will broadly benefit Cerner, Intermountain Healthcare and our client base. Now I will turn to our results. Overall, we had a solid Q4, a very strong year, and we have a good outlook for 2015 and beyond. Our total bookings revenue in Q4 was $1.16 billion, which is an all-time high and reflects 5% growth over Q4 of '13. Bookings margin in Q4 was $982 million or 85% of total bookings. For the full year, bookings revenue was $4.25 billion, up 13% over 2013. Our bookings performance drove a 19% increase in total backlog to $10.62 billion. Contract revenue backlog of $9.79 billion is 20% higher than a year ago. Support revenue backlog of $826 million is up 5%. Revenue in the quarter was $926 million, which is up 16% over Q4 of '13. The revenue composition for Q4 was $280 million in system sales, $197 million in support and maintenance, $431 million in services and $81 million in reimbursed travel. For the full year, revenue grew 17% over 2013 to $3.4 billion. System sales revenue reflects a 14% increase over Q4 of '13, with strong growth in technology resale and good growth in software revenue. For the full year, system sales revenue grew 12% over 2013, driven by software growth of 17% that was partially offset by lower full year technology resale growth of 4%. Subscription revenue grew 12% for the year. Q4 system sales margin dollars grew 11% over the year-ago period, and full year system sales margin dollars grew 16% over 2013, reflecting continued strong levels of higher-margin system sales components like software and subscriptions. Moving to services, total services revenue was up 19% compared to Q4 of '13 and 23% for the full year, with strong growth in professional services, managed services and ITWorks. Support and maintenance revenue increased 16% over Q4 of '13 and 9% for the full year. The higher growth rate in Q4 reflects the impact of the quarter having 14 weeks, instead of our typical 13 weeks. Note that the revenue benefit of the extra week was minimal for professional services and system sales, as we had low professional services utilization during the extra week due to the holiday and system sales is mostly non-recurring revenue. Looking at revenue by geographic segment. Domestic revenue increased 14% and global revenue grew 34% over Q4 of '13. The higher rate of global growth in Q4 was driven by strong software and technology resale as well as continued growth in global managed services. For the full year, domestic revenue grew 18% and global grew 6%. As a preview to the annual update of our detailed business model that we'll provide at our Investment Community Meeting on April 14 at HIMSS, I'd like to provide you with the total revenue and growth by business model for the full year 2014. Licensed software grew 17% to $453 million. Technology resale grew 4% to $273 million. Subscriptions and transactions increased 12% to $220 million. Professional services revenue grew 28% to $1.09 billion. Managed services increased 15% to $549 million. Support and maintenance was up 9% to $725 million. And reimbursed travel was $90 million, which is up 28%. Moving to gross margin. Our gross margin for Q4 was 81.3%, which is down compared to 82.1% in Q4 of '13, reflecting the higher level of tech resale and third-party services compared to the year-ago period. Full year gross margin of 82.2% was basically flat to 2013. Looking at operating spending, our fourth quarter operating expenses before share-based compensation expense and acquisition-related adjustments were $524 million, which is up 17% compared to adjusted Q4 of '13 operating expenses, which also excluded a settlement charge. For the full year, operating expenses before share-based compensation expense and acquisition-related adjustments were up 18% to $1.96 billion. Adjusting the growth rate for the extra week reduces the Q4 growth rate to approximately 10% and the full-year growth rate to about 16%. Sales and client service expenses increased 17% compared to Q4 of '13 and 19% for the full year, driven primarily by a continued increase in revenue generating associates in our services businesses. Our investment in software development was up 15% compared to Q4 of '13 and up 16% for the full year, and continues to be driven by investments in our growth initiatives. G&A expense increased 16% compared to Q4 of '13 and 13% for the full year, driven mostly by increases in personnel expense related to our strong growth and higher amortization expense related to recent acquisitions and acquired intangibles. Moving to operating margins. Our operating margin before share-based compensation expense and acquisition-related adjustments was 24.7% in Q4. This is down 90 basis points compared to Q4 of '13 due to higher tech resale and to third-party services. We were also impacted by the extra week, which ended up having a slightly bigger impact on expenses than it did on some revenue elements, such as professional services, where we incurred a full week of expenses, but had low utilization due to the holiday. As