塞納 (CERN) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Cerner Corporation fourth quarter 2003 conference call. Today's date is February 4, 2004 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 Securities and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in these forward-looking statements may be found under the heading; factors that may affect future results of operations, financial condition or business in the management discussion and analysis discussion of Cerner's form 10-K and other periodic filings which are on file with the S.E.C.

At this time, I'd like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation.

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

I'm going to lead off the call today with a review of the numbers and that will be followed by comments from Paul Black, Executive Vice President of our U.S. Client Organization. Trace Devanny, our President. Neal Patterson, our Chairman and CEO will then follow. Glenn Tobin will join us for Q&A after the prepared comments.

Looking at the income statements, we saw strong sequel improvements in revenue and operating margin. Revenue for the quarter were $227.4 million, up 10% sequentially and 6% over the year-ago period. The revenue composition was $90.8 million in system sales, $59.9 million in maintenance and support, $68.9 million in services and $7.7 million in reimbursed travel. Note, that support and maintenance revenue had a stronger than normal sequential increase of $8 million due to the extra week in Q4, which was 14 weeks long instead of the normal 13.

Gross margin was $177.9 million or 79.1% of total revenue. The higher than historical gross margin is is a trend we expect to continue going forward due to the success of our managed services business which reduces one-time hardware sales in exchange for significantly larger long-term highly visible recurring revenue stream for hosting services.

Bookings revenue for the quarter was a record of $255 million, up 26% compared to last year's fourth quarter. For the year, bookings were up $811 million, also a record and an increase of 10% over 2002 bookings of $736 (million). Bookings margin was $232 million this quarter, an increase of 33% over the year-ago quarter and for the full year, our bookings margin totaled $714 million, compared to $628 million in 2002, an increase of 14%. Total revenue backlog increased 25% over last year to $1.25 billion. Contract revenue backlog for the quarter increased 28% from a year ago to $938.2 million and supports revenue backlog was $312.9 million. Margin on the contract backlog was $892.3 million and margin on the software -- the soft support backlog was $281 million for a total backlog margin of $1.17 billion.

The things we're highlighting, the higher growth rate in backlog is compared to revenue. Paul and Trace will discuss further, during 2003, we had seen an increased level of managed service and subscription bookings and these models roll into our income statement in a very predictable manner over a longer period of time. This increase, when combined with the strong growth in our support and maintenance revenue, which ended 2003 at 25% of total revenue compared to 22% in 2002, enhances revenue quality and visibility going forward which is a focus of the company.

Other initiatives that improved revenue visibility include increasing contribution from our consulting organization. Leaders in that organization will be incentive on five levels of profitability in 2004, driving even tighter management of these projects in order to deliver results for both the client and Cerner. While we clearly still require new bookings to drive a portion revenue, the continuing mix shift will increase visibility over time.

Operating expenses for the quarter were $151.1 million in line with what we projected. This was a sequential increase of about $12 million, almost all of which was driven by the extra week in the quarter. We're pleased with the expense control reflected in Q4 results, given that we absorbed slightly more than $2 million of spending related to the procurement process in the U.K. This had approximately a 3 cent EPS impact on the quarter. There will be some hangover U.K. procurement spending in Q1 as we refocus associates on the significant business signed in Q4, but it will be much less than we saw in the last half of 2003.

For Q1, we expect total spending to be around $150 million and recall that Q1 has a higher than normal increase in spending due to the restart of payroll taxes and an increase of amortization expense for capitalized software that begins to amortize at the start of the calendar year. This increase is not as apparent this year because we're following a quarter that had the extra week of spending.

Continuing with results, net earnings were $16.2 million in the fourth quarter, compared to $15.7 million a year ago and EPS was 44 cents per share compared to 43 cents a year ago.

Turning to operating margins, we delivered strong sequential improvement on our operating margin in Q4 with a 220-basis point increase over Q3 to 12.7%. As you know, we remain focused on expanding our operating margins. The biggest opportunity to expand margins is our consulting organization, which represents about 28% of our total revenue.

We believe this organization, which currently has mid-teens contribution margin levels can operate at a contribution margin greater than 30% within a few years as we continue to drive improvements and productivity as a approach to products. We also have an opportunity to generate margin expansion by leveraging our intellectual property investments. We've been very focused in hardening Millenium so that we can take advantage of our common platform, this will allow us to continue our record of innovation while growing R&D spending at a rate that is slower than the top line growth.

As a result of these areas of leverage and spending control, we continue to believe that 20% operating margin is an achievable goal for Cerner over the next several years. Our balance sheet remains strong, cash ended the quarter of $121.8 million, accounts receivable were $256.6 million and contracts receivable or the unbilled portion of receivables ended the quarter at $94.3 million, representing 36.7% of receivables. Our core debt remained flat at $137 million. Total debt increased by $9 million due to capital leases of data center equipment utilized in our managed services hosting business.

Turning to cash, our cash performance was very strong again this quarter. We had record cash collections of $250.1 million which drove operating cash flow of $41.8 million. Traditional collections were the primary driver of this improvement as third party financings were only slightly higher in the quarter. This performance reflects the enhanced focus on our internal collection process, the impact of database licensed software payment terms and our effectiveness of delivering solutions to our clients. Clients value Cerner's Millenium software and they are paying us for it.

