塞納 (CERN) 2003 Q2 法說會逐字稿

Welcome to the Cerner Corporation second quarter 2003 conference call. Today's date is July 16th, 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, 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 MD&A 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.

Thank you, Mike. Good afternoon, everyone, and welcome to the call. Joining me today are Paul Black, Executive Vice President of our QS Client Organization, Marc Naughton, Chief Financial Officer, Glenn Tobin, our Chief Operating Officer, and Neal Patterson, our Chairman and CEO. I will start the call today by providing highlights of our results. Then I will discuss industry trends and competition. Paul Black will discuss our top line results and Glenn Tobin will discuss operational results and give a Global update and Marc will provide guidance and financial results. Neal will provide some closing thoughts prior to Q & A. Starting with some highlights from our results.

As you saw in our press release, our second quarter results were strong across the board. New business bookings were $201.2 million, our largest second quarter ever, and also near an all-time high. Revenue was up 11% over a year ago to $207.7 million. Deluded earnings per share were 25 cents, which is 2 cents above consensus in the middle of our guidance range. We delivered very strong cash flow with operating cash flow of $36.6 million and free cash flow before financing activities of $2.6 million. Our free cash flow, excluding monies spent on our campus, which will be completed later this year, was an impressive $15.5 million. Our day sales outstanding declined 10 days compared to a year ago and three days compared to last quarter to 112 days.

We continue to set the bar in this industry for systems implementations, setting yet another new record of Cerner Millennium major system conversions at 302 for the quarter. We believe that to be more conversions than all of our competitors combined. Now let me discuss the healthcare information technology marketplace. We continue to believe the market for our solutions is substantial and there's a growing list of fundamental reasons why we expect our industry segment to continue gaining momentum. They include the elimination of paper records and automation of work flow remain essential strategies for healthcare organizations, as they attempt to improve quality of care and eliminate the waste and bearings created by current paper and memory based methods of providing care. Pressure around patient safety from consumers, employers and leapfrog group continue to factor into hospital decision-making. Hospitals are evaluating their information technologies strategies as they consider how they will comply with looming HIPAA deadlines.

The aging baby boomers are becoming increasingly dissatisfied with healthcare with 67% of 39 to 57 year olds indicating that the US healthcare system has major problems or is in a state of crisis. The need to improve efficiency, to address work force shortages remains a key issue. The government continues to weigh in on healthcare information technology. Most recently the Department of Health and Human Services announced it will commission the Institute of Medicine to create a model electronic medical record that will be available as soon as 2004. The government is also helping drive standard language into the electronic medical record discussion, by subsidizing licenses to Snowmed medical terminology, allowing all hospitals free access to that terminology by January of 2004. This is important because the widespread distribution and use of the common set of terminology is critical to achieving an inner operable healthcare system and achieving mass adoption of electronic medical records. Note that Cerner has used Snowmed in our solutions since the early 80s. Media coverage of healthcare issues is also intensifying.

Take these two examples from the past few weeks: On July 1st, a Wall Street Journal article stated that the nation is woefully backward in its use of information technology in healthcare, and on June 26th a ram study received coverage in the New England Journal of Medicine and USA today. The study revealed that 45% of patients do not receive the recommended care from their physicians and the media coverage also highlighted that information technology is vital to the future of healthcare. And finally, medical error is the fifth-leading cause of death in the U.S. A situation that must be addressed and reversed. All of these factors bode well for Cerner and our entire industry. We believe Cerner remains well positioned to benefit from these trends based on our leadership position and proven ability to deliver value to our clients. As we discussed last quarter, despite all the positive industry forces, there are some external factors that can make our environment challenging. These are the challenging economic environment for our clients and a continued high level of competition.

Provider organizations continue to face tough economic, as we mentioned on previous calls. Medicaid reimbursement is a problem because of the state budget crisis that exist in many states, impacting the county hospitals and some academic centers that have a high mix of the Medicaid patients. Employers are closing monitoring the rising healthcare costs which could result in providers not getting rate increases as easily. The escalating cost of malpractice insurance is a concerning issue with many CEO's and their boards, with both the medical staff and hospitals lobbying hard for tort reform at both the national and state levels. We continue to see increased competition for capital created by the need for many hospitals to consider new facilities to accommodate increased demand for care. As indicated by our results and the level of expressed demand we are seeing, providers are finding ways to overcome these challenges.