we indicated last quarter, we expect the first year of incorporating Siemens Health Services into our results to bring our adjusted operating margins down to the low 20% range. We expect operating margin to return to the mid-20s by 2017 based on ongoing leverage in our core business and as the expected accretion ramps. Moving to net earnings and EPS. Our GAAP net earnings in Q4 were $148 million or $0.42 per diluted share. GAAP net earnings include share-based compensation expense, which had a net impact on earnings of $11 million or $0.3 per diluted share. GAAP net earnings also include adjustments related to our acquisition of Siemens Health Services, which had a net impact on earnings of $4 million or $0.2 per diluted share. Adjusted net earnings were $163 million and adjusted EPS was $0.47, which is up 20% compared to Q4 of '13. For the year, adjusted net earnings were $576 million and adjusted EPS was $1.65, which is up 17% from 2013. The Q4 tax rate for adjusted net earnings was 30%, which is lower than our normal tax rate, primarily due to the reinstatement of the R&D tax credit during the quarter. In total, the lower tax rate benefited Q4 adjusted EPS by $0.2, with about $0.1 tied to the prior period portion of the credit. For 2015, we expect our tax rate to be in the 33% to 35% range. Now I'll move to our balance sheet. We ended Q4 with $1.65 billion of total cash and investments, which is up $94 million compared to Q3. Our total debt, including capital lease obligations is $130 million, down from $147 million in Q3. As previously announced, we added $500 million of debt early this year, which will increase our balance sheet efficiency and provide ample financial flexibility at a low cost. The impact on earnings from the debt will be minimal and does not change our guidance. Total receivables ended the quarter at $673 million, which is up $56 million from Q3, driven by strong sales in the quarter. Our DSO in Q4 was 66 days, which compares to DSO of 67 days in Q3 and 67 days in the year-ago quarter. Operating cash flow for the quarter was $223 million. Q4 capital expenditures were $76 million and capitalized software was $47 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was $100 million for the quarter. For the full year, operating cash flow increased 22% to $847 million. Free cash flow for the year was $393 million with capital expenditures of $276 million and capitalized software of $178 million. Moving to capitalized software, the $47 million of capitalized software in Q4 represents 37% of the $126 million of total investment in development opportunities. Software amortization for the quarter was $28 million, resulting in net capitalization of $19 million or 15% of our total R&D investment. For 2015, we expect to continue generating good free cash flow, with strong expected operating cash flow growth offsetting an expected increase in capital expenditures tied to beginning construction of a new campus and capital expenditures related to our Siemens Health Services acquisition. Now I'd like to provide an update on our acquisition of Siemens Health Services, which closed last week as scheduled. The purchase price was $1.37 billion, which includes the $1.3 billion agreed upon price and $70 million in working capital adjustments. We accomplished a significant amount of integration and transition preparation in the six months since we announced the acquisition. There is still a lot of work to do, but all of our work to date has supported our positive view of Health Services, and we are very excited to move forward as a combined company. Now, I'll go through Q1 and full year 2015 guidance. For Q1, we expect revenue between $1.05 billion and $1.1 billion, with a midpoint reflecting growth of 37% over Q1 of '14. For the full year, we expect revenue between $4.8 billion and $5 billion, reflecting 44% growth at the midpoint. We expect Q1 adjusted EPS before share-based compensation and acquisition-related adjustments to be $0.44 to $0.45 per share, with the midpoint reflecting 20% growth over Q1 '14 adjusted EPS. I'd like to point out that the consensus for Q1 adjusted EPS increased from $0.44 to $0.46 in the last 30 days and it appears to include some significant outliers. Our guidance is based on our outlook, not consensus, but I want to point this out, because Q1 consensus seem to shift a bit out of line with the rest of the year, especially when you consider Q1 will naturally include the least amount of accretion from Health Services. For the full year, we continue to expect adjusted EPS before share-based compensation and acquisition-related adjustments to be $2.05 to $2.15, with a midpoint reflecting 27% growth. Our estimate for the impact of share-based compensation expense is approximately $0.03 to $0.04 in Q1 and $0.14 to $0.16 for the full year. Moving to bookings guidance. We expect bookings revenue in Q1 of $1.05 billion to $1.15 billion, with the midpoint reflecting 21% growth over Q1 of '14. With that, I'll turn the call over to Zane.
