塞納 (CERN) 2004 Q2 法說會逐字稿

Ladies and gentlemen, welcome to your Cerner Corporation Second Quarter 2004 conference call. Today's date is July 21st, 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 Litigations Reform Act of 1995. Actual results may differ materially from those indicated by the forward looking statements. Additional information concerning the 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 Operation, Financial Condition Or Business" in the management discussion and analysis section of Cerner's form 10-K and other periodic filings, which are on file with the SEC.

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

Thank you, Bernie.

Good afternoon, everyone, and welcome to the call.

I will lead off today with a review of the numbers, followed by sales and operational detail from Paul Black, Executive Vice President, and broad market operations from Trace Devanny, our President. Neal Patterson , our Chairman and CEO, is speaking at the National Health Information Infrastructure Summit in Washington, D.C. today, and will not be on the call.

Now let me turn to the results.

We are extremely pleased with our results this quarter. Our new business bookings were well ahead of expected levels, and our income statement and balance sheet continue to reflect progress on all of our key financial initiatives, including improving the quality and visibility of revenue, expanding operating margins, and improving cash flow. This strong performance keeps us on track to meet or exceed all of our full year targets.

Starting with bookings, we delivered an exceptional level of new business bookings this quarter, with $240.4 million of bookings revenue, which was 19% higher than the $2001.2 million in the second quarter of last year and $30 million, or 14% higher, than the midrange of our guidance for the quarter. Bookings margin was $211.3 million this quarter, an increase of 21% over a year-ago quarter. Strong contributions from managed services and professional services bookings helped drive this performance.

While the services bookings don't have an immediate impact on revenue, they helped drive a 29% year over year increase in total backlog, which ended Q2 at $1.4 billion. Contract revenue backlog for the quarter increased $70 million, or 7% sequentially, to $1.07 billion, and is up 36% from a year ago. Support revenue backlog was $324 million. Margin on the contract backlog was $1.02 billion, and margin on support backlog was $291 million, for a total backlog margin of $1.3 billion.

The strength of managed services bookings once again meant that hardware was a lower percentage of bookings and revenue than in the year-ago quarter, as one time lower margin hardware revenue is replaced by a larger, long term highly visible recurring revenue stream from hosting services. On the income statement, this mixed shift resulted in gross margin increasing 15% over Q2 '03 to $178 million, reflecting the lower hardware contribution. This mix is also reflected on our gross margin percentage, which increased 350 basis points over the year-ago quarter to 77.9%.

Looking at the mix of revenue in the quarter, we continue to see a healthy shift to more visible and recurring components. Total revenue was $228.4 million, up 10% compared to the year-ago period. The revenue composition was $84.9 million in system sales, $59.7 million in maintenance and support, $74.2 million in services, and $9.6 million in reimbursed travel.

System sales revenue growth was about 3% compared to a year ago, with gross margin on system sales growing over 9%, once again reflecting the shift to less hardware sales and more managed services contribution. Services revenue, which includes managed services, grew 12% compared to a year ago, and support and maintenance, our most visible revenue, grew 19%.

As for spending, we again demonstrated the ability to leverage our operating expenses. Operating expenses for the quarter were $151.9 million, which is up 1.6% compared to the first quarter, and 9.9% over the year-ago quarter. For Q3 we expect total spending to be in the low to mid $150 million range.

Continuing with results, net earnings were $14.3 million in the second quarter, compared to $8.9 million a year ago, and EPS was 38 cents per shared, compared to 25 cents a year ago, reflecting growth of 52%. We have now met or exceeded EPS expectations 18 of the past 19 quarters.

Turning to operating margins, we delivered strong improvements in our operating margin in Q2, with a 340 basis point increase over Q2 of last year, and 100 basis point sequential increase to 11.3%.

We are very pleased with our margin performance progress, as it keeps us on track for our longer term operating margin targets. As we have communicated previously, we maintain a goal to achieve 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 market expansion strategy is expanding professional services margins from the 2003 levels of 15%. In 2004 we are targeting 20% contribution margins for professional services, and we are on track so far as they are over 20% in Q2, up from 17% in Q1.

We also have an opportunity to generate margin expansion by leveraging investments we have made in our Millenium platform and solutions as we plan to grow R & D spending at a slower rate than topline going forward, while still expanding our rate of innovation. There is also these areas of leverage.

We continue to believe a 20% operating margin is an achievable goal for Cerner over the next several years.

Let's move to the balance sheet.

Our balance sheet remains strong. Cash end of the quarter at $137 million. This is roughly equal to our total debt, which end of the quarter at $136 million, after a $19 million scheduled annual principal reduction.

