塞納 (CERN) 2002 Q2 法說會逐字稿

Welcome to Cerner Corporation's second quarter 2002 conference call. Today's date is July 17th 2002, and this call is being recorded. The company has asked me to remind you that various remarks made here today by Cerner's management about future expectations, plans, perspectives and prospects constitute forward looking statements for the purpose of the safe harbour provisions of the Security and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward looking statements. Additional information concerning factors that can cause actual results to differ materially from those in the forward looking statements may be found under the heading 'Factors that may affect future results of operations, financial conditions or business' in the MD&A section of Cerner's Form 10K and other periodic filings, which are on file with the SEC.

At this time I would like to turn the call over to Glenn Tobin, Executive Vice President and Chief Operating Officer of Cerner Corporation. Please go ahead Sir.

Thank you. Good afternoon everyone, and welcome to the call. I am pleased to announce that Cerner has again delivered a record quarter, which we have done for every quarter for nearly the last three years. Across the board our business was strong: from revenues to earnings, to implementing to helping our clients achieve true business benefits.

we achieved our eleventh consecutive quarter of record bookings in revenues. At US$ 178 million, bookings grew by 40% over the year-ago quarter. Our revenues also grew substantially to US$ 181 million, a 39% increase over last year. We achieved our eleventh consecutive quarter where we met or exceeded earnings estimates. EPS increased 52% to US$ 0.32, reflecting our growth as well as the continued leverage in our business model. We are increasing our guidance for the rest of 2002 and into 2003 as well. We achieved record cash collections at US$ 168 million, which drove strong operating cash flow at US$ 16.4 million, slightly ahead of our projections. We over-attained from a product implementation standpoint, setting a new record number of Cerner Millennium major product conversions at 136 for the quarter. As you will hear over the next few minutes, we are very proud of where we are as a business. We have clearly emerged as the leader of our industry. We are helping clients all over the world to a change in how they practice medicine, leading to more cost-effective and safer care. At the same time, we are humbled by both the opportunities and the challenges inherent in transforming an industry that accounts for a large proportion of every major economy - currently at around 13% of US GDP, for example. Today we are going to break our remarks into four segments. Trace Devanny, our President, will briefly discuss why we think we continue to succeed in the market and what we see happening in the overall healthcare information technology industry. Paul Black, our Chief Sales Officer, will discuss our top line growth. Then I will be back to discuss some broad operational successes, and Marc Naughton will then clean up and provide the financial analysis and our outlook for future periods. Neal Patterson is travelling in a fairly remote area, making his participation in this call difficult. Now I will turn the call over to Trace Devanny.