- Zane Burke:
- Thanks, Marc. Good afternoon, everyone. Today, I'll provide color on our results and make some marketplace observations. I'll start with our results. Our bookings revenue in Q4 of $1.16 billion reflects 5% growth over Q4 2013, which was an all-time high. Full year bookings of $4.25 billion represent 13% growth over 2013. I view our bookings performance is very good, especially when you consider the mix of long-term bookings was lower than it has been in the past. In Q4, long-term bookings were 24% of total bookings. This is well below our typical 30% to 32% range. While, we did have one ITWorks deal in the quarter, the overall lower mix of long-term contracts is the primary reason our bookings were at the lower end of our guidance range. For the year, 30% of our contracts were long-term compared to 32% last year. As Michael discussed, our outlook for ITWorks is very good. Looking at overall contract size, we had strong level of contracts over $5 million and $10 million, with 33 contracts over $5 million, including 16 over $10 million. For the year, we had record level of contracts at both categories, with 112 contracts over $5 million and 63 over $10 million. New business activity was good, with 28% of our bookings coming from outside of our core Millennium installed base for both the quarter and full year. This is slightly lower percent than last year, which is more reflective of success in our base than lack of success outside of our base. Looking ahead, our pipeline reflects more new business opportunities than we have ever had going into a year, with a notable step up from a number of opportunities we saw in 2014. I am also pleased with how well-positioned we are competitively in these opportunities. As a result, I expect 2015 to be a very good year for new business. I believe we still have a multiyear period ahead of us, where there will be opportunities to win new footprints, where the core EHR isn't Cerner's. Overlapping this opportunity is growing demand for population health solutions, which continues to be fueled by trend away from fee-for-service payment models. A recent example of this trend is HHS' announcement last month that they intend to ship from fee-for-service to value-based reimbursement more rapidly than many people expected, with a goal of having 90% of Medicare payments tied to quality or value by 2018. I believe these trends play to Cerner's strength, as we improved our solutions that meet the present need of healthcare providers, while also widening our differentiation and population health, interoperability and having the most open EHR. Now, I'll discuss a few key areas of our business, starting with population health. Our population health organization had a strong 2014 with revenue increasing more than 20% to $415 million. This was driven by sales of enterprise data warehouse, analytics, clinical process optimization, HIE, Patient Portal and Healthe registries. 2014 was also a year in which we demonstrated that our Healthe Intent platform has great potential beyond our installed base by establishing important new population health footprints outside our base. We have many more prospects in 2015. As I mentioned last quarter, we believe we will emphasis where our population health capabilities are sold first, and then lead to new EHR footprints. Another trend that emerged in 2014 is that we are already starting to see opportunities to displace niche providers of population health solutions that were purchased by our clients as recently as 18 to 24 months ago. One of our larger bookings in Q4 was for replacing several niche population health solutions at a large client. The niche providers have not taken on the significant challenge of aggregating and normalizing clinical, claims and financial data across multiple systems. It is also difficult for them to match our ability to bring new real-time information into the clinician's workflow. As a result, we believe most competing offerings are using incomplete and latent datasets and they are part of the workflow, which makes them less attractive to providers. Moving to our revenue cycle business. We had a very good year that included strong growth and good progress at bringing key clients live on a revenue cycle solutions. For the year, our revenue cycle business grew more than 30% to approximately $200 million. This is a five-fold increase since 2010, reflecting our strong progress and returns on the significant ongoing R&D investments we've been making in this space. A key for our revenue cycle business has been getting more large clients to roll out our revenue cycle solutions. 2014 was a big year in this regard, as we brought sites live for some of our largest clients, and they are now hosting reference sites for us. This success contributed to another one of our large IDN clients purchasing a broad suite of revenue cycle solutions in the fourth quarter to implement across their 12 acute facilities and 85 ambulatory clinics. In addition to our strong current capabilities contributing to this selection, a key factor was our work on next generation revenue cycle solutions, designed to support emerging financial models that are more aligned with population health. Looking ahead, we have a very strong pipeline for revenue cycle that includes several of our large IDN clients. We also believe the significant experience the Health Services associates bring will help continue our strong momentum. Moving to the ambulatory space, where we had a strong Q4 and year that included the following highlights
- Michael Nill:
- Thanks, Zane. Good afternoon, everyone. Today I'm going to discuss ITWorks, professional services and provide a client success highlight. I'll start with ITWorks, which had a great year, including a new contract in the fourth quarter. Our new ITWorks client is Genesis Health System, based in Davenport, Iowa. Like most organizations, they have been on a journey to increase quality, while reducing costs. They viewed an ITWorks alignment as a good match. It can improve service and allow for predictable IT spend. The new relationship also calls for the establishment of a value alignment office, which is aimed at helping Genesis innovate and optimize care processes, ensure patients receive the best possible care and increase return on technology investments. The agreement also includes new services, such as help desk operations, application services and optimization of IT service delivery across the health system. Financial results for ITWorks were excellent in 2014, with revenue growing over 60% to more than $300 million. We believe our offering is very compelling, because we help clients control spending, while getting more done and achieving a higher level of value. Our ITWorks clients are all referenceable, 100% have attested for meaningful use, and 74% are at HIMSS EMR adoption level 6 or 7, which is more than 3x the 22% industry attainment level. Overall, ITWorks clients are typically model clients that stay on our latest code, embrace new solutions and services and are strong Cerner advocates. We believe that as provider organizations face ongoing pressures, our ITWorks value proposition will continue to resonate very well. This is reflected in a very strong pipeline, and we expect 2015 to be a record year. Now I'd like to provide some highlights from a strong year from our professional services organization that they delivered. In 2014, our professional services revenue grew more than 25% and eclipsed the $1 billion mark, with strong growth in traditional implementation revenue as well as operational management, performance improvement and other non-implementation revenue that is creating diversity in our services business. With approximately 6,000 associates, our professional services organization is the largest healthcare IT-focused consulting business in the world. I believe our services capabilities create a competitive advantage over competitors that rely almost entirely on third-party services, because of our ability to deliver a predictable outcome at a predictable cost. In 2014, we continued to advance our implementation methodologies, including our model system approach that starts with a fully built best-practices system, then allows for fine tuning as users get hands-on experience and training. This approach has the potential to significantly reduce implementation duration and effort, which should benefit new clients transitioning to a Cerner platform. In 2015, we are focused on
- Operator:
- [Operator Instructions] Your first question comes from the line of Michael Cherny with Evercore ISI.
