塞納 (CERN) 2004 Q1 法說會逐字稿

Welcome to Cerner Corporation's first-quarter 2004 conference call. Today's date is April 21, 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 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 management, discussion and analysis discussion of Cerner's Form 10K and other periodic filings which are on file with the SEC. At this time, I'd like to turn the call over to Marc Naughton, chief financial officer of Cerner Corporation. Please proceed, sir.

Thank you, Mike. Good afternoon, everyone, and welcome to the call. I will lead off today with a review of the numbers, followed by comments from Paul Black, executive vice president; Trace Devanny, our president; and Neal Patterson, our chairman and CEO.

We are very pleased with our results this quarter, as we made progress on all of our key financial initiatives, including improving the quality and visibility of revenue, expanding operating margins and improving cash flow. This is a great start to the year for us, and we remain on track to meet or exceed all of our full-year targets. I'm going to discuss our results today in the order in which they flow through our business model. I also encourage you to read the shareholder letter in our annual report, which includes a detailed walk-through of our business model. The report is currently available on our website.

Starting with bookings, we delivered another strong bookings quarter with $216.4 million of bookings revenue, which is 43% higher than the $151.1 million in the first quarter of last year and more than $25 million over the mid-range of our guidance. Bookings margin was $190.4 million this quarter, an increase of 49% over the year-ago quarter. Our strong bookings drove a 29% year-over-year increase in total backlog, which ended Q1 at $1.3 billion. Contract revenue backlog for the quarter increased 35% from a year ago, to $1 billion.

Support revenue backlog was $318.5 million, and margin on the contract backlog was $954.2 million. Margin on support backlog was $285.9 million, for a total backlog margin of $1.24 billion. Similar to what we experienced in 2003, our backlog grew faster than our revenue as we continue to see a higher mix of managed services and subscription bookings, with more than 20% of total bookings margin in these categories, compared to 15% in 2002. As you know, these bookings roll out over backlog over a longer period than other categories, such as software and hardware, creating more predictable revenue growth going forward.

Looking at the income statement, we show solid revenue growth, with a continued healthy shift to more visible and recurring components and strong margin expansion. Revenues for the quarter were $218.7 million, up 10% over the year-ago quarter, and the revenue composition was $84.5 million in systems sales, $57.8 million in maintenance and support, and $69.2 million in services, with $7.1 million in un -- in reimbursed travel. Gross margin was $172.1 million, or 78.7% of the total revenue. That's up 300 basis points over the year-ago quarter, basically flat sequentially. The higher-than-historical gross margin reflects continued success of our managed service business, which reduces one-time lower margin hardware sales in exchange for larger long-term highly-visible recurring revenue stream from hosting services.

For the fourth consecutive quarter, we demonstrated the ability to leverage our operating expenses. Operating expenses for the quarter were $149.5 million, which is up 7.8% over the year-ago quarter. Q1 expenses include $700,000 of spending related to the procurement process in the U.K. that carried over to Q1, and a $2 million sequential increase in amortization expense for capitalized software that began to amortize at the start of the calendar year. For Q2, we expect total spending to be in the low-$150 million range.

Continuing with results, net earnings were $12.3 million the first quarter, compared to $5.6 million a year ago, and EPS was 33 cents per share, compared to 15 cents a year ago. These results are before the $3 million, or 5-cent gain, on the sale of the referential content portion of Zynx Health to Hearst Corporation. We received $12 million for the referential content portion of Zynx, which had a book value of $9 million, resulting in the gain. We retained the life sciences portion of the business, which is engaged in selling life sciences data to pharma companies for use in research, and we retained the rights to use the Zynx content in our solutions going forward.

Turning to operating margins, we delivered strong improvements in our operating margin in Q1, with a 460-basis-point increase over Q1 of last year, to 10.3%. Even though Q1 of last year was a low comparable, we are pleased with our margin performance, as it keeps us on track for our longer-term margin targets. As we discussed in detail at the HIMSS investment community meeting in February, we have a clear plan for achieving 20% operating margins over the next several years. In order to stay on track for this goal, we need to achieve a full-year 2004 operating margin of approximately 12%, which remains very attainable as we expect our margins to sequentially expand each quarter throughout the remainder of the year.

A key component of our margin expansion strategy is expanding professional service margins from 2003 levels of 15%. In 2004 we are targeting 20% contribution margins for professional services. And we are on track so far, as they were 17% in Q1. We also have an opportunity to generate margin expansion by leveraging development costs of our intellectual property over the next several years, growing R&D spending at a rate that's slower than the top-line growth even while we expand our rate of innovation and expand the reach of our Millennium platform. As a result of these areas of leverage, we continue to believe that a 20% operating margin is an achievable goal for Cerner over the next several years.