Accounts receivable were $258.7 million, which is flat compared to Q1. Contracts receivable, or the unbilled portion of receivables, were 34% of total receivables, or $88.8 million, which is down from $96.7 million and 37% of total receivables in Q1.

Turning to our cash performance, our cash performance was strong again this quarter. We had cash collections of $235.3 million, our second highest ever. Operating cash flow is $36.7 million, with net earnings of $14.3 million, depreciation and amortization of $21.7 million, and net working capital adjustments of $700,000.

Traditional client collections were the primary driver of this strong performance, as third-party financing were at normal levels at about $11 million in the quarter, or less than 5% of total cash collections. I would like to reiterate that our third-party financing arrangements do not involve us taking any existing receivables off of our balance sheet.

As we have stated in the past, all of these third-party financings are non-recourse arrangements made as part of the contracting process, at which time our clients may accept our normal payment terms, which include a 35 to 50% software downpayment with the balance tied to date base payments over the next 6 to 9 months, or utilize third-party financings with a longer payment period. 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, Q2 capital equipment expenditures were $10 million, and about half of that was related to equipment for our growing hosting business. Campus related expenditures were $2 million, and and capitalized software was $15 million, bringing total cash used by investing activities to $27 million.

Free cash flow before financing activities for the quarter was a record, at $10 million. Cash used in financing activities during the quarter was about $14 million, consisting of a $19 million debt repayment, a $2 million reduction in capitalized leases that was partially offset by a $7 million of proceeds from exercise of options.

Looking at Q3, we expect operating cash flow around $30 million, which will keep us on track to deliver previous full-year guidance of operating cash flow in the range of $120 to $140 million.

Looking at CapEx, we anticipate capital expenditures for 2004, excluding capitalized software, will be around $50 million. We expect to continue generating free cash flow for the remainder of 2004.

DSO's for the quarter were 103 days, which is down 9 days compared to a year ago and down 5 days sequentially. Going forward, we expect DSO's to remain within a few days of Q2 levels, with a longer term goal of getting below 100 days.

With respect to capitalized software, the $15.2 million of capitalized software represents 32% of the $47.4 million of cash spent on development activities. Amortization for the quarter was $10.5 million, which results in a net cap rate for the quarter of 10%, down from historical levels of around 13%.

Moving to guidance, looking at Q3, we expect revenue in the $230 to $235 million range, which is about 13% higher than Q3 of last year. We expect Q3 EPS to be between 43 and 44 cents, which is more than 30% over Q3 of last year.

For bookings, we expect bookings revenue in Q3 of $205 to $225 million. That's a $5 million increase over our Q2 guidance. This guidance reflects both the fact that our Q2 bookings were $30 million over projected levels, and that Q3 is often a seasonally lower quarter due to the high volume of vacations.

For the full year 2004, we believe that EPS estimates in the range of $1.66 to $1.69 are reasonable. This represents an increase from our previous guidance of $1.63 to $1.67, and reflects more than a 40% year-over-year earnings growth compared to 2003. Note that this is before the 5 cent gain on the Q1 sale of Zynx. We still expect 2004 revenue to be in the upper end of our existing range of $920 to $940 million, which reflects between 11% and 12% year-over-year growth.

With that, I will turn the call over to Paul.

Thanks Marc.

I will start covering our sales and operational results and then make some comments on the competitive environment.

Q2 was an outstanding quarter from a sales perspective, with many records set during the quarter. As Marc noted, we delivered a record level bookings revenue for the quarter, at $240.4 million, up 19 over bookings in the year ago quarter of $201.2 million. This is an all-time record for Q2 bookings and our second highest quarter ever. We signed an all time record 228 contracts in the second quarter, compared to 149 a year ago. We also had one of our best quarters, with a good mix of larger contracts, with 13 over $5 million, 4 of which were over $10 million.

We continue to see success across a broad range of solutions, with strong bookings in access management, patient accounting, home care, emergency medicine, intensive care, CPOE, pharmacy, PACS and radiology. We also continue to have success in our managed services business, which had over $30 million in Q2 bookings.

Worth noting, Cerner signed its first Virtual INet client in Q2. This model of remote monitoring in the ICU is gaining traction in the market, as Leapfrog and other groups publish recommendations about intensivist coverage and other quality indicators in the critical care arena. Cerner offers a comprehensive critical care solution, including work flow automation, physician documentation, and alerts and pathways to improve quality of care.

With Apache and Project Impact, Cerner has the largest critical care database in the United States, allowing for benchmarking to guide improvements and patient outcomes. Layering the virtual solution is a natural extension of Cerner's critical care solution. Only Cerner can enable seamless patient care across physical locations, allowing healthcare organizations to leverage scarce resources and improve care. Because ICU's account for only 10% of an organization's bed -- beds, yet 30 plus percent of the costs, we expect critical care to be an area of continued growth in the future.

