塞納 (CERN) 2002 Q3 法說會逐字稿

Good day, everyone. Thank you for holding and welcome to Cerner Corporation's third quarter 2002 conference call. Today's date is October 16, 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 Harbor 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 could 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 Condition or Business" in the MDNA Section of Cerner's Form 10-K and other periodic filings, which are on file with the SEC.

At this time, I'd like to turn the call over to Trace Devanny, president of Cerner Corporation. Please go ahead.

Thank you, Kevin. Good afternoon, everyone and welcome to the call. Today, we're going to break our remarks into five segments. I will provide some highlights of our results, and discuss why we believe we continue to succeed in the Healthcare Information Technology Market.

Paul Black, our chief sales officer, will discuss our top line growth. Glenn Tobin, our chief operating officer, will discuss broad operational successes. Marc Naughton, our chief financial officer, will provide financial analysis and our outlook for future periods. And finally, Neal Patterson, our chairman and chief executive officer will provide some closing comments.

Starting with results, I'm very pleased to announce that Cerner has once again delivered a record quarter, which we have now done for 12 consecutive quarters, or three years. Quite a feat, considering the turbulence in the broader economy in our sector during this period.

All aspects of our business are strong, from new business bookings to revenues, to earnings, and to implementing our technology to help our clients achieve true business beefits.

A few of the highlights. We achieved our 12th consecutive quarter of record bookings and revenues. At $183.2 million, bookings grew by 40 percent over the year ago quarter. Our revenues also grew substantially, to $190.3 million, a 36 percent increase over last year.

We also achieved our 12th consecutive quarter, where we met or exceeded earnings estimates. EPS increased 48 percent to 37 cents, reflecting our growth, as well as the continued leverage in our business model.

We are again increasing our guidance for the rest of 2002 and into 2003 as well. We also have achieved record cash collections at $176 million, which drove operating cash flow of $17 million.

We overattained from a system implementation standpoint, setting a new record of Cerner Millenium's major systems conversions at 148 for the quarter, and keeping us on track for a four year goal of 500 system conversions.

Moving to the market place, as we've been saying for the past several quarters, healthcare information technology is a very strong market. I think most of you are aware of the key drivers of spending in the HC IT market. I will briefly highlight them.

First, healthcare providers are now, more than ever, addressing patient safety and quality of care issues by leveraging information systems to eliminate the unnecessary waste, variance, delays, and errors that contribute to as many 100,000 preventable deaths each year.

Second, the [Leifbrow] Group, an employer's coalition representing 32 million lives and $55 billion in annual healthcare spending, continues to be a strong proponent of adopting information technology, particularly around computerizing physician order entry, an underpenetrated market that we believe will grow to over a billion dollar opportunity.

Third, tight capacity and work force shortages are driving IT investments that will improve the efficiency of clinicians.

And fourth, broadly healthcare suppliers business models are reasonably healthy, getting good rate increases from the managed care companies. They're experience in increased demand for healthcare services, which we believe is the front edge of the Baby Boomer's generation, entering a high demand phase of their lives, thus the beginning of a very long cycle.

Unfortunately, there are exceptions to this trend. Some regions of the country are not as healthy, and most all healthcare organizations with a high mix of state funded Medicaid revenues are being hurt by the state's vast budget challenges.

Given this broad range of demand drivers, as well as our own internal indicators of demand, we remain confident that there are significant growth opportunities in this industry for years to come.

For Cerner specifically, we expect to continue growing faster than the broader market, because of our depth and breadth of products, superior architecture, and leadership position.

As Paul will discuss, we again demonstrated strong competitiveness this quarter with over 40 percent of our new business bookings coming from clients that have no prior relationship with Cerner.

We expect that this competitiveness will continue to result in a growing marketshare for Cerner. The healthcare provider IT marketplace within just the U.S. is a huge, growing market. This fact alone is one of the fundamentals that give us confidence that we can continue growing our company.

The opportunities we have to leverage our large footprint should not be overlooked. For example, we have some form of a relationship with about two-thirds large health systems in the United States. But only about 15 percent of these health systems use Millenium as their core enterprise architecture. Thus, we have a significant opportunity to expand on our existing relationships.

Another way of looking at this is that even after three years of record bookings growth, we still have a huge opportunity to meaningfully expand these existing relationships.

In addition, we have made significant inroads into the independent standalone hospital market. In this market, we have relationships with nearly 40 percent of the 1200 large independent hospitals, as a result of having successfully sold our departmental solutions for over 20 years.

Yet only 3% of them use Millenium as their core enterprise architecture. We are well positioned to take advantage of this opportunity because of our ability to offer a broad range of integrated applications, including such applications as patient accounting impact, plus our ability to host these solutions and reduce the need for onsite technical staff that is hard to attract and retain in smaller markets.

Beyond our domestic opportunity, we also continue to see significant focus on clinical systems by the National Health Service Trust in the United Kingdom. We remain well positioned to benefit from the significant amount of IT spending expected to occur over the next several years.

Also on the global front, we completed our acquisition of Image Devices, a company based in Germany, on September 30th. This acquisition was to secure the file management portions of our image architecture, a key portion of our architecture that image devices have been providing.

This acquisition will also facilitate the continued development and enhancement of industry leading image solutions for the radiology market, as well as new features and future offerings for cardiology, surgery, pathology, orthopedics, and other areas of patient care.

In addition to the technology benefit, the acquisition expands our presence in Germany, Switzerland, and Austria, where image devices have more than 80 clients giving Cerner one of the largest packed installed base of clients in Europe.

Moving on to key drivers of Cerner's success. There are several reasons Cerner continues to gain marketshare and widen our leadership position. Simply put, our strategies work, our team works, and our execution works.

Our core strategy is to invest heavily in designing and developing solutions, based on a long term vision and a common system architecture that meet the complex clinical and business needs of our healthcare clients. This strategy creates enormous organic growth by increasing the amount of markets, which we can address, and meets our clients inherent need for a clinically focused enterprise architecture.