Looking at the balance sheet, our balance sheet remains strong. Cash ended the quarter at $141.5 million, up from $121.8 million at the end of 2003. Accounts receivable were $259 million, up $2.5 million from the preceding quarter. Consistent with last quarter, contracts receivable, or the unbilled portion of receivables, were 37% of total revenues, or $96.7 million. As we mentioned in the past, our date-based payments for software licenses add visibility to our unbilled revenues, but it won't eliminate them.

Our total debt ended the quarter at $154 million, $8.7 million higher than at the end of Q4. This includes about $1.2 million related to capital leases and a $7.5 million note payable, issued to Cedars-Sinai to finalize the original purchase of Zynx. $2.5 million of that note is in the current portion of long-term debt, and the remaining $5 million is reflected as long-term debt. Issuance of the note was necessary to permit the completion of the sale of Zynx during the quarter, and has no impact on cash flow. Looking forward to Q2, we will be reducing our total debt by $18.7 million when we make the scheduled principal payment on our long-term debt.

Turning to cash, our cash performance was again strong this quarter. We had cash collections of $218 million, which helped drive operating cash flow of $30.7 million. Traditional client collections were the primary driver of this strong performance, as third-party financings were at normal levels of about $14 million in the quarter. As you may have noticed, we are now disclosing the amount of third-party financings in our SEC filings. As a reminder, our clients may elect our normal payment terms, with a 35 to 50% software down payment and the balance tied to date-based payments over the next six to nine months, or they may utilize third-party finances with a longer payment period. The third party financings are non-recourse arrangements made as part of the contracting process and can cover all elements of the contract, including implementation services. We believe this unique financing option is a competitive advantage and continue to offer it to clients seeking a longer-term cash flow structure.

Moving down the cash flow statement, Q1 capital equipment expenditures were $8 million, campus expansion expenditures were $7 million, and capitalized software is $15 million. We also received $12 million in cash for Zynx and $1 million from repayment of associate notes, bringing the total cash used by investing activities to $17 million, including the Zynx sale, and $29 million excluding it. Free cash flow before financing activities for the quarter was $1 million before Zynx and $13 million including Zynx. Generating free cash flow in Q1 is a great start to 2004, as we expect it to be the quarter with the highest level of capital expenditures. Cash from financing activities during the quarter was about $5 million, and was primarily driven by proceeds from exercising options.

Looking at Q2, we expect operating cash flow in the mid-$20 million range, which will keep us on track to deliver our full-year operating cash flow in the range of $120 to $140 million that we have previously discussed. Looking at capex, we anticipate capital expenditures for 2004, excluding capitalized software, to be around $45 to $50 million. This is up slightly from our prior guidance due to the expectation that we will need to invest more to expand our data center facility to meet the demand for our managed services offering. This does not change our expectation that we will generate free cash flow in 2004.

DSO's for the quarter were 108 days, which is down 7 days comparable to a year ago and up 5 days sequentially. We expected the sequential increase in DSO's following a very strong Q4 collections quarter. Going forward, we still expect DSO's to remain in the 100 to 110-day range for 2004, with a longer-term goal of getting below 100 days.

With a respect to capitalized software, the $15.2 million of capitalized software represents 32% of the $47.1 million cash spent on development activities. Amortization for the quarter was $10.7 million, resulting in a net cap rate for the quarter of 9.6%, compared to 13% in Q4 of last year. The significantly lower cap rate resulted from a $2 million increase in amortization of capital software that starts at the beginning of the calendar year, coupled with flat sequential spending on software.

Moving to guidance, looking at Q2 we expect revenue in the $225 to $230 million range. We expect Q2 EPS to be between 35 and 37 cents, which would be about 44% year-over-year growth, and for bookings, we expect bookings revenue in Q2 of $200 to $220 million. For 2004, we believe that EPS estimates in the range of $1.63 to $1.67 are reasonable. This does not include the 5-cent gain on the sale of Zynx, and this represents an increase from our previous guidance of $1.60 to $1.65 and reflects more than a 40% year-over-year earnings growth compared to 2003. We expect 2004 revenue to be in the upper end of our existing guidance range of $9.20 to $9.40, which is reflective of 11 to 12% year-over-year growth. With that, I will turn the call over to Paul.

Thanks, Marc. I'll start by covering our sales results and make some comments on the competitive environment, and then I will cover Q1 operational results. We're pleased to report another strong quarter in several performance categories. As Marc noted, we've delivered a strong level of bookings revenue for the quarter of $216.4 million, up 43% over bookings in the year-ago quarter of $151.1 million. This is an all-time record for Q1 bookings. We signed 206 contracts in the first quarter, compared to 143 a year ago. We had one of our best quarters, with a good mix of larger contracts, with 11 over $5 million, two of which were over $10 million. This also is an all-time record for total signed contracts.

The contribution from contracts of new clients remains strong, 34% of Q1 contract dollars coming from new clients. Going forward, we continue to target 25 to 40% of contract dollars from new clients. Our bookings results reflect the depth, breadth and maturity of our solution offerings. We had strong bookings from a broad range of solution categories, including access management, patient accounting, knowledge solutions, emergency medicine, intensive care, CPOE, laboratory medicine, radiology, and PACS. We also continue to have success in our managed services business, which had over $20 million in Q1 bookings.