- Michael Cherny:
- You obviously had a very strong year going into your base in terms of incremental new bookings, as evidenced by the results you've generated. As you think about 2015 and think about priorities for pursuing new business, obviously, Zane, I heard you guys talk about incredibly strong pipeline. How much do you think about that in segment, the opportunities in the pipeline, at least qualitatively, in terms of going into the existing base of your own customers, first going to the existing base now of the Siemens customers that you have on, where I would assume there is a pretty nice, very hopefully early to achieve incremental upsell opportunity versus the replacement market, which seems to continue to be shaping at least in a nice way in your direction?
- Marc Naughton:
- I think the overall market as we look for '15, again, I think you segmented it pretty well, Michael, our space kind of the HS base and then the new opportunities. Zane has spent a lot of time working on our new opportunities. Zane do you want to?
- Zane Burke:
- It will be the new business space, particularly the large regional player is very active in the marketplace. And I think you would see, we do some segmentation to match up with the buyers. If you think about our CommunityWorks offering on the smaller end, the regional community hospital marketplace, the IDN segment, and then the investor owned segment. There is further segmentation down that and then there is also our outside the U.S. organizations, which each country reflects a different marketplace, as we look at those. And so we attack those in different ways. And frankly, across the board, we see good opportunities across all segments of both new business as well as our installed base, and that's across the U.S. and outside the U.S.
- Marc Naughton:
- Zane, this is Marc. How about the Siemens client, you've had a chance to.
- Zane Burke:
- In fact, I've had to spent a fair amount of time with a number of clients, and clients are very receptive and excited that Cerner has stepped in to acquire our services. And I think there is many that are looking for a strong path moving forward with Cerner, and whether that's on Soarian platform or whether that's perhaps on a Millennium platform. And each client's journey is different, but I've been very pleased with how the clients have responded to date.
- Michael Cherny:
- And just one clarification. I heard the one ITWorks deal in the quarter, I assume there were no RevWorks since they weren't mentioned. Any other kind of really, really sizable deals that were into that bookings number?
- Zane Burke:
- There were no large RevWorks deals of any kind. We did have a number of business, some small business office services deals and some smaller RevWorks offerings, but no full scale revenue cycle management and no other significant large long-term booking.
- Marc Naughton:
- That's kind of one of the reasons that the bookings were at the lower end of the guidance range. I think as we look for '15, we do see some, particularly the ITWorks side of the business, looking that it could get on kind of the 1.25 type of a run rate for the year that we've been talking about. So we kind of do see a little bit of an uptick in that, as we look at our pipeline.
- Operator:
- Your next question is from the line of George Hill with Deutsche Bank.
- George Hill:
- I guess, Zane or Marc, first I'd start with you guys. If I look at kind of the composition of the bookings in the quarter, the very strong booking guidance for Q1, and the rev pull-through. I guess, Zane, can you provide any color around did any kind of long-term deals, long-term bookings, slip from Q4 to Q1 that you kind of have visibility to in Q1? And if not, I guess, can you just talk about what was generally happening with the longer-term bookings environment in the quarter?
- Zane Burke:
- Look I'd say, there is a lot more opportunity in 2015 than what we saw in 2014 in total, particularly on the new business side, but we see a number of opportunities, as Mike pointed out in his comments, around ITWorks side. We'll continue to be judicious about how we engage in the rev cycle space. And so I think you're going to see a little -- it's not unnatural to see some lumpiness in terms of how those longer-term bookings will pull through and have an impact on those numbers. So I don't think there is any trend per se in that space other than we feel very good about the ITWorks activity and the pipeline, and how that maybe impacting the bookings outlook as we move forward.