Healthcare providers are turning to Cerner because we have demonstrated that we can meet their current and future technology needs. Even though Millenium is early in its lifecycle, we are now well positioned to address the unparalleled breadth of needs that our clients have. And these solutions are real and available today.

Not only can we offer our solutions today, but they are live and running on our modern architecture in many sites around the world. The value of this is immeasurable because we believe we have won the architecture matter of debate in this industry. And most of our competitors are now promising what they will do versus what Cerner has already done.

Another key driver of our success is our demonstrated ability to execute our vision and core business strategies, which is a direct reflection on the strenghth and consistency of our management team. During an era when all of direct competitors have struggled, Cerner has delivered record quarterly bookings, revenues, and earnings for 12 consecutive quarters.

Our consulting organization has been very effective in supporting this demand by implementing nearly 1600 Millenium applications during this period of rapid growth. This rapid growth will in no way impede our ability to continue to deliver.

In summary, we're very pleased with our third quarter results. We feel very good about our ability to widen our leadership gap. And we're excited about the significant growth opportunities that are in front of us.

Now I'd like to turn the call over to Paul Black, our chief sales officer.

Thanks, Trace. I am pleased to announce another record quarter. As Trace mentioned, bookings revenues were $183.2 million, an increase of 40% over the year ago quarter and our 12th consecutive record.

We are very pleased with these results, given the normal cyclical nature of the third quarter. This is typically the toughest quarter of the year, as holidays, vacations and other matters compete for our client executives' focus.

Our sales execution over the past three years, and especially during the third quarter of each year, has been great. We've effectively taken the seasonality out of the results and delivered another quarter over quarter record.

Please remember our bookings revenues number does not include future support payments, including the present value, that future support stream would increase our bookings number 40 to 50%.

Bookings margins for the quarter was $157 million, an increase of 43% over the year ago quarter. For the quarter, we are pleased with our sales executions, signing a record 120 deals. The deal mix was strong again this quarter, with nine contracts over $5 million, and two were over $10 million.

The breadth of our solutions continue to drive our success. We are on track to have a record bookings year in seven major solution categories.

Worth noting are very strong contributions from our knowledge and content solutions, including [Zenx], Apache, and [Multum] in a record quarter for remote hosting. We also had contributions from the Pharma marketplace, which is a net new addressable market for Cerner.

Turning to the competitive landscape, we again demonstrated the ability to gain marketshare of more than 40% of this quarter's bookings coming from new clients. At our current pace, 2002 will mark the third consecutive year in which the dollar amount of our revenue increase exceeds the combined increases of all major competitors for which comparable data is available.

A noteworthy example of our competitiveness and the quality of demand for our solutions is the Aventis Health System relationship we announced today. This is a significant competitive win against several competitors.

Aventis will implement a comprehensive set of Cerner solutions, including the automation of registration and medical records in 29 of their hospitals. Computerized physician order entry is also a key element of the agreement.

Aventis will avoid the shortcomings of a standalone CPOE system by implementing a comprehensive computerized person record that connects emergency room, the pharmacy, a laboratory, and other clinical care areas.

We won, due to the importance Aventis placed on buying improvements reliable, scalable and flexible enterprise architecture. Our long term commitment to innovation was also a major factor. They want a partner that will not only meet their needs of today, but also anticipate those of the future.

As always, there's a fair amount of dynamics in our marketplace. Most of our competitors simply use our messages and strategies and repackage them. Most of them have reformulated their development and sales strategies to compete directly against Cerner.

That is what happens when you are the leader. On the pricing front, we have seen isolated cases in which certain competitors are aggressive with software pricing in order to drive hardware related sales. However, we continue to be effective at competing against this approach because of the values clients place on Cerners contemporary architecture and our continued commitment to R&D.

This is a risk adverse market. It demands a proven solution.

Looking at Cerner's key sales activity measurements, leading indicators suggest that this market is robust and expanding. Our pipeline continues to increase in both size and quality, even after another quarter of record bookings.

Total RFP volume increased more than 40 percent over the year ago period, and the volume of vision center visits remains strong.

We were also pleased to see the number of Millenium reference sites increase by 21% sequentially over Q2. In addition to growing the overall client reference base, we continue to see diversity by hospital types, geography, and a range of Cerner Systems employees.

As a result, we are able to direct potential clients to numerous reference sites to see Cerner Systems running in a wide variety of environments. 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 executions and marketshare gains as we continue to grow Cerner's top line faster than a broader market.

I will now turn the call over to Glenn Tobin.

Thanks, Paul. This was a quarter of many records and successes for Cerner operations as well. As Trace mentioned, we completed a record 148 Millenium major system conversions. There are now nearly 1,600 Millenium applications live at sites worldwide. Based on the outstanding results in the quarter, we're ahead of schedule to meet our annual target of 500 new solution implementations for the year.

Our success in turning on our solutions was quite widespread. We turned on systems at 36 different client organizations, spread nicely among academic institutions, children's hospitals, large integrated delivery networks, standalone hospitals, and Department of Defense locations.

The clients were located in the United States and around the world. The 148 solutions also covered 34 different products, an amazing breadth of applications built on a common architecture.

I'm confident that no other software organization in the world is implementing the breadth or number of solutions that we are. Cerner Millenium Solution set is world class, industrial strength, very broad, and proven.

The Cerner Solutions Factory, a rapid implementation group, had another strong quarter. We increased the number of live applications from clients that have come through the Solutions Factory by more than 40 percent since June of this year.

With this implementation approach, we continue to have success at installing our solutions in a shorter amount of time. Equally important, these clients are able to implement large numbers of our solutions in that shorter timeframe with an average number of solutions per client greater than 10.

It's also worth noting that we're seeing an increased level of interest in the solutions factory from the larger clinic. In the third quarter, two of the seven clients that signed up for our solutions factory implementation approach were large integrated delivery networks.

We continue to focus heavily on training our staff, and those of our partners. We continue to have great results here. The number of consultants certified on one application has increased 24% since June and over 100% since the beginning of this year.