Thanks Glenn. Hello everyone. Given some of the recent news in the marketplace, I think it is worth to point out some of the reasons Cerner continues to consistently deliver great results quarter after quarter when other healthcare information technology companies have struggled. While we believe there is enough demand in this HCIT marketplace for several companies to be successful, there are three distinguishing characteristics about Cerner that have lead to our leadership position and unmatched consistency in delivering strong results. The first factor contributing to our success is our ability to envision, architect, design and develop a set of information technology-based solutions meeting the clinical and business needs of our clients. Our leadership position is the result of our consistent, long-term strategy of making large investments in information technology for healthcare. We have achieved unmatched depth and breadth in our Millennium solution, enabling us to address the very large and complex needs in the markets of healthcare. We believe Cerner will enjoy this competitive advantage for many years to come. From this position we can continue to grow our company by executing on a number of growth strategies, including cross-selling the breadth of the Millennium solution into our large install base; realising growth in new markets, such as Europe; and addressing new opportunities, such as medical content, pharma, and bioterrorism. In discussing the strength of our product it is important to point out the strategic acquisition we made during the second quarter. The Holy Grail of healthcare is that all medical decisions are based on the best available evidence at the point of decision. Many people refer to this desired state as 'evidence-based medicine.' Cerner's long-held belief is that creating an evidence-based medicine environment will require the total integration of workflow-based information technology with medical knowledge. To that end, on 2 May 2002 we announced the acquisition of Zynx Health, a subsidiary of Cedar Sinai Medical Centre in Los Angeles. Zynx is widely recognised for advancing evidence-based medicine through content solutions and services that deliver the latest scientific knowledge and best practices, based on the research of thousands of articles and clinical studies. By integrating this evidence-based content from Zynx into the already robust clinical content capabilities of Millennium we are creating the next generation in healthcare information technology. We are convinced that by adding Zynx's content we will continue to broaden our leadership position and provide the clinical community with the capability to move from the traditional memory-based practice of medicine model to that of knowledge-driven care. A second major differentiating factor for Cerner is the leverage inherent in our business model. This leverage allows us to continue funding our vision and long-term commitment to research and development, while still expanding operating margins and growing earnings. Evidence of this leverage is the fact that we continue to spend much more on new product R&D than any other HCIT competitor, while continuing to grow operating margins to industry-leading levels. It is important to note that our competitive advantage from an R&D perspective goes beyond the dollars we spend. The experience of our product development organisation is a very important component of our competitive advantage. There is no company in our industry that has a product development organisation with over 1,300 associates with an average experience of five years, and a core group of architects averaging over 12 years of clinical information experience, working every day to improve healthcare through the strategic use of IT. The combination of vision and a strong business model has positioned us well for success in the current healthcare and general economic climate. Healthcare providers are looking for strong visionary partners to redesign the way they practice clinical medicine. We believe there is compelling evidence that Cerner is the clear leader of this transformation. We continue to get credit for our long-term thinking and commitment to our vision and clients. We have consistently maintained our core strategies in an industry where many companies have continually changed theirs, and it is now paying large dividends. These factors, as well as our continued strong financial performance, make Cerner the safe choice among IT suppliers. A final key to our consistency is our unparalleled execution in both selling and delivering our solutions, as well as the strength and continuity of our management team. Our vision and commitment to R&D only creates value if we execute, and our ability to consistently execute quarter after quarter continues to distinguish us as a clear leader in this sector. For nearly three consecutive years now our sales force has delivered a record level of bookings, and our consulting organisation has matched this demand with an ever-increasing ability to deliver, implementing more than 1,400 Millennium applications during this rapid period of growth. Finally, I believe that our leadership team at Cerner is one of the most experienced, stable and [deepest] in this industry. While you will only hear from a few of us, there is a very strong group of over 200 executives leading this company every day. Our execution is impressive when you consider the ups and downs experienced by other companies during this period. Now I would like to make a few comments on the market-expressed demand for our products and services. As we have been saying for the past several quarters healthcare providers are increasingly embracing IT as a core business strategy. As Paul Black will discuss in a moment this trend continues to show up in all of our leading top line growth indicators. The fact remains that healthcare providers are faced with significant issues that can and should be effectively addressed by information technology. Patient safety, quality of care, and the workforce shortage have remained at the top of CEO priority lists. High capacity and the increasing complexity in providing care also continues to create challenges for these healthcare systems. These problems will be exacerbated by growing demand for care by the baby boomers, who will turn 65 within this decade. Computerized Physician Order Entry, or CPOE, remains a robust driver of demand. We believe this industry will grow to US$ 1 billion in the next several years. As we discussed at length last quarter, we strongly believe that our closed loop approach to CPOE is superior to any other approach. CPOE is not effective unless you can integrate the flow of data from the physician placing the order, to the pharmacist filling the order, back to the nurse administering the order, and then finally back to the doctor for monitoring. In addition, the content throughout this process is critical, and the addition of the content from Zynx to our integrative platform will only widen our leadership position in this emerging growth market. CPOE has clearly begun to drive clients towards making IT a strategic imperative. More importantly, once they are in the market they will quickly come to appreciate that investing in a broad, clinically focused architecture, such as Millennium, is clearly the best approach for their organisation. Once again, our vision - long-term investment in technology and the depth and breadth of our catalogue - becomes a compelling reason to choose Cerner. Turning to the financial conditions of the healthcare providers, we continue to report to you that the core group of healthcare providers, health systems, hospitals and large physicians' groups continue to see high-volumes of patient activity against improved operating margins. We believe that this will result in improving cash flows sourced for their need to invest in information technology. There are clearly some providers who are not enjoying this type of economic success, such as those hospitals with a large percentage of Medicaid patients in their revenue mix. However, our view of the broader improvements in the economic health of providers is supported by a June 2002 report by [Solutionet] indicating that 2001 operating margins improved 60 basis points over 2000 to an average of 4.27 percent. In closing, I would like to reiterate how pleased we are with our second quarter results. We are excited about the rest of the year and we expect to continue to widen the gap between ourselves and the rest of the marketplace. Now I would like to turn the call over to Paul Black, our Chief Sales Officer.

Thanks Trace. I am pleased to announce another record breaking quarter. As Glenn mentioned, bookings revenues were US$ 177.9 million, an increase of 40% over the year-ago record quarter and our eleventh consecutive record. Please remember that our bookings revenue number does not include future support agreement. Including the value of that future support agreement will increase our bookings number 40-50%. Bookings margins for the quarter was US$ 151.4 million, an increase of 41% over the year-ago quarter. For the quarter we are pleased with the breadth of our success, signing a record 102 deals. Over 40% of this quarter's bookings were signed with new clients, demonstrating our continued and unprecedented market share gain. We liked the deal mix of the quarter contracts, with ten of them over US$ 5 million, three of which were over US$ 10 million. Deals less than US$ 5 million contributed significantly in this quarter. This reflects the strength of our experienced sales organisation and the critical competitive advantage of having a broader set of solutions available to this marketplace. The importance of this breadth is further highlighted by a record quarter for emergency medicine packed in ProFit patient accounting deals. Turning to the competitive landscape we continue to believe that there is amble opportunity for a few large companies to have success in this market, even while we increase our market share. We also believe that our long-term vision, commitment to R&D, consistent execution and delivery of projects continue to distinguish Cerner from the competition. This makes Cerner the preferred partner for the majority of the healthcare providers in our global marketplace. Our result in Q2 and in the previous ten quarters support this statement. On the pricing front we see isolated cases where competitors are more aggressive on price, specifically when they are trying to protect their install base. However, we are maintaining a premium pricing level relative to the overall market. More important than price we continue to see product availability, product depth, company stability, company vision and commitment to R&D drive the decisions in this market. Looking at Cerner's key [field] activity measurements, all leading indicators remain strong. Even after another record bookings quarter our pipeline remains very strong, with a sequential net increase over Q1. The volume of Vision Center visits and product demonstrations also remain strong. Our RPs are at record levels, both in numbers and in dollar amounts. At the same time we continue to sign more than half of our deals without an RP. Another key field indicator this quarter was HNA Millennium sites visits, which were up 22% sequentially over Q1. We benefit from having more applications up and running on a contemporary architecture than any other supplier. As a result we are able to direct a potential client to numerous reference sites to see Cerner systems running in a wide variety of environments. This helps to highlight that Cerner is a safe choice for this market. Our large and growing install base, our product depth, our leadership position and the investment we started over three years ago in our sales force give us visibility to many more deals than we have seen in the past. In summary, we continue to see good opportunities in the marketplace and are very pleased with our position in this industry. We look forward to continuing our record of strong execution and market share gain as we continue to grow Cerner's top line faster than the broader market. I will now turn the call back over to Glenn Tobin.