They're beginning to realize the strategic importance of investing information technology. However, we will continue to monitor these trends very closely. The second factor we have discussed with you is the competitive environment. We have been talking about competition on the calls for more than a year and we consistently have said we expect our competitors to attack us as the clear leader in this marketplace. We discussed how some competitors have aggressively used irrational pricing to try to keep their install base of clients from committing to Cerner. This quarter, as in previous quarters, we remain unwilling to mask these random desperate offers and yet still deliver the second highest level of bookings in history. We believe our proven solutions and proven ability to deliver will allow us to remain successful in this very competitive environment. We also believe that there is sufficient demand in the market place for several suppliers to have some success.

On the global front we delivered strong booking results and made good progress in the procurement process currently underway with the National Health Service in England. Paul will provide more details on the bookings in his comments and Glen will provide an update on the NHS procurement. In summary, we believe there is significant demand for our solutions in the U.S. and global marketplaces and Cerner remains well positioned to capitalize on this expressed demand through our comprehensive suite of solutions and our leadership position in the industry. With that, I'll turn the call over to Paul.

Thanks, Trace. As Trace stated, bookings revenues for the quarter came in at $201.2 million with a bookings margin of $174.3 million, a 13% increase over the $177.9 million of bookings revenue in the year ago quarter and represent an all-time Q2 bookings record for Cerner. Q2 booking revenue also reflects a strong 33% sequential improvement over the first quarter. As a reminder, our bookings revenue includes contract value of the software, hardware and services, but does not include future support payments. If we included the present value of that future support stream, our bookings number would be 40 - 50% higher. We are very pleased with our sales execution in the quarter. Once again, our overall results reflect the depth, breadth and maturity of our solution offerings.

Here are some of the highlights: In terms of successful plant segments, we saw strength in large IDMs, position office and children's segments in Q2. These clients are buying multiple applications at a time from laboratory, radiology and pharmacy to cardiology, CPOE, EMPI and clinical content. No other supplier offers this architected suite of solutions. From a specific solution standpoint, laboratory medicine, pharmacy, emergency medicine, CPOE and health information management were all particularly strong solution categories for us in the second quarter. We also continue to have success with our remote hosting options, offered by our managed services business, which had a strong Q2, posting one of its strongest quarters ever.

Our subscription business model for medical content, which includes businesses such as Zinck's, Apache and Multum also had a very strong Q2. We've also continued to gain traction in the market for bio-surveillance solutions with sales to clients in Texas, Florida, and Washington. On the global front we find a large contract with two national health service trusts in London, Homerton University Hospital and Naum Healthcare. These trusts partnered to procure an electronic patient record system and they selected Cerner after a rigorous selection process. We believe this is significant because it is the only successful NHS trust procurement in England this year, outside of the 5 regional cluster procurements, a strong indication of Cerner's potential success. This success in England is in addition to the contract we announced earlier in the quarter while we were chosen by CAPIO AB as their strategic IT partner. Capio is a leading private healthcare provider in the UK and throughout Europe.

Initially this contract covers the UK-based hospitals and CAPIO also has the option to extend Cerner solutions to their hospitals throughout Europe. Continuing with the numbers, the total number of deals signed in the quarter was 149, compared to 102 a year ago. About 39% of the Q2 contract dollars came from new clients, indicating we are having continued success outside of our installed base. As we indicated last quarter, we expect that this will continue to be the case. We also had a good mix of larger deals with seven deals over $5 million, four of which were over $10 million. I would like to note that while one of our large deals was the Naum and Homerton deal in the UK, our bookings revenue would have easily exceeded our guidance without this transaction. Our leading sales activity indicators also look great going into Q3. Building on last quarter's impressive RP volume we experienced, we experienced volumes in Q2 that exceeded any quarter since we have actively tracked the RP measurement.

Overall proposal activity, defined as RP's, R5's and quotes was also the highest that we've seen since we began measurements. Vision Center visits at our world headquarters increased substantially over last quarter. In addition, both site visits and application demos remain strong. As we have mentioned on past calls, we will complete a vision center expansion later this summer that will more than double the square footage of our existing facility. We continue to have success by increasing the number of Millennium reference sites in addition to growing the overall client reference base, we continue to expand our reference sites by hospital type, geography and the breath of the Cerner systems deployed.

This expansive installed base gives us an opportunity to show Cerner solutions are adaptable to a variety of environments and a diverse set of potential clients. In addition, we are now able to demonstrate this adaptability to potential global clients that span a variety of languages and cultures. In summary, I was very pleased with our quick recovery from last quarter's disappointing bookings and look forward to expanding our leadership position in this marketplace. As I stated on our last call, we expect to rebuild your confidence in Cerner one quarter at a time. I believe this performance was a good step toward regaining that confidence. I will now turn the call over to Glenn Tobin, our Chief Operating officer.