Even more impressive, the number of people certified on two or more applications increased by 44% since June, and well in excess of 200% over the year. This investment and education clearly demonstrates our ability to successfully expand the consulting organization to meet the implementation needs of our growing client base.

We have been discussing on this call for some time, our new patient accounting software, which we call Pro-fit. Three more Pro-fit applications went live this quarter.

More importantly than that, we believe that we're at the beginning of a new era of clinically driven revenue cycle improvements. In a clinically driven revenue cycle world, clinical and financial data are seamlessly integrated, creating new opportunities to manage healthcare costs and outcomes.

At one early Pro-fit client, Nebraska Methodist, our client has documented a one-half day reduction in length of stay through the integration of clinical and financial information.

This remarkable result is only achievable using an integrated information system. Our client's also seeing increases in revenues, and 12% more claims being processed cleanly the first time, compared to their previous system.

In addition, they're seeing substantial soft benefits, such as receiving compliments from patients on patient friendly bills, reduced call volumes, and increased satisfaction of staff.

Let me give you one more example of the unparalleled benefits that are achievable through the integrated Millenium products group. During the third quarter, we turned on a set of applications at a specialty cardiac hospital in the Midwest. Our client implemented a unique service model, allowing a patient to be admitted directly to one room, and then remain in that room with the appropriate tests, monitoring and care being brought to the patient as needed.

Any room can be used as a critical care room, minimizing the need for transferring patients. Cerner's Millenium software was able to adapt to these unique requirements, allowing the facility to become fully automated.

Cerner software supports their entire care process, starting with admission into an electronic medical record, with physicians entering orders, documenting care and accessing a customized roadmap for clinical care through discharge and final billing.

Systems implemented at this site included a broad range of clinical and financial solutions, including CTOE and Pro-fit patient accounting.

I also wanted to discuss briefly the successes that we're having in our technology organizations. Our managed services business unit continues to grow substantially.

Since signing our first remote hosting client in March 2000, Cerner now has over 70 clients utilizing our data center for the delivery of technology services. That data center's now profitable. We expect a number of clients in the data center will grow by about least 35 percent in the next 12 months.

Another way of saying that is that one of four net new clients we sign utilize some aspects of our data center, we believe. We're also continuing to innovate in creating new technology solutions, such as disaster recovery, which we have ruled out in 2002. And we've already signed nearly 20 clients.

Cerner's committed to providing our clients to a comprehensive technology solutions that allow them to focus their efforts on driving improvements in clinical process and efficiencies.

With that, I'll turn the call over to Marc.

Thanks, Glenn.

Let me take you through the numbers quickly, starting with the income statement. Revenues for the third quarter were up 36% to $190.3 million compared to $139.8 million for the year ago quarter. The revenue composition was $84.9 million in systems sales, $62.7 million in services, and $42.7 million in maintenance and support.

Tracking revenue backlog to the quarter increased 30% from the year ago quarter of 5% sequentially to $691.9 million. Support revenue backlog was $263.7 million, for a total backlog at the end of the quarter of $955.6 million, up 28 percent over the $749.2 million at the end of the third quarter of '01.

Margin on third quarter backlog was $636.1 million. And margin on support backlog was $239.1 million, for a total backlog margin of $875.2 million.

Operating expenses for the quarter were $129.2 million, up about $8.5 million over the second quarter. The primary driver of the increases continued growth of our consulting organization. And they do bring in new campus hires during Q3, during the summer. Other factors include some operating expenses associated with [Zenx], which was a Q2 acquisition that had full impact on this quarter and increased insurance costs.

Looking to Q4, we would expect spending increases in about $4.5 to $5.5 million range, excluding image devices. These increases are similar to what we saw in 2001 for Q3 and Q4.

Net earnings were $13.8 million in the third quarter, up 49% from $9.2 million in the third quarter of '01. And EPS was up 48% to 37 cents per share from 25 cents a year ago.

Turning to operating margins, operating margin increased a 100 basis points sequentially and 60 basis points over the year ago quarter to 12.6%. Year to date, margins are up about 90 basis points year over year.

For the fourth quarter of this year, and throughout 2003, we expect our operating margins to continue to expand at a rate of about 100 to 150 basis points year over year.

Turning to cash, cash collections for the quarter were a record $176.2 million and did not include any significant third party financing deals.

As you'll recall in the second quarter, we received approximately $90 million in cash and proceeds from the sale of Web MD shares. That showed up last quarter in the cash flow from investing activities.

We made a tax payment this quarter related to the sale, which reduces operating cash flow by $31.2 million. After adjusting for this one time payment, operating cash flow for the third quarter was $17.1 million. It was up sequentially, but slightly below our projections.

Given the significant level of top line growth, which is 40% year to date that we continue to experience and the resulting investment of working capital, we are pleased with this level of operating cash flow.

We currently expect operating cash flow in the fourth quarter to be substantially higher, in the range of $25 to $30 million. And that'll bring our full year operating cash flow to more than $50 million, slightly less than last year, but strong, given the accelerating growth we've experienced this year. And remember that the full year cap operating cash flow target doesn't include the $31 million one time payment.

Going to capex, capex for equipment and buildings was $21 million. And that includes $13.3 million spent on campus improvement projects, primarily buildings.

We also made $5.7 million cash investment in image devices, which is an acquisition that will close, or has closed in Q4. Capitalized software for the quarter was $13.2 million. The gross software capital was 33%, consistent with prior quarters. And the net cap rate for the third quarter was about 14%.

Total debt at the end of the quarter was down a million at $117 million. Cash into the quarter at $88.6 million. And at the $54.8 million decline from last quarter, $50.2 million relates to items that aren't recurring in nature. And that includes the $31.2 million tax payment on the sale of Web MD stock, the $5.7 million downpayment on the acquisition of image devices, and the $13.3 million of campus and building improvements.

Excluding those items, cash declined about $4.6 million, which is reasonable given our significant growth.