- George Hill:
- And then, Marc, maybe a quick follow-up, just with respect to the Q1 bookings and the Q1 revenue guidance. Is there any chance you'll give us some color on which portion of that we should think of as legacy Cerner and which portion we should think of as the SMS contribution?
- Marc Naughton:
- Really as we've given the fact that Q1 is going to have maybe a partial impact of Cerner health services and after going through a forecast meeting there, which actually I have to put a little bit color, that was really impressive that both their teams and our teams were able to have a pretty descent forecast format and a dive onto their opportunities. They are not going to have much contribution to bookings in their first quarter. I mean, they're kind of waiting for the close. Clients are certainly looking to see what the next step is and those conversations are ongoing. But most of the activity that you're going to see driven by in Q1 from a bookings perspective, will be coming almost entirely from Cerner. I think as you look at the revenue side, topline side, you kind of can look at health services providing us between $95 million and $100 million a month on the revenue topline. So I think that's pretty good estimate. That's kind of the number we've talked about. And I think that's one that our most recent work would continue to confirm. So I think from that perspective, you'll get a good view of the company. For those of you that are looking to kind of give a little bit of a historical view, at least kind of a prior year under Siemens, their 930 financial statements under GAAP will be issued some time in the next 60 days, as one of our filings and it will breakout health services. So you get a little bit of view. I would just indicate that when you look at those numbers, topline will look about right. I think on the earnings line, they had some one-time things, as they put together their GAAP statements and operations that moved up their earnings a little bit more than you'd expect. Basically you exclude those and their earnings would have been breakeven, which is kind of what we talked about. So that's a little kind of the color I can provide right now as far as what their impact on Q1 is going to be. And obviously, ones we get them in our income statement format and have a little bit better view, well certainly I think probably be looking to update our trend file and do different things in that space. As we combine the companies, there is things like backlog that we just have different approaches on certain elements and trying to parse them out between contract and support may not make sense going forward, we may have to go to a single backlog number, but our goal always is to be transparent and provide you guys what you need to make your decisions.
- Operator:
- Your next question is from the line of Steve Halper with FBR.
- Steve Halper:
- Just going back to the cash flow comments that you forecasted or made. Could you provide a little bit more color, I mean, Marc, just because we're not really familiar with the levels of capital requirements at Siemens or what you're planning on doing on R&D basis? Are you looking at flat free cash flow in 2015?
- Marc Naughton:
- When you're looking at 2015, right now my best estimate is that we'd expect it to be right around $400 million, so basically flat to this year. The primary driver of that is going to be more CapEx. The CapEx required for health services isn't significant. There is some things we want to invest in Clearly, just their offices and making sure that they've got what they need, a little bit relative to their data center, getting that up to speed relative to our standard and be able to utilize some of that space. But I think overall even with those additions and even with spending more money on our campus than we certainly did last year, we should still be able to fund all of that and still drive out right around $400 million of free cash flow.
- Steve Halper:
- And would you expect that number to -- your level of CapEx, does that stay elevated for a number of years or is '15 a little bit of a increase because of the campus build-out?
- Marc Naughton:
- The campus build out is going to be the key for '15 and '16, so that will impact those years. Once we get the first phase of that campus done, we'll likely be able to take a little bit of a pause, once again depending on our growth, because the key for us is, we're a growth company and we got have places to go, put our people and make them productive. But I think right now that's kind of looking like '15 and '16 impact with '17 probably being a relief from some of those bad spend.
- Operator:
- Your next question is from the line of Bob Jones with Goldman Sachs.
- Bob Jones:
- Marc, I actually wanted to ask one on operating margins. I know the target coming into 4Q, I think was for more than 50 basis points of expansion. You obviously didn't see that. Margins were actually down. And then also for the year, I think you came in below the annual target as well. I understand you guys are talking about the holiday week being unproductive, but I would imagine some of that is more of an annual issue. So I guess as you think about the margin progression you saw in '14, and in the quarter, for that matter, could you maybe just talk a little bit about kind of what went off target as far as the things you thought you had control of?