Thanks Paul. This was a quarter of many records and successes for Cerner Operations as well. Cerner consulting teams completed a record 136 Millennium major project conversions at 35 different clients. There are now over 1,400 Millennium applications live in over 360 sites worldwide. Based on the outstanding results in the quarter we are well on track to meet our annual target of new product implementations for the year. Cerner's Solutions Factory, our rapid implementation group, had an outstanding quarter. In June we turned on 14 products at Somerset Medical Center, a New Jersey community hospital. That project, which ran 11 months from start to finish, was the quickest project conversion of that magnitude in the history of Millennium. The record stood for only a few days, however. Early in July Uniontown Hospital in Pennsylvania turned on 19 products in just ten months after the project kick-off. Even more remarkable, the Uniontown project also included ProFit, our new patient accounting solution, demonstrating the strong status of that new product for Cerner. For those of you keeping score the count of live ProFit sites is now eight, and we remain on track for general availability of ProFit by the end of this year. Another noteworthy event was the implementation of our entire suite of registration, scheduling, eligibility and other capstone access management solutions in a major East Cost academic medical center. One 1,200-bed acute care facility and 145 of its separate clinics were connected across a huge metro area, creating a common set of front-end business processes for the organisation. At this institution there were no other clinical applications from Cerner. We even displaced a well known niche competitor in the process. This success demonstrates that Cerner's access management and other administrative solutions are standalone competitive. We can lead with them as well as we can with our clinical applications in a wide variety of healthcare settings: in-patient, out-patient, large or small, independent or IDN. Every time we do them standalone we create substantial downstream opportunities for our clinical solutions. The success stories I have told you about are no accident. They are the result of the continuing commitment we have made to operational excellence in Cerner, which I have discussed repeatedly over the past several years. Cerner attained ISO9001 certification earlier this year, as I mentioned in the previous call. Our commitment to high quality continues, and I believe our hard work in that regard is paying substantial dividends today. As part of our quality imperative we are working hard to create the perfect client experience across our entire client base. We are putting our money where our mouths are in that regard as well. Everyone with any variable compensation has that compensation tied to the result of quarterly surveys of our client base. An important part of our ability to drive high quality client experiences is the training of our associates, which I mentioned on previous calls as a key initiative. We have had great results here. The number of consultants certified on one product has increased 67% since the beginning of this year. The number certified on more than one product increased by 161% in the same timeframe. We made a commitment to educate our new people and that commitment is now being conclusively demonstrated. Now, let me turn to Turner's operating margins. For the quarter operating margins increased 120 basis points over the year-ago quarter to 11.6%. While this growth in operating margins is slightly lower than previously announced targets, our top line growth continues to exceed our estimates, allowing an impressive 52% increase in EPS. I do not know about you, but I cannot think of many companies growing revenues over 30% and earnings over 50%. Even better, we continue to believe we can grow this business at impressive rates over the long term, with sustainable revenue growth in excess of 20% and sustainable earnings growth in excess of 30%. In the near term, as we support the higher top line growth rates, we expect to see margin expansion in the 100-150 basis points range. This level of expansion should drive out nearly 50% earnings growth for 2002. Finally, I want to make a brief comment on our recent sale of 14 million shares of WebMD stock. This was an investment decision we made, recognising that we are in a major bear market and that Cerner is not an investment company. Our decision was not reflective of our opinion of the outlook of WebMD. The sale of this position and an additional 700,000 shares we have sold earlier in the quarter generated approximately US$ 90 million in pre-tax proceeds this quarter. Including the US$ 25 million of pre-tax proceeds from shares sold in 2000, we have received approximately US$ 115 million from sales of WebMD shares. With that I will turn the call over to Marc.