Accounts receivable increased $13.7 million to $263.7 million. And contracts receivable or the unbilled portion of receivables ended the quarter at $92.4 million or about 35% of receivables. That's down from 37% of receivables in Q2 and gives us more confidence in our ability to collect receivables and drive operating cash up in Q4.

Total deferred revenue declined by $10.7 million to $35.2 million. And as we've mentioned before, the majority of our deferred revenue gets created by payments received in advance on contracts that are financed by third parties.

As the revenue from those deals is recognized, the deferred revenue balance will go down, unless our new deal is financed. Based on the economic health of our clients, and their access to capital, we've seen less interest in these third party financing. And therefore, we've seen deferred revenues decline without being replaced by additional finance deals.

We may see some financing in Q4, which will allow us to increase deferred revenues slightly, but right now, we have not seen a lot of activity in that space.

DSOs for the quarter were 126 days, flat compared to last quarter and down six days compared to a year ago. We expect the sequential decrease of three to four days in the fourth quarter. And that'll bring us to our targeted range at the low 120s for the year.

We continue to have success getting date based payment terms in our licensed software agreements, but more than 75% of Q3 contracts containing all date based payments. And we should start seeing the benefits of those efforts as we roll through into 2003.

On a guidance basis, let me provide some thoughts on the rest of the year and our outlook on 2003. Based on our strong year to date performance in earnings visibility, we're raising our 2002 revenue and EPS guidance. We now expect 2002 revenue in a range between $740 and $745 million for the year, and EPS of $1.39. And that would be up from previous guidance of $720 to $730 million of revenue and EPS in the range of $1.36 to $1.38.

Looking at Q4, that translates to revenues in the range of $195 to $200 million and EPS of 42 cents. I think that reflects strong year over year growth of 50 percent in EPS.

Looking at bookings, we feel very good about our visibility. And I expect bookings revenue Q4 of around $190 million. Looking at 2003, we're increasing our revenue and earnings guidance. We now expect 2003 revenues of $870 to $880 million, up from our previous guidance of $850 to $870. And at this time, we expect 2003 earnings per share to be in a range of $1.78 to $1.82, up from our prior range of $1.75 to $1.80, reflecting 30% growth over our 2002 guidance.

Before I close, I want to remind you about our Investor Day on October 22nd at our annual healthcare conference in Kansas City. We expect nearly 3000 healthcare professionals and industry experts to be at this conference. And if you have not registered to attend this day, and would like to attend, please contact Allan [Kells], our director of investor relations at (816) 201-2445.

Now let me turn the call over to Neal.

Thanks, Marc.

I have just a couple comments here and then we'll get right to your questions and our answers. I've spent a great deal of time traveling and covering this industry really from a worldwide basis. And I have done that for a very long time, or seems like very long time. It's been well over 20 years.

And there is I think some very big and important, very subtle things that have happened in our industry. And Franksly, it has to do with just - it's a bit of - it's a tipping point. And we are past it in my opinion. And it has to do with basically how doctors and nurses view information technology.

And the center of healthcare delivery and medicine's always been at the doctor, nurse, and person patient interactions. And for the first time ever, doctors are basically assuming that, you know, that an information technology platform must be implemented.

And nurses are actually demanding it, and putting lots of pressures on the docs. And to a very large degree, executives are now not fearing the information technology, but they're actually accepting it and seeing it as strategic for their organization.

So that is a huge, huge change. Last week, I also had an interesting experience. I was with Hallmark and Sprint and several other employers here. Turner was certainly one of the major employers here in Kansas City. And we met with the hospital side around the leapfrog initiatives.

So it was actually the first time I was in the room and experienced the dynamics first hand. And it was a very interesting dynamic. It is part of the tipping point. And we've been talking to you all for probably a year and a half around some of these factors we think that are really influencing and driving our market.

And I'm - I guarantee you that leapfrog and the employers now kind of not assuming that healthcare is a safe, effective, efficient industry, and is starting to get at the table. It's creating a very, very strong dynamic. And it is a dynamic that's going to create a lot of change.

And to a very large degree, government with a part of it being here in this country, but outside this country, we even see it more so. And this is a government basically recognized that the healthcare delivery has to have an IP infrastructure to it.

And then broadly, we also continue to think that the consumer has been and will continue to put pressure which the healthcare industry will respond to.

So there's a lot of very somewhat subtle, but interesting dynamic that is good. And it was not in this industry even two years ago. So we talked to you about over the last couple years. We theorized that we were caught wild card for some time. I think we have passed that. And it is what it's fundamentally feeling a lot of talk of our growth here.

So with those comments, let's open it up for questions. So who wants to go on to questions? Kevin, you're there?

Yes, I am.

Okay.

The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the * key, followed by the digit 1 on your touch-tone telephone.

Also, if you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take as many questions as time permits today.

Once again, please press *, 1 on your touch-tone telephone to ask a question. And we'll take just a few moments to assemble the roster.

First up is Glenn Santangelo at Salomon Smith Barney. Please go ahead.

Yeah, hi, thanks. Marc, I just have a quick bigger picture cash flow type question. You know, post Y2K, this company has posted, you know, three years now of record bookings and revenues, but I wouldn't say we've seen a correlated performance on the cash flow statement.

This quarter was obviously a little bit better in that regard, but it might be helpful, it would certainly be helpful for me if you could talk about some of the variables that maybe have created some challenges on that front.

And at what point should we start to expect maybe more correlated performance between the income statement and the cash flow statement?

That's a good question, Glenn. Obviously something that investors are focused on. I think one of the things you have to look at is we've grown so significantly over the last two years. One of the biggest areas of our growth has been in our consulting organization.

And as we continue to bring people into that organization, we always have a certain level of investment, basically if you will, people that are hired on, are in training, are not contributing to the top line, are not contributing to the cash flow, but are certainly contributing to the cash outflow from a spending standpoint.

Just the people we brought on probably in Q3 alone was about $4 million of additional expense, but it's not going to get any return on that. At the rate we're growing, I think that's what you've seen from an operating cash flow standpoint that's impacted us.