On the radiology and PACS front, Cerner signed 20 new contracts in Q2, leading to a very strong contribution to bookings. In fact, we signed more radiology and PACS business in Q2 than we did in all of 2003. Our momentum in this base is additional evidence that the unified radiology information systems and PACS systems are on the rise, and Cerner has the largest client base for truly unified risk PACS solutions in the market.

In addition to the strength across solution offerings, we also had a broad range of success across several segments, including integrated delivery networks, or IDN's, children's hospitals, academic medical centers and stand alone community hospitals. Our IDN success this quarter included a comprehensive contract with Florida Hospital, an acute care health system with more than 2800 beds across 17 hospitals and 12 urgent care centers . Florida Hospital is the second busiest health system in the country and has been recognized by the US News & World Report as one of America's best hospitals for the past 3 years.

Our children's segment bookings included a contract we announced this week with Children's Mercy here in Kansas City. Children's Mercy, who is frequently designated as one of the top pediatric facilities in the country, selected Cerner solutions for CPOE, nursing, emergency, intensive care, radiology, pharmacy, imaging, surgery and laboratory.

In our opinion, the driver of Cerner's success include, one, a continued focus from health care organizations on CPOE to drive major patient safety and quality initiatives. Two, increased desire to have a common architecture, spanning clinical management in financial requirements, which supports the "architecture matters" points we've been making for years. And, three, a longer-term drive to create a complete digital organization.

As Trace will discuss in a moment, there are also several new and exciting developments which have historically been called wildcards by Cerner that could have a big impact in the future, including one, more activity by employers, such as Boeing in Seattle, two, more widespread adoption of a pay for performance compensation system that could drive complete automation of hospitals and physician offices, three, the increased interest of the federal government -- federal government to help provide organizations with the capital costs through a Hill-Burton like program, and four, the interesting coalitions that are being formed, such as with Congressman Patrick Kennedy, Senator Hillary Clinton and former speaker Newt Gingrich.

Operationally, we also had an outstanding Q2. During the quarter, we turned on another 245 Millennium solutions, bringing Cerner over a major milestone of more than 3000 live Millenium applications in more than 600 client facilities, further widening the gap between Cerner and our competitors. The go-lives during the quarter includes 36 different types of solutions at client facilities throughout the world at a variety of healthcare organizations.

Further evidence of our delivery capabilities and breadth of solutions is that we now have 13 major solution categories that have been brought live at more than -- more than 100 times. That -- this is unmatched in the industry.

We had four more PACS clients go live in the second quarter and now have PACS live at more than 45 client facilities. We also signed 5 new ProFit patient accounting clients in the second quarter, and currently have 16 live sites and 19 actively implementing.

Q2 also included significant progress at implementing CPOE. We brought CPOE live at 64 locations in Q2, and now have more than 300 in production. We remain on track to have more than 400 live CPOE locations by the end of 2004, which would more than double our 2003 levels.

This is an unmatched capability in this industry. In Q2 we turned on more CPOE systems than all of our competitors combined.

A notable CPOE conversion in the quarter was at Children's Hospital of Los Angeles, one of the most -- one of the premier pediatric healthcare organizations in California and the nation, went live with Cerner CPOE, emergency, laboratory, pharmacy, scheduling, and documentation solutions.

There was also a noteworthy update on Children's Hospital Pittsburgh, who implemented CPOE 18 months ago and now has approximately 1100 physicians using Cerner. In a joint press release with Cerner on April 30, Cerner -- Children's Pittsburgh announced some phenomenal results, including cutting harmful medication errors in half, virtually eliminating weight related adverse drug events, reducing medication delivery time by 50%, eradicating transcription and handwriting errors, and improving compliance with regulatory requirements.

The fact that these prominent children's hospitals are turning to Cerner for CPOE systems is a testament to the proven nature of our solutions and the unique capabilities made possible by our integrated medication administration process. The key to our ability to deliver closed loop medication administration, which is especially important at children's hospitals, is our proven pharmacy system. Which, like all of our solution, shares a common Millennium platform.

While some of our competitors once discounted the importance of pharmacy, calling it a back office system, Cerner has architected ours as an important part of a true closed loop medication administration process, and we now have nearly 200 live pharmacy sites with more than 100 clients. Many of our competitors are still working on their pharmacy strategy and are struggling. Cerner's pharmacy solution is a significant and sustainable competitive advantage in the CPOE space.

As Marc mentioned, we are making great progress at increasing margins in our services organization. This success is being driven by consistent improvement in the quality of our code, the mature nature of our Millenium architecture, ongoing refinements to our implementation processes, and the improving skills of our 1600 person consulting organization.

