塞納 (CERN) 2002 Q4 法說會逐字稿

Welcome to the Cerner Corporation's Fourth Quarter 2002 Conference Call. Today's date is January 23rd, 2003, 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, perspective, and prospects, constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Securities and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements. Additionally, 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 Conditions or Business in the MBNA section of Cerner's Form 10K and other periodic filings which are on file with the S.E.C. At this time, I would like to turn the call over to Mr. Trace Devanny, President of Cerner Corporation. Please go ahead, sir.

Thank you, Sara. Good afternoon, everyone, and welcome to the call.

Today, we're going to break our remarks into four segments. I will provide some highlights of our results and discuss our current view of the ACIT markets, Paul Black Executive Vice President of our client organization will discuss our top-line growth. Glenn Tobin, our Chief Operating Officer, will discuss broad operational successes, and Mark Naulten, our Chief Financial Officer, will provide outlook for future periods. Neal Patterson, our Chairman and Chief Executive Officer, is traveling today, but he will join us for the Q&A.

Starting with the results, Cerner capped off a record year with yet another record quarter. The fourth quarter of 2002 marked the 13th consecutive quarter we have delivered record bookings and met or exceeded earnings expectations. All aspects of our business are strong, from new business bookings to revenues to earnings, and perhaps most importantly, implementing our technology to help our clients achieve true business benefits. We also delivered outstanding cash flow performance, which resulted in a significant decline in day sales outstanding.

A few of the highlights -- At 202 million, bookings grew by 35% the year-ago quarter. Full-year bookings were 736 million, or 40% over 2001 levels. Our revenues also grew substantially to 206 million, a 36% increase over last year, and nearly 8% sequentially.

Full year revenue of 752 million was 39% over last year. Our total revenue backlog grew 27%, and end of the year had a major milestone of $1 billion.

Earnings per share before nonrecurring items were 43 cents, or 43% over year ago periods. Full-year EPS of $1.40 is 51% over last year, and we are again increasing our guidance for 2003.

We also achieved record cash collections at 225 million, which drove operating cash flow of 43 million and led to a five-day sequential decline in DSOs. Importantly, we also generated free cash flow of 17 million before financing activities, the proceeds from the sale of WebMD-1, and payments related to acquisitions. And we over-obtained from a systems implementation standpoint against setting a new record of Cerner Millennium major system conversions at 159 for the quarter and exceeding our previously stated full-year goal of 500, with 519 conversions for the year. It was a very good performance by our consulting organization in overachieving an aggressive install target for 2002.

While we are very pleased with our outstanding results, we're even more excited by the significant opportunities we see in front of us. Even after our strong growth over the past two years, note that we have more than doubled our revenues over the last three years, all indications are that we are still in the early stages of a major adoption cycle for clinical information systems and health care delivery.

Take computerized physician order entry, or CPOE for an example. While industry estimates place current penetration of CPOE in the 5% to 15% range, various sources indicate that between 60% and 80% of hospitals and health systems are expected to purchase or implement CPOE in the next three years.

The primary drivers of demand for CPOE and other clinical applications remain the same. You are all familiar with the list. Patient safety and quality of care. Pressure from employers in the late [broad] group, a realization by health care providers that improving efficiency is the only way to address tight capacity and the workforce shortage, and lastly, the continuing shortage of trained clinicians to address the growing population of baby boomers impacting the health care system.

I've previewed some of the quarter's results. Let me review the 2002 accomplishments.

Cerner continued to strengthen its leadership position in the healthcare information technology market In 2002. At the start of last year, we indicated 2002 would be a year of heightened competitive pressures.

Well, it was certainly that. Our major competitors came out in full force in 2002. They had all regrouped, tuned their strategies and messages to compete directly against Cerner, and then took their best shots.

Despite those efforts, we had an incredibly successful year. We believe that we continue to be uniquely positioned to lead this market, not only because of our greater depth and breadth of product offerings, but because of our commitment to spending the necessary R&D dollars to support the needs of our clients. While most of our competitors continue their efforts to update old technology, they're consequently not investing in new product at a rate necessary to keep up with the rapidly changing health care environment. This transformation journey is one that requires not only commitment and vision, but significant R&D funding to be a player as well.

The numbers clearly show we have taken market share from just about every competitor. For example, in 1999, the combined revenues for the six largest ACIT providers, including Cerner, were approximately $3.4 billion. Cerner's revenues that year were 340 million, or about 10% of the total. In 2002, three years later, the estimated total revenues for the same six companies increased 15% to 3.9 billion. Cerner's 752 million of revenue represents 20% of the 2002 totals, or double our share in 1999. In fact, of the 500 million of combined revenue growth during this time frame, Cerner delivered more than 80% of the total, or more than $400 million.

The primary driver of this phenomenal success has been our leadership position in enterprise-wide systems within all segments of the market. Potential buyers understand an integrated architecture is required when automating the complex activities of physicians and caregivers. Architecture does indeed matter, and buyers are voting by purchasing large suites of applications from us.

In the large hospital and integrated delivery network, or IDM portion of this market, Cerner is the clear leader for enterprise-wide clinical systems, and we have maintained this leadership position despite the best efforts of every competitor. We believe over the next three years, we will become even stronger in this segment. In the smaller, independent community hospital markets, Cerner shares the leadership position with Meditech. This is remarkable considering we just entered market in late 2000 and quickly have become one of the top suppliers of enterprise-wide systems in this segment. We plan to tune our practices to this market and believe that the huge competitive advantage created by Millennium architecture will result in a great deal more success in the future.