Thanks, Paul. Good afternoon, everyone. Our success on the operational side of the business continued in Q2. This quarter we had an outstanding performance in delivering our Millennium solutions to our clients. During the last three months we turned on a record 302 Millennium major systems. I probably should repeat that number. It was 302. I'd like to put this number in perspective as it's truly an outstanding accomplishment. Our previous quarterly records compare to the 302 was Q1 of '03, when we accomplished 172 application go-lives, so we did 175% of our previous record. So far this year we've turned on 474 applications.

That's more than twice as many as we turned on the first half of 2002. In the entire 2002 we turned on slightly less than 550, as again compared to this first half of '03 with 474. This brings the cumulative count of live Millennium applications to over 2200 at nearly 500 client sites. This is an incredible record for Cerner and we are far ahead of our goal so far for the year. Again, as I did last quarter, I would assert that we've turned on more applications in the last three months than the aggregate amount our competitors have turned on in the entire history of their currently-marketed products.

The go-life that I just described in Q2 occurred at over 100 sites throughout the world and included numerous go-lives of computerized position-order entry and at a variety of different types of healthcare organizations. There is no other organization in the world that can boast the record we've achieved. We again turned on a great breath of applications with 36 different application types turned on during the quarter. I continue to believe our competitors are unable to match this breath of solution implementation with products that they're currently marketing. We also continue to have great success with multi-application go-lives. We had 18 different client sites do big bang implementations, defined as five or more applications going live at one time. This compares to 12 from last quarter. Let me give you an example of one.

A community hospital in the southwest selected Cerner over a strong competitor in the community hospital market for the implementation of a breath of solutions, including pharmacy, radiology, and surgery, just to name a few. In ten short months our accelerated solutions center team was able to convert ten applications hospital-wide. This was an outstanding achievement that resulted from a strong partnership with hospital management and the extremely strong level of physician and user buy-in. The client project manager stated the following shortly after the go-live: "I'm concerned. Things are too quiet and going too smoothly." Another very successful community hospital transformation occurred involved CPOE, FarmNet, profit patient accounting, pro vision document imaging and FirstNet to name a few. It's impressive to note that in the first 72 hours over 45 physicians were entering orders into the new system.

The hospital CIO stated "remarkably more physicians than expected are entering their own orders. We did not push this with the physicians, yet some of them have already realized the value of CPOE. Even some of our non-techie physicians are starting to enter orders. We still have quite a way to go with this, but it's been a much stronger start towards CPOE than I've expected." As one more example of the value we're adding to our clients through our depth and breadth of solutions, a large academic hospital in the west converted a number of applications in the quarter, including farm net, power chart and FirstNet, as evidence of Cerner's impressive ability to scale, this system will have approximately 4,000 users of Powerchart. On the Monday morning after the successful conversion, it's estimated that 700 users logged in. The CIO provided positive feedback, stating that the conversion was phenomenal. Now let's turn to our operating margins. Our operating margin of Q2 was 7.9%, which is up 220 basis points over Q1. As we mentioned last quarter, there's a carry-over effect from our Q1 bookings shortfall.

We estimate this carry-over effect had about a 300 basis point impact on our Q2 operating margins. Therefore, our normalized operating margins would have been around 11%. I mentioned on our last call that we would review our spending in light of our Q1 earnings miss. After completing a very detailed operational review that involved the entire senior management team, we were able to identify several areas of opportunity to control expenses and get more leverage out of our business model. Our Q2 spending levels, which are basically flat compared to last quarter, already reflect some of the benefits of our efforts and we expect to see more improvements going forward, which should produce continued sequential improvements in operating margins.

Going forward we still see large opportunities to further leverage spending and improve profitability, such as leveraging controllable expenses, including travel, communication, and outside consulting, increasing the profitability of our consulting practice, deploying highly-skilled people from staff support roles to front-line consulting and sales assignments, leveraging our support organization as Millennium matures and finding ways to streamline our business operations. A longer-term area of spending leverage for Cerner is in our R&D spending. While our spending on this this year will likely continue to reflect growth of about 20%, as we continue working on our Millennium version 2004 we expect to see R&D spending decline as a percent of revenue beginning in 2004. As a result of these areas of leverage and spending control, we continue to believe a 20% operating margin is an achievable goal for Cerner over the next several years. Now, I'd like to discuss some exciting activity that's been occurring in England. As we mentioned last quarter, Cerner's very involved in the procurement process being conducted by the National Health Service in England for I.T. systems for all the public hospitals, clinics, and general practitioners in the country. This could be the biggest opportunity in the history of our company and possibly the biggest opportunity we may ever have a chance to pursue.