Moving down the cash flow statement, Q4 capital equipment expenditures were $8.4 million. Cap Ex expansion expenditures were $16 million, and captialized software was $15 million. We also spent $6.4 million on our Beyond Now acquisition, bringing total cash used by investing activities to about $46 million.

Free cash flow before financing activities for the quarter was a negative $5 million. But if not a continuing item, such as acquisitions and the campus expansion costs were added back, the adjusted free cash flow would have been $18 million in Q4. For the full year, we've generated $134 million of operating cash flow, capital equipment expenditures were $27 million. Campus expansion expenditures were $56 million and capitalized software was $59 million.

We had a huge improvement DSO for the quarter. DSOs were at 103 days, down 13 days compared to a year ago and down 9 days sequentially. This performance reflects the very strong cash collections in the quarter. Going forward, we would expect DSOs to remain in the 100 to 110 day range for 2004, with a longer term goal of getting below 100 days.

We're very focused on improving cash flow in 2004 and beyond. Clearly our progress in this area during 2003 is a great start. This year we are focused on delivering strong operating cash flow and free cash flow. Our operating cash flow should remain strong as we continue to improve our folks on improving DSOs and expanding margins, and our free cash flow should improve significantly because most of the capital expense relating to our campus expansion is now behind us.

As we look to 2004, we expect to generate operating cash flow in the range of $120 million to $140 million with Q1 starting out in the $20 million range and ramping up from there. We anticipate total capital expenditures for 2004 will be between $40 million and $45 million, which includes some hangover campus expansion costs and the need to expand our data center to meet the demand for our managed services offering. We expect capitalized software to be in the mid $60 million range and based on these estimates, we anticipate generating free cash flow in 2004.

With respect to capitalized software, the $15 million of capitalized software was 32% of the $47.3 million cash spend on development activities. Amortization for the quarter was $8.8 million, resulting in a net cap rate for the quarter of 13%.

Moving to guidance, looking at Q1, we expect revenue in the $215 million to $220 million range. This is sequentially down due to typical Q1 seasonality and the fact there is one less week in Q1 than there was in Q4. We would expect Q1 EPS to be between 30 cents and 32 cents per share and for bookings, we expect bookings revenue in Q1 of $180 to $200 million, also reflecting Q1 seasonality. For 2004, we believe EPS estimates in the range of $1.60 to $1.65 are reasonable. This represents an increase from our previous guidance of $1.55 to $1.60 and reflects more than 35% year-over-year earnings growth compared to 2003.

At this point, we expect 2004 revenue to be in the $920 million to $940 million range, $10 million higher than our prior guidance and this would reflect between 10% and 12% revenue growth. With that, I will turn the call over to Paul.

Thanks, Marc. I will start by covering our sales results and then making comments on the competitive environment. Then I will cover operational results.

We're pleased to report another record-breaking quarter and year in several performance categories. As Marc reported, we delivered an all-time record level of bookings revenue for the quarter of $255 million, up 26% over last year's record Q4. For the year, bookings revenue were $811 million, also a record, an increase of 10% over 2002 bookings of $736 million. As a reminder, we don't include support in our bookings. If we did, our bookings revenue would be 40% to 50% higher.

Q4 bookings included more than $50 million from the Ascension Health relationship we announced last week. We could not be more pleased with this opportunity work with Ascension Health, the nation's largest Catholic, non-profit healthcare system. Over the lifetime of this relationship, bookings will exceed over $100 million. This strategic relationship includes CPOE, electronic medical records, knowledge solutions, medical management, nursing documentation, registration and scheduling. And Ascension will have the opportunity to acquire more solutions in the future. If contracted for a subset of Ascension Health, 29 health ministries and 67 acute care hospitals and the remaining ministries will have the option to purchase the entire suite of Millenium Solutions.

Ascension Health will also be working with us in the accelerated solution center, which allows for a much faster and more repeatable design, build and deployment of Millenium Solutions across their system. These solutions will be hosted in Cerner's data center. While we believe this was an impressive sales quarter, it is even more impressive to list some of the major, multi-state health systems we have signed to strategic relationships over the past two years. In addition to Ascension Health with over 67 hospitals, the list includes the University of Pittsburgh's Medical Center, Catholic Healthcare West, Catholic Health Initiatives, Trinity Health, Sisters of Mercy Health Systems, Advocate Healthcare, Adventist Health Systems, Adventist West, to name a few.

These health systems annually account for more than $40 billion of healthcare revenue and retain over 300 hospitals and they represent all venus in the continuum of care including acute care, clinics, physician offices, long term care and home health. While each of the agreements are unique, they're all strategic commitments between our two organizations. Interestingly, these institutions represent more than 1/3 of the total hospitals in England.

Our overall results reflect the depth, breadth and maturity of our solution offerings. Here are some of the highlights: We continue to have broad range of success with a record year for several major solution categories, including access management, cardiology, document imaging, knowledge solutions, laboratory medicine, pharmacy, physician practices and supply chain. We have had great success with our managed service business. In Q4, the managed service portion of Ascension Health helped set new records for managed services bookings which were up 50% from Q3 of '03. Full year 2003 managed services bookings were triple 2002 levels.

We also had a record quarter and year in our subscription models, which include businesses such as Executable Knowledge, Cerner Multem and Cerner Apache. Collectively, managed services and subscription bookings accounted for more than 20% of our total bookings margin in 2003 compared to about 15% in 2002. This shift in mix gives us greater visibility going into 2004.