As I mentioned a moment ago, no one in this marketplace comes close to Cerner's breadth of offerings. Simply put, we cover most all venues in the continue of care. This has been a long-term core business strategy of ours, and it has paid big dividends. Cerner had a very successful year across the major solution category and Paul Black will discuss in a moment.

In addition to the success we achieved with our traditional solutions, we made great progress on some of our newer solutions, creating new organic growth. We believe in constant innovation and are continually investing in the creation of solutions for new markets. In fact, we have some exciting announcements around Cerner innovation in future releases.

During 2002, we became a clear new-age patient accounting alternative to the current big three of F&F Siemens, McKeffen, and Meditech suppliers and their multitude of legacy systems. A recent survey indicated Cerner was the fourth most likely supplier to be considered for patient accounting systems. This is amazing when you consider the relative maturity of our solutions.

The PAC segment is clearly one of the industry'shottest markets. Moreover, it is a very big market. Today, it is dominated by image modality companies, including Siemens, GE, Philips and Kodak.

We do not believe we can unseat these companies in the short term, but in the long term, there's a very compelling argument that medical images should be a part of the clinical information architecture of the enterprise, not merely an extension of the machinery that created it. Our strategic acquisition of image devices has given us a significant foothold in the European markets with installed base of over 60 clients. We believe that 2003 will be another big year as we mount a serious challenge to the image modality companies for major market share.

Another new growth service is managed services, which includes the hosting of Cerner applications for our clients. Clients are realizing that managing IT is not part of their core business expertise, as they are focused on providing care. This creates a demand for the remote hosting of Cerner solution. We opened our hosting center in November of 2000, a mere 26 months ago, and now have more than 80 clients relying on our center for the delivery of technology services.

As we have said in the past, our ability to offer a host of solutions combined with our recent entry into the patient accounting market has allowed us to significantly increase our presence in the independent community hospital market segment, into the larger health systems as well. While we were very pleased with the high level of performance we delivered in 2002, we are even more excited about 2003. We believe we are in an excellent position to deliver another year of strong results by focusing on the following strategy.

First, extending our leadership position in the industry by continuing to gain market share in the U.S. as we have effectively done over the last three years.

Secondly, leveraging our strong solutions and existing global presence to establish a leadership position in foreign markets. Our goal is to have Cerner's positioned to effectively compete as a prime contractor for global business opportunities. This effort will have limited and financial impact in 2003, but will lay the important groundwork for future growth.

Thirdly, solidifying our position at the most trusted, long-term partner of our health care provider/clients by continuing to deliver superior solutions in quantifiable benefits.

Fourth, continuing the migration of our classic clients to the Millennium platform, which will drive additional Millennium cross-sale opportunities as well as provide these clients with the most contemporary architecture available.

Fifth, continuing our long-standing tradition of creating growth through innovation, delivering solutions in a variety of areas, including knowledge driven care, which is the merging of work flow with medical knowledge to reduce variance, delays, error, waste, and friction in the care delivery process. Mobile computing, making information available to the caregiver on their device of choice, and expansion into markets beyond providers, such as selling data to pharmaceutical companies, where we have already demonstrated some success.

And finally, significantly improving upon our already strong financial performance by delivering top-line growth, continuing to expand our operating margins towards our long-term 20% goal and improving our operating and free cash flow while continuing to invest in the R&D and capital necessary to advance our growth and innovation. We believe that focusing on these important initiatives, combined with our proven ability to execute will allow us to continue growing the company and extend our leadership positions in 2003. Now I'd like to turn the call over to Paul Black, Executive Vice President of our client organization.

Thank you, Trace.

I'm pleased to report another record breaking quarter and year in most performance categories. As Trace stated, bookings revenues were 202.3 million, an increase of 35% over the year ago quarter and our 13th consecutive record. For the year, bookings were$736 million, an increase of 40% over 2001. Please remember Cerner's bookings revenue numbers does not include future support payments including the present value of that future support, our bookings value would be 40-50% higher.

Turning to bookings margin for the quarter, we achieved $173.9 million, an increase of 35% over the year-ago quarter. For the full year, our bookings margin totalled $627.7 million, compared to $450.7 million in 2001, an increase of 39%.

We signed 110 deals in the fourth quarter, leading to a record of 407 deals for the year. Q4's deal mix was impressive again, with eight contracts over 5 million and five over $10 million.

The broad range of success across our solution domains continued during the quarter and contributed to a record year for 10 major solution categories, including access management, Cerner patching knowledge and discovery, document imaging, patient care or CPOE, pharmacy, laboratory, radiology, emergency and surgery. Nearly all of these solutions also had a record year in 2001, making this record -- this year's record even more impressive.

In lab, weakened competitors and the realization that no clinical department should be an island in the patient care process, have cemented our leadership position in this marketplace. Our pharmacy solution delivered record sales based on the increasing realization by providers that the integration of the complex medication and administration process is a prerequisite to any effective CPOE solution.

We are consistently voted the number one or two supplier considered in most markets, in rank in the top three in the number of installed solutions. Our unmatched breadth of solution offerings also contributes to our consistent financial performance. Cerner's less reliant on an individual solution category than our competitors, who will only have the narrow range of offerings.

Our subscription base solutions, called knowledge and discovery content, from Cerner Multim and Cerner's Inc., and our growing Cerner managed services also had strong bookings in 2002. These subscription solutions represented about 15% of our bookings for the year, significantly growing subscription portion of our business model and continuing to improve our visibility of future revenue streams.