As a result, we're investing significantly in this opportunity, even though we have no guaranteed return on our investment. We believe this risk is justified, given the scale of the opportunity and our progress to date in the selection process. Let me update you on the nature and status of the NHS procurement and how we're fairing to date. As many of you know, the NHS provides most of the healthcare in England. The NHS has broken England up into five regions, each of which will have a large outsource or takeover of the I.T. operations for that region. This outsource is called a Local Service Provider, or LSP. The LSP will be responsible for all I.T. operations and for bringing the local system up to a defined specification of functionality. Cerner formed a consortion of companies to bid directly on LSP and we are also the core application architecture in two other bids.

In the beginning, 99 companies formally expressed an interest in bidding on an LSP. Today we believe that 16 companies submitted responses to the government's very comprehensive requirement specifications. All three of our bids are included in the 16. We're also bidding to become a national application service provider, or NASP. The intent is for the NASP to provide major architectural components for the entire country of England.

We partnered with SchlumbergerSema to bid on the E booking solution and in May we made a short list of three NASP suppliers in our current contract negotiations. As for timing, we expect decisions to be made for two of the LSPs by November and for the remaining three LSPs by the end of the year. At this point, it's difficult to quantify the size of this opportunity, but it is significant and we are pleased with our current status in the procurement. I should also note that even if we were selected for one or more of the clusters this year, the revenue impact would not likely occur until some time in 2004 when the contracts are finalized and we've begun the projects. With that, I'll turn the call over to Marc.

Thanks, Glen. Hello, everyone. Let me take you through the numbers quickly. Revenues for the quarter were $207.7 million, up 11% over the $186.8 million in the year-ago quarter, excluding the $8.7 million of revenue from reimbursed travel expense, revenue for Q2 was $199 million or about 10% over a year ago comparable. The revenue composition was $82.8 million in system sales, $50 million in services, $66.2 million in maintenance and support, and the $8.7 million in reimbursed travel. Gross margin on revenue before reimbursed travel expense and revenue was 77.7%, compared to 78.4% in the year-ago quarter. Total revenue back log increased 18% over last year to $1.08 billion. Contract revenue backlog for the quarter increased 20% from a year ago to $788.1 million and support revenue backlog was $290.4 million.

Margin on the contract backlog was $739.5 million and margin on support backlog was $259.4 million for a total backlog margin of $998.9 million. A side note: The contract backlog contains the full value of the Naum and Homerton UK contracts. While this contract included licensed software, it was structured more like a term license deal, so the revenue will roll out over the life of the contract. This is a pretty good example of how revenue recognition on licensed fees is determined by the business terms demanded by our clients as we've discussed previously. Operating expenses for the quarter were $138.3 million, about the same as last quarter. And as Glen indicated, we are aggressively managing non-personnel spending and saw some of the benefits this quarter.

Overall we expect spending to have a slight uptick next quarter due to increases in personnel costs. Net earnings were $8.9 million in the second quarter, compared to $12 million a year ago and EPS was 25 cents per share, compared to 32 cents a year ago. Our cash performance was very strong this quarter. We had cash collections of $214.6 million, which drove operating cash flow of $36.6 million. Traditional collections were the primary driver of this improvement with third party finances around $7 million. This performance reflects enhanced focus on our internal collection processes, the impact of data base license software payment terms and our effectiveness at delivering solutions to our clients. Moving down the cash flow statement, Cap Ex was $19.6 million, including $12.9 million spent on campus expansion. Capitalized software for the quarter was $14.5 million.

Free cash flow before financing activities for the quarter was $2.6 million, including the $12.9 million spent on campus expansion. Without the campus expansion Cap Ex, our free cash flow before financing, would have been $15.5 million. We anticipate total capital expenditure for 2003 will be in the $65 to $75 million range, including $35 - $45 million toward the completion of our campus expansion projects. Financing activities for the quarter included the use of cash for scheduled debt repayment of $12.8 million and $5.9 million spent on our stock buy-back program. With respect to capitalized software, the $14.5 million of capitalized software was 33% at the $44.2 million cash spent on development activities. Amortization for the quartern was 8.8 million resulting in a net cap rate for the quarter of 13%. Looking at the balance sheet, it remains strong. Cash in the quarter $121 million.

Accounts receivable were up $5 million to $255.6 million and contracts receivable or the unbuild portion of receivables ended the quarter at $80.7 million, down $12.8 million from the year-ago quarter and representing about 31 1/2% of the receivables balance. DSOs for the quarter were 112 days, down 3 days sequentially and 10 days compared to a year ago. Excluding travel reimbursements from the revenue number, they would have been 117 days or nine days lower than a year ago and two days lower than Q1. We could expect to see DSO's in the current to a slightly lower range for the balance of the year. Moving to guidance, let me provide updated thoughts on the remainder of 2003. We expect 2003 revenue in a range between $845 and $865 million for the year, including about $30 million of revenue from reimbursed travel expenses.