Our expectation, I think, as we go through is that the second half of '03 and '04, that that growth probably slows somewhat based on our business projections, and that we start realizing a little bit more of the cash flow that is inherent in this business.

So if I was going to kind of give a long term picture, that would be my expectation as we move forward. Clearly on the capital investment side, you know, capex is higher, but I think your focus was on operating cash.

Okay, so the biggest contributor's been adding incremental personnel, essentially?

Right adding people to - basically adding resources that are not driving out additional revenues and earnings from that model because of the growth. We want to make sure that we're able to handle those clients that we sign up, but you cannot have a model in this business where you sign the contract, and then you go start recruiting the people who go work on these projects.

The client expects to start those projects very quickly. We have to be ready when that face on the demand we're getting.

So looking at sort of the schedule of capex coming up in 2003, you would say we'd still see more spending in the first half of '03, but as we get to the back half of '03, we should start to see growth, and the cash flow that looks more like, you know, the bookings and revenue growth. Is that fair?

I think you'd be approaching those levels. You mention capex, but I think capex, just to be clear with investment we've had on campus, etcetera, we'll probably be very similar in '03 to what we're looking at for '02 as far a total capex.

Are you prepared to give cash flow guidance at this time or no?

We are not at this point. Why don't we basically kind of give it a quarter at a time similar to our bookings, just based on our visibility of those numbers. And that's what we've got done this quarter, giving Q4 guidance of $25 to $30 million operating cash flow, and bookings guidance of about 190.

Okay, thanks a lot. I appreciate the comments.

Sure.

Hey, Glenn, I'm going to add a couple thoughts there. This is Neal. How we created this momentum is we fundamentally spent heavily in development back in the last half of the '90s. As we ended the '90s, we spent heavily on building a sales force ahead of growth and reasonably criticized for all that.

By the end of the nineties, we had been criticized for about everything. But we had confidence that we were aimed at the market price.

What happened, too, is when we started realizing, we had to invest. We just didn't want - we had to invest on the delivery side of the business.

Marc made a comment which I think you took right, but I don't want to take a chance. We don't see that our business is going to slow down, but we get to a proportion, we think next year, we hit a stride that we're not having to do these kind of massive buildups. And there's a proportionality, both in the development, sales, and on our delivery that wwe can track better on the sales side. I mean, excuse me, on the cash side.

And he also said that we know the investors are focused on that. Let me tell you, the management is, too. So I wanted to restate a couple things that Marc said.

He meant what I said. He and I aren't disagreeing. I just put the inflection a little bit different.

Okay. Thanks for the comments. I appreciate it.

Okay, thanks.

We have a question now from Patrick Coylo, Bank of America Securities.

Marc, I actually want to follow up Glenn's question and your comments on cash flow. And it seems to me, we certainly know you're growing rapidly, but it's certainly also the biggest drain on cash right now or working capital requirements that are related to your growth.

With that in mind, what would probably be helpful to me and others in making our own projections about your cash flow next year, and when it's going to turn, would be some targets that you've set internally for DSOs. How are you going to get those down, and what you think you can ultimately get those to.

And similarly, the capitalization of our software R&D, can you talk more about what that's going to be looking like next year, the trend we're going to see there?

Let me see if Patrick, if I can clarify that.

On the DSO side, I think we've been pretty consistent on our goal for this year to be in the low 120s. And based on the guidance we gave today, that's what we will be at that level.

I think for '03, as we roll through that, obviously the goal was to get down into the one teens, if you will. I think in our - we've talked about this, I think, with many investors about given a perpetual life and software model, and given that you're selling in the healthcare, which is traditionally a slow pay industry, when we get to the 110, 115 day range of DSOs, you're getting pretty close to what the industry standard would be on a perpetual model basis.

Our goal was to continue to drive below the 115, 110 range, and over time, to try to get down into the - basically under 110 days, given our current perpetual license model.

And what about software cap?

I think on software capitalization as a percent, keep in mind one of the main things that the company is based on is creating new software. And I don't think we see the likelihood that is going to slow down.

We are obviously focused very heavily on productivity here. And our goal would be part of the software Tap rate, might not change a whole lot, or might trend down maybe a point or two over time with the increased engineering spending as a percent of revenue basically would actually start to decline as a percent of revenue.

So we continue investing and you'll see us invest more in engineering, but as a percent of revenue, it would be a lower rate of interest.

That's great, Marc. Now do you think these date based payments are eventually going to hit 95 percent of all contracts Or even 100?

Yes, I think 95 percent is definitely attainable goal. Well, I don't know if you ever get to 100, but that is - that's obviously what we're striving for, and I think the acceptance in our client base and new clients tells us that, you know, the industry is used to buying software that way.

Sure.

If you have an existing prudent product, the discussion's really aren't very long. It's not a negotiation nationwide because you either do it. And it takes it out of the conversation.

Got it perfect.

One last question. Now regarding the event this deal, from what we hear, you guys, it sounds like the event is installed. Systems are largely home grown. Is that accurate? Or is there someone you're displacing there?

Patrick, this is Trace Devanny. The Aventis has primarily installed a traditional healthcare suppliers with whom you would be most familiar if I mention the name.

Okay.

So we're displacing some significant competitive footprint.

That's great. Thanks a lot.

Next up is J.P. Morgan's Lisa Kil.

Thank you very much and congratulations on a great quarter.

Just one on policy, if you could give us a little color on the bookings expectation for the fourth quarter? It looks like you're expecting just about a 4% growth sequentially, where in the past it's been mid teens.

Is this just a conservative number or is the pipeline not looking as strong in the fourth quarter? Thanks.

The pipeline looks, as I said in comments, is looking great. Fourth quarter is shaping up to be a very good quarter, as they always are for us on a seasonal basis. I hope that I didn't infer at all through my comments that you see any softness in Q4.