Turning to our competitors, as Trace discussed, we continue to demonstrate the ability to gain market share in the fourth quarter with approximately 38% of bookings coming from new clients. We had a very effective year in competing head to head in displacing all of our major competitors, including competitors who are in the initial process of installing their Mede 2 solutions. In total, we displaced major competitors over 37 times in 2002.

Our continued success and current financial state of many of our direct competitors can have negative impact. We have seen isolated cases in which certain competitors are aggressive with software pricing in order to drive hardware-related sales. We have seen in behavior in the past, and it has proven to be unsustainable behavior.

I can assure you that Cerner continues to be very effective at competing against this approach, because the value clients place on Cerner's contemporary architecture, our proven track record and continued commitment to R&D.

This is a risk-diverse market. Health care clients demand a proven solution. Proof of this statement is in our 13th consecutive record quarter.

Looking at Cerner's key sales activities measurements, leading indicators suggest that the HCIT market continues to have substantial growth potential. Our sales pipeline remains very strong, which is impressive considering the enormous volume of deals we have signed and taken out of that pipeline. For example, between '99 and 2002, we booked nearly $2 billion of business from our pipeline. Yet the pipeline is still more than doubled during that time frame. This is a strong indication of the level of opportunity remaining in the industry, including the growth Cerner has enjoyed during the past several years.

Our volume continues to be healthy with a notable increase in global [RT] activity, volume of vision centers, visits and sight visits also remain very strong. In addition, Cerner had a very positive turnout with a record number of demonstrations at the Radiological Society of North America, or RSNA, trade show, held in Chicago last November.

We remain very optimistic about our opportunities -- our opportunities in the PACS market, we signed three more PACs clients during the fourth quarter, bringing the cumulative number of PACs clients to 16. We also had a good quarter in patient accounting arena, citing four more Pro-Fit clients and bringing another Pro-Fit site live. We continue to increase the number of Millennium reference sites, which increased by 25% sequentially over Q3.

In addition to growing the overall client reference base, we continue to expand our reference site by hospital type, geography and breadth of the Cerner systems deployed. This gives us an opportunity to show that Cerner's systems are operating in a wide variety of environments to diverse set of potential clients.

In summary, I want to reiterate how pleased I am with our sales execution, both in the fourth quarter and for the full year. For the many reasons that Trace and I have discussed, we continue to see excellent opportunities in this marketplace and are very excited about our prospects in 2003. We look forward to sustaining our three-plus-year record of strong execution and market share gains as we continue to grow Cerner's top lines faster than the broader market. I'll now turn the call over to Glenn Tobin, our Chief Operating Officer.

Thanks, Paul. Good afternoon, everyone. 2002 was an exceptional year for Cerner operations as well. I'll start with an update on the strong operational performance of our consulting organization.

For the quarter, we turned on a record 159 Millennium major systems, allowing us to surpass our annual target of 500 for the year. There are now over 1,700 Millennium applications live at over 400 client sites worldwide. Let me give you a sense of the remarkable breadth of accomplishment that we're seeing.

We turned our major systems in 50 different organizations, including nearly 20 large integrated delivery networks, nearly 20 community hospitals, and six academic medical centers. We activated applications in the United States, Europe, the Middle East and Canada. 10 clients did big-bang implementations with greater than five applications going live at one time.

We turned on CPOE systems in multiple places, and one institution, 500 physicians are now routinely using Millennium CPOE power orders, and the second site, 300 physician users are live. Equally important, 40 different applications -- application types went live, demonstrating the remarkable breadth of our intellectual property efforts.

Let me put these successes in a competitive context. We put more clinical systems into production in the last 90 days than any organization in the world. We are engaged in more large-scale clinical transformation efforts than any organization in the world. I believe we turned on more systems last quarter than our combined competitors have ever turned on of their currently marketed products.

Cerner's always had a clear lead on vision in this market. We also clearly have a lead on operations as well. An important part of our ability to scale our company and expand margins is we continue to innovate and prove how to deliver our solutions better, faster and less expensively toward our clients.

Let me give you a taste of facts and case studies from Q4 that demonstrate the significant operational progress we made in 2002.

Cerner's accelerated solutions center, a rapid implementation group, had another strong quarter. With this implementation approach, we continue to have success with installing our solutions on an accelerated schedule with lower variance and hours in cost and higher number of applications converted per client. For example, Community Hospital in the Pacific Northwest, who will present with Cerner at Hymns in February, combined an accelerated solution center implementation with the traditional six-month process redesign phase to increase organizational acceptance of the 16 applications that were installed in under 11 months. Over 80% of the hospital employees were impacted by the changes, so acceptance was critical. According to the hospital's CEO, the implementation was a phenomenal success, in quotes.

Also worth noting that one of the 16 applications implemented was our patient accounting solution, Pro-Fit. This was our smoothest conversion to Pro-Fit to date.

We're also having successes in rolling out CPOE as I mentioned earlier. One of the leading pediatric hospitals in the U.S. utilized the the road map as the framework for their move to computerized physician order and paperless medical record. The end result is 300 physicians online and virtually 100% physician compliance. Physician interest and buy-in was so high, that physicians were caught trying to sneak into the system before the actual system went live.

Let me turn to some impressive statistics regarding our associate base next. We increased our associate population 2002 by 20% to about 4,800 associates. Same time, I'm happy to report that we continued retain our best. The unplanned attrition rate in 2002 was 6.1%, down from the historically low number of 7.6% we achieved in 2001.

We continue to experience successes with our heavy focus on training our staff and those of our partners. The number of consultants certified on one application has increased 22% since Q3 and over 150% since the beginning of 2002. Even more impressive, the number of people certified on two or more applications increased by 35% since September and over 400% over the last 12 months. Our investment in education clearly demonstrates our ability to successfully expand the consulting organization to meet the implementation needs of our growing client base.