We signed 169 contracts in the fourth quarter compared to 136 a year ago. This led to another record of 584 contracts for the year compared to 407 a year ago. For the quarter, we had a good mix of larger contracts with 9 over $5 million, 4 of which were over $10 million. We had very strong contribution from new contracts outside of our installed client base with over 50% of the Q4 contract dollars coming from new clients. The Ascension Health booking drove this level above historical levels and we still had strong success outside of our base, even without Ascension.

Going forward, we continue to target 25% to 40% of contract dollars from new clients. Our leading indicators continue to look strong as we head into 2004. We experienced year-over-year increases in RFP volumes and our level of vision center visits and sight visits remain strong. We improved the quality of our multi-billion dollar pipeline with the top three tiers of our pipeline increasing 32% over a year ago. This portion of our pipeline contains the deals that are the furthest along in the procurement process so it is the most visible portion.

Let me turn to the competitive environment. In short, we feel great about our competitive position going into 2004. Throughout 2002 and much of 2003, our competitors were aggressively promoting their version of technology that they claimed would match Cerner's proven contemporary architecture. Some gained sales momentum as they were able to sell this promise, usually at a significantly reduced price, especially within their installed base.

We consistently said their momentum would slow if they did not succeed in proving their software was live at more than a handful of sites. More importantly, we have indicated that our competitors would begin to realize how difficult it is to scale the disparate systems they have tried to patch together with a new-edged front end. The implications of these challenges become very public from one of our competitors in the fourth quarter of 2003.

We understand why many of our competitors have focused on the front end. One, it is cheaper, probably 20% of the total cost is related to the front end. And two, it is faster to get to market, but as some competitors have learned, getting to market and getting value from the software are two distinct things. Cerner has been emphasizing this to the marketplace for years and recent competitor difficulties have made this a much more important topic for CEOs who are increasingly demanding a proven solution from an experienced management team that they know will work.

We expect clients to continue to look under the hood and place more value on what is working today and what may work tomorrow. This should lead to a much more rigorous selection process from a proof of solutions standpoint and we welcome this change. In fact, we encourage it.

Our success on the operational side of the business has continued throughout 2003. During the quarter, we turned on another 204 Millenium applications compared to, excuse me, 162 in the year-ago quarter. For the full year 2003, we have turned on 884 Millenium applications, a 63% increase over 2002. This brings the count of live, Millenium applications to over 2,600 at more than 550 client sites. 2003 was a year where we accelerated past our competitors on the operational side of the business.

The goals reazlied during the quarter included 36 different types of solutions at 73 sites in a variety of different types of healthcare organizations throughout the world. We ended the year with 11 major solution categories that have each been converted at more than 100 sites, reflecting the proven nature of our solutions. I believe none of our competitors can make this -- or make this claim about any one of their currently-marketed products.

2003 included significant progress at implementing CPOE. We turned on CPOE at 80 sites in 2003 and ended the year with 201 CPOE sites, including 24 inpatient and 177 outpatient sites. We planned to more than double our live sites in 2004. I would note that we only count sites where physicians are actually entering orders on the solution that we are currently marketing.

In summary, I would like to reiterate how pleased I am with Cerner's sales and operational execution in the quarter. I'm also pleased with how well we executed for the year, despite our slow start in Q1. We continue to see significant opportunities in the HCIT marketplace and I assure you that we are very focused on delivering a better start to 2004.

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

Thank you, Paul. I will start with our assessment of 2003. We believe we began 2004 a much stronger company. We continue to strengthen our leadership position in the healthcare information technology industry despite a disappointing start in the first quarter. In fact, our shortfall in Q1 of 2003 focused and strengthened our company in many ways.

Going into 2003, we had doubled the size of our company in the proceeding three years. Revenues in 1999 were $360 million and into 2002 at $780 million, a 117% increase. The number of associates almost doubled from 2,600 to 4,800, frankly, a lot of growth to manage. Our shortfall in Q1 of 2003, while disappointing, accelerated our focus on basic productivity, expense control, planning and profit improvement. Our results in the last three quarters of 2003 reflect the initial benefits of this focus and we enter 2004 with a leaner, more visible business model.

As Marc indicated, we continue to believe in and remain committed to our business model. We're keenly focused on expanding our margins to 20% while maintaining our top line growth, which is a basic assumption in our margin expansion strategy. In addition, we will continue to focus around generating free cash flow.

Relative to competition, while some of our competitors realized some sales success in 2003, broadly we believe it was a difficult year for them around their core technology development. As we have stated many times before, we believe building solutions on a contemporary architecture is the only way to solve healthcare's complex challenges. To that point, we believe we just demonstrated one of Cerner's competitive advantages in 2003 the important progress at extending our Millenium Solutions to the web. As we repeatedly communicated, Millenium is a multi-layer architecture with the most robust person centric data model in the industry.

In the fall of 2002, we shared with our clients our road map and J2EE open platform strategy of adding a new, web-based human interface to Millenium. We are getting significant marketplace acceptance of our approach for the technology and the design of this effort. The Millenium web experience combines the technology benefits of a browser agnostic platform with optimized human interface that aligns clients personalization, digitized knowledge and clinician work practices.

Unlike competitive offerings, this new human interface is an extension of our already proven Millenium architecture and it offers seamless co-existence with Windows and all other browser-based technologies. The ability to deleverage the Millenium architecture has put us in the position to focus our efforts on complex collaborations as this will represent the next generation of clinician productivity. Most importantly, it is 100% compatible with previous releases, making the use of the new human interface completely optional to every user.