Because of stronger Q2 bookings and spending leverage we expect to achieve, we now expect 2003 earnings per share in the $1.13 to $1.18 range compared to prior guidance of $1.10 to $1.15. Looking at Q3, we expect revenue in the $210 to $215 million range, including about $7 million of revenue from reimbursed travel and expect DPS between 31 and 33 cents per share. For bookings, we expect bookings revenue in Q2 of around $190 to $200 million for the quarter. At this point we are holding off on giving specific guidance for 2004, but we believe the current 2004 consensus for EPS of $1.49 per share is reasonable. This level would equate to 25 to 30% growth from our earnings guidance for 2003. And we will provide more detailed guidance in future quarters as we enhance our visibility. With that, I will now turn the call over to Neal for closing comments.

Thanks, Marc. I'll make a few comments and then open it up to questions. As you can tell from our comments above, we are positive about our future. We continue to see healthcare organizations viewing information technology as a core strategy in their future. This comes at a time when care providers, i.e. doctors and nurses, are much more accepting of changes in how they practice medicine. It also comes at a time when the cost of healthcare is escalating and the demand for care is increasing due to the simple math of our aging population. I want to comment about a few other areas. First, for years I've talked about our multi-tiered application architecture, HNA Millennium, and our ability and strategy to manage this architecture over decades.

Later this year, we'll begin releasing our Millennium 2004, which is a major change to the top two layers of the Millennium application architectURE. Our goals in this release were: One, to completely redesign the human interface, simplifying and stream lining the core clinical and financial work flows. Two, to be 100% compatible with previous releases, making the use of the new human interface completely optional for every user of the system. Three, leverage the web to its fullest extent in our architecture against our proven back end and four, lower the long-term cost of ownership of Millennium for our clients. The clients that we've worked with in the development of this major release are excited about what we have been able to accomplish. While this release will substantially improve our already strong competitive advantage in this area, it will be a non-event from an operational point of view due to how we chose to architect the improvement. As I indicated, this really is 100% compatible with previous releases and we will make the use of the new human interface completely optional for each user.

Functionally, we continue to expand the breath of Millennium and we'll be addressing the unique content and system requirements of specific areas, such as women's health, oncology, and cardiology. We are also making improvements to our organization in other areas. At the beginning of the year I briefly discussed the changes we made on our organizational structure to create a more client-centrick organization. The change to this new organization is substantially complete. We continue to be pleased with this model and feedback from our clients indicate they're pleased as well. In summary, we strive to improve on nearly all aspects of how we plan and operate our business. We will at the same time, continue to aggressively pursue our vision of how information technology can transform our healthcare system. We believe we're on path to build a uniquely capable organization to do very important work. With that, I'll turn over to the operator for Q & A.

Ladies and gentlemen, if you wish to ask a question, press star 1 on your telephone. If your question has been answered or you wish to withdraw your question, please press star 2. Questions will be taken in the order they are received. Again, that's star 1 to ask a question. Please stand by for our first question. Again, please stand by for the first question. Our first question comes from Steve Halper with Thomas Weisel Partners. Please proceed.

Hi, good afternoon. Can you just talk about the systems sales margin on the income statement? It looks like it declined sequentially a little bit. Is there anything in there say higher -- hardware component during the quarter?

This is Marc, there's always a little bit of a mixed difference in those. I mean, it's basically flat relative quarter-over-quarter. There's nothing significant in that number that's different, except for the mix and hardware.

Thanks.

Okay, please stand by for our next question. Our next question comes from Sandy Draper with Deutsche Bank. Please proceed.

Thanks. Question is certainly the quarter you guys put up was certainly better than I was expecting. Paul, you sound very positive looking at the outlook for the third quarter. In terms of guidance for the bookings for the third quarter going down or down to flat sequentially, is that really a reflection of the British contract you signed, pulling that out? I'm just curious why you're guiding slightly down on the bookings?

This is Marc. Traditionally Q3 we've usually seen that as the lowest bookings quarter of the year. There tended to have been seasonality in this business. We kind of blew through that over the last three years through some very strong bookings, so we think it's prudent at this point to assume that there may be a little bit of the seasonality that we have traditionally seen coming in. We feel obviously looking at our pipeline, we feel very good about the deals that are out there to be done, and we think that number reflects our best estimate at this time of what we're going to do.

Okay, great, thanks.

Again, please stand by for the next question. Our next question comes from Ray Falci with Bear Stearns. Please proceed.

Thanks. I just want a brief clarification to the prior question. I know seasonally, that's always been your tough quarter, in September. I was wondering, Marc, historically you used to give us a visibility indicator of how much of your revenue guidance for the upcoming quarter is visible. Do you have a general sense of that in your current September guidance?