- Marc Naughton:
- Well, I think the key talking about the holiday week is not so much that it's a holiday, because, yes, Christmas comes every year, which my kids think it does, and they're right. And the fact that we do a 52-53 week year, so this year was 14 week quarter, which included that extra week, which had the normal spend, all the spend, but didn't have as much topline impact. I think we've always looked at the company as we should have a goal of driving out 100 bps per year growth in our operating margins. And that growth is going to kind of go up and down on an annual basis, but if you look back to 2010, I mean in the last four years, we probably averaged right at a 100 basis points a year of growth. I think the key really for operating margins at this point is looking at '15, because when we add in the health services revenues, and then much lower margins from those revenues, you're going to see a significant impact on our operating margins. So I said in my comments, we'd expect those to be down kind of in the low-20s from current 25-potentially-plus-percent levels. The good news is that as the accretion starts driving out as we go into the out years, that quickly gets back to current levels and begins to be able to go up at our 100 basis points a year expected growth rate. So 2014 strong, in Q4 particularly, really the margin impact was as much driven by a strong hardware quarter and device resale quarter as anything, but I think it doesn't change our view of the business and the opportunities we have to get more efficiencies out. And clearly as we add health services, we, a bigger company, we should have more opportunities for those efficiencies.
- Bob Jones:
- And then I guess, maybe Zane, just one on the new business side. I mean nice win with Meridian Health, particularly given that it is outside of your EMR base. Any sense you can give us on what the bookings or annual revenue contribution is for a strategic deal like this? And maybe more broadly, anything on the pipeline around similar deals that are focused around Healthe Intent?
- Zane Burke:
- As we mentioned that the population health is about $415 million in revenue. And still we had the good growth and we're anticipating continued good growth in that space. So they can kind of use that as a marker for how you can anticipate our population health business to grow in some of those kinds of schematics, but I can't speak about the individual deal economics.
- Operator:
- Your next question is from the line of David Windley with Jefferies.
- David Windley:
- So as you think about the Siemens side of your bookings for the full year, I know, Marc, you already said, first quarter won't be much of a contribution. As you think about the full year, can you help us to understand maybe which of the major buckets you expect to see the most traction in the early going? Is it selling Millennium into the base? Is it population health leading? Zane, as you kind of talked about going to market population health first and following with EHR, or is it even managed services? Can you help us to understand where that traction will come early?
- Zane Burke:
- I think you'll see traction. I think managed services will continue to be a strong element for -- that's kind of an existing business for them and one that will continue. We offer some additional services in that space. So remember our first objective is to make sure that we keep that client-base satisfied and moving forward. I think you will see a number of clients that may think about moving to a Millennium platform and so there maybe some benefits in that. And so that will be reflective in our guidance as well. But it's a blend of the managed services, which is what they've continued to do, some add-on solutions. We'll continue to sell Soarian Financials in a patient accounting on a standalone basis. There was a marketplace for standalone patient accounting, particularly, given one of our competitors has announced the sunsetting of some of their applications in the larger space. So I think you will see a number of different buckets that that falls in. Those are all kind of reflective in the bookings guidance that we provided.
- David Windley:
- And then, Marc, to your point on margin going down first, and then working its way back up over time, are there, say, significant buckets of expense that you could identify to us that will come out of the Siemens side that will be the contributors to that synergy and margin accretion over the next couple of years? And are those things tied to the pace at which, say old Siemens base converts over to new Cerner footprint base?
- Marc Naughton:
- Yes, relative to, I mean, the synergies are certainly important. I think efficiencies come from just a combination of our two organizations. I don't know, I mean we've liked the health services associates. We think they are talented. They are experienced. There were valuable assets. So we're pleased to keep to work with them and to build their momentum certainly within that client-base and our shared-client base. So I think a lot of the synergies are just, they're efficiencies relative to being a organization under a large corporate parent that has a certain method of operating, that is somewhat more bureaucratic than perhaps Cerner Corporation is. There are things that we just see from how you operate and certainly there are elements of staffing that we can repurpose people to be focused on revenue producing activities rather than administrative type activities. So we think there are opportunities to go drive that out and given the targets we set, get into a $175 million of OE kind of coming from these assets by 2017, we think those are eminently attainable. And if we just keep executing, keep driving our business, and getting with their client-base and driving them forward, that we should be able to deliver that without a great deal of effort.
- Operator:
- Your next question is from the line of Lisa Gill with JPMorgan.
- Gavin Weiss:
- This is actually Gavin Weiss in for Lisa. Zane, I wanted to touch on your comments on the ambulatory space. I think you said, you had 11 displacements, including three of the largest clients from one competitor. I just wanted to get some color on the drivers of those displacements. Is it dissatisfaction with the products or are the providers now affiliated with a core Cerner institution?
- Zane Burke:
- These are long standing clients of Cerner's from an acute key perspective, and I would say it's kind of a combination of factors. One, our ambulatory solution is incredibly good. And the investments that we've made in the R&D and the improvements that have been made on the ambulatory side, our clients have seen. And as they move towards further clinical integration and wanted to create more system-ness, if you will, they're looking for an integrated acute, an ambulatory solution as they move forward. And I think you will also look at that organization, and say that that competitor was also not providing the kind of value that those clients were looking for. So it's kind of combination of factors that comes together, but incredibly good wins for us this year and representative of a trend that we think we'll continue to see.