To date, our most significant proof point for our web solutions is the load testing for our electronic bookings solution in England, where we have proven the capacity to handle the scheduling for over 50 million British citizens. We've internally processed more than 2.9 million transactions in one hour against a database with 2.7 billion rows of data, proving that our web architecture delivers consistent performance under extreme work loads.

In 2003, we continued to organically grow Cerner through expanding Millenium into new markets, creating the broadest range of solution offerings this industry has ever seen. As Paul mentioned, we again set full year bookings records in numerous solution categories. This diverse range of success substantiates our long-term core strategy of developing a broad range of offerings on a common architecture that cover nearly all venus of care.

Some specific progress in 2003 worth noting is our success in two of our relatively new solution categories, patient accounting and PAC. In patient accounting we continue to progress with increase in the functionality and stability of Pro Fit with each implementation going smoother than the last. Cerner now has 15 live patient accounting sites with 19 more actively implementing.

In the PAC space we also made a lot of progress. Most notably we converted several large systems, including Our Lady of the Lake in Baton Rouge, Louisiana and All Children's Hospital in Tampa, Florida on our completely integrated radiology solution. Both sides are reading soft copies and are virtually filmless. In addition, several of our PAC sites, including these two, are poised to go paperless by the end of the first quarter through the introduction of our technologists, documentation module and web read module for ED or emergency department.

In all, Cerner converted 11 PAC clients in 2003 and has another 15 signed clients scheduled for conversion for module rollout in 2004. Bringing our total converted client sites to over 40 in North America and 120 clients globally. These clients clearly recognize the advantage of the productivity and safety delivered by an integrated solution.

We also expanded the reach of our solutions to the acquisition of Beyond Now in 2003. Beyond Now has been a leader in the home care information technology market for many years and this acquisition is very consistent with our vision for a community health model and our commitment to connect the person. As the baby boomers age and hospital resources continue to be stretched thin, home care will become an increasingly important part of the continuum of care. We are proud to have beyond now over 200 client sites and 60 associates join the Cerner family.

Over the last couple of years, we have vigorously expanded the types of services we offer our clients. Our managed service business, which includes the hosting of Cerner applications for our clients had an outstanding year, with its contribution to revenue more than doubling from about $14 million in 2002 to more than $30 million in 2003. While this business model started with a focus on community hospitals, we have expanded to meet the needs of clients of all sizes with Ascension Health, the largest Catholic non-profit health system in the U.S. being a prime example. We now have more than 100 clients relying on our data center for delivery of a variety of technology services.

We expect 2004 to be another strong year for this business as it has become an increasingly attractive option to both hospitals and large health systems of all sizes. This is a very good business for Cerner because it generates highly-visible and increasingly profitable revenue streams.

Now, I will provide some thoughts on the marketplace. From a broad, healthcare industry perspective, the healthcare industry continues to significantly outpace the growth of the economy. With the most recent CMF data indicating that healthcare spending totaled $1.6 trillion in 2002 representing a 14.9% of the GDP, after holding steady at 13.3% through most of the '90s. This increase is driven by acceleration in hospital spending, which increased 7.5% in 2001 and 9.5% in 2002, after increasing an average of less than 4% through most of the 1990s.

At $486.5 billion, hospital spending represented the largest portion of healthcare spend and accounted for nearly a third of total healthcare spending, of the total healthcare spending increase in 2002. There is little doubt that volume from the front edge of the baby boomers is a fundamental driver behind this growth, and based on the demographics, the volume will increase in the next 20 years. To put U.S. healthcare into perspective, consider this; there are only four countries outside the United States that have a GDP larger than the amount spent on healthcare in the United States. In fact, U.S. healthcare spending is larger than the entire gross domestic product of the United Kingdom, Italy, Russia, Brazil, Canada, Mexico and the list goes on.

We are in the right business. In the current environment, we are seeing a major conversion among the major stake holders in healthcare. That is the board of directors, the chief executives and the doctors and nurses. For the first time in history, there is a lessening resistance to making fundamental changes. These major stake holders are beginning to accept the adoption of healthcare informational technology as strategic to their success. There are opportunities to alter the manual and inefficient manner on which this industry operates, as well as to address the issues of quality, safety and workforce shortage.

Further, the healthcare IT industry stands to benefit as investment in IT increasingly becomes a hot political topic. Washington, D.C. is waking up to the role that information technology can play in eliminating error, variance, waste, delay and friction. The Medicare Bill contains important provisions on quality and pay for performance, a foundation that should accelerate the industry's automation efforts.

The President affirmatively mentioned computerizing health records in his State of the Union address and all of the major democratic presidential candidates, John Kerry, John Edwards and Howard Dean, have specific IT provisions in their healthcare plans. There is an emerging and compelling case for healthcare information technology and national policy makers are beginning to embrace that message.

We are also seeing generally positive trends in the condition of healthcare providers and would characterize their overall condition as relatively stable, with the primary exception being hospitals with a higher mix of medicaid revenues. Recent data from S&P supports our belief that the economic health of providers is stabilizing and they indicated a higher reimbursement coupled with sustained demand for services should improve the quality of hospitals -- excuse me, improve the credit quality of hospitals. And finally, new debt issuance was up 8% in 2002, indicating continued access to capital.