Thanks Glenn. Turning to the income statement revenues for the second quarter were up 39% to US$ 180.6 million, compared to US$ 129.9 million for the year-ago quarter. The revenue composition for the quarter was US$ 75.3 million in systems sales, US$ 42.1 million of maintenance and support, and US$ 63.2 million in services. Systems sales declined slightly from Q1 due to a lower mix of equipment sales as compared as compared to the unusually high Q1 number. Our normalised basis Q2 systems sales are up about US$ 4 million sequentially. This more normal mix is also reflected in our gross margin, which increased 150 basis points sequentially, to 78.4%. Contract revenue backlog for the quarter increased 30% from the year-ago quarter at 7% sequentially, to US$ 656.3 million. Support revenue backlog was US$ 261.3 million for a total backlog at the end of the quarter of US$ 917.6 million, up 29% over the US$ 710.6 million at the end of the second quarter of '01. The margin on the second quarter backlog was US$ 600.2 million, and the margin of support backlog was US$ 236.3 million for a total backlog margin of US$ 836.5 million. Operating expenses for the quarter was US$ 120.7 million, up US$ 4.6 million over the first quarter and in line with the increase we expected. Primary drivers of this increase included the continued growth of our consulting organisation and the increased operating expenses associated with Zynx. Net earnings were US$ 12 million in the quarter, up 57% from the US$ 7.6 million in the year-ago quarter. EPS was up 52% at US$ 0.32 per share, up from US$ 21 per share a year ago. I would note that these earnings exclude a non-recurring gain on the sale of WebMD shares this quarter that increased EPS to US$ 0.37. Cerner has completed this computation under a SFAS 142 relating to the carrying value of goodwill this quarter. The net result is a one-time reduction in the carrying value of goodwill in the amount of US$ 1.3 million or about US$ 800,000 net of tax, a relatively small number given the number of acquisitions we have made. This item does not impact the Q2 statement we have made, but is reflected in the six month year-to-date GAAP income statement as accumulative change pursuant to SFAS 142. Turning to cash, cash collections for the quarter were at a record US$ 168.4 million and did not include any significant third party financing deals. Operating cash flows for the quarter were US$ 16.4 million, in line with our projections. We continue to look for operating cash flow increases in the last half of the year, for the full year target similar to last year's operating cash flow. Please note that we will have a non-recurring tax payment related to the sale of WebMD shares. This should be around US$ 33 million, and we will hit operating cash flows in Q3 even though the proceeds are included this quarter in cash flow from investing activities. Our full year operating cash flow projection does not include that payment. CAPEX for equipment and buildings for the quarter was US$ 12.2 million. Capitalised software was US$ 11.8 million, and we had about US$ 13.4 million in net cash investments as a result of our acquisition of Zynx. Taking account of WebMD proceeds as US$ 90 million during the quarter cash increased US$ 68.9 million to US$ 143.4 million. Looking at the balance sheet, receivables increased US$ 9 million to US$ 250 million. Contracts receivable ended the quarter at US$ 93.5 million, about 37% of receivables, which is the same as Q1. DSOs for the quarter were 126 days. That is up one day from Q1, down three days year-to-date and down nine days year-over-year. As we discussed in Q1 the unusually high level of equipment revenue helped the four day decline in DSOs. Without the equipment impact Q1 DSOs would have actually been 127 days. We still believe we are on track to reach our lower DSO goal below 120 by the end of this year. We have talked about actions we have taken to lower DSOs, one of which is working with our clients on date-based revenue [milestone[ based payment terms for licensed software. That is where we indicated that around 50% of our contracts had all of the license payments tied to dates, which we felt was great progress. This quarter that number increased to almost 70%, and that will be a significant factor in reducing DSOs as we go forward. Looking at the software capitalisation, the net capitalisation rate was 12% of our total R&D spending this quarter, and the gross software capitalisation rate was 23%, consistent with prior quarters. Let me now provide you with our thoughts on the rest of the year and an initial outlook on 2003. Based on our strong start to the year and continued good earnings visibility we are again raising our 2002 EPS guidance to the range of US$ 1.36 to US$ 1.38, up from our previous US$ 1.33 to US$ 1.36 guidance. The middle of this range reflects [CPS] growth of about 47%. Given our strong top line momentum and visibility we are also increasing our expectation for 2002 revenue to between US$ 720 million and US$ 730 million, compared to our prior guidance of US$ 700 million to US$ 720 million. The middle of that range reflects revenue growth of 35%. We continue to have good revenue visibility with about 85% of our targeted revenues either in backlog or available from highly reliable sources. Looking specifically at the third quarter we are comfortable with the current consensus estimate of US$ 0.36, which reflects 44% growth over Q3 of '01, and revenue of around US$ 185 million, reflecting 32% growth. Looking at bookings we again see very good visibility and expect bookings revenues for Q3 of around US$ 180 million, which would be a 37% growth over the third quarter of last year. I would note that both our revenue and bookings guidance reflect sequential increases to this quarter's record levels, and I would see that as fairly strong performance given that historically Q3 has been lower due to seasonality relating to summer vacations and other issues. As our custom we now also provide initial guidance for 2003. At this time we expect 2003 earnings per share to be in a range of US$ 1.75 to US$ 1.80, which reflects 30% growth over our 2002 guidance. We expect 2003 revenues to be between US$ 850 million and US$ 870 million, reflecting nearly 20% growth. Finally, before I turn over for Q&A I would like to just make some brief comments about Cerner financial reporting practices. Given the lack of confidence in reported results that have been created by the unethical practices of a few companies our accounting practices are driven by our intent to accurately represent the economic health and status of our business to our shareholders, applying the Generally Accepted Accounting Principles and following the financial reporting requirements of the SEC. In addition, as evidenced by this call, we attempt to share with our shareholders key data and frank opinions about the status of our markets and company. The most common area of questions asked about Cerner's accounting is around revenue recognition. I would just like to clarify that. First, a significant majority of our revenue actually comes from consulting services, support and maintenance, and hardware. The [economic] reach of these components is very straightforward. Services are recognised as they perform and support revenue over the term of the support agreement, and hardware revenues are recognised when the hardware is shipped. In addition, a growing component of our license revenue is now on a subscription or term license basis, which is recognised readily over the term. The remaining portion of our revenue comes from perpertualising software sales, which are recognised in accordance with SOP 97-2 and SOP 81-1. For over ten years we have consistently applied the percent of completion accounting method required by these policies with appropriate update to changes in our business model. What has changed over time is the way be bill and collect the revenue associated with licensed software. As many of you may recall our DSOs were as high as 185 days when Millennium was first introduced to prolonged implementations and favourable payment terms. Now that Millennium is established as the market-leading solution set, we are able to command better payment terms, which has brought down DSOs substantially from that peak. As I indicated today we are getting nearly 70% of our new contracts having date-based payments for licensed software. That will continue to help decrease our DSOs. In summary, I assure you we always have and always will manage this company for the long term as we see no benefit for our shareholders or clients, and we try to use accounting to benefit this in the short term. We believe this philosophy has lead to a long history of consistent, strong performance that clearly distinguishes us from other companies. At this point, let us turn the call over to the operator to start the Q&A.