Q1 2004 was also a record quarter for Cerner Health Insights, our life sciences business unit, which provides data solutions and consulting services to half of the top 25 pharmaceutical and life sciences companies around the world. Cerner Health Insights includes an expert team of life sciences researchers, clinicians and principal investigators, formally announce as Zynx Life Sciences. These experts and this business was retained by Cerner as part of the divestiture of Zynx Health. Cerner Health Insights achieved record bookings with a large number of clients, including two new clients and a strategic contract with NAAC, the National Anemia Action Council.

Our leading sales indicators continue to look strong as we head into the second quarter. We had a very high level of RP's in the quarter, and our multi-billion-dollar pipeline is at an all-time high. We also had good levels of vision center visits, site visits, and field-based client demonstrations.

From a competitive standpoint, we still see aggressive tactics by our competitors. We still feel good about our competitive position, given the industrial strength of Millennium and the unproven nature of most of the competitive architectures and products that we face. Each of our major competitors face their own unique challenge in competing against Cerner. Some of them are struggling with the fundamental technology choices that they have made, discovering first-hand the perils of incorrectly designing and building a large-scale, industrial-strength architecture for clinical computing. These people are retrenching and now are offering a portal strategy as a solution for an inadequate, poor design. Others are struggling to deliver large contracts in which they have made many high-risk commitments. Yet others are having limited success in generating new footprints because they are consumed with having to aggressively defend their install base that they acquired with prior roll-up strategies.

However, while we believe that the next couple of years represent an improved competitive environment for Cerner, we still face strong competitive pressures every day in the market. A number of competitors have implemented an influence model on the industry's consultants, where they share the revenue stream for professional services and managed services out of these contracts. Also, certain competitors have implemented a pay-for-praise strategy where clients economically benefit when they provide positive references. Some of the big cap competitors routinely use their ability to bundle other technologies and broad access to capital into deals. Each of these strategies can help competitors compete against Cerner in the short-term. We can and do successfully compete with each of these strategies daily.

Turning to operations, we're also off to a very fast start this year, operationally. During the quarter we turned on another 187 Millennium solutions, compared to 172 in the year-ago quarter. This brings the count of live Millennium applications to over 2,800 and more than 600 client facilities, further widening the gap between Cerner and our competitors as prospective clients want to see that a like organization has already successfully installed the solution they're searching for. The go-lives during the quarter indicated 38 different types of solutions at over 70 facilities throughout the world at a variety of different types of healthcare organizations, clearly demonstrating our unmatched depth and breadth of solutions. We had two more PACS clients go live in the first quarter and are on track for four new conversions in the second quarter.

Q1 also included significant progress at implementing computerized physician order entry, or CPOE. We brought CPOE live at 54 locations in Q1 and now have more than 250 in production. We remain on track to more than double our live CPOE locations in 2004, compared to 2003. I would note that, unlike many of our competitors, we only count locations where multiple physicians are actually entering orders. We also count only those locations where the solution implemented is a solution we are currently marketing. We have clearly extended our lead in this important industry solution. Our client numbers are verified by [inaudible] and represent, in most cases, a ten-fold increase over competitive offerings. This is an unmatched capability in this industry.

As you know, CPOE is only part of a broader closed-loop medication administration offering. Pharmacy is another critical component. Cerner is approaching 200 live pharmacy sites with 100 clients. Our competition is still trying to create their closed-loop meds administration offering, which will require them to build their pharmacy system or to integrate acquired systems. Our lead in this space is significant and sustainable.

A client doing business with Cerner today can expect a predictable experience. Predictable solution functionality, implementation timeframes, system uptime and performance, and a total solution price. We are finding these four issues top of mind in what has become a market full of surprises from other HCIT suppliers.

In summary, I would like to reiterate how pleased I am of Cerner's sales and operational execution this quarter. With that, I'll turn the call over to Trace.

Thank you, Paul. Today I'm going to make some broad observations about what we are seeing in the marketplace. The market for Cerner solutions remains strong, both inside the United States and around the world. We continue seeing healthcare providers making information technology, and specifically clinical information systems, a high priority in their capital spending plan. Broadly, we see a convergence of priority and opinions among healthcare's major stakeholders, including boards of directors, chief executives, doctors and nurses, toward the imperative of improving patient safety. They're also focused on significant opportunities to alter the manual and inefficient manner in which this industry operates.

In addition, we're seeing more multi-state health systems and regional integrated delivery systems looking for ways to improve efficiency by standardizing IT systems across multiple facilities. These health systems are finding that a contemporary architecture is necessary to accomplish critical standardization, something healthcare clearly lacks today. We also believe HIPAA requirements will add incentive to standardize on a contemporary architecture, as compliance pressure increases and CIO's learn the challenges involved with managing privacy and security issues across the current system.