Turning to operating margins, our operating margin increased 70 basis points sequentially and 30 basis points over the year-ago quarter to 13.3%. The year ago quarter comparable reflects a higher level of hardware and third party software mix in Q4 2002. Gross margins in Q4 2001 were 79.1% as compared to 77.9% in Q4 of '02. For the year, gross margins were comparable to 2001, and the operating margin increased 80 basis points.

We remain very focused on improving margins and expect operating margins in 2003 to expand at a rate of 100 to 150 basis points year over year, allowing us to continue our position as the most profitable company in our sector. Longer term, we continue to strive for 20% operating margins.

To reach this goal, we'll need to tap the leverage in several different areas of our business model, including, number one, increasing the productivity consulting organization. For the last three years, our primary focus has been grow growing our capacity to deliver the $2 billion of contracts that Paul and his organization brought in over the last four years and improving the operational performance of this part of our organization.

Since 1999, our consulting organizations more than doubled in size from less than 900, to nearly 1,900. We call this rapid growth a high-class problem. Today, we have significant opportunities to increase the productivity of nearly 2,000 Cerner associates, which is a key strategy in realizing our 20% operating margin goal.

While the context and objectives are different, what we need to do is very familiar to us. We've made a number of changes in the last 100 days that we believe will move the productivity and profitability of this part of our business model to a new level.

Second, in terms of driving higher margins, we're scaling our support organization. As our Millennium platform continues to mature, we'll be able to leverage the associates supporting it across more clients. Further, we'll get great leverage out of supporting only one platform as our classic clients migrate to Millennium.

Third factor in driving up our margins is leveraging R&D. As we discussed, our large investment in research and development is the primary reason for our current leadership position, and we'll continue to invest heavily in R&D. However, we believe there's opportunity to get meaningful leverage out of our R&D spending by slowing the rate of growth relative to revenue. Given our already large spending base and technology lead, we can do this while still widening the gap on our competitors.

Fourth, we're going to leverage G&A more. We feel we can get to the point where we can get greater leverage out of our G&A spending because we built a scalable infrastructure that will allow us to keep it lower than our top-line growth. We'll be talking more about our long-term goals for margin expansion at our Hymns meeting. We look forward to seeing you there.

Before I turn the call over to Mark, I'd like to make a few comments about our strategic uses of cash. I feel it's appropriate to make these points, given the level of cash investments we've been making in our company. Since 1999, Cerner has spent over $700 million of cash in four categories, R&D, acquisitions, capital expenditures and working capital. I'd like to briefly highlight the strategic benefit of this spending.

$440 million spent on R&D in this time frame has led to an industry-leading health care technology architecture with an unmatched depth and breadth of solutions. We believe that the strategic investment is the major reason for our ability to more than double our revenues, adding nearly 400 million of organic growth to our annual revenues and gaining significant market share over the past three years.

$50 million has been spent on strategic acquisitions. These acquisitions contribute in excess of $60 million in annualized revenue. They'be allowed us to quickly enter new market segments, expanded our global presence and are a major contributor to our significant lead in integrating content with the clinical work flow.

$120 million has been spent on capital expenditures. $40 million of these expenditures have been for buildings, including a data center that supports approximately $40 million in revenue, and the first part of our campus expansion that's necessary to accommodate the growth of 2002 associates during this time frame. Our building investments will allow us to continue benefiting for our -- from our collaborative campus environment, which we believe is a competitive advantage and to expand our ability to accommodate the increasing levels of client visits.

$115 million has been used in the form of working capital. This is a very reasonable growth in working capital when you consider it is supported over $400 million of revenue growth. During the same period, we drove down DSOs about 60 days with accounts receiveable growing at half the rate of revenues. We feel strongly that these points illustrate our diligence of the use of cash in the past, and we continue to approach every spending decision with a similar level of focus. With that, I'll turn the call over to Mark.

Thanks, Glenn.

Let me take you through the numbers. Starting with the income statement, revenues for the fourth quarter were up 36% to 205.7 million, compared to 151.8 million for the year-ago quarter. Revenue was composed 92.9 million in system sales, 68.4 million in services, 44.4 million in maintenance and support. Gross margin for the quarter was 77.9%, which was lower than a year-ago quarter as Glenn explained earlier. The full-year gross margin of 78.4% is basically flat with last year's. Revenues for the full year were up 39%, 751.9 million as compared to 542.4 million. Last year, in the full-year revenue composition, was 332.3 million and system sales, 248.3 million in services, 171.2 million in maintenance and support.

As Trace mentioned, we reached a major milestone of $1 billion in total revenue backlog this quarter, up 28% over the 787.7 million at the end of 2001. Contract revenue for the backlog increased 29% from a year ago and 60% sequentially, to 732.7 million, support revenue backlog was 269.2 million. Margin on the contract backlog was 681.4 million and margin on the support backlog was 243.1 million, for a total backlog margin of 924.5 million.

Operating expenses for the quarter were 132.8 million, up about 3.6 million over the third quarter. As we looked at Q1, we would expect spending increases in the $8 million to $10 million range.

As in past years, the higher than normal increase in spending in the first quarter is driven by a restart of payroll taxes and increase in amortization expense for items that begin amortizing at the beginning of the year. Interest expense for Q1 should be about $2 million, which reflects the newly issued debt. Earnings before one-time charges were 15.7 million, up 42% from 11 million, the fourth quarter of '01 and EPS was up 43% to 43 cents per share from 30 cents a year ago.