Yeah, Lisa, I think the growth rate you're going to see is probably 27% year over year. And clearly we think that is very strong growth. And we certainly wouldn't - we think 190 is the number that we believe appropriate to put out as our guidance at this time.

Marc, would you agree though that it seems a little conservative, based on what you've been able to do in the fourth quarter in the past?

I think I'm probably better stated to say that the - our current guidance at this time would be the $190 million of bookings as a reasonable view, given this time of work.

Okay, great. Thanks very much.

Lisa, one final point. Remember that the last two fourth quarters were record quarters for us as well.

Okay, great, thanks.

Our next question comes from Steve Halper at Thomas Weisel Partners.

Yeah, just a quick follow up on the Aventis deal. Was that in Q3 bookings? Or is that going to be Q4 booking number?

No, the Q3 deal, Steve.

Steve Halper, Okay, great, thanks.

We have Seth Franks, A.G. Edwards.

Hi, good afternoon. Can you talk about the consulting organization right now? Since you're saying you're investing in it. Where are we now on an FPE basis? Where do you expect to be over the next maybe finishing out the year? And maybe even sort of a year from now, whatever metric you want to give.

What's your utilization rate now in that organization? I would assume if you're not getting the productivity level out, that you expect, because it's earlier in its growth cycle, if that should continue to ramp up.

Seth, this is Glenn. What about, in the consulting organization about 1800 people catch up from about in the 1400s at the beginning of the year.

We anticipate that the fourth quarter will probably edge up a little bit, but it's not going to be a huge increase, based on the relatively heavy recruiting that we've done earlier here in the year.

And then we expect the numbers to continue to go up, but at a slower rate, as we go forward, just similar to the comments that Marc and Neal made earlier as people begin to increasingly roll off of projects that were started a couple of years ago or a year ago. Those people then become available for the total need to hire new people, actually, isn't as great as when you're in the very early phases of a major ramp up like this.

So we - the training statistics that I indicated we're really particularly pleased with in terms of the amount of, you know, experience that we've got out in the field. Utilization is in the '70s percent, the high '70s. And we are, you know, continuing to manage that, feel good about that. People are very busy. We're working hard.

Do you feel that you're going with the high end of how far you can push people without burning them out?

We think the high end is kind of around 80 at a kind of average point for the quarter. It might be a little bit higher than that.

And we are kind of aggressively managing that - those statistics. Also if I could just say, we had the lowest quarter of - or the lowest results in terms of turn over within that organization that we've ever seen before.

So that helps on the experience levels. It helps in terms of our ability to go get real work done.

Care to share that number by chance?

Yeah. I think it as 2.5% for the quarter. And I believe that actually reflected about a percent. Now these are company wide numbers, I'm sharing with you, but they were about 2.5% company wide with 1 percent of that actually being managed out as part of our goal of managing the bottom 5% of the organization out on an annual basis.

Appreciate the comment thank you.

From Jeffries and Company, this is David Francis.

Hi, quickly on the U.K. front, which you guys mentioned briefly. We've heard a lot of promise about that over the last 12 to 18 months, but outside of McKesson's non clinical deal in I think one deal announced by Per Se, we haven't seen a hell of a lot from anybody on that front.

I was wondering if you could give us a sense as to your expectations as to where the NHS stands in moving a lot of those contracts forward.

Yeah this is Glenn. Let me just launch off on this because I just got back last week from spending a week in the U.K. There's a lot of really interesting stuff going on over there. It is a government contracting process. And so, things take some time.

The government is really re-energizing its efforts though, what you'd say right now in terms of how aggressive they're being in terms of kind of launching new initiatives to drive IT through the entire healthcare system there.

It's really quite remarkable what they're trying to do when you compare it anywhere else in the world from a government sponsored initiative.

So we anticipate there is, you know, lots of activity that will be seen there. The exact timing of that activity is just very - has been very, very hard to predict. And then let me pass it over to Trace for any further comments he might have.

Yes, David, we are absolutely convinced the Blair government is going to spend some significant pounds to fix what ails the healthcare system in the U.K. It's obviously a much different environment than what we work with here in the United States, but we are working very diligently to be a part of their plan going forward.

Now having said that, as Glenn indicates, it's a very, very typical government environment when it comes to moving quickly on these types of large scale decisions. But we are convinced they will make a decision. We are convinced they will spend the money. And we're very hopeful we'll play a meaningful role in how - how it's all deployed before we're done.

But no better sense on timing at this point?

Yes, David, we don't include in our guidance any major successes in the U.K. We're taking a wait and see attitude on that as to when we actually see the business.

Because in that business, you actually, because of the contracting period, you have time to ramp up in those deals as opposed to the U.S.

Okay. And one quick follow up, Marc, on the share count it was down about 500,000 sequentially. Is that a function of the stock having come in with the market? Or is there something else going on there?

No, that's just basically options in the price of the stock.

Right.

Less options, you know, being in the money.

Thank you.

Sure.

We'll move to Daren Marhula at Piper Jaffrey.

Hey, guys, just from a macro industry perspective, we've been hearing some anecdotal evidence that hospitals have been out refinancing their bonds. Has that allowed, or opened up purchasing patterns as they see more cash flow drop down to the bottom line?

I'll take that. I'm Neal. It always does. About every three or four years, we see this pattern when interest rates come down. And IT is a piece of the infrastructure that they will put in the use of proteins.

Have you seen that specifically driving deals? Or is that just one more - one additional driver to deals?

I think it's an additional driver. I don't think it's the driver.

Okay.

The driver in my opinion has been basic change in attitude toward information technology at the center of delivering care.

Okay. And then, Paul, I think you made a comment in your earlier discussion that you signed a deal in the pharmaceutical marketplace. Could you just give us a little bit more color on that?

Yeah, it was true that our [Zenx] organization, where we supply data to those folks, they're planning, the referential data that we supply down at hospitals could be of interest to back of the Pharma industry. And we expect that part of our business to grow. We have invested in that. And we'll continue to get some modest return on that, but our expectations of where that will go in the course of the future is quite high.