Simply put, our software works, we are delivering it, and our clients are deriving value it -- value from it, and paying us for this value creation. Our experience and maturity of our architecture are also allowing us to further distinguish ourselves from competitors and their immature platforms when it comes to client expectations around system availability and performance. We are now in a position where we can guarantee greater uptime and minimize planned downtime compared to others that have been put to -- that have put clients through frequent release and upgrades in order to get a stable release. This is another significant competitive advantage for Cerner.

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

As for the broad competitive landscape, you can tell by our comments that we remain pleased with our competitive position. While each competitor has their own unique issues, our fundamental competitive advantage against all of them remains our proven ability to deliver value to our clients because of the industrial strength of our Millenium architecture and solutions.

Our proven services organization, which is larger than any other HCIT focused services organization, expands our lead each quarter as we turn on more solutions than all of our competitors combined.

Evidence of our strong competitiveness is also our continued high levels of bookings from clients that are new to Cerner. In Q2, 38% of our contract dollars came from new clients, and this percent has remained in the 25% to 40% range for several years. We are the only company generating this much business outside of our install base in a consistent manner.

In summary, I would like to reiterate how pleased I am with Cerner's outstanding Q2 results. Our sales and operational execution this quarter was as good as I've ever seen it, and we intend to build on the strong momentum.

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

Thanks, Paul, and good afternoon, everyone.

I would like to take the next couple of minutes to make some broad observations about what we're seeing in the marketplace.

As you can tell from our results and Paul's comments, the market for Cerner's solutions remains very strong. Never before have we seen the forces aligning to drive investments in healthcare information technology as we are seeing today. Patient safety continues to be a key driver of demand, as it remains top of mind for all the key stakeholders among healthcare providers. Clearly other stakeholders are becoming more vocal as well.

Employees are -- employers, that is, are increasingly voicing concern over quality of care and rising costs, and are becoming stronger advocates of investments in technology. For example, Boeing Corporation, based in Seattle, reduces copay for employees who use hospitals that meet Leapfrog standards and requires the employee to pay a 5% premium of the bill when they choose noncompliant hospitals. This puts enormous pressure on hospitals to invest in information technology in order to remain competitive.

For Cerner's part, we are leading the way in the Seattle area when it comes to working with our clients to address these Leapfrog compliant recommendations. As we reported yesterday, 5 of the top 6 Seattle area hospitals making the greatest progress toward the Leapfrog Group CPOE, or computerized physician order entry standard, are Cerner clients. In fact, Cerner client Children's Hospital and Regional Medical Center was the first Seattle hospital to fully meet the Leapfrog Group's CPOE standard. In addition, all but one of the Seattle area hospitals approved for Boeing employee use is a Cerner CPOE client.

Let me briefly comment on the pediatric hospital market. As you've heard from us today and in press releases over the past several weeks, Cerner has a strong position in the very important pediatric market. The examples we have discussed are just a few among more than 35 pediatric clients that are realizing the benefits of Cerner solutions. In fact, about a quarter of the hospitals designated as US News & World Report's Best Pediatric Hospitals of 2004 are Cerner clients.

Pediatric care brings about unique complexities that our competitors' systems cannot handle in the same manner that Cerner Millennium can do. Cerner's unique ability and the commitment we share with these clients to improve the safety of our children create a powerful combination that is having a major impact on the care of children around the US and the world.

Returning to the marketplace discussion, in addition to more active employers, there have also been continued momentum in the political and regulatory environments. As we have mentioned, national policymakers of both parties are embracing healthcare information technology as a remedy to the emerging healthcare crisis.

The President has called for every provider to have an electronic medical record within the next 10 years. Senator Kennedy has made a similar statement that called for it to be done within 7 years, and Senator Frist is now advocating a similar direction and has called -- even called for more speedy adoption.

The Department of Health and Human Services has also made it clear that they are focused on driving standards and interoperability to lay the groundwork for mass adoption of electronic medical records. Announcing the appointment of Dr. David Brailer as the first Health Information Technology Coordinator in May was an important first step.

The National Health Information Infrastructure Conference in Washington, D.C., which kicks off today, will include a much anticipated update by Dr. Brailer on his National Health Information Technology Strategic Plan and several working sessions among all industry stakeholders to discuss the development of a nationwide interoperable health information technology infrastructure that will facilitate improvements in safety, quality, efficiency, and care coordination. Our CEO and Founder, Neal Patterson, was asked to participate on a panel at this conference with select other key industry leaders, and he is there as we speak.