Before turning the call over to Neal, I would like to provide you with some details on our growth strategy. As a growth company, we will continue to focus on expanding our top line. We plan to continue gaining market share by leveraging our proven solutions and exposing the unproven nature of some competitive offerings.

We are also focused on cross selling into our install base, which, on average, has only about 5 products of the more than 50 potential Cerner Millenium solutions. We will continue our long history of innovation by expanding and enhancing our solution offerings, which will create more top line growth opportunities. Our 2004 areas of focus include the ICU, cardiology, oncology, women's health, orthopedics, whole health, supply chain, cost accounting and evidence based medicine.

We will continue to leverage our experience in the global markets. We will place a strong emphasis on delivering electronic bookings in England, which remains a very important political deliverable. But we also believe there are meaningful opportunities in other areas of the world, including Continental Europe, the Far East and South America. As Marc discussed, in addition to our focus on top line, we are very focused on improving our revenue quality and visibility, expanding margins and generating free cash flow. We believe that focusing on these important initiatives combined with our proven ability to execute will allow us to extend our leadership position in 2004 and to continue to profitably grow this company. Now, I would like to turn the call over to Neal Patterson, our Chairman and Chief Executive Officer.

Thanks, Trace. What I think we will do here is just open it up to the Q&A and see what questions you all have.

If you have a question, key star followed by 1 on your touch-tone phone. If you want to withdraw your question, key star 2. Again, star 1 for questions. Our first question will come from Steve Halper from Thomas Weisel Partners.

Hi, relative to your costs in the U.K., how fast can you redeploy those, you know, those people and is that reflected in the higher guidance?

Yes, Steve, this is Marc. For the most part we have not really moved to any great extent people over there. There were people that would be their future assignment. So, we're actually are able to get those people productive, given the level of bookings we had in Q4 that absolutely was part of the reason that we were able to increase our guidance for the level we did this time. We will have some small amount of carryover expenses kind of as we wind down some of the things there, but those, as I indicated early, won't be material.

And you said it was 3 cents in the quarter, is that correct?

It cost us $2 million pretax which works out to be a little bit over 3 cents.

Great, thanks.

And our next question will come from Alexander Draper from Deutsche Banc Securities.

Thanks and good afternoon. I'd just like to dig in a little bit deeper, Marc, on your comments relative to the revenue model, which it definitely looks like you're getting more visibility. And just want to make sure I understand what is it exactly, is it just the increase of the services, and that revenue that's increase your visibility? Clearly when you just look at you're you're pulling out of backlog that number is dropping which suggests that you are being more conservative in having more visibility. If you could give a little more color on that that would be great?

Sure, Sandy. Really, the key item there is the managed services business, we've grown very significantly over the last two and a half years and what you're seeing is a lot of these contracts are now coming with a managed service component, which was not an element we ever had in our element before, that was business we didn't get. We book the net present value of three years worth of those services on those contracts. Many of those contracts are longer than three years, but we book that, that shows up in our bookings and we'll feed, you know, revenue streams down the road.

I don't want to over-- at this point, that's a -- still a fairly new business it probably generated a little over $30 million of revenue as we rolled out of '03 so it's still a small piece of our total revenue pie, but that will expand given the amount of bookings we had as we start turning on things and turning those streams on. So, it's highly predictable and a new revenue stream for us compared to two years ago.

Would there be anything else that's happening that would cause the amount of revenue you're pulling out of backlog, as a percentage to come down, you haven't changed anything from revenue recognition, correct?

No, we have made no changes whatsoever in our revenue recognition model. The key component is you now take our normal deal which was software implementation services and hardware and you basically take the hardware out of the deal and put in a large component of the managed service component of the deal.

Great.

That's the primary change.

Okay, thanks.

Our next question comes from Ray Falci from Bear Stearns.

Good afternoon, guys. I guess my first question, my primary question on your revenue guidance for '04 and just sort of really thinking long-term, your, you know, I think the high end of your guidance calls for 11% revenue growth '03 to '04 with the understanding that obviously you had a little depressed first quarter in '03. So, I guess my question is we talked about some of the issues that are creating a smaller pull through of revenue out of the backlog, giving you better visibility.

But, beyond that, what's sort of driving your thoughts on the overall revenue growth rate in the context of, I think some of the experts say the market's growing right around, you know, 10% to 12%, so you're sort of looking to grow with the market. Is that the way you're thinking of it or is there something else going on?

I think, Ray, from our standpoint, some of the impact of the managed services, which will impact the revenue growth rate, it's also early in the year. I think we've, you know, we took our revenue growth up a little bit this quarter. As we continue to get visibility to better growth rates we will continue to review what our revenue guidance is. I think the market probably is growing somewhere around the 8% market, us being at 10% to 11% is in excess of that. We are going to be relatively conservative as we go into the year as we always tend to be and then provide an update to investors as we get better visibility for the year.

Okay, great. And just a quick housekeeping question. I think, Marc, you said your unbilleds were 36.7% of total AR.

Correct.

If I heard that right. And that's a bit up from where we'd been earlier this year, yet you obviously had a great DSO number. I'm trying to reconcile the two beyond just having great cash collections as you said. Is there something that drove that higher unbilled this quarter?

I think when you look at a percentage of AR, clearly when you have great cash collections quarter, your build AR has actually decreased during the quarter.

Okay, sure.