Right. And this is Neal. We have also solved in the past empirical data that is harvested, you know, from our clients into the drug industry.

So I don't know that there was any of that - those in there this quarter, but that's - we've been doing that, too.

Okay, thanks guys.

We have a question from Ray Fauci at Bear Stearns.

Yeah, hi, guys. Just two questions. One, Marc, on the revenue growth, I think you're running with your guidance, you're going to do around 35 percent or so total revenue growth this year.

I was wondering if you could tell us how much of that is organic, versus driven by your acquisitions of late last year?

The key thing on the acquisitions, Ray, is that a lot of those, such as [Zenx] and Apache are, if you will, they're subscription based type impacts.

So they don't - there isn't a whole giant impact from bringing those things in. I mean, I think [Zenx] probably have revenues some place in the, you know, on an annual basis of probably about $7 to 8 million, I believe, is kind of, what they were on a standalone basis. So that's - you know, and that's probably of the one we've done the biggest revenue impact.

So I think part that's probably the major component.

But I would state, too, in most all cases, having access to larger sales force, larger resources is driving - we're very pleased with these acquisitions. Most of the acquisitions have been very successful.

So they're small. And these are strategic or were basically to a market share of acquisitions. But we're able to drive some revenues there those companies would not have ever gotten to.

Right, but for this for - basically the things we've done in 2002 as far as impacting 2003, I tell you [Zinx] will probably be the major one.

Image devices, which will close in Q4, will have some impact, but we'll probably - we look at our guidance after we get that field quote in Q4.

Yeah, I guess, I'm sorry. I was looking at it the other way. Your - you know, with your revenue growth going to be around 36% this year, and your guidance for next year suggesting around 20%. That's a big variance.

And so, I guess I was trying to get to the bottom of your total revenue growth in 2002, because if I remember correctly, didn't you close either Citation or Dynamic in the fourth quarter?

Right, if you're looking back.

That's where I'm going.

Okay, I'm sorry.

I'm sorry.

No, it's my fault for not catching it. DHT was - and there's probably 16 million revenues associated with that. And then Citation's probably a similar amount. That was a prior year, though. I think that was back in 2000. So if you're really - if you're looking at the '02 rates, you would in fact earn DHT. And I think that was probably the biggest one of the acquisitions. And my recollection is that's about $16 million of impact.

Okay, so sort of -

You would be factoring those out for the guidance that we've done. The only one that's probably material is Apache. And it's probably four million.

Okay, great. And then my last question, some interesting facts, I think, Glenn gave us on the solutions factor and the remote hosting businesses. I guess both of those initiatives are a little bit more ramped up than I would have guessed.

And I guess my question is, how big do you think both of those can be in terms of their contribution to your business? And since obviously everybody's focusing on DSOs and cash flows.

Were those modes of business given the faster install solutions factory and the sort of revenue stream of remote hosting. Were both of those necessarily help reduce DSOs as well? And if so, how much?

Does anyone want to comment on the solutions factory?

Yeah, we see that the demand out there for novel approaches to implement the software that actually results in less implementation time, is actually highly demanded by the client.

And it really revolves around having them make fewer decisions in the process of the implementation. So we can go a lot faster. So a lot of the stuff is pre-set in terms of many of the choices.

And we see that demand growing, but as I said, there were, we're seeing it on the part of larger institutions who say we don't want all these customization anymore. We want to be able to go to drive standard approaches across our health system.

And we don't want to have to make it all, you know, unique to every site. So we see that the trend is turning, particularly among the senior executives of these organizations. And our implementation approach is - solutions factor approach is really just tailor-made, so people don't want go back.

And I think on a remote hosting side, it really is a net added benefit as well for them because they don't have to then worry about maintaining the breadth of skills necessary from an IT stand point.

Similarly, on disaster recovery options, they don't have to have the same breadth of skills, and yet they can still get the same performance and the same benefits that'll assist them, that you'd really like to get.

So as I said, we see 1 in 4 new clients actually trying to get into the data center in one form or another at this stage. And I wouldn't be surprised if it would go up over time.

Yeah, Ray, on the - as far as the DSO impact to that, clearly faster projects will help drive down DSOs because the faster project goes, the clients pay - they just pay those invoices more quickly, because they write them, along with their expectations. There isn't any need for any conversations.

So that will have an impact. Whether I could quantify that to say it's going to be X amount of days, I don't know that I can do that at this time, but as we get further along in that, one of the key things, Ray, is that at some point, solutions factory successes will permit us to even look at our fixed fee model, and perhaps in some instances, or fee for service model, in some instances go back to looking at a fixed fee model, which then you turn those payments into late day payments because absolutely helps your DSOs also.

I couldn't quantify today what impact that's going to be.

Hey great, thanks.

James Kumpfel has the next question from Raymond James.

On yes, can you just remind us, Marc, where you are year to date in terms of cash flows from operations?

Yes, let me just quickly do the math here. It's going to be about 25.

And maybe you can help us understand maybe operationally how you're driving awareness of the cash floor implications of deal structures and pricing throughout your sales force. Trace or whoever else wants to address it?

I'd be happy to address it. Basically, each of our contracts, once again, they base payments on license fees. That initial date based payments, which is 35% downstroke, the sales force does not get their commission check until we get that payment.

So in fact, they get a portion of their commission check when we get that first payment. They get another - the rest of their commission when we get over 50% of the payments on that license.

So we have absolutely tied our sales incentive compensation to cash. And we've actually done similar things in our consulting line of the business for reflection of their bills and invoices. All of them have cash targets, which is part of their incentive plan.

So once again, as Neal indicated, this is an organization very focused on cash.

Now the solutions factory obviously is designed to help to compress the implementation time and that net will help you in terms of revenue recognition and cash flow collection.

To what extent does the high level of customization and interfacing to other vendor solutions, how much does that impact on your R&D overall?

Basically, your question, Jim, is what is the cost of our development group on developing interfaces to others' technology?