[PATRICK HOSLOW]: Good afternoon guys. Solid quarter - congrats. I just wanted to ask you a question about deferred revenues. Was down sequentially. I wondered if you had any more colour on that.

Sure Patrick. In our business deferred revenue really is a good indicator of whether we have had some upfront financings or funding of our deals, and this quarter, as I indicated, we did not have any significant financings. What we are seeing in the marketplace is that, given the current investments that are available to our clients and the returns from both the stock market and interest bearing securities, they are actually not looking for some of the arbitrage plays they were getting a year or 18 months ago. We are not seeing as much interest in the financing. That really is what is driving our deferred revenue. Those are the things that really buffed it up as you look back in 2000, and clearly impact our operating cash also. That is the main reason why you will see our deferred revenue decreasing sequentially, as we have indicated, when there is no new financing occurring. [PATRICK HOSLOW]: Makes sense, thanks. [STEVEN HALPER]: Relative to the operating margin, I guess Paul was talking about the fact that your margin expansion is not occurring as quickly as you had hoped, but you are making it up on the top line. At some point is there a concerted effort underway to maybe shift that at some point, or will that occur whether you would like to slow the revenue growth and concentrate more on the margin as well as your returns?

I do not think we will ever consciously try to slow our revenue growth. At the same time we are constantly focusing on what we can do to improve our efficiencies and our effectiveness to drive the margins up. I think that as things do naturally slow down a little bit, you will see the margin increases going up a little bit, just as less and less is required to fund the kind of growth that we are seeing. [STEVEN HALPER]: And the fact that your revenues are clearly exceeding everyone's expectations. It sounds as if you are making more investments in your infrastructure to position yourself for future growth than you normally would have if the top line was not that strong. Is that an accurate assessment?

That is really true to the mark. We are clearly a consulting organisation. It is an area where we are putting in a lot of resources, keeping up with demand. But those also turn into revenue producing assets four to six months down the road. But as you continue to grow that organisation you do have more expenses that are not producing revenue currently. I think we have done a pretty good job of holding the line on the G&A side. So, with some of the infrastructure there I think we are doing pretty well. We are going to continue making investments, particularly in consulting, as we go forward. [LISA GILL]: Marc, I was wondering if you could comment on the gross margin improvement on the systems sales, and also maybe just talk a little bit about what did come in a little bit later on the top line and what we were looking for? I am not sure if that has to do potentially with some hardware sales that did not happen this quarter or perhaps some sales that have been pushed off to the future. But, if first you can talk about gross margin, and then secondly talk about sales that would be great.

Sure. The gross margin basically was impacted based on the higher equipment. If you lay down Q1 versus Q2 we did, as we indicated on the call last quarter, have a significant overage in equipment of about US$ 8 million, which would have impacted our margins both on the systems sales line and on the total gross margin line. So, I think that when you look at this quarter you will see that reversing back to what we consider more normal space. I think that is where we come in with our gross margins of around 78.6. So, I think the answer to both questions basically is the equipment mix. We would not say that this quarter we were lower than what we would have projected for equipment, and the answer would be that this is really more of a normal quarter and the first one since we began our change in the income statement presentation.

Ok, great. Thank you.

Marc, just a quick housekeeping question. Could you comment, and I do not know if you can give any remarks, on the tax rate just creeping down a little, and also give us your thoughts on cash flow going forward? You obviously had a good cash flow quarter this quarter.

The tax rate did take a slight impact. We have recently concluded an IRS audit, basically locking in some benefits there that we can recognise. A very small impact, but is really what hit the tax number this time. As far as cash flow going forward, we expect that to be, as I indicated in my comments, some place comparable to last year as our bogey or target out there. The lower level of financing is impacting us a little bit, so we think that is a reasonable number to put out there as a target that we need to get. I think that the tax rate obviously was a pretty minimal difference, but [inaudible].