So, as a percent ratio between the two, I think it went from up 35.2% to 36.7%. So, not a significant increase, kind of in the same range. There was a little bit of growth in the contracts receivable but I think that was like 6% compared to 10% revenue growth. So, we still remain pretty comfortable with the unbilled levels. Mainly a factor of the just significant cash collections on billed receivables we had in the quarter.

So, you will probably stay around this level in '04, the mid 30s?

Yeah, we cash on the mid 30s as our goal, we were a little under that for a couple of quarters, but I think that if you look back over the last 8 quarters you would see us being in the mid 30s.

Okay, great, thank you.

And the next question will come from Dave Francis from Jeffries.

Good afternoon, guys. Nine months ago after the first quarter situation you had talked about some pricing dynamics in the marketplace from some of your competitors that you described as less than optimal and what have you that you would not go along with. Has that situation cleared up at all or can you put a finer point on where we are relative to the competitive and pricing dynamics in the market today? Thanks.

David, this is Paul Black. Every deal we compete for is pretty competitive, but we're not seeing that impact our net price in a substantial manner, meaning, you know, we will continue, if it's not a good deal for us and for our shareholders, we won't take it and the focus has increasingly become more on value and again, as I said, in my comments, the clients like to see the stuff operational and we are typically commanding a premium. We don't have to meet the rock bottom prices and, as I said earlier, we won't.

David, this is Neal. I think that's -- I won't say stabilized but it's, you know, we're past that -- that era -- and the era, basically, was people saying they won't lose to us, again. And it was at any, at any means.

There was certainly in the U.K., you know, it's a significant discussion around price of, you know, your intellectual property and to some degree we were at gridlock with the NHS as to how to price software within that marketplace and we had competitors there, certainly the U.K.-based company there had no choice but to, they were incredibly price sensitive there. So, we are, we're committed to, we think this is a big, this takes significant investment, if you're really going to build industrial strength, multi-tiered architectures to really transform healthcare, we don't think there's a lot of shortcuts here. We think that's expensive. We have that basically as a core business strategy here.

So, and clients that, you know, or countries that try to bypass that, I'm not sure where the implications come from because this is a very complex, healthcare is very complex. So, we like it a lot where we're at. But in regards to Ray's point, you're getting from us or should be getting from us the broad message. We actually think the next two years are probably, from a competitive point of view and I will say we actually told you about on this call, year 2002, we said we expect an increase in competitiveness. The forward-looking competitive nature of this industry, we think, improves -- has -- is an improved one over the next two years.

We don't think there's too many newsworthy items out there left. This is all hard work, architecture matters, everybody is basically made their play and we're delivering a lot of stuff now. We have got what people want now and we're delivering it now. So, our operational side the conversion, we're just turning on systems right and left and doctors are using it.

And so, you know, we -- we can -- we're way down the road on really a native web version of Millenium. Come to Hems and we will take you through the detail there. So, we're in a very good position. We're going to we think the market is strong, too.

Neal, on that point, we're kind of through the whole Medicare debate at this point in into an election year, is there anything you see from a macro environment perspective, reimbursement for hospitals or otherwise that concerns you about the purchasing environment or do you think that we've got a good at least 12 months of running room relative to the solid purchasing environment for hospital IT and clinical IT?

think the political environment will keep any major cuts out of Medicare. I think the states on Medicaid are going to be a problem. That's not a huge market for us. And it creates actually some opportunities there. I think at the Federal level, there's pressures on Medicare but those pressures, you know, I don't think there's going to be massive cuts out of that. And I think the political environment, I think what it's going to be a fair amount of discussion about healthcare in this election, but the big debate's going to be coming up and I think both parties will be trying to get ready for it.

Great, thank you.

Your next question will come from Ryan Stewart from SunTrust Robinson Humphries.

Yeah, hi thanks. Paul, based on Trace's comments on the platform agnostic nature of Millenium, could you provide any color based on the demand you're seeing in the marketplace for some of the different platforms out there? You know, CIO's preferring IBM to AIX versus just a straight UNIX to people looking at LINUX and of course, back to people looking at Windows on the server side of the business?

Well, I think broadly there's interest in having the applications be accessible over the web, especially as you're talking about physicians. That's, I think, an important driver in the marketplace. From a global perspective, there are countries who are looking at LINUX and you stating that as a requirement to do business in the country. We think, over time, that will be something we just have to participate in that world and in the world we live in here, in the United States, you know, it's basically down between an option between IBM and between Hewlett-Packard and we support both of those like we have to offer and we will continue to offer our clients choice, whether that's hardware platforms, operating systems, desktops, we will continue to offer our clients' choice. We think that's an important thing to do in order for us to continue to be relevant to this industry.

And is -- is it your -- I'm sorry --

Let me, this is Neal, let me kind of cap, you know, put a cap stone on that and say that I think open is increasing as a subject among CIOs and also among at any major procurement. We think open is a major topic and that's all the way through the system, all the way from the whatever the client layer is running on where there's desktop, laptop, tablet or on your phone. And we think that's an important thing for to us make sure as, you know, architects and engineers to create that option for our clients.

Great, thanks. And just building off of that, are you seeing a you know, as a majority of the households in the U.S. , are still running primary mainframe in their data centers, are you seeing a movement and more of an interest towards Windows? Are you still seeing a preference toward UNIX as an operating system? Just generally speaking?

I think, generally, it would be toward the UNIX, the flavor of UNIX. But LINUX is going to quickly show up. Both on the client and on the server.