Yeah, Ray, it's -- when we go and look at September traditionally we've kind of been looking anywhere to find 5% to 15% of that. We're somewhere kind of at the low end of that range, so I would say anywhere between 10% and 13% right now is what we're looking to get out. This quarter in Q2 we got out about 13% coming out of the current quarter stuff and it should be consistent with that.

Okay, great, so more conservative than in the past, great. And one strategic question, maybe more for Nael. In terms of the new generation product that you discussed, and obviously you emphasized you don't see any concern about the clients waiting for the new version, given the huge emphasis on compatibility with the current generation, I don't know if you gave us the timing on when we're going to see that product, and if that's going to be one of the major catalysts for potential R&D leverage that you're talking about in '04, for the reaching of major milestones in that new human interface and some of the other components of that.

Ray, Neal. As far as the timing, we are going to be rolling a good piece of this out -- a good piece of the work out -- this year. And we went way out of our way to architect the changes in where they'll run it parallel and co-exist with the current application architecture. And then going forward, as far as -- there's no question we see this as improving our competitive advantage in the area of technology. So, the clients that have seen this work really like it a lot. And it's real clever and it's very solid. So, this was a piece of what I referred to -- and I probably created a little bit of confusion, but I think mid-year next year, we are -- our competitives will go up quite a bit. And this is certainly a key part of that statement.

And again, will that be a key point at which maybe your R&D spending growth rate can temper a little? And maybe for Marc, would it also potentially mean the software cap rate might also decline a little at that point?

Ray, it's Marc. It certainly means, as Glen indicated in his comments, that we would expect the percent of revenue spent on R&D to temper a little bit. We'll continue developing new stuff so the impact on the cap rate kind of depends on what the next new thing we're going to have people working on. But the growth rate in R&D certainly will temper as a percent of revenue.

All right, thanks.

Our next question comes from Lisa Gill with JP Morgan. Please proceed.

Thanks. I was wondering perhaps, Neal, if you could talk a little bit about last quarter versus this quarter. Everyone sounds very optimistic this quarter and sounded very disappointed last quarter as far as what hospitals were doing on the buying side. Obviously it seems that they've picked up their spending and the overall hostile environment from our perspective hasn't changed all that much. And secondly, Marc, if you can talk a little bit about -- I think you said you have additional spending coming up in the next quarter due to additional personnel. Can you elaborate on that a bit? Thanks.

Lisa, with regards to the difference between this quarter and last quarter, what we tried to communicate last quarter was that we still saw a strong marketplace for our solutions in this country and then a growing strength outside this country. We were positive -- we knew we disappointed everybody and we were disappointed too, but the basic marketplace we said was still relatively -- was positive. We did say two things that happened in the marketplace that we felt like basically were the major factors of why we missed the bookings. We also said that our bookings last quarter -- even though they were below our plan, which subsequently created the disappointment -- our bookings were very strong compared to every other competitors. So, and of the two areas that we talked about that we felt that we sensed and saw in the marketplace was -- and I agree with you that the general economic state of the healthcare providers, specifically of the hospital organizations, is fairly stable -- but there was a change in attitude over the last six months where there was increasing pressures on their cost and there was a realization that their opportunities to grow their rates through -- that they had been getting over the last couple of years, was coming to an end. Plus, we also said that there was a huge building boom going on in the industry. People are building a lot of fixed assets, and that was competing for the capital dollar. So there was enough change there in the economics that created a kind of a bit of conservatism, where we were getting deals done in the previous quarters. They didn't happen. There was enough of those it didn't happen last quarter that contributed to our miss. The other thing we talked about really for the last well over a year has been the increased competitiveness that we are seeing in the marketplace. Some of that competitiveness is in the form of aggressive pricing in trying to protect clients, certain competitors' install bases, and what we had said is in the prior quarters we frankly were getting those wins and we had lost a couple during last quarter. Some of it around aggressive pricing, and we chose not to chase the pricing. Okay? Which we think is a sound long-term business decision, but there was enough changes in the competitive side that contributed to the miss. So it was not a huge miss, but it was enough of a miss -- and there's some sensitivity to top line versus bottom line in our model -- so there was enough difference, there was enough changes last quarter that caused the miss. The difference here is we're being more conservative with what our plan is, and but we still see -- what we're saying is -- we know we disappointed everybody, but we want to get back on a strong path of putting numbers out there that we feel good about, that we see the business to go to, and we want those to be conservative numbers. So, I think we're - I think we're still going to grow this business very, very well.