As we previously announced on January 6th, we had two one-time charges in the fourth quarter. The first was a nonrecurring gain of approximately 500,000 net of tax related to the sell of Web MD stock in the fourth quarter, and one-time charges of approximately 6.3 million net of tax related to the impairment of various investments in non-publicly traded securities.

EPS, including these items, was 27 cents in the fourth quarter, as we mentioned in our press release at that time, we now have less than $1 million of investments remaining on our books in public and nonpublic companies.

Net earnings for the full year before one-time charges were 51.8 up 51% from '01. EPS for the year, excluding one-time charges was $1.40 per share, up over 50% from the prior year, and if you include one-time items that occurred in the second and fourth quarters, EPS was $1.30 for 2002.

Going to cash, cash collections for the quarter, as Trace indicated, a record 224.5 million, nearly 50 million higher than our previous record, which was set last quarter. Traditional [fluctuations] were the primary driver of this increase. We had slightly stronger financing activity contributing about 10 million of the increase.

The performance here reflects the enhanced focus on our internal selection processes. The impact of date base license payment terms and the Q4 impact of organizations completely annual budgeted spending. The strong cash collections drove operating cash flow for the quarter of 42.8 million.

Moving down to cash flow statement, cap Ex was 11.7 million, including 6.9 million of campus improvements. Capitalized software for the quarter was 13.5 million, and we had a payment related to the image devices acquisition of 6.9 million.

Other positive cash flow items club Web MD stock, proceeds of 5 million, and financing activities about 38 million, related to our private placement of 60 million in debt and the repayment of all amounts outstanding under the company's 90 million credit facility. The net result of the strong cash flow performance was free cash flow of 17.3 million before financing activities, before the proceeds from the sale of WebMD warrants, and the payments related to acquisitions. We're obviously very pleased with this performance.

Looking forward to 2003, we would expect Q1 to be lower than these record results. We would expect full-year 2003 operating cash flow to reflect a solid improvement over 2002. As we complete our building projects, we would also expect capital expenditures in '03 to be in the $60 million to $70 million range.

With respect to capitalized software, the cap software rate was consistent with the quarters, and the net cap rate for the year 13%.

Looking at the balance sheet, cash ended the quarter at 142.5 million, up 53.9 million, accounts receiveable increased 8.9 million to 272.7 million, and contracts receiveable, the unbilled portion of receivals, end the the quarter at 84.1 million, or about 31% of receivables. That's down from 37% in Q2 and 35% in Q3. We're very pleased that we continue to improve the mix of our billed receivables, because it enhances our ability to collect those receivables and drive operating cash flow.

DSOs for the quarter was 121 days that's down four days sequentially and eight days compared to a year ago. We continue to expect to drive the DSOs down in 2003 with our goal to be in the 116 to 118-day range by the end of the year. We continue to be successful getting database payments in our license software agreements with approximately 75% of Q4 contracts containing all database payments, and we should continue seeing the benefits of those efforts in '03.

Before we take some questions, let me just move to guidance. Based on our strong momentum and earnings visibility, we are raising our 2003 revenue and EPS guidance. We now expect 2003 revenue in the range of 880 and 900 million for the year and EPS of $1.80 to 1.84. That will be up from our previous guidance of 870 -880 in revenue, and EPS in the range of 1.78 to $1.82.

Looking at Q1, we expect revenue in the 205 to 210 million range, and we're comfortable with the current EPS consensus of 38 cents EPS. Looking at the bookings, we feel good about our visibility, and we'll look for bookings revenue in Q1 of around 200 million. Our guided numbers reflect around 20% revenue in bookings growth and 30% EPS growth over last year. Which was impressive given that Q1 '01 is a very tough comp quarter. We called it Q1 last year, we had about $8 million in additional equipment sales that drove up revenue bookings and EPS for the quarter.

With that, I'll close our prepared comes here and we will turn the call over to the operator for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and take as many questions as time permits. Due to time constraints, we ask that you initially limit yourself to one question, and we'll go first to Steve Haufer with Thomas Weisel partners.

Hi, could you just go through why the gross margin was down in the quarter again? I missed it.

Primarily -- this is Mark. Primarily the mix relative to -- if you're looking at Q1 or Q4 of '01, more hardware, more sublicensed software come in for Q4 of this year, and that's primarily what drives the difference, about 120-basis point difference in the gross margins compared to quarter -- year-ago quarter.

And just a quick follow-up on the bookings forecast for Q1, that 200, that'll compare to 172, is that -- is that an accurate -- but there was a huge pickup Q4 '01 to Q1 '02, right? Is that what you were talking about?

We had a very successful Q1 '02. Historically, we kind of usually get a bump up and have a very strong Q4 bookings performance. Q1, if we are -- with the momentum we currently have, Q1 tends to be about the Q4 level of bookings, about a step up from the rest of the year. Last year, we actually had even a much higher Q1 relative to that, but right now, our expectations are continuing the momentum we had in Q4 in delivering approximately the same level of bookings, traditionally historical.

Thanks.

And next, we'll hear from Patrick Coylo with Banc of America Securities.

Good afternoon, guys. Regarding the margin trend, Glenn, you talked about, you talked about still targeting 100 -- 100 to 150-basis point improvement this year, and in the past you've spoken of -- hoping to hit that 20% bogey by mid '05, is that still reasonable? And then, second to that question is, you talked about some changes in the consulting organization that will help you attain that goal you made in the last 100 days, could you give some more color on that as well?

Sure. On the consulting organization changes, I think what I'd say is that we're improving the business infrastructure given the size of the practice that we have today. We are implementing some new management processes that will enable us, I think, to drive the productivity of our associates upwards, and I think it's a natural given the growth of the business we've seen over the last couple of years.