There have been several notable developments in the political and regulatory environment. The Centers for Medicare and Medicaid Services have finalized their approach for quality reporting, establishing new incentives for health care organizations to provide more robust data. The push for pay-for-performance is gaining momentum in the public and private sectors alike. And just last week the President's Information Technology Advisory Committee, or PITAC, issued draft recommendations to accelerate the adoption of healthcare IT, including, most notably, a call for the development of a single set of standards for electronic health records.

While spiraling budget deficits and an increasingly heated political environment no doubt preclude a more aggressive near-term investment like differential reimbursement, national policymakers of both parties clearly are embracing healthcare information technology as a remedy to the emerging healthcare crisis. Most importantly, the administration appears poised to continue to push forward in the above areas. We believe both dynamics argue well for a more substantial government investment in information technology in years ahead.

It is also worth noting the elevated discussion among healthcare organizations and employers around return on investment. Providers increasingly are looking at IT and corresponding core process redesign as an investment that must provide a demonstrable return. In addition, as a recent New York Times article described, employers want to receive the maximum value for every healthcare dollar they spend and are developing new incentives for providers to employ strategies like computerized physician order entry. We believe both trends bode well for Cerner, as our contemporary, proven architecture allows healthcare organizations to lower total cost of ownership and new financial incentives make the IT value proposition even stronger.

On the global front, we still see opportunity for growth around the world, including the United Kingdom, continental Europe, the Far East and South America. As we mentioned on our last call, our electronic booking service project is going very well in England, where we have proven the capacity to handle the scheduling for over 50 million British citizens. The success of this project emphasizes a key competitive advantage of our web strategy. Not only is our new human interface and personalized clinician workflow getting great acceptance in the marketplace, but our J2EE open-platform strategy has proven to be the right way to extend the power of Cerner Millennium to the web. In addition to the proven scalability of our web offering, the open standards are proving to be an important differentiator. Our open architecture allows us to be agnostic on database, web services, server operating systems, and client desktop operating systems.

We believe that these underlying technology platforms will continually change, so it is important to provide our clients with choice. In the global markets in which we operate, we have found this to be a meets-minimum requirements. This strategy has required substantial vision and investment in R&D, but we see no other way to be relevant to healthcare. There are no shortcuts.

I would like to provide you a quick update on Glenn Tobin. As many of you know, Glenn relocated to London, England last year, as we aggressively pursued the NHF opportunity. In doing so, his family relocated back to the Washington, D.C. area, where they had lived prior to Glenn joining Cerner. Glenn has recently decided to leave Cerner at the end of April to be closer to his family and to pursue other interests. There will not be a replacement named for Glenn. We wish him the best.

Under our current structure, Paul Black, executive vice president, and Doug Krebs, president of Cerner Global, report to me. Paul is responsible for the United States and has five regional Cerner in Cerner, or CINC, presidents reporting to him. Doug is responsible for the rest of the world. And, of course, Neal still remains very engaged in all aspects of our company, including our large investment in developing intellectual property. With that, I'd like to turn the call over to Neal, our chairman and chief executive officer.

Thanks, Trace. I'll be brief here, and then we'll open it up for comments. I'm quite pleased with the results this quarter. We continue to grow the company and also broaden and strengthen our business model. We're continuing to develop or -- continue to demonstrate our ability to develop intellectual property and systematically deliver value to our clients, and the organization overall is running relatively smoothly. That's not to say that I am content, and I believe we still have a lot of work to do. So with those brief comments, let me just open it up for your questions.

Ladies and gentlemen, if you wish to ask a question please press star, one on your telephone. If your question has been answered or you wish to withdraw your question, please press star, two. Once again, please press star, one to ask a question. Your first question comes from Steve Halper with Thomas Weisel Partners. Please proceed.

Hi, Marc. Could you tell us where that additional $2 million of software amortization is included? In the income statement?

Yeah, it will show up on the -- basically the product engineering line.

The R&D line, right?

Yep, yep.

Okay. And relative to -- was that something that you were expecting?

Yeah. Just to remind everybody on capitalized software, basically the capitalized stuff during the year, and then you turn on the amortization of that in the first quarter of every year. So you're not sequentially turning it on during the year. You basically start it all on January 1 as you start the new year.

Yeah, what, what, what -- why do you turn it on at beginning of the year, as opposed to when you reach some other milestone?

That's basically the practice that we've always employed. It's -- that way you've got -- you're putting things on the balance sheet as you go through. You're able to do the analysis on an annual basis, as far as things that are going to have a longer-term value, that you're going to go ahead and amortize over a useful life. So it's more a matter of just annually you review what you capitalize, the income streams from the assets, and that's how you make the final determination of what you're going to amortize going forward.

Okay, and relative on the $700,000 in U.K. costs, where does that go to in the second quarter?

That would hit kind of a variety of lines -- primarily sales in client service.

I know. But what -- what number does it go to from $700,000 to?