Interestingly, the fact that healthcare IT has become such a major part of both party's platforms during this election year is very similar to what occurred in England, where the political position led to major commitments and ultimately evolved into a $10 billion countrywide healthcare IT procurement. And for Cerner's part, we are right in the middle of that process, as the core supplier for the most important political deliverable before their 2005 election. The electronic booking systems, now called "Choose and Book," will fundamentally change the way 51 million citizens in England schedule their healthcare appointments.

On that note, we are pleased to report that we have met all delivery milestones on this project ,proving our ability to meet the government's rigid standards and proving the ability to scale the Millennium architecture and our web solutions to heretofore unmatched levels.

Yet another important development is in the continued momentum of pay for performance initiatives in both the public and private sectors. The Center for Medicare and Medicaid Services, or CMS, has engaged a major pay for performance trial whereby hospitals are paid a premium if they are a top performer in 5 different high volume medical conditions, requiring 34 discrete measurements, each with a numerator and denominator.

As an example, when a hospital sees a patient with acute myocardial infarction, or AMI, they must be able to document not only all patients who have prescribed a beta blocker at hospital discharge, but also all AMI patients without beta blocker, contraindications. Successfully participating in this type of pay for performance plan is nearly impossible for those providers without a highly structured electronic medical record. Today, Cerner can automatically calculate each of the 34 measurements, and meet -- even more importantly with our knowledge-driven care capabilities, we can almost ensure that a hospital will maximize their scores.

Most importantly, these plans go beyond the CMS pilot. Earlier this month, the Leapfrog Group launched a national database of pay for performance programs that is already tracking 77 different programs with various financial and nonfinancial incentives for improving performance. There are ongoing initiatives to develop standardized processes and data criteria for these initiatives, at which point they will have potential to be a huge catalyst for HCIT investments.

In summary, there is clearly an enormous amount of activity that has the potential to drive major demand for healthcare information technology today and for years to come. Health care represents a significant percentage of our nation's gross domestic product, and it is growing.

The citizens of this country enjoy the best health care system in the world, however the challenges we face as an industry have never been greater. We believe Cerner is the best positioned supplier to significantly impact these tremendous challenges. We're delivering higher quality intellectual property than ever before, our services organization is strengthening, and our business model continues to strengthen and become more visible. All of these factors are reflected in the outstanding financial results you've heard us describe today.

With that I would like to open up the call and to the operator for Q-and-A.

Ladies and gentlemen, this begins your question and answer session.

If you do wish to ask a question, please press star 1 on your telephone. If your question has been answered or you wish to withdraw your question, please press star 2.

Your first question comes from Lisa Gill. Please proceed, ma'am.

Great. Can everybody hear me?

Yes, Lisa.

Good afternoon.

I was wondering if you could just talk a little bit about the driver of the new bookings. It was obviously higher than we had anticipated.

Marc, how many days were there in this quarter versus last year? Did it have anything to do at all with the number of days in the quarter?

And then lastly, you talked about core contracts being greater than $10 million, but was there anything of substantial size, say greater than $20 million, that you were able to book in the quarter?

Okay, Lisa, it's Marc.

The quarters were the same length, so there was no difference in days, which usually isn't a major impacter of bookings, anyway.

There was not a mega deal, if you will, that skewed these bookings. So I think that's important. That 10 that were large were, you know, good size deals for us, over $10 million, but they weren't mega deals. And I think it's important to note, that even with the success we talked about with Choose and Book, which was the electronic booking system in the [AHS], there was no bookings, cash or revenue, related to that in this quarter.

Okay, so from the UK there was no revenue at all recognized during the quarter?

Not from the Choose and Book contract. Obviously we have operations in the UK that contributed.

Right, from the e-bookings.

So -- and then secondly, if you could just -- you talked about 300 CPOE systems being in production. How do you define when a CPOE product is up and running? How many physicians do you generally have that are utilizing it? Is it more than just the several in order to meet that criteria that you say it actually meets the milestone for you?

The answer to that question is yes. We don't count science projects. When we go live, we talk about a majority of the physician in a clinic or in a acute care system that are using them.

And -- so are you getting a better response from the physicians at this point to utilizing the products?

Yes. I mean, they are being widely adopted and then rolled out to other facilities and to other sites. That's why we are clear on the number of facilities that we actually talk about as well.

Okay. Great.

Lisa, this is Trace Devanny.

We, you know, actually we look at CPOE a little differently than our competitors. We include the complex meds administration process, which includes the pharmacy transactions, in addition to the nursing and physician pieces of a CPOE solution. So it's a very complex and very comprehensive view that we bring when we talk about CPOE.

Okay. Great. Thanks very much.

Your next question comes from Steve Halper of Thomas Weisel. Please proceed, sir.

Yeah, hi, good afternoon.

I'm looking at the software developing line on the income statement. You're basically unchanged from Q1 levels, and as a percent of revenues, it declined.