If I could ask a brief follow-up to Glenn's. You talk about some new market activities, which I sense you are giving a little bit more of a high profile to as you are talking to us. Europe, content, and I think there was another category you mentioned. I was wondering if you could give us a couple of signs of where you see any of these, or all of these collectively, going in the next couple of years and how material they are going to be to your business?

I think that in the ones that you mentioned at least content and global are still relatively small components of our overall business. But, we expect them to become noticeable and to become drivers over the next several years. It is a little bit of our investment philosophy. We have a broad product set and invest in a broad product set, including a new number of new areas. It gives us some flexibility as new topics become hot over time as well. With the next set of hot topics we are going to be extremely well positioned to be able to capitalise on those market opportunities as we go forward.

Ok, thanks.

Thanks, and congrats on the quarter, guys. I was wondering if you could give us an update on the implementation progress at Arden Health Services. If I remember right I think they have about 24 hospitals and you sold them a suite of 11 Millennium applications under a rapid implementation contract. Can you give us a feel for how that is going?

Yes, it is going great. We generally do not talk in detail about what is going on at specific client sites without having talked to them. It is going fast and the client is pleased. We have very talented people working on both sides. They are a great organisation and a lot of fun to work with. It is proceeding along down the road.

The exciting thing about them is that they are such a growth company, currently making such progress and looking at new facilities. That really creates more opportunities for us. So, a big positive. GLENN TOBIN I think it is also really indicative of this for-profit segment. It is really a very interesting set of clients. They tend to make decisions quickly and tend to want to move rapidly. In terms of our ability to meet the needs of this set of clients I think you will see the benefits of that as we go through time there.

They had initially stated that as they continued to grow they would were going to continue to utilise your applications in new hospitals that they acquired. That was what was driving my question. Thanks. [GLENN SANTAGELA]: I just have two quick questions for you, Marc. The first is on the operating cash flow number. It looks like US$ 16.4 million. Does that include the change in all the working capital accounts? Should I be netting out the one-time tax payment for the WebMD stock in that number, or is cash flow really up US$ 16.4 million?

Cash flow really is up by US$ 16.4 million. The WebMD does not really impact your operating cash flow. What it is going to do is that next quarter we will make a tax payment. At that point you will have a big impact on operating cash because you put proceeds down in the investing section, and then the tax payment comes in under the operating. [GLENN SANTAGELA]: Can you just remind us what cash flows were last year? I am seeing operating cash flows of about US$ 60 million to US$ 65 million. Is that a decent number to use for the full year?

That would be reflective of what they were last year, yes. [GLEN SANTAGELA]: For DSOs you said the low was a low 120es for this year. How much lower can they go in 2003? Is there a lot of work we can do on that front?

As we continue to work on the date-based payments, and just payments in general, I think we can continue to ratchet that down. To be honest, once we get to a low 120es it will go much slower making progress. Our goal internally is to get down near the 115 range, but we have not set that out as a target or defined a timeframe that we expect to get there. We are not going to be satisfied with low 120es. We just think that is the goal set for this year, and as we get more towards the end of the year we will be able to reset capped expectations for the following. [GLEN SANTAGELA]: My last housekeeping question. You said that 40% of your bookings came from new customers. Does that include customers that are already being served by companies that you acquired, or was that 40% number really indicative or true market share shifts?

That is absolutely indicative of true market share shifts. We aggressively compete for business each and every quarter, and we have been prevailing a large preponderance of the time. [GLEN SANTAGELA]: Ok, thank you very much, appreciate the comments.

Can you just give us a little bit more of an update on your European initiatives and what you see going on in that market?

As we have said consistently over the previous quarters, we continue to believe that the world is a big place and there is much opportunity for the types of products that Millennium represents. We will continue to invest in markets such as the UK and the continent of Europe, and, frankly, all over the world where it makes business sense for Cerner to roll out its products. The investment will continue. I would like to think that we will have some more specific news about our global efforts as the year rolls on. We continue to be optimistic and continue to invest.

I know that there are some deals that you have been working on over in the UK specifically. Are those continuing to progress through the pipeline?

As you probably know working in overseas environments is challenging at best and frustrating at worst. But, we continue to make progress and continue to have a number of very important client opportunities in the pipeline. They have not gone away and take a little longer than we would like, but we are optimistic that we will prevail and that we will have some good solid business coming out of that segment if not by the end of the year then certainly in 2003.

Two questions if I might. Firstly, could you characterise for us, whether it is by region or by customer type, where you think generally speaking the best demand is for you to have been able to deliver such strong results? Secondly, of the 136 applications that went live could you break them down, maybe by application type? Then, a quick housekeeping question. Could you give us D&A in the quarter?

Whether by region or by customer type, I can probably answer that question by saying that there is a broad set of demand out there across all our products and services and across regions in the United States. You just heard the answer that Trace gave on the global marketplace. There is not a particular segment or region that is hotter than the other. We are seeing demand across the board and, again, good demand across the board for all of the product breadth and depth that we have.