Zero.

Zero. Okay, thank you.

And the next question comes from Lisa Gill with J.P. Morgan. Please proceed.

Thanks very much. Paul, you had talked about some of the aggressive tactics by competitors in the marketplace. I was wondering if, Marc, if you could just possibly comment on that as it pertains to the 12% margin that you talked about. I mean, do you think that that's at risk this year, based on some of those tactics that you're seeing from a competitive standpoint? And then secondly, just looking at the way that the guidance is that you've set up, it looks like you're now pushing things more towards the back half of the year. I'm just wondering if you're seeing anything specifically for the next quarter as to why you're pushing this back? Thanks.

It's Marc. The -- our business has a seasonality to it, which basically says Q1 tends to be lower than the prior Q4 and then ramps up each sequential quarter thereafter. So I don't think we're pushing anything back. I think it's very consistent with what you've seen historically from us, as the seasonality of the business basically grows as we go through the year. Relative to the competition, as we look at -- the key thing I would look at in that space is kind of the pricing impact. As we reviewed our pricing for this last quarter, our discounts were in line with where they've actually been in the last couple of quarters. So while the aggressive tactics are being employed by our competitors, we are still maintaining our pricing and winning significant share.

Just going back to the second quarter, if we would see a sequential improvement, it looks like you're guiding towards bookings being flat to down between the first and second quarter. Is there something specifically that we should be looking at?

I believe our guidance range is 200 to 220 --

It's 200 to 220 -- right-- and you came in in at --

And we delivered 16.

Right.

So to the extent that we are at the top end of the range, we will be higher, and if we're at the low end of that range, we would be lower. There's nothing in our guidance to give -- keep in mind our guidance for Q1 was 180 to 200, and we did 216.

Right. That's why I'm asking if something got pushed forward. I guess that's really what my question is. Did something get pushed forward into this quarter that perhaps you had expected originally in the second quarter, or should I not look at it that way?

No, actually, it could be -- there could be a little bit of the reverse of that being true. So, I think we just feel that based on the business, based on our review -- and our forecast being the 200 to 220 is a pretty good target to place out there. As I indicated, in Q1 we beat that by $16 million at the high end of the range.

Okay. And then just lastly, you talked about the fact that your margins are up in this first quarter. However, if you go back to 2002, they're actually down from 2002. I think they were 10.7% in the first quarter in 2002. Obviously you're expecting to ramp. Is there -- was there anything unusual, other than the amortization this quarter -- in this first quarter, you know, as we start to model out going forward for the ramp for the rest of the year?

No, Lisa. In fact, if you take kind of the guidance and the plan that we've laid out at the HIMSS meeting, that shows you the way we're looking to get these margins up to 20%.

Right.

I think that would be a very good road map for anyone looking to go to work on their models as to how we're going to continue to grow it. So the margins we came in at, we're basically right at what we were planning and we will continue to see increases in those as we work through the year and as we work over the next three or four years.

Okay, thanks for your comments, Marc.

Let me just add, Lisa, Marc talked about the seasonality. I believe the reason we see that pattern, and have always seen that pattern, is most of our clients are on annual calendar year and they start and they start these capital acquisitions kind of in the beginning of the year. And so there's -- and they'll spend certainly six and twelve months going through the process, so, there's kind of -- a new business comes -- starts -- you know, comes in the marketplace here and we start closing it in the last half of the year.

And the next question comes from Ryan Stewart with SunTrust Robinson Humphrey. Please proceed.

Yes, just a couple quick questions here. First, we've talked in the past about the -- you know, and you guys have talked in detail about the strategic importance of being platform agnostic. I was wondering if first you could provide sort of a high-level sense of, you know, the operating system mix that you have across your Millennium client base, relative to Unix versus Microsoft and etc., and not getting too specific if you can, but just a relative mix? Is there any comment you can make on that front?

This is Neal, Ryan. At the server level, it's still a fairly high content on the IBM -- it's on a, you know, a Unix platform. I mean, at the server level you're going to see a lot of Unix, and on the -- at the desktop, that platform will be, you know, a high degree of Microsoft.

Right.

So --

Okay, and then just on that front, you know, as you look at kind of the dynamic at Microsoft with the upgrade cycles, and if you look at kind of rolling out the new, you know, sort of web-based systems as we look into the next year, and sort of PC compatibility with what's required of a web-based system versus a, you know, a two-tiered system, can you comment -- are you seeing or hearing anything from prospects or customers on kind of the pain point [ph] -- on the upgrade cycle that we're seeing in other industries?

Well, I'm going to speak anecdotally. I covered -- I do, though, get out a lot in the marketplace. I'm hearing more pain and more CIO's talk fairly negatively about having to base -- they're being more critical of a Microsoft platform going forward. And we certainly are listening to that, and that's why we're, you know -- we're making very clear statements that going forward with our technology strategy, we want to be agnostic as to what operating system on what -- at whatever part of the stack of the architecture is, we want the client to make those choices versus us come in and impose those taxes on people.