Marc, should we be thinking more about that level increasing as a percentage of sales or are you basically saying that, you know, $43, $44 million a quarter is probably the right amount?

Well I think, Steve, our -- we've been on record saying that our expectation is that the gross number won't go down, but as a percent of revenue that it should decline over time. We haven't seen a lot of that decline yet. The Millennium '04 and the web work we're doing has impacted that somewhat. But over time we will expect to see those expenses decline as a percent of revenue, although not as a gross number.

And one question for Paul.

Can you just talk about the competitive environment? Is it easier? Is it harder? Or is it the same relative to Q1?

I'd say it's the same compared to Q1, Steve. And in saying that, I think it's always hard. There's a lot of formidable people -- formidable competitors out there that we engage with every day.

Thanks.

Sure.

Your next question comes from Anthony Vendetti of Maxim Group.

Yes, thanks. A couple quick questions here.

First, when you talking about the competitive environment, when you're going up against -- you alluded to some competitors. Obviously one of them I would venture to say is Eclipsys when you're talking about, you know, systems that have had problems and issues. When you're going up against them, they're selling a new product, clearly. But, like, when they win a contract with the University of Michigan or some of these bigger contracts, are you having trouble unseating them because they are selling their product as an upgrade and your product is considered a, you know, a premium product at a higher price point? Can you just give me a little bit more of the competitive dynamics that is happening there?

And then if you could just address -- you mentioned ProFit, you had signed up 5 new contracts there, have the -- any of the issues that occurred in Orange County last quarter, have they all been resolved?

This is Paul.

On the competitive environment, the -- you know we continue to do very well as noted by the 38% of the new bookings contracts coming from competitive win-backs. So in those environments, we're literally going into an incumbent that's not Cerner and we're displacing them. So we're actually abe, on a consistent and continued basis, to competitively compete for and win that business, which is growing our book of business in a big way.

The -- on the individual by individual basis, you know, we have our strengths and their weaknesses that we call out, et cetera. But we try to mostly hone in on the things that we can do that people are looking for that they are willing to pay for, and the referencability of the installed base is really very, very valuable to us at this stage in our company's history. So that's quite good.

The thing, though, that is increasingly, with CPOE, giving us traction, is this concept of the pharmacy system, and people who have not built one or have tried to integrate one, or build a two-way interface to that are finding that's a very difficult thing to do with -- for the closed loop meds administration process. Not only for the counting of pills or attaching to a automated robot, but 40% of an acute care facility's pharmaceutical distribution is still through IV's, and that's an interface that's almost impossible to do if it's not integrated or architected from day one.

The pediatric piece also has a substantial amount of additional pharmacy-specific cumulative weight checking, et cetera, that has to occur at the point of order entry, and that does not allow for a two-way orders interface.

So it is very, very difficult. We've been working on this for a long time, and we've been successfully deploying that. And what I'm seeing is the capability to go in to clients struggling with that with competitors' solutions and quite frankly point to that as something they are not willing to wait for on an ongoing basis.

Okay, but is your competition using prices as a weapon when there's a contract out for bid?

In some cases they are. We've talked about that in the past, and in some cases we can't compete at that low level. We won't do that for our shareholders. In many cases clients are willing -- are not willing to make a price-based decision on something that is this important. So they are willing to forego a premium for a solution that is proven and someplace they can go see it in production. That's pretty important to these folks. It continues to be.

And the last question was on the ProFit.

We are making great progress at Orange County. The client is pleased with our progress. There are three project milestones -- project milestones that we hit this quarter. And we feel very good about the progress there.

The ProFit solution that we have deployed in the 16 other clients are all very good references for us in a broad sense. So we have all clients we can take prospective clients to to show them ProFit in production.

Okay, and the last question on the managed services revenue, that's leading to the increasing -- is helping increased margins. Obviously operating margins were up significantly this quarter. Can you talk about what the margin is on the managed service business, what that -- ?

Yeah, Anthony, this is Marc.

It's -- the target of that is eventually to get it to be above 30%. Probably today, given the size and the utilization we're getting, it's right around 20%.

Okay.

So there is some -- there's additional room to grow that business as we get more efficiencies out of the data center space we've created and utilization of the equipment we're buying.

Okay, great. Thanks, guys.

Your next question comes from Ryan Stewart of Piper Jaffray.

Yeah, good afternoon.

Just a couple questions on some things you've already hit on, I just wanted to make sure I had it right.

When you're talking about CPOE and the, you know, the interoperability and integration with your pharmacy system, for the CPOE sites that you have live, are you saying that all of them have -- are integrated with the pharmacy system or is it, you know, a vast majority of them?

Vast majority, Ryan.