Relating to the -- to the margins, I don't think that we are -- that we've said 2005 at 20%. We expect to see the upward trend that we're projecting now to continue over time until we get to the 20% level.

Okay. One quick follow-up. Your services gross margin was down slightly sequentially. Was that due to some of the subscription contracts that Mark mentioned?

That's probably more due to just a slight difference relative to third-party consultants who we have working for us. That's primarily what impacts the services' gross margin.

Got it. Okay, thanks.

And we'll take our next question from Seth Frank from A.G. Edwards.

Hey, I had a question on the Seder-Sinai thing. I assume you guy saw the "L.A. Times" article that -- last week they shut off their home-grown CPOE system. I was wondering, Trace, or whoever wants to answer it, what kind of opportunity does this create for you at all? There is a relationship between the two -- you know, between you guys and them, they hold a credit from the [Zinks] purchase, if I recall, and more globally, do you view this with some caution given it was kind of a backlash, you think it's a solution-specific problem or more a backlash against the technology?

This is Glenn. Let me answer with a couple of points.

One is, this is really hard work to get large institutions to a fully automated and digital health system. I think what you've seen over time has been, despite, you know, very aggressive management, and very thoughtful approaches, with the Cedars folks, I think, certainly had, it's just really, really hard to get a system that is functional enough to meet the needs of very, very diverse sets of positions, nurses and others, as well as perform at a level that everyone says, yeah, this is good for how we practice medicine. It's just enormously difficult, and I think what this shows, really, is that, more than anything else.

We have seen a trend over time, in terms of a reduction of organizations that are willing to undergo these kinds of massive self-development efforts, and I think this will be yet one more example or reason why people continue to shift more towards industrial strength applications provided by commercial organizations like us.

We have, you know, good relationships with the folks at Cedars, and we are anticipating that we're going to work with them in many ways as we go forward and look forward to the chance, you know, to the chance to do it. They're a great organization, very fine set of leaders, with a lot of -- with a lot of, you know, attention to detail and a lot of other things, and we don't -- you know, you raise a question, do we expect any backlash from this? I don't think there will be a backlash from this, in part because of just the continued rollout of CPOE-based solutions and other organizations, you know, the two organizations that I mentioned, just two examples for us recently of big organizations going to a very broad scale CPOE type of solutions.

Thanks, Glenn.

And next we'll hear from Glenn Santangelo with Salomon Smith Barney.

Yeah,I had more of a macro question. You said in your prepared remarks that the company still has the ability to take market share here. I'll tell you, when I listen to some of what the competitors' calls and whatnot, it seems their revenue lines are gaining some traction as they, you know, are having some success selling into their existing customers. Are you seeing that become an issue at all as it relates to your ability to take market share? And, you know, this market share, as you describe it, I mean, are you seeing more market share come in any specific -- different product category - any sort of color along those lines would be helpful?

This is Trace, an I'll ask for Paul's comments as well. We clearly see a heightened awareness by the physician community around CPOE, as we mentioned in our comments, 60%, 80% of the marketplace, in fact, will intend to install some form of system in the next three years, so I think what you're see something broadly a lot more activity. I think the market climate and the focus that's come from the ILM report, the Leap Frog group, all of those pointers are forcing us into a direction whereby there's lots of interest in taking technology to the next level and creating value for the clients, and they're asking for a lot of return on investment for having made these decisions, so there's other drivers, as well, post-Y2K, that the patient accounting and integration of those very important patient accounting applications with clinical applications, is the next generation. There's a big opportunity there. That's the competitive -- that's virgin territory for us. PACs, as we mentioned in our comments, that our comes are virgin territory for us, and we're very pleased with our -- very pleased with our -- our progress in 2002, and only expect to improve that on 2003.

Glenn, this is Neal. The other comment I would make there, too, is on a prior call, and I think it was the last call or the call before, we kind of went out of our way to tell you all that you should expect our competitors to actually see some growth, because this marketplace is so -- is strong enough, you know, that we're not getting every place, so I think part of what you're seeing is this is an indicator of how strong the market is. If you look at the numbers that get reported, we are taking basically share from everyone. We're doing better than everyone, but I do see the boats -- other boats rising, too.

Okay, thanks for the comments.

Moving on to Robert Pile with UBS Warburg.

In the context of that question, and, Paul, your comments earlier about how the market is fairly risk averse, are you seeing any sign, or what sign are you seeing of problems or conditional reluctance from the possible pressure on hospital reimbursement?

I haven't -- this is Paul Black. I haven't seen a lot of that, Robert, come into play yet. This is an industry that's pretty RLI based, and there's not a lot of excess money that's out there, but I'll tell you one of the most competitive marketplaces that we have in the United States that has been the most affected by that historically has been California and some of western areas, an that's been a marketplace that we had in 2001 and again in 2002, very, very strong success. The weight of the clinical systems decisions, it's much greater than that of many other pressing issues that are out there, including new buildings, quite frankly, and we're competing for, and we're getting good traction in a lot of areas, and we've done extremely well in California, which I think is one of the toughest economic marketplaces on the globe.

Great, thanks very much.

You're welcome.

From Robinson Humphrey, Sandy Draper.

Thanks. I guess there's not a lot to pick on in terms of the numbers, everybody is talking about go forward and competition. I guess I have two questions. One, you really have a new competitor, old competitor that looks like it's going to be more aggressive this year in in terms of Siemens. What are your thoughts there of that player coming into the market and the follow-up would be, you know, considering how well you guys have executed and the outlook looks great, if you sort of had to rank competition, the market and your basic execution, how would you lank the risk levels of those three issues to, you know, any potential stumble going forward?