As a follow-up to one of your comments. On the competitive landscape, in talking about irrational pricing, going forward, what's the difference here as far as clients go, number one? And number two, when you're looking at your competitors, do you think that the irrational pricing could get much worse? And as we look out in the next several quarters could it get to a situation where they bring down pricing even more because information technology is not their core competency and are just trying to win business perhaps for some of the other businesses that they run? Is that a concern of yours?

Well, I mean in broad terms I'd have to say that's a concern. What we see -- and quite frankly I think we demonstrated here -- that healthcare providers are by nature a bit conservative. We are a proven, safe choice out there. Okay? So we have what they want, and we have it, and our architectURE and solutions are very broad and very deep and we're turning on systems at a major scale. That makes us safe. Most all of our competitors have promises of what they're going to go do. They're working aggressively on trying to take their applications and make them do things they weren't designed to do. So, we feel like we're the safe choice and we've proven that without chasing the price that a lot of people will commit to us. So, I think I'll be cautious here, but the market is very strong right now. And price is a factor, but it's not the only factor people buy on.

Okay, great. And then Marc, I'm sorry, my second question was just spending expected on additional personnel --

My point was that spending probably -- from the current level -- upticks a little bit, mainly because of new campus hires coming on. So personnel spending will go up a little bit. We'll also have that offset by some additional non-personnel spending. So, in the past you've seen us increment $4 to $5 million a quarter in spending. You'll see that much lower than that probably, Q2 to Q3.

Great, thanks very much.

Our next question comes from Bill Haus with Advest Incorporated. Please proceed.

Good afternoon, guys. Just a couple questions. First on the UK opportunity. You mentioned there are 16 companies. I know there are five geographies. You mentioned three bids. Can you talk a bit about what the three bids are? For three of the different geographies?

Trace, do you want to do that?

I'll take a shot. Bill, the way it's played out, as Neal indicated, there were 99 players at the start. We think now there's about 16, as we clear the fog. We have our own, we call local service provider, which is our own prime opportunity, and we've built a consortion of companies to address the opportunity and we've actually partnered with two other very large companies that also have we think a very solid place, a very solid solutions offering. There's very few people -- and speaking specifically to the Cerner piece of it, there's very few people who have the application software, the depth and breath of product that we can offer that is so appropriate for what the UK and NHS is trying to do. We like where we're positioned. There will only be a small number of selected players, and I think much of the decision will be driven around the ability to provide the solutions today as opposed to in the future.

Let me chime in too, Bill. Basically we are operating as a prime -- we created a consortion of our companies and we're the lead in that, and we're bidding as the prime contractor. We're the sub-contractor to two other bids where our application architecture is the core technology they're bidding.

I see. So is it possible then that you could have -- I would imagine it would only award the geographies to separate companies, that you wouldn't get two geographies as well as the prime contractor so that you have an opportunity potentially it sounds like to win in LSP and then also to have your product being used in one or a number of other LSPs if I'm hearing that correctly?

That is correct. And there's a lot of discussion over there whether anybody will win more than one geography, but --

seems like a lot of work.

Well, we're talking about the entire country. So, we have a shot at 20, 40, or 60% of England is how you boil it down.

Great. And on the terms of the electronic bookings, what's the time table or have you given one? I might not have heard it.

I'm not sure we gave one. They're negotiating contracts for that now.

We believe that will be a decision probably in 2003.

Okay, thank you, Marc. Finally, just -- in the prior investor days you mentioned a push to get old clients from the old classic versions to a new Millennium version, if I heard that correctly, or existing clients upgraded. What's the status on that now? Is that something that you're still pursuing doing? Clearly you're not going to sunset maybe older versions, but have you made headway there?

This is Paul Black. We've made pretty good progress there, Bill. We'd always like to have more progress, but the clients there, we've made a very important commitments to them in the 1999 time frame, saying what you said earlier, that we will not sunset our Cerner Classic product for a period minimum of 10 years, so we gave them a planning horizon in the 1999 time frame we did not want to, from the business standpoint, to put a gun to anybody's head. We have now, over the course of the last two to three years, told them that over time it will be very apparent to them that the investments we're making in R&D is going towards Millennium. We have other things we're doing to stay current on the classic platform and over time it's certainly our intent to migrate them their existing platform over to Millennium. We've had a number of them make that jump, and a lot of them will be moving a lot more of them will be moving over the course of the next three years.

Thank you all.

Our next question comes from David Francis with Jefferies. Please proceed.

Hi, congratulations on the bounce back in the quarter. I have two quick questions. One for Marc, one for whoever wants to take it. First, Marc, if you could tell us, relative to the bookings number that you guys did this quarter, how much you might characterize as slippage that fell over from last quarter to this? And secondly, on the UK opportunity. Given the recent acquisition by MISi of Persay Patient One product, I was wondering if you guys perceive any potential new or unique political issues given a UK company's ownership of a potentially competitive product and they're likely to be trying to bid for business over there as well, thanks.