Okay. And then for the others, integrated with, you know, another pharmacy system?

Yeah, typically it's ours, they just haven't installed the final aspect of it, the closed loop meds administration piece, which is a -- some cases is a later part of the project. Or they may be migrating from class Pharm Net to Millenium, or they may be coming off another competitor's pharmacy system to ours.

Got it, great, okay.

And on the managed services side, can you talk about how many deals make up that $30 million?

When you talk about $30 million, Ron, what are you referring to?

What'd you say, $30 million in bookings was managed services, correct?

Yes.

And just how many clients that represented, was that one client or -- ?

Taking a quick look Ryan.

Just a second.

Ryan, looks like we had hosting in probably 20 of our deals.

Okay, great.

Hosting is not usually a big bang impact. It is pretty broadly spread throughout the client base.

Sure, sure.

And I guess just a high-level question here, we heard a lot about children's hospitals and pediatrics. Is this something, you know, maybe Paul, to you that's something that, you know, I'm looking at the pipeline or your emphasis on sales, it's something you set forth, 12, 18, 24 months ago to really attack the pediatrics market?

Yeah Ryan, this is Trace Devanny, let me try to take that one.

We've had a focus on pediatrics since at least four years ago. We recognize the complexities that are required to be successful in that environment. If you're good there, you can be good anywhere. And as Paul mentioned earlier, you know, the weight based dosing, the dose range checking requirements in our pharmacy systems that really, we have specifically identified as parts of our IP focus that we must be good at, have really positioned us very well. And today I think we mentioned over 35 hospitals -- pediatric stand alone facilities, that is, are running Cerner systems.

So we have had that focus. We will continue to have that focus. We have a biannual pediatric leadership forum that talks about some requirements. So we really do a much better than average job of understanding of the requirements and it becomes a priority for our IP efforts.

Ryan, I just -- this is Marc, just throughout the -- probably given 35 clients, we've got a third of the pediatric hospitals, maybe half are a Cerner client in some way. These -- when you talk about access to capital, these institutions have very high access to capital. They are very well funded. So this is a marketplace we think is strong and we wanted to highlight a little bit on the call this week. Our strength in that market that we think is another avenue of growth that you -- people maybe aren't seeing as much as they should.

Great, appreciate it. And then just one final thing. Paul, are you seeing more -- it seems that we're seeing more enterprise buying out there, just in your discussions with -- in the last quarter. Are you seeing increased momentum for CIO's looking to buy in sort of an [ascension] health way?

Yeah, we are on that, Ryan, which is, you know, the number -- what I like is the number of bigger deals we're doing. Again, they weren't mega deals, but we had a larger number of big deals, we set a record there, which indicates an enterprise buy.

The other thing, though, we continue to see, is that we've got the strength in things like radiology PACS, which were pretty much stand-alone sales. Our lab systems, which are standalone sales, still continue to do very well, and a lot of people are coming back to the market for pharmacy systems, having tried somebody else.

So, the strength of the breadth and depth continues to work very well in our favor, all of those then are footprints that we would obviously go back, once we successfully deploy that, and cross sell other applications, too. So, it's a good, strong story this last quarter across both aspects, enterprise wide as well as department specific.

Ryan, I would add to Paul's comments right on that I think people -- more and more people are recognizing the advantages of a common architecture, which we've been, as you know, talking about Millennium in that space for years now. I think the marketplace recognizes why that is important and I think we're getting more credit now than ever before. So we're very pleased -- we've taken that direction and we've stuck with our guns.

Great. Well, thanks so much, guys.

Your next question comes from Sandy Draper of Draper Investment Research.

Thanks. Two questions.

One, Marc, is just a really short one. On the share buyback, where do you guys stand on that? Obviously didn't -- doesn't look like you did any this quarter, is that something you plan to go back into or is that just on a sort of basis where you're looking purely at price on short-term and seeing any weakness to buy back. That's one question.

The second is -- when I'm looking at the margins, Marc, you're talking about improving margins. And I'm trying to sort of look at the systems sales line which was about flat sequentially but the margin was down, and I'm trying to understand what would impact that outside of, obviously, hardware sales, which can drop down the margin.

Yeah, Sandy, this is Marc.

I think the -- let me address your second question first. On systems sales line Q1 to Q4 is basically flat, a little bit down, once again, you're exactly right, that's going to be impacted by hardware sales. That's, as we indicated, as we continue to do more managed services, we did a lot of managed services business this quarter, hence the strong gross margins. So, it's a little bit of the mix in that system sales line. All of the managed services goes into the services line. So all of the benefits we're getting from there are not -- won't show up on the systems sales line.

We're kind of indicating we're going to have a mix of hardware that's likely to be declining so system sales will be -- could be flat, probably will increase slightly as we go forward, as we continue to sell more software.