Yeah, this is Trace, Sandy. A question around Siemens, and I might ask you to restate your second question. But Siemens obviously is a very fine company. We've had experience with them as a partner, a few years ago, in Germany and the foreign markets, so we have great respect for what they have done and what they can do, as you would expect we would. Having said that, we have not seen, nor have they delivered yet any of their -- their -- [INAUDIBLE] products, I know there's some alpha sites that are probably in process, but we really believe the jury's out on Sorian, and we expect it to be a product and we expect it to be a competitive project.

Trace, let me take the second part.

Sure.

Sandy, this is Neal.

Okay.

So you're basically asked for us to rank the risk we see in the order of the prevalence, whether it's competitor, our ability to execute or the basic marketplace, what we -- what we try to say very clearly, and I believe we said it to you all at the beginning of last year, we thought last year was probably the peak of the competitiveness. We told you at the beginning that we thought we'd see an uptick, because people had had plenty of time to get their stories and their plans and their strategies, so we think we passed the highest risk on the competitive side, and that's quite -- that's against the general marketplace out there. I mean, I can talk for a long time about some specific things, but generally, we thought 202 was our peak there.

As far as our ability to execute, frankly, we are improving execution every year, and we think '03 is what -- that's why we're -- you know, we're still coming to you on the operating margins. We got lots of ways to improve this organization and get better, but we're through the high-risk part of that, and now we're into the tuning part, and, frankly, it's -- it's fun and exciting.

So, and then you get back to the marketplace. I would say the marketplace, you know, is clearly the greatest risk when you're selling to provider organizations, those organizations are -- those aren't usually high big margins to start with, and they're influenced by basically policy decisions. So I would rank that the highest, but I would then also say that you've got to focus on what value we bring to this marketplace, the value is around some very important things like making the safe environments to practice medicine and making them more efficient environments to practice medicine.

So that's -- we need to improve our ability to demonstrate and deliver, you know, return on these investments. But I think this marketplace has to invest in this information technology, and will continue to do that.

You can go outside the country and just look at U.K., who is strapped for cash, but they, you know, even though there's more talk over there than action, there is a lot of action coming over there, so that's a strapped health care delivery system that knows it's going to have to commit major capital to building an infrastructure to practice medicine on.

Some of the fundamental issues of health care will not be fixed until the investment is made, so I think we might have short-term risks on the environment, but I think it's a very positive long-term scenario. I would rank it the -- now, hopefully I heard your question right.

Yeah, absolutely. That's very helpful, Neal. Thanks.

Thanks.

Next we'll hear from James Kumpel with Raymond James.

Hi, good evening. You guys talked about a number of areas of promising growth, including the rapid installs, small hospitals and informed markets, and I was wondering if you could characterize the kind of -- the kind of customers buying into the rapid installs and the types of applications that smaller hospitals are focused on. It seems to me that your architecture might be more sophisticated than the smaller hospitals might be inclined to pay for it, if you could kind of characterize that as well, that would be helpful.

And then, finally, on the -- on the foreign market side, you referenced, you know, RAD, PAC system, through the most recent acquisition, can you talk a little bit about how you expect to roll that out over the next year or two?

This is Paul Black. I'll answer the first part. What kind of client goes -- goes into the solution center. We find that these folks are -- have actually done pretty well from an economic standpoint.

Maybe the people didn't buy a health plan, didn't buy physician offices, and they're actually sitting out there in relatively decent shape economically, which is one of the reasons why we find it to be an attractive marketplace for us. Thery're still very interested in ROI, etcetera, but the need people have in small community hospitals are not terribly different from a medical center, from a clinical systems perspective.

They buy, on average, anywhere from 7 to 16 different applications at once, and this marketplace, in order to be a competitor in there, you have to have a totally one solution for them that covers the entire clinical process as well as the financial process. There's really only two suppliers out there that have that, us and one other. So people who are serious about the marketplace really only look at us and one other place.

These people, from your question about Millennium, in the complexity there, was the inference, they actually enjoy the fact that they can take this solution, have it rapidly installed and rest with the comfort that to the extent that they want to go, eventually move into an ambulatory setting, outreach billing setting, to capture some endowments on a lab outreach program, they have the flexibility and strength of the architecture behind them to do that, versus having to glom on some other application from some other supplier in the future.

Now, how big would those contracts be and how economical is it for you guys to be going after that market?

This is Mark. In that marketplace, those are attractive clients for us, especially when we can control the implementation to the extent that we can. So those are actually very -- can be profitable deals for firms.

This is Glenn. One of my big learnings over the past couple of years, is these organizations can be very, very fast at making decisions. They're very, very fast at driving chains within their organizations. They are -- they have shorter sell cycles than other clients, and when they make -- when they make a decision to go, they get everybody on board, and they go.

Mm-hmm.

So it's counterintuitive, but it's an exciting segment of the market to have an offering like we have.

Are you concerned about their financial status, because it's, you know, often repeated that these are the guys that are -- that are, you know, closest to the edge in terms of -- in terms of finances? I mean, are they able to make the kind of commitments to solutions, and do you feel comfortable with that in the next few tough belt-tightening years?

Absolutely.

Okay.

Yeah, Jim, this is Mark. There's a variance between those -- you know, how well some of the institutions are doing and how well some others are. The people we are playing with now are usually the ones well managed, successful institutions that are doing actually pretty well financially, often have a nice market niche that they don't have as much competition.