- Gavin Weiss:
- And then, Marc, I think I heard you that you said the addition of the new debt will not impact earnings, so can you just give us more color about how should we think about the interest expense, interest income for '15?
- Marc Naughton:
- No, it will impact earnings, but as you've likely noted, our guidance has basically remained the same, since we talked about at the end of Q3. So we'll just cover that interest expense within our existing guidance.
- Operator:
- Your next question is from the line of David Larsen with Leerink.
- DavidLarsen:
- Zane, you made an interesting comment about 2015. And I think you indicated that the pipeline and the activity for '15 was actually greater than 2014. Can you just give any more color around that? Are you talking about hospitals, large hospitals, community hospitals, just any more color would be great?
- ZaneBurke:
- I am speaking about hospitals primarily, so in the hospital marketplace and it's across many segments. And as we've talked about for a while, this is a replacement market, a replacement market that's preparing for changes in their business models, that's preparing for changes in being a true systems and just not seeing the value from their existing suppliers that they need on a going forward basis. And it's much stronger than it was in 2014 and we see the level of activity significantly up.
- DavidLarsen:
- And then would you say a good portion of that is coming from Siemens? And then would there be maybe one or two other vendors like may, I don't know, Horizon or MEDITECH that you'd highlight or is it really maybe 10% Siemens? Just any more details will be great.
- Marc Naughton:
- Sure. So obviously, one of those you mentioned has announced some sunsetting of solutions, and that's creating a part of that, which actually, I would say, is additive to even the level of activity that we've seen. The Siemens activity is actually additive to the volume that we were seeing early on. So we are already seeing increased levels of activity for '15. And some of these other events, including some of that we've created through our own acquisition is driving even more demand for our solutions. So it is all those factors out there, but the activity level is just higher than it was in '14 by orders of magnitude.
- Operator:
- Your next question is from the line of Sean Wieland with Piper Jaffray.
- Sean Wieland:
- If you could break down for us, if I am a Millennium customer, what's on my shopping list that I really have to buy to be ready for Medicare's shift to fee-for-value? Put another way, what are some of the specific capabilities that you are bringing to the table there that you think are unique to you?
- Zane Burke:
- Sean, there's is a couple of things, which you would first to think about. We have, what it we call our Lighthouse offerings, which are truly around how do you provide the best quality care at a lower cost. And so we are able to actually put content and process through our software and solutions to help drive better outcomes both from a patient perspective and a financial perspective. So the first thing you want to do is go future-proof yourself around some of those quality metrics and prepare for that. As you take more risk, our population health offerings will be the next set of things that you'll want to have and you have to have in this marketplace. You will need the access to data, so you're going to have to be able to think about your data in different ways and he who has the data wins in the future game and following that data is going to be really incredibly important. So having a open interoperable solution is a very important element. So you're going to need an EMR that's capable of actually accepting different solutions, getting it back into the clinician's workflow. Its actually, you're going to need all of Cerner to be successful moving forward and the things that we have built and the things that we will build continue to add value. So it's a very exciting time. More risk that's borne, obviously, has impact on our clients, but we view that as very positive from an IT perspective and the need to understand the data, know the data, and to impact at the point of care is going to be more important, so you really think about all those components as part of that future proof.
- Sean Wieland:
- How about specifically some of the stuff you're doing with iCentra and Intermountain Healthcare, or should I wait for HIMSS for that?
- Zane Burke:
- Well, we'll give you guys an update around HIMSS for that, but we're very pleased with the progress that's been made at Intermountain. We anticipate going live here in the first quarter. And so I think you'll get an opportunity to speak with both our client and Jeff as it relates to what's happening at Intermountain. And we believe that represents another turn of the crank on EHR that will be ready for the future, so there are number of things that we're pretty excited about.
- Operator:
- Your next question is from the line of Mohan Naidu with Stephens.
- Mohan Naidu:
- My questions, Marc, maybe on the bookings, so you noted about the long-term contracts. What do you construe as long-term contracts, I am presuming ITWorks, RevWorks. What else?
- Marc Naughton:
- Usually anything that's got a duration that's going to be five-plus years, so ITWorks tend to be seven to 10 years, RevWorks are similar to that, so that's how we would manage services or hosting agreement all of those. And keep in mind, when we sign a brand new client, and they buy software and services and implementation, many of those also buy managed services or hosting services. So that contract, a component of it will be a long-term booking and the rest of will be just kind of normal.
- Mohan Naidu:
- And one follow-up question on the Siemens contribution. You noted $95 million to $100 million per month. Is it fair to say that the majority of that is going to be support and maintenance revenue?