Right, okay. And I guess just lastly, as you guys start to, you know, kind of beta out the three-tiered system, am I right in thinking that you can actually offer Millennium on specific modules in both still a two-tier and three-tier system, and layer basically the web-based interface you know, on top of the existing Millennium platform? And it's really up to the client? Is that the right way to think of it?

That is a way to think of it. Actually, our web -- I mean, our Windows-based system is really a three-tier model too, so we have a lot of competitors that really ended up sticking with the two-tier model. We've been three-tier throughout Millennium. So, that's why it is easier for us to change a layer so the presentation layer, if you will, at the client level, we can run either and the client gets to choose, and it can be really down to the user level. It doesn't even have to be at the organizational level or the department level. So the three-tier model gave us an enormous amount of flexibility in how we manage our architecture over a long -- over the period here.

And then at that client level, when you go to the web interface that you guys are rolling out right now, that basically gets rid of any requirements for emulation software, correct?

Absolutely. And there -- our web presentation layer is in our current release for parts of the application, so it's -- this is not a future we're talking about. So, there's, there's -- at the application -- at the application area we are, you know -- we are adding the alternative human interface.

I'm sorry to take so much time. Just one final. Just your thoughts on kind of what you're seeing in the market relative to demand for web, and is HIMSS next year going to be all things web?

I think the market is increasingly ask expecting. They're not even -- I think we're past the asking, where you're at the expectation is there and I think it's even greater outside the country. So all the work we're doing in the U.K. on the country-wide scheduling system, that's 100% web-based interface. And our performance -- we have gotten very impressive performance out of that architecture. So I think we're moving beyond the, you know -- it's becoming an assumption now, and I think it's going to be hard for the people that don't have contemporary architecture to do that. So Ryan, I do not mind questions about technology on these calls either, so --

Okay. Thanks a lot.

Okay, thanks.

And the next question comes from Ray Falci with Bear Stearns. Please proceed.

I promise no technology questions from me.

Oh, come on, Ray.

I am just kidding. One question for Marc and then one strategy question. Marc, just from an unbilled receivables standpoint, I think you said it was roughly flat as a percent of revenue from the last quarter. I guess I look at it as -- look at it relative to your total receivables, and it's been up now for three straight quarters sequentially. I'm just wondering, is -- have we reached the sort of the peak of what the date-based billing can do for bringing, you know, the unbilled number down? You know, is this sort of where we're going to level off, do you think?

Yeah, we basically -- I think Ray said on the last call that kind of, you know, in the mid-30% range, right around 35%, would probably be what we would expect. His date-based payments help a lot, but they're still not going to get rid of your unbilled receivables, and we've kind of been in, as you said, the 36 to 37 range the last few quarters. I don't think it's necessarily a trend. We still expect to be in kind of the mid-30s, if you will. But we -- that's where we expect to be for a while. I don't know that we're going to pull it down to where it's under 30%, but I think we'll be pretty standard there. The receivables went up, you know, just slightly, maybe a couple million bucks, and I think those were probably the unbilled change. So not a lot of change in those numbers this quarter.

Okay. And then my strategy question, you know, based on the experience you have and, you know, you pointed out a clear advantage you have, just given the length of time you've been in the market with your Millennium versus competing products and their predictability of particularly price and implementation. I was wondering if you see any opportunity to go back to something you had tried years ago in terms of offering some kind of a shared savings program to your clients that says, you know, if you can bring that up as another way to really take advantage of your predictability relative to others who probably can't be in that camp, or is there not an appetite for that out in the market?

This is Paul Black. We see, because of what I would call the distinguishing between an early adopter marketplace and we're now into early majority -- the early majority still is very interested in proof statements and they're very interested in putting your money where your mouth is, if you will. So you're seeing a fair number of people who request some sort of an arrangement where you would like -- they would like to have you participate and be at risk for some of the benefits. And from time to time, we've been doing that. I would say that that's, you know, still in a, you know, small percentage of the clients that we talked to, but that's something that we're willing to do because we have great confidence that that's something we can go do, under the right kind of structural environment. And by that, I mean there's a client environment that has to be right, plus the types of solutions that they're looking for also have to be right.

Ray, this is Neal. I'm agreeing with your broad point. That is, we do see another, if you will, after-market for all of this implementation work we're doing. We see an after-market in going back in and really helping organizations, if you will, do the reengineering. And we believe the reengineering has to be done at, if you will, the medical condition level. So the oncology, the complete, you know -- you have to have different expertise and different medical content to optimize how, you know, how a cancer service is ran versus a cardiac service versus an orthopedic versus an OB service. So that -- we actually have a very bright group of team here working on that kind of professional services and then, you know, the gain -- the business model of doing gain share there is certainly something we are considering. So you will start hearing more about that as we get toward the end of this year.