So a couple hundred beds but not like 50 to 100 beds, you're talking a couple hundred to 500 maybe?

Yeah, bear in mind that four out of every six hospitals in the U.S. is about a 300-bed hospital, so it's a marketplace that is wide open for Cerner, and we've had great success there, and we will continue to focus on that, what we would describe as a community hospital model.

Okay, great. And on the foreign side, if you can talk about, you know, your expected rollout of your infrastructure.

This is Trace again. There's been a great deal of activity, as you may well know, in the foreign markets, particularly the U.K. and Germany. If you follow those, the health care environments, you also know, and we've said on this call before, about 52% of all healthcare IT dollars are spent overseas so that's better than the 48% spent in the U.S., so we think that's a very big opportunity.

It's a place, and particularly in the U.K., they buy a little bit differently, it's a government-based initiative, and it goes much more slowly and requires great patience, but we are making the right decisions. We have been increasing our level of presence and infrastructure, and are working successfully with many of the large health trusts in the U.K. and all over -- all over the U.K., frankly, and expect success there to come as time -- as time passes.

Okay, great. Thank you very much.

Next, we'll hear from David Frances at Jefferies & Company.

Hi, two quick questions. First, you guys did a number of small product-related acquisitions in 2002. Do you see any holes that you expect to fill on the same basis in 2003, what should we expect there, and secondly, can you remind us how many customers have contracted for the Pro-Fit system, and how many total have gone live to date? Thanks.

Yeah, this is Mark. Relative to the 2002, the focus there was clearly on our acquisition relating to knowledge, content, adding to our solutions, and our image devices acquisition, which was a key component of our PACs technology. As far as looking forward, we will probably not want to comment on any activities we would have in that space, just probably not appropriate at this time. We continue to evaluate the marketplace and look for things that can be integrated into Millennium, keeping in mind that we do not buy products and keep them separate. It has to be part of the Millennium product.

And Pro-Fit?

Pro-Fit, we've basically sold about 40 and have 12 live currently.

Great, thanks.

Should - Should we take one more question here?

I think that's it.

We do have one final question, and that will come from William Hoft with Advest Incorporated.

Okay, thank you. Thank you, Bill.

Thank you, Gentlemen. Just one quick one. In terms of a global initiative of rolling the product out, what types of things or investments would be necessary to export Millennium, the Millennium platform or some set of the core products, internationally? I mean, for the U.K., I can't imagine that it's a large change, but in some of the other markets, I would imagine it would need quite a bit of retrofitting.

Bill, this is Trace. I'll try to take a quick shot at that and let my colleagues chime in. Every country has a different set of health care requirements. Every country has a different health care delivery system, and so, to -- the short answer to your question is, yes, it is different.

The U.K. has a different reimbursement system. It's a government-run -- a health care delivery process, an it's got its shortcomings as does ours. We are doing the things where we believe, on the ground, that are necessary to be a very strong competitor, not only in the U.K. but in Germany, the Middle East, the Far East, Canada, Australia, other parts of the world where we believe there's emerging -- significant emerging opportunities.

In the case of the U.K., language is not the issue. It's the work flow and the way they deliver care and the way they pay for care.

In Germany, they just embrace the Australian DRG. That's going to move closer to the way the United States delivers and reimburses for their medical -- their medical care, but we have a language issue, so everywhere we play, and we've never left a country, so when we make a decision to enter a country, we are there and committed to be successful there, we do the right thing by having about 80% of our population of associates, nationals, foreign nationals, and we work the work flow, and we do the things necessary to create a successful product, clinical product, for starters, and move into the full suite of applications as time goes on.

Let me add a thought here, too. This is Neal, Bill.

Thank you.

You would be absolutely shocked how similar healthcare is around the world. Particularly on the clinical side, and then once you've actually saw the similarities, you'd realize we're all -- there's not a lot of variance in our species, so in western medicines, most of the world is practicing western medicine, and much of it is out of the United States or Great Britain.

So there's shocking similarities, so there's about -- and then the second part is, we design Millennium to be multilingual, you know, to support multiple languages, and we're supporting -- I'll let Glenn -- I don't want to give a bad number here, but we're supporting today multiple languages inside Millennium, and so, we're -- we designed it to go around the globe. The differences you do get are in the work flow area, and then how funds flow on the administrative side. But us being clinically focused to start with, an that's the systems people want, the clinical systems, so it's a lot of work.

It's the organizational infrastructure and the presence of the marketplace, the sales, where the bigger costs are. The amount of dollars -- a huge leverage we get off of the -- our strategy on technology, by going into these other markets, it's huge, on the technology side.

Mm-hmm.

So that's -- quite honestly, that's the way drug companies work, too, so they -- they use this market to pay for a lot of R&D and then take those products around the world.

Okay, I was just curious to see if there was a lot of involvement, and I know you mentioned there would be a rewriting of practically every interface or user front-end interface for Millennium in the next two years. I know that probably is a bit of a development effort, and I would wonder if there was a significant global development effort going on, if you were looking to export the product.

Well, we in the first -- we developed originally, we put -- put multiple languages in it, and as we reworked the front end, we will get smarter about that.

Thank you, Neal.

We've quite honestly been doing this for a long time. So thank you very much. I'll close the call here.

So we appreciate your focus and your attention as investors. We continue to try to be responsive to you, and, you know, open in how we communicate with you. We have a great company, and we are in a very good marketplace. We like where we're at. We're not without our challenges, but we're committed to -- to you all and the shareholders, and we're going -- we're going to go fix healthcare.

So thank you very much.

That concludes today's Cerner Corporation's fourth quarter earnings results conference call. We thank you all for your participation.