This is Marc. Just on the slippage, Dave. We indicated last quarter that the deals that do not happen that quarter will be spread throughout the next 12 months. So we wouldn't -- we're not attributing anything here specifically to deals that slipped. This is basically just executing against our pipeline and delivering it as we have 13, now 14 of the last 15 quarters.

And relative -- this is Trace -- relative to the acquisition of the Persay assets by MISi. This process for this opportunity started about 2 1/2 years ago, and it's a little late in the game for anyone to kind of come running in with a solution. We don't know and don't have the ability to who the final 16 are, or how the final teams will line up. But we have not seen a lot of evidence of MISi interest or participation in the process today. That's not to say they're not there somewhere or working hard to get there, but in our estimation, it's pretty hard to come into this at the last minute and expect to be a player.

You don't sense any potential political issues or otherwise as it relates to your opportunity there?

Well, it's obviously England, and it's a government, and there are obviously political issues any time you're doing business overseas. So it's difficult for us to predict that. But the fact that they're a UK company could be of help to them. I just think it's such a complex requirement and the visibility to this opportunity has had to have been identified literally years ago in order to be successful in our view. We don't know how they could be a serious competitor at this point given the timing. That's just an opinion.

Right.

And Dave, I have to add one other thought there. Our direct conversations with the government -- if we can use that word -- they're very sensitized to the risk here. So they want to be dealing with -- they want to be buying real stuff, integration is very key to them. That's what -- one of the problems they're trying to fix in their health system is tying everything together. And they want to be dealing with a company that's got a commitment, big-time commitment to this. So again, I think to be safe, who knows who will win and - or what basis they'll win on, but our experience and our abilities, I think, is an asset to us over there.

And Mike, why don't we take one more question. We'll let everybody get back to work.

Our next question comes from Daren Marhula with Piper Jaffray. Just one moment. Okay, please proceed, sir.

Yeah, hi. Following up on David's question regarding bookings, was there anything that you had budgeted maybe for Q3 that may have come through the pipeline a little bit quicker than any typical quarter?

No.

Okay.

It was very much one of the quarters where we worked the pipeline, deals line up, we go execute on the deals and they get signed. As I said, it was very similar to what we have seen the prior 13 quarters before we had the miss. So, nothing unusual came in. It was pretty much execution.

Okay, I just wanted to be clear on that. Then you did mention I think there were the two deals over in the UK. Were there any other global deals that were non-UK deals?

I think we had a couple of smaller deals, globally. They were -- Canada being what we would call global, outside of the U.S.

Okay.

And so we had another deal in global, the Canadian deal that had some size, but it was not a large deal by any chance. They had a pretty good job, we did business in Australia, so overall, global actually -- including the UK business -- was a pretty good contributor to the quarter.

And looking at your historic percent of bookings that comes from outside the U.S., can you just kind of give us some color where that's been historically and where you think that will be tracking going forward? It looks like that's ticking up for you.

It's very -- Daren, kind of each geography has had peaks and valleys, if you will. Australia in the mid-90s was strong. We then saw some far east activities. Europe was strong kind of in the early 90s. At this point I think we're seeing Canada, we're seeing the UK, and then I think we've got -- our impression is that Europe will probably follow soon after UK as far as marketplaces that we see heating up.

Okay.

This is Trace. We have no guidance -- none of our guidance would include any additional UK opportunity.

Okay.

The remainder of the year. We're actually being very conservative in the way we approach this, optimistic and we're trying to give you some good guidance around that subject, but we're not building it into our plan.

Good. And then of the four deals that were greater than $100 million, were two of those then outside the U.S. and two were domestic?

No, I think you mean over $10 million, rather than over $100 million, although we wish you were correct.

Sure.

You're still thinking about the UK, aren't you?

Those were -- the deals over $10 million were U.S. deals.

They were all.

Correct.

Great, thanks, guys.

Well, I think Marc, that should be our last question here. Let me just close here by saying we recognize that we disappointed our shareholders last quarter, but I think you can see and tell here that we still believe we've got a very good business here. It's not easy, there's a lot of variability here, but we've made a lot of good investments over frankly over the last -- certainly it's the last five or six years. And we think those investments are going to pay fairly large dividends to future shareholders. So, it's not easy, but we like our business a lot. We think we're dealing with a strong marketplace that recognizing increasingly recognizing the value of what we've invested in. So, with that we'll going to go back to work and we're working on Q3 now, so, thank you very much.

This concludes your conference call. Thank you for your participation today. You may now disconnect.