You are going to weigh the segment by hospital size? Is there regional variation across size that would be able to characterise where demand is?

I think that we saw in this quarter really a broad based effort by our team. We had a lot of small transactions, we had mid-sized transactions and we had large transactions in every one of our segments and every one of our enterprises. It is a very good, broad based effort I think, and I believe that the fact that we had over 40% of those deals coming from new opportunities, or new footprints, is a pretty strong statement about how well we are competing in the marketplace.

If I could just then provide a little bit more detail on the implementation. We really saw just a remarkable breadth. We turned something on in 30 different product areas. I do not know if it is a record for us, but it certainly was a very broad set of implementation, and really just across the board. We had a number of things turned on in a number of children's institutions. In a number of community based hospitals we had things turned on. I am scanning here a list of probably 10-15. Large IDNs, and rollouts of major groupings of functionality to new institutions and large hospitals. We saw some very good things happening in the federal marketplace with the military, as well as globally. Implementations turned on in the UK, in Canada and in Australia. There were different types of institutions, such as psychiatric institutions as well as our standard bread and butter type of client. It is very broad based. Across the entire healthcare spectrum out there we probably turned something on in almost any sector you can imagine.

If I could make one other comment. As we try to make known in our comments we really are seeing broad based support of our breadth and depth applications, and it really does smooth out some of the bumps on the road as we attack the marketplace. Our competitors continue to be very strong.

D&A would be US$ 13.8 million for the quarter. [MARGOT DERILLO]: Congratulations. Two questions about the CPOE product. Number one, how many CPOE reference sites do you have up and running for clients to visit? Number two, I understand that speed is a very important criteria to get physician adoption, and I am wondering how your CPOE product compares to competition with regards to speed? Lastly, Marc, you made a reference to subscription, but if you gave us a metric I did not get it. What percentage of your business is subscription?

The indication was that we have a growing portion of our licences that go out on a subscription basis. It is not a hugely material number at this point. We clearly have some content and some other things that go out, so as a total part of our revenue it is less than five percent. But, I think that the point I make in this is that it is a growing number, and we will start looking at what metrics are relevant to start talking to people about. I really just wanted to put the point out that we too have some of that in our revenue

On the CPOE front I think that what we see is that what physicians really want is something that matches to the needs of their day, meaning that if they go and do their work they want an application that is really closely tied to them and that has appropriate content embedded, which enables them to make better decisions. Speed is one component of a fairly broad set of requirements that they have in order to really improve how they practice medicine. That is what we are seeing across the board, whether it is academic medical centres or community based institutions where there are doctors from around the community practising there. [MARGOT DERILLO]: How many CPOE sites do you have up and running now?

We have a number of them that are in a variety of different stages around the country. [ROBER KYLE]: Were you not scheduled to pay down the debt in the second quarter? It does not look like that happening if I add up total long-term debt on the balance sheet.

I think that what you will see is that we did make a payment of about US$ 12.5 million of debt. What we actually did was replace that using our [revolver] credit facility because of the very attractive interest rates on that. Basically, when you are moving cash flows the net financing [count] is a [wash]. [JAMES CAMPBELL]: If you were to identify the specific areas where you are increasing your R&D focus and also the areas where you are increasing your sales force focus, can you identify those and then maybe characterise the shift in the nature of demand that you are seeing in '02 versus '01 and 2000?

I will do the R&D side. One thing that is important to note is that it is not just with the shift of where we are doing R&D, but really the total amount of R&D that is going on around this Millennium product set. This is not a game for the small anymore, I think. We spent close to US$ 100 million on Millennium development. I have hundreds of people working on automating processes within every aspect of healthcare more or less. Those teams of people have both longevity with us as well as very deep clinical, administrative and financial expertise in terms of being able to pull off what really is a huge development challenge. We are trying to envision the future of health care - what healthcare could be with an entirely new electronic infrastructure. The process of doing that is really amazingly complex and difficult to get right. We will continue to increase our R&D expenditures as we expect, albeit be it at a slower growth rate than our total revenues over time, in part because there are just so many things to go do. With healthcare coming in a 13% of the economy there is a lot of different types of activities out there to really try to go and make some progress on. [JAMES CAMPBELL]: But are you finding that you are maybe putting more into PACS and CPOE than was true for the prior year and the year before that?

Our product investments have a life cycle to them, where we put a lot of effort into getting things implemented the first time. You will then need less effort over time to enhance them and at some stage you can take those investments down as you really do nail the workflows and the needs of the people you are trying to automate. What you see is that patient accounting and others probably are on the upward side of the investment curve. Global is an area where we are on the upward side of the investment curve. On content solutions we are on the upward side of the investment curve. Our consumer solutions are on the upward side of the investment curve. Physician applications and the automation of care teams. We really see CPOE as a narrow topic and what we are trying to do is to automate the processes of the care teams that are delivering care to human beings. So, we are on the upswing of the next generation of investment in that regard, taking our capabilities and the capabilities of the entire industry to a new level. Those are all on the upswing. One of the things that are really unanalysed in this industry is, on a relative basis, the amount of money that is really going into new product development efforts. I think that if you distinguish between what is necessary working off a new product developments to a product that is actually being sold versus maintenance activities or products that are really at the end of their life cycle overall, you will find that Cerner is spending multiples, if not three, four, five or six times what others are spending. Again, there has not been an independent study of this. If anyone wanted to do one, we would actually welcome it. We would participate fully. I do not know whether our competitors would or not, but maybe if you ask them we would be able to get a little bit of industry movement going here. [JAMES CAMPBELL]: In terms of the sales sign are there particular segments that you are directing your sales force at to emphasize more so this year than you were in prior years? You said that geographically it is pretty widely dispersed, but in terms of customer mix you have now got the ability with citation to service smaller customers, and you highlighted that as a potential growth opportunity. Can you talk about how you might be redirecting or reallocating your sales resources, and if the IBM relationship is really affecting that in any way, shape or form?