Right, because to the extent that you can do more off the shelf enterprise wide systems that essentially displace having to work with other vendors, I would think that you you ought to be able to save in the R&D front down the road?

Glenn, do you want to do that?

Yeah, let me take a crack at least. We interface to huge numbers of other systems. And we have a huge library of existing interfaces to everybody known to mankind.

And we anticipate that that will continue as systems exist, we will continue to have to interface to others. As you appropriately pointed out, our clients get a huge benefit by implementing a breadth of our solutions, such that they don't need to do those interfaces, and that the ability to look at data across the organization, etcetera, etcetera, etcetera is much, much better.

So from their benefit, the fact that we're not implementing interfaces across their organization is a huge benefit.

The interfaces as a percent of our R&D expenditure is probably not that high at this stage. So even if went down to nothing, it would be only a modest portion of what we spend, which is primarily focused on trying to create great systems that allow people to practice care in new ways.

Okay, and just finally, housekeeping here, what was the depreciation, amortization for the quarter?

Jim, why don't we go to the next question, and I'll get that and give it to you before we end the call?

Sounds good. Thank you.

We have time for one more, one last question.

And the last question for today will be from John Sauter at S.G. Cowan.

Thanks. I just want to talk about the selling cycle. It sounds like there's been no increase in that selling cycle, even though some competition has come out with newer products. Is that safe to say?

This is Paul Black. We continue to monitor the sales cycle. And it's amazing, the variance you get, if you add some sales cycles that literally were days, last quarter. And we had some cycles that were the, if you will, the culmination of two years' worth of work.

So on average, there has been not a substantial uptick in that, that would cause us any major concern. But I wouldn't say that the sale cycles have in aggregate decreased over the course of the last two or three quarters.

And would say though in this past quarter that the competitive environment in terms of products that are GA have increased, Paul?

I'm not aware, John, that there's been a lot of GA software that's come into the market last quarter. There's been a substantial increase in the number of Powerpoint slides that have been developed in the marketplace, that are being used to sell against us, but I'm not aware of a lot of new software, of contemporary architecture that would parallel that which we bring out, that's been brought online in this industry last quarter.

Great, okay. So your expectation, the guidance is that selling cycle doesn't dramatically increase, but you're keeping an eye on it closely? Is that...

Yeah, we're - the cycle itself probably isn't increasing. There are more people out there with - that's got to have a Cerner like approach and vision for what they're going to do with the clients.

The fact that the cycle isn't increasing has to do with my opinion. People are going to go. And that's a very good thing for us, because we're ready to go.

And there's a lot of people trying to do a lot of stuff in the marketplace. So we're in tune with it, I guarantee you that. And in the total scheme of things, I'm not sure it's changed a lot. There has always been major things people were doing.

But I guess what I'm trying to figure out, and I think I've been dead wrong on this so far, my expectation was that you pretty much had to market to yourselves, if you will, in 2000 and 2001. And here in the back half of '02, it would get more competitive, and it'd be tougher to achieve the bookings numbers that you've done, and get the installs the way you've done them.

And again, it looks like I've been dead wrong on that. I'm trying to figure out if in fact it's because some of these products are later to come to market, and they're just using Powerpoint slides right now. And we're going to see more of that in Q4 and Q1 perhaps, or they're already out there. And you guys are becoming the de facto standard.

I guess Trace or Glenn, if you could give a little bit of color on that?

No, I think we've been very clear in our vision and our commitment to this business and the soul of this business for many, many years.

We've sold against the best the competition can bring. And expect they'll continue to focus on us as the leader, but we haven't changed our strategy. We haven't changed our vision. We believe what we're doing will in fact dramatically impact the way care is delivered in this marketplace, both in the United States and the world.

So while Paul mentioned, I think, and said it very well, we continue to see new versions of Powerpoint. This is very complex, very difficult work that must be done, that takes years and years of development, and a large development staff, huge pockets of money to support the development of these products.

And Franksly, it takes a culture, such as only Cerner in my view, only Cerner offers to this marketplace, of one of clinical automation and clinical training.

So we have in excess of 400 clinicians that work for our company. And we've always been focused on these types of the complex applications, John.

So we think entry into this market is very, very difficult. And we think what you're seeing in the marketplace is evidence of that fact.

So John, I'm going to close the call here kind of with some comments that you've got open here. But you're hearing from this team here is that we've got a long history here of really doing these kind of complex clinical based information systems. We've had a vision that's relevant, we think, to this entire industry. We use that to basically guide our investment.

And we, in both our technology and how we built this company, and we just systematically built this company really over a couple decades. And we think we can keep it going. We see enormous opportunity. And for the first time, we really see healthcare at the very top leadership.

And doctors who, if you get close to healthcare, you realize the doctors can stop almost anything. And they don't usually work for these companies, these organizations. I mean, they contract with them. So doctors are now understanding and accepting the role that they are going to have to replace their medicine by memory, put their pens down and start interacting with information technology.

And we have been getting ready for this for a very, very long time. Will it bring competitors? Yes. They'll come out - they're there and they will come out even more strong, but the market is moving.

And the reality will be, the market's going to move probably faster than we can address the entire breadth of this marketplace. We're going to keep this thing growing, we believe. And we think some of our competitors are probably doing it this same marketplace. We won't get every place. It's moving too fast now.

But it is - it's a good time to be where we're at. We're going to stay focused on the building quality organization here. We're focused on some of the things that you're focused on. These are all very good questions.

So we know we got to get leverage out of this business. We got to get kind of proportionality of the size of this company, and we got to continue driving the top line. We think we can do that. We think the market's there. We're going to drive - continue to drive the bottom line. We're going to expand, continue to expand margin as rapidly as we think we are - it's wise to do that. And we're going to generate increased cash flows with more correspondence the rest of the growth factors.

So with that -

My one last data point, depreciation, amortization was $14.3 million for the quarter. And with that, it's my honor to bring to close this conference call. Thank you, Kevin.

Thank you very much, everyone for attending. That will conclude today's conference call. Have a good day.