Ray, let me just give you one point. It's been pointed out to me that on the call when I was reading the script, I said 37% of revenues was what those unbilled were. It's 37% of receivables.

Which is the same math I was doing. Okay.

Yeah. So, sorry about that. It's a pretty big difference.

Exactly. Okay, then I feel better. Okay, thanks.

And the next question comes from David Francis with Jefferies. Please proceed.

Hi. Briefly, you guys have been involved in a bit of a public spat, it would appear, over the status of a ProFit implementation down in the Florida market. I was wondering if you guys could give us an update on the status of the Orange County situation and kind of generally characterize the status as you see it of ProFit in the marketplace, from both a sales and implementation perspective. Thanks.

David, this is Neal. I'll do that. It's actually California. And I want to -- I want to verify that here with my colleagues. It's Orange County, California, and the -- it is in the behavioral health, mental health portion of the healthcare system. So -- and I don't know that I'd characterize it as a spat. We do have a, you know, a client situation there. My assessment of it is two-fold. One, there is no question we have a functionality -- we did not get the specification correct on a part of the functionality to build -- to bill mental health, and that has created a significant amount of issue. The other side -- the other part of that, you know, issue is we were going to be, I think, the first in the state -- we had developed the interfaces with the intermediary there on the new HIPAA-compliant specification, and we we got into, how know -- we basically at conversion, the intermediary site said that they could not take that interface. So, we've had some issues in that engagement. The project we have -- we did roll out over 180 clinics with an awful lot of functionality, and those clinics are live and running today, and running well today. The ProFit part has been deferred into the fall, I believe. Now, broadly, ProFit has -- I think we have 16 clients that are converted and live on ProFit and we have another, I think, over -- you know, around 18 clients that are currently in different stages of implementation. So in broad terms we are, you know -- we're disappointed that we did not have the requirements defined correctly in the behavior health space, but broad -- most of our client base is in the acute care, not in the behavioral health side. So we learned a lesson. We are certainly paying the price for that, but we will -- we're doing the right thing there and we'll get it fixed.

Just a quick follow-up, Neal. You said you had 16 clients up and running on ProFit. Can you tell us, or ballpark for us, how many you have contracted for and characterize how important that is to the whole sales process going forward? And then I'll turn it over. Thanks.

Dave, this is Marc, I'll just step in. We have about 40, or more than 40 that are contracted for. In fact, in this last quarter, even with all the noise relative to Orange County, we cited an additional four clients on ProFit this quarter, so we're making -- we're having good success with that solution as people understand the linkage of the financial with the clinical.

Yeah, and it's a very important space for us for a variety of reasons. One, it is probably still the largest marketplace out there, and we have a very small market share in that, so it is part of our growth strategy and one of the ways we'll keep this company growing the rest of this decade. The second is that we have come to that marketplace with an awful lot of innovation that is impressing the hell out of people. We have always argued that the revenue cycle cannot be developed independently from the clinical process. That's why we did the clinical side first. So, we're going do extraordinarily well in this very large marketplace. And then third, from a defense point of view, without the, you know, revenue -- without our ability to do revenue cycle, that left an opening for people to shoot at us -- our competitors to shoot at us. That door is shut. In fact, we are the ones doing the shooting now. So, it is an important part of our future, and it is maturing very well.

One last point. We're very committed to the success of that project. So, we've got a team on it. We're working it and we're working very closely and collaboratively day-to-day with that client in Orange County.

Thank you.

And the next question comes from Zack Shafran with Waddell & Reed. Please proceed.

Question's been answered, thank you.

And the next question comes from Sean Wieland with WR Hambrecht. Please proceed.

Hi, thanks. Two quick questions. Can you update us on the status of the rollout of Millennium '04 in terms of -- is it in general release now and the number of customers that are running on that platform? And the second thing is, Neal, you had mentioned at the HIMSS conference something along the lines of pushing ProFit, making a stronger push. I'm not -- I'm sorry, not ProFit -- making a stronger push for Power Chart in the ambulatory setting. Can you update us on that? Thanks.

Let me go -- start with the Millennium '04. Broadly, that is our web layer of architecture, and it is -- we added it to the -- and it's in the current release for the applications that we have, that we'd done the development and done the testing for. So -- and I would say that's -- I'm just going to throw a thumbnail out there. I'm going to say that's probably 20% or 30% of our applications have now that web front end, and we will make, there's going to -- that number will, you know, significantly increase throughout this year. So, it's in general release. The -- with regards to the ambulatory space, we are going -- we are in process of making some change, basically getting even more aggressive in that space. We had been doing reasonably well, but not well enough in -- certainly in my opinion. So, we're changing the service model and how we approach that marketplace. What we are finding is that these communities, both small and large, there's a new level of kind of cooperation that the medical community will now do together. In the past, there has not been cooperation, if you will, between the hospital and the docs, and I'm pleased as punch as to the level of cooperation we are now seeing in the marketplace. So the ability to create kind of create community-level services, and in the process end up with a community-level EMR, is, -- I think that we're going to see a lot of progress over the next couple of years, and I believe you'll see us leading the way.