- Marc Naughton:
- The majority of it will be in backlog for health services that will come into the income statement. The classification of it will vary, but it is flowing from long-term contracts that will have a variety of components to the revenue, but it's basically kind of a single bucket of dollars that would be parsed out in different places, but it's coming out of primarily the backlog.
- Operator:
- Your next question comes from the line of Steven Valiquette of UBS.
- Steven Valiquette:
- So one of your smaller hospital EHR competitors reported some soft earnings about a week or two ago, and it talked about this meaningful use attestation period for FY '15 being increased from 90 days to 365 days starting back in October of last year. However, that may have caught some hospitals unprepared to start a year-long attestation and may have led to push out of some purchase related to stage two. So I guess I am just curious if you think that this CMS timing situation maybe had any impact on your bookings in the just-reported 4Q '14. And also, could that impact the current 1Q '15 as well?
- Zane Burke:
- I don't see, we've been talking about this for a while, but meaningful use has not been part of our bookings elements and our clients have been passed that dialogue for quite some time as it relates to impact on our bookings or revenues. And we've been in a different marketplace around the replacement side of that, so I don't anticipate that that had any future impact and I don't think it had any impact on the previous quarter either.
- Marc Naughton:
- Even the new business opportunities outside our client base are people that probably cobbled together something to meet stage two.
- Zane Burke:
- I will actually say, substantially all of them have strategies for meaningful use. They are looking at the increased level of activity is not a meaningful use conversation. It is about how do I create a platform for the future by which I can think about either remaining a viable standalone organization or creating a scale to be a bigger larger organization or preparing for changes in payment models, aligning across the continuum of care, all of which plays into Cerner's strength.
- Steven Valiquette:
- So were you surprised to hear this peer talk about this, or is this peer just kind of so small in the grand scheme of things it wasn't really something that you guys were really focused on one way or the other?
- Marc Naughton:
- Their view differs from ours.
- Operator:
- Your next question is from the line of Jamie Stockton with Wells Fargo.
- Jamie Stockton:
- Just a couple of quick ones. Marc, on the Siemens business, can you give us some feel for what bookings were in 2014 or what the book-to-bill was, or anything that we can go by as we think about how 2015 is likely to play out?
- Marc Naughton:
- Jamie, I don't know that really historically it's going to have a lot of value. Some of their activity has been extending contracts, so adding years to existing relationships, which is great, when we come in, because there is a lot of long-term agreements that are in place. If you looked at any particular period where they had a bunch of those, you would come up with a big bookings number. And so I don't that that's going to be that helpful. I think as you look going forward, are they going to have the same book-to-bill level we will? No, I don't expect that. At this point, I don't know that I could, given that in Q1, which is the bookings number we can really talk about. It's going to be so low that it's not really worth doing the math to figure out their book-to-bill. We should be able to give you a better sense of what their bookings level is going to be as we go forward, and get a better sense of kind of what we think on a quarterly basis they'll be able to do, but is it 1 to 1, is it 0.5 to 1, I cant' tell you today what that is, but I can tell you it's going to be lower than ours.
- Jamie Stockton:
- And then, Zane, maybe real quick, you mentioned that there were some niche health guys that were already at risk of being replaced in, I assume some of your core clients. Can you talk about in the pop health space how important is it for a vendor to be able to provide both the technologies that health needs and maybe also services around that technology, care management or whatever? Is that something that is differentiating some companies from others in kind of the pop health space and how do you think that will play out?
- Zane Burke:
- It's good question, Jamie. I'll speak first to kind of what I think has happened in the replacement activity. I think the replacement activity has been driven by people that earlier on they had something that sounded like it was pop health related, and our clients and their industry was needing anything and grasping it, at some of those niche providers that had something of some value, but at the end of the day it's not a comprehensive platform for managing population health. And I think what the future is, is a true platform-based population health strategy. And I've talked before about kind of 1.0 buyers in the space versus 2.0 buyers. And what I mean by that, people that have actually been assumed taking risk see the need for a system-based approach, that's an enterprise-wide based approach that thinks across the continuum side of this. As it relates to integrated services, I think there are some compelling offerings and I think you'll see additional solutions and services for companies that do provide both technology and service moving forward. And I think you'll continue to see business models evolve as we get further into the population health role, and the more risk that our clients take on. I do think there were some opportunity for that side. End of Q&A
- Marc Naughton:
- We're kind of over our limit on time. So I just want to thank everybody for being on the call. We're very pleased with the strong 2014 that we had and we really like the outlook for 2015. We really look forward to welcoming our health services brethren and going to do great things together. Have a good day.
- Operator:
- Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.
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