Okay. Great. And then just quickly one last thing, on the consulting margin comments you had earlier that you're in the mid-teens now and think you can get it up to traditional consulting margins at around 30%, is that primarily going to come from just increased experience in the consultants? I know you've, I think you've gone from about 900 in 2001 to 1,800 or so in 2002, somewhere around there. And that now you have got this dynamic that you've just got more experienced consultants that have done more and more system implementations and every one, they do better and better and that is where you think you can continue to get that efficiency and drive us into 20% to 30% margins?

This is Neal. I'll take that, too. It's really a fairly broad set of things to do but the summary of it is really we have an opportunity to manage that part of our practice better.

Yep.

It's almost traditional ways of managing professional services. Plus, as we get really good at some of this stuff, we will increase the amount of what we will do on fixed fees, engagements, so, where we manage the scope, but we get paid a fixed fee and that will drive with us, so, we will manage toward improving our rates and then, you know, keeping our write-offs down and keeping the staff that we have productive. So...

Great.

And I thought, you know, Steve Halper's first question, how quickly can we make the staff we had in the U.K. productive in the U.S., is just part of it. And so we're going to -- they're being deployed pretty fast.

Okay, thanks a lot.

You have to keep that productivity up.

Great.

And the next question comes from James Kumpel from Raymond James.

Yes, it's Jim Kumpel. I wanted to focus first on the Ascension deal. Can you again just confirm total contract value of $100 million over the life of the contract and how much went into bookings?

Yeah, Jim, this is Marc. Basically, this quarter we booked a little over $50 million and we have indicated that that contract will, over time, be over $100 million. We have not put a cap on how big that could be, but we've indicated it could be over $100 million.

Can you give us a sense of what kind of milestones you expect to hit over the next year and then maybe over the life of the contract and how that concerns to the similarly large deals?

I think, Jim, it's a little hard to lay out. It's a large institution, there are basically phases that they're going to go through and as those phases become operationalized, there will be additional bookings relative to those phases.

But basically it's pretty evolutionary.

Exactly.

Well, let me focus just on the U.K., and just were there some lessons or some take away from the entire experience that might apply if and when Canada, if and when Australia, if and when New Zealand and other countries pursue similar strategies as the U.K.?

This is Neal, I will see if Glenn is awake at this time. Glenn, are you there?

Yeah, I'm here.

Do you want to take that?

Yeah, I mean, I think there are huge numbers of lessons we took out of this thing. Some things where we did fabulously. Others where we really didn't do as well as we would have liked. I think that the nature of large scale government procurement is something that the company has never really dealt with before at this level. So we had, you know, kind of the opportunity and hundreds of associates who worked on this, so, it's a broad base of learning that we had that kind of came about because of our, you know, kind of the depth that we participated in that thing.

Okay, were there any specific ones you want to highlight that you might use and maybe within the United States, not to mention some of the international opportunities?

Well, one of the key early things that we had to solve was how do you actually put an IT infrastructure in at a region wide level? And so, we had been working on our health economy layer, which is really a layer that rests above an individual institution for some time before that, but it really helped us to formalize and finish that work as from a design perspective, in terms of what was really necessary to help improve healthcare across all the providers of healthcare in a particular part of the world. Those designs and the capacity that we created as part of the bid will go with us and continue to lengthen, I think you'd say, the lead that we have in terms of what our software can fundamentally do as we are deploying, you know, continuing to deploy around the world.

And I would say, too, that even though the e-bookings wasn't a very large contract relative to the other $10 billion they left here in the last 75 days, I would say that the e-bookings, though, will be the first true national architecture running in the world so, we will get credentialed, frankly, pretty quick as having a systems architecture that can support a whole country. Because we will be doing the bookings between as people are referred from the general practitioner to a medical specialist, all of those transactions will be going through the sorter system in the near future. And so we gave you the statistics as to how we had benchmarked those volumes internally.

So, I think that will, the other bids quite frankly were the kinds of work we do every day. We probably, one of the lessons we talked about earlier was we probably knew too much about this business to accept all the risks that were in this deal, we think, we think there is a lot of risks in being able to deliver what they are for, given the terms that they asked for to us sign up for. So... And we -- I think we knew more than anybody, so that probably hurt us.

In other words, that was kind of a commitment to that 20% margin goal you have in the long run?

The commitment to the margin, at the end of the day, our one line on the U.K. is we think the outcome was a good one for the shareholders.

Very good, thank you.

Let's take one more question. And -- we're going to take two more questions. I got corrected there. And then we'll wrap.

The next question is from Sean Wieland from WR Hambrecht.

Okay. Thanks. Most of my questions were about the U.K., but those have been addressed. Maybe we can look at the Ascension deal for a second. Can you tell us how this is going to be rolled out? Is this going to be rolled out on a central platform or regional platform and, you know, give us some kind of details of how this thing is going to work?

This is Paul Black. The folks are coming in, they're doing individual planning for each one of their ministries so it's contingent upon what the ministry already has in place as to what solutions they're going to deploy and at what rate, given their capital allocations for 2004. So there will be a central platform that is hosted in Kansas City and we will deploy that using the solution center approach that I talked about earlier, which will be a standardized design and build for some of the core clinical processes that these folks want to deploy broadly across their ministries.