Just one follow-up. That's interesting. What do you think is the driver behind that new level of cooperation between the hospitals and the docs?

Frankly, I think it's still the safety issue and the physicians recognizing that if I go just to a medication issue -- you know, they cannot independently -- we cannot have a safe health delivery system if everybody just has a piece of the record. And so medication is the cleanest way of making the point. I need to see all the meds that an individual's on, not the meds that have been prescribed in my office or was prescribed at discharge time during, you know, during the acute care stay. So we have to defrag the healthcare system, and information technology is going to have -- is going to be how we fundamentally change this healthcare system. And so, frankly, patient safety is probably the core of changing it. Plus, I think just the -- and I think we'll see more drivers going forward. Another one, I think, will come in will be trying to simplify this ridiculous administrative, you know, billing system -- ridiculous way that people have to get paid in this marketplace. And I see payers actually starting to respond to that. So, so there's a lot of movement going on out there. It is -- people are fundamentally accepting technology -- I would add that to the cause too. The adoption of information technology is now almost -- is a given. People are not debating anymore. So --

Okay, and then one other thing on the Millennium '04. Is this -- can you estimate the number of customers that are actually running the new web architecture?

We're all looking at each other. I don't want to be incorrect with that, so -- it's not in the hundreds. Okay? And again, it's pieces of, you know, it's not the entire suite of applications. It's specific applications.

Is -- do you have CPOE implemented running Millennium '04 anywhere?

Not in the acute care.

Okay. Great. Thank you very much.

Okay. Why don't we take one more question, Mike.

The last question will come from Anthony Vendetti with Maxim Group. Please proceed.

Yes, thanks. Can you tell me -- you were obviously referring to some of your competitors when you were saying that some of your competitors have roll-up strategies and so forth, which may make it difficult for them to support all these different platforms. Can you just talk about whether or not, in a competitive situation this quarter, you've had any replacements or you think you have a shot at replacing some of your competitors in the next couple quarters?

Yeah, this is Paul Black. You know, every time we talk about the new business, percentages, when we refer to that every quarter, every time we have new business we are fundamentally taking business away from a current incumbent supplier. Last quarter, specifically, we took business away from IDX, McKesson, Eclipsys, Siemens and Meditech, in displacing them in some of the wins that we had. So that happens frequently, and in most cases that's something that we're competing head-to-head for new business. But in many cases we're actually displacing one of those installed incumbents as we go do the enterprise-wide large transactions that we refer to.

So can you tell -- can you mention whether or not you've seen an increase in the number of displacements, or is this something that you see on a quarterly basis? And if so, has there been a particular competitor that you're displacing more often than another right now?

I think the history would suggest that we've run at about 25 to 40% of our new dollar -- total dollars come from new client relationships, and that's been a historical number. As I said in my comments, we were at 34% of the dollars this quarter coming from new business, so we're at -- we're within that range. Again, we've ranged from 25 to 40%. It seems like every, you know, two or three quarters there is a competitor out there that's stumbling, if you will, more than others. That has to do with their missing commitments or their installed base becoming more concerned about their future with that particular supplier. I'd hesitate to say that there's one in particular that we're particularly successful against. They all fiercely compete to save their installed base, which has a lot to do with some of the tactics that I talked about in my comments, but we still prevail, in some cases, even when they're offering it for free.

Okay, thanks.

Sure.

Okay, let me just close here. But I'm going -- we have -- address first how Paul just ended there and talk about "for free." I don't think we see price as -- we're not seeing people use price as aggressively as they have in the past. So probably about a year ago -- and we try to be very candid on these calls and tell you, you know, there are subtleties to us. I'm not sure how you all can interpret it all, but we're trying to be transparent as to what's happening in out marketplaces. So the price point -- I don't want to end with the people giving this stuff away. The price has not been, you know, that has gotten a bit -- that's improved as far as a competitive factor out there. So, as Paul says, it is -- this marketplace is good, it's -- frankly it's good as I have seen it, but it is -- there's still caution out there. These are very complex organizations. They're not always -- there's virtually nobody knows exactly how these organizations work. And when we come in and want to do broad-based core implementations of new processes at the core of these organizations, these are hard, complex projects. We are frankly getting -- we are good at that and getting better. So in short, I think we have a good, strong marketplace. It is still holding up. We are continually improving our capabilities, and I think we're going to be able to continue growing the company into the foreseeable future. So we're going to -- we need to be cautious about how, you know, one, how fast we grow, and two, how we communicate to you as to what -- the expectations we create with you. But -- and we are clearly trying to improve the fundamentals of our business model. So we've changed some aspects and we have merged that in and we still continue to grow the company. So, appreciate your time and your focus here, and have a great day. Thank you.

This concludes your Cerner Corporation's first-quarter 2004 conference call. Thank you for your participation today. You may now disconnect.