We have been consistently investing in our sales force over the last three years. We tripled the sales force, beginning actually at a very unpopular time back in 1999. We have been embarking upon that road for a very long period of time, and we have what we consider to be a very large and very experienced sales force. The redirection of that is something we do not typically do. In fact, we do not typically redirect R&D back and forth. The consistency of maintaining a client relationship is very important and we keep those people focused on a small set of clients each and every day to learn more about how we can be relevant to them. It is not a mass redirection back and forth depending on which market is hot. We have to be there when the market is hot, but that is the result of the long-term relationships we hope to enjoy. [JAMES CAMPBELL] Did the IBM relationship begin in any meaningful way and how do you see that affecting your outlook going forward? TRACE DEVANNY The IBM relationship quite frankly has exceeded our expectations to date. I think that we have a little surprised and very pleased that it has gone as well as it has gone and that we have seen pretty dramatic improvements in our ability to come to the market together. We think that relationship will only get better as we expand our borders and our developments into the global marketplace. To answer your question, we are pleased and think that it will only get better. We are seeing tangible results to that end. [DAVID REISINGER]: Since everybody else has asked a number of questions, if I could squeeze two in I would appreciate it. The first is: can you talk about your initiatives to develop any new platforms for the small- or mid-sized hospital market for those customers who do not want to utilise the remote computing? Secondly, Marc if you could talk a little bit about bad debt expense and how that has changed over time, and how we should understand bad debt expense this quarter.

Our bad debt expense actually is fairly low. Hospitals and health systems may be slower pay in the scheme of things, but the good news is that they do pay. So, our bad debt expense has been pretty consistent at a fairly low number over a period of time. [DAVID REISINGER]: And what are those numbers?

I apologise to do this a little bit from recollection, but it might have been US$ 300,000 for this quarter.

First of all, we recognise that the smaller community hospital market and the smaller healthcare segment opportunities are very large. We continue to expand our thinking around any opportunities that allow us to better beet the marketplace. So, we are constantly reviewing options in areas where we can make an impact. Having said that we began focusing there about a year and a half to two years ago, actually closer to two and a half years, and we have seen great results from that focus. Our challenge is to take what we believe is the best set of integrative applications available on the marketplace today that have done very well at the high end of the market and scale those down to the broader marketplace, and to continue to give our business model the leverage that we not only believe we deserve, but that we expect. So, as technology changes - and we all know that technology changes about every 18 months - it is something that we will look at constantly and that we continue to examine. We will continue to take a look at opportunities to better that very important marketplace. [BILL HUSKS]: Just to follow up on PACS. You have given some numbers on how many install you have had there and you mentioned that you had done well there. How many installs do you have

To date we have signed ten contracts representing well over 25 sites. We have taken that opportunity, as I have been talking about for a number of quarters now, as a very critical and strategic part of what we believe will represent the lifetime patient record, electronic medical record. Voice, data and image are those three components. We are pleased and we think that we have the best radiology information system in the marketplace today. We think we have developed a tremendous Internet image server capability to distribute images around not only a large enterprise, but around the world. That supports many other physicians other than radiologist to include surgical teams, remote clinics as well as general practitioners. We believe that the bottom-up strategy of attacking this very important opportunity is now an example of what we planned for to be a big part of our future going forward. So, the investments are in place and we made the commitment and will continue to aggressively attack that opportunity. With our large install base people want to hear about the rest of the story and about the rest of the puzzle, and clearly image management fills in that very important piece. So, we will continue to look favourably on that market opportunity. [BILL HUSKS]: Just one additional question on the mid-share market. You have talked about some numbers in the past - I think we are looking for about US$ 40 million in 2000 sales and about US$ 80 million in 2001. Are the growth rates still in that ballpark, or are you looking to double that annually? What is the sizing of the opportunity there, and where do you think you can sort of level out there if level out is the right word?

I think those numbers were actually related to some other topics, because we have not come out with numbers based on the community market. We are still attacking it and it is a very fruitful market for us. But, those numbers are unfamiliar to me. We can talk off-line if you want and I can try and figure out what those relate to, but that would not be necessarily reflective of what we talked about in that space. [BILL HUSKS]: Good enough, Marc. Thank you.

That concludes the questions and answers session. Mr Tobin, I will turn the call back over to you.

I would like to just say thank you all very much for your participation in the call and for your excellent questions. We look forward to next time we talk, and we are really pleased with the results of this quarter, as you have heard. So, thank you all for participating.