Let me just add a couple of thoughts here. So, in the -- we're basically hosting the applications. So, there's going to be a central model here. There will be, you know, DR, disaster recovery aspects to that, but one of the drivers out there is the organizations have a large number of entities healthcare organizations. They need, they desperately need standardization to drive fundamental improvements both operational improvements, clinical improvements, and then basically get to patient safety.

So, there's a huge agenda around standardization in these large multi site, multi-organization deals and there's a big part of the Ascension. The Ascension organization has got a very large commitment to safety and this is the vehicle which to drive that. So there is a fundamental, you know, current out there that is great, frankly, just generating a lot of demand and we are at the center of those strategies.

Okay. Can you breakdown that $50 million number a little bit in terms of installation services, consulting, support, license?

We have not disclosed that at this time. So, unfortunately we're not able to do that.

Okay. How about revenue recognition on the deal? Will it be fairly, first of all, what's the term of the contract and then how should we think about that revenue being recognized over the term?

It should be our standard, basically pretty standard rev-rec type stuff. That's -- it's got hosting services. So... That's no different from most of our stuff.

Okay, so it was a fairly standard licensed deal then?

Yep.

And if I can ask one more question. When you look out into '04, what are some of the must-haves that your customers and prospects are saying they need in terms of functionality? We've been talking for a couple of years about CPOE and you've guys have been talking about PACs. Do you see any other must-have apps that hospitals are looking for that you're ready to deliver?

That's a great question. We'll frankly talk your leg off on that. We still maintain a fair amount of enthusiasm around the patient accounting area, even though it's all replacement. They went through a cycle to lock those systems down prior to Y2K and many of them did not really go in the marketplace. So, there's a drive that will create a -- a fair amount of volume there. HIPA has laid out there as a undercurrent -- as far as a potential driver demand. I do not think that has gone away, okay? Although it never surfaced and I think -- I certainly have tried to be careful about calling a wildcard that has not at this stage generate a large amount of demand.

But I think the privacy side will be there. And then I think there are some kernels in this -- around we have the safe -- first of all, I think the safety issue has a community aspect to it, which will create demand for physician systems, okay? For Cerner. So, physicians track and office systems and then I think the, you know, certainly half a trillion dollars, if not probably a trillion dollars of benefit we added to Medicare here in the last month, we think that that will create demand at the, frankly at the national, certainly state level, if not national level. We're trying to come up with new methodologies on how to manage that benefit and we think that's all IT. So, there is a lot of demand out there, both in provider organizations and then in connecting provider organizations to, frankly, to the payer reimbursement system.

So, are we out of time? Let's take one more question and then we need to land. Thank you very much.

And the last question will come from Anthony Vendetti from Maxim.

Yes, just a follow-up quickly on the Ascension. The bookings of a little more than $50 million, is that going to be recognized over about a three-year period and is that why the rest of the contract is not in there because that's a three-year bookings number and I thought you may have mentioned the revenues that were actually in this quarter if there were any? And the last question is what percent of your revenue guidance of $920 million to $940 million is already in the 12-month backlog?

Okay, this is Marc. On the Ascension, the basically the way that rolls out is we book as the phases kind of get started. Phase I started so the initial booking of over 50 million took place. The additional bookings will occur as those phases basically get kicked off. So, as I indicated earlier it just flows through the backlog and the revenue recognition as projects normally would. So probably less than a three-year period because those additional phases will be booked at a later date and roll through backlog. And I think your other question was basically on kind of going forward, out of our revenue guidance, kind of what visibility, what's our level of visibility as we look at that.

In essence, as we go out we look at about traditionally probably 85% of the revenue that we've looked at for any single year has either coming from our backlog so it's already signed or it's coming from a very recurring stream such as enhancement sales and certain services that, that pretty much kind of occur on a continuing basis during of year, so, as we go into '04, we're pretty similar to that as we we will be looking for 10% to 15% of revenue to be driven out of new business bookings and the rest will come from backlog or very recurring or visible additional sales into the base.

And the last question, Marc, was there any revenues from the Ascension contract recognized this quarter?

There would have been some in just to basically for our standard rev-rec.

Okay, great, thanks.

Okay, so I'm going to close one, we appreciate you all's time and interest in the company. We think even though 2003, you know, was not, did not turn out the way we thought it would in the beginning due to a slow start, we got a lot done in 2003. We came out a much stronger company in many -- in a number of ways and I've already said, just kind of looking, we think the marketplace, it is a provider-based marketplace, we think it stayed strong. The financial health of our core client base is stable and solid. And we see that our view of that future is that will stay that way for the next couple of years. We think on a competitive basis, we think as we said in 2002, we thought it would increase, we actually think now next two years we, our strength and our abilities to do things now are going to pay pretty significant dividends. So, the market, we think, is strong. We think we're at the right place at the right time.

So, I think we had some very good questions here today. You know, we were disappointed on the U.K., there is just no question about that. We competed very hard for that business but at the end we are comfortable where we ended up. We would have liked to have won that but we would not on the terms that it was contracted for.

So... And but I -- as we said earlier, we told you all during the year we thought that was going to be a large opportunity and in essence it turned out to be about $10 billion over the, you know, that was contracted for in the last 60 days. So, that's huge. We see other opportunities out there, none of that size but the idea of these healthcare information systems need to be above the individual organization. That will prevail outside this country and, in certain cases, inside this country. So, and those are, we grew up a little bit on that competition.

So, with that, we look forward to 2004 and we appreciate your time and interest. Have a great day.