But would you expect then eventually to start to see the gross margin line for system sales starting to improve as -- because you're starting to drop less hardware in there?

Yes.

Okay.

And then on the stock buyback, board of directors, we do have an authorized buyback, and it is not currently activity today.

Okay, thanks.

Your next question comes from James Kumpel of Raymond James.

Hey, Marc, can you elucidate us on factoring of receivables on how much was done in the past and what's being done presently and how it affects DSO's?

Sure.

We do not factor receivables. So the amount of receivables basically factored, if you will, is zero.

Okay.

What we use financings for is as part of the -- of the initial contracts, in setting those up we're basically working for those clients that need assistance, need certain payment terms. We're working with a variety of lenders to provide those payments terms where we get nonrecourse payments up front for those. The discount for that is built into the price of the system that is negotiated.

So for us it is a great deal, for our clients it is a great deal. We do not basically take billings we have and invoices we have out to our clients and factor them. That's -- our client relationships are too important for us to do anything that would be -- might be characterized as factoring.

No, that would introduce a third party, yeah.

Exactly, it makes no sense for us. And given the cash collections we're getting, this cat performance this quarter I think, really is strong. I mean, we paid off $19 million of debt this quarter, and our cash balance went down $4 million. So, we really don't have the need to do anything like that.

Is third-party financing becoming more prevalent, less prevalent or does it tend to be flat lining?

It has been about the same. In my comments I indicated it probably was comparable to a year ago.

We kind of looked for it to be around $10 million a quarter, and I think this quarter was $11, a year ago it was probably a little bit under $10 million. But it's been pretty consistent, usually hitting two to three transactions, depending on the client request.

And keep in mind that when we do those, the financing cost can be built in. If you would go to a factoring, you'd be taking a hit on factoring those receivables, once again, something that doesn't make sense, given our success in collection and the lack of bad debt that we realize.

And just kind of following on to that, can you talk a little bit about the status of date-base billings as a percentage of deals that you're doing now? And what percentage of the bookings would be associated with something subscription pricing like.

I think your question on date-based, I would tell you that the -- over 90% of our contracts had date-based payments related to licensed software this quarter. So it is still very high.

What was the second part of the question. I'm sorry.

The second part was basically what percentage of deals -- I guess in terms of dollar volume -- would be associated with subscription pricing like terms.

Of our new bookings, you would probably see 5% to 7% of those bookings represent -- probably closer to 5% would be subscription, and in our world, subscription is content. So it's true subscription. [Inaudible] databases, physician documentation, those types of things.

And this would be really for the the whole team. I was kind of curious if you could offer any kind of color on milestones that you could talk about on Ascension and Catholic?

Yes. I would say at this time we really don't have anything that we would announce. We're working very well with those organizations. But as you know, most of our conversations relative to clients has to be cleared with those clients. So we wouldn't really have anything we can say in public yet. But we certainly look forward to announcing the successes we anticipate with those clients in the future.

That's great, thank you.

Your next question comes from Ray Falci of Bear Stearns.

Yeah, hi guys.

Question on your professional services numbers, it sounds like you had some pretty nice margin expansion. I heard some of your explanations there. I was wondering also if you could talk about just absolute head count, what is going on in terms of recent hiring patterns, future hiring patterns and whether some of the improvement is also related to having a more mature consultant base and less, sort of, guys in the start up mode?

Yeah, this is Paul.

I think we've got a good story there. There's three or four things that help with that.

Number one, maturity at -- where we are with the Millennium solution today is much more predictable from our standpoint and from the client's standpoint of what you're going to get, what you're going to deliver it, and how you're going to deliver it. Secondly, our methodology, as you would hope over a period of time, has developed into something where when we show up, we know what to go do. There is also a methodology where we have a substantial amount of the client organizations bill being performed here at Kansas City by us, which is giving us some pretty nice productivity gains on a per milestone basis, the amount of headcount required on our side to go do that. We also fix price that, which helps some of our economics there.

So it's -- the measurement systems that we have in place today, we feel very good about. We have a group of people that by and large have been around here a longer period of time compared to last year or two years ago, and we're able to maintain turnover rates that are below industry averages for that group, and we're hiring, as we do have turnover, we're hiring off campus and putting them through in a facility in Kansas City where they are able to do some of the work at a billable rate that's commensurate with that skill level, yet they're gaining skills in a very productive manner. So, we feel pretty good about it, what we're able to do there.

All of the metrics we look at with regard to on-time delivery, number of solutions per client, cumulative conversions per quarter and then the complex stuff with CPOE, which is pretty heavy lifting, we're able to get those things turned on in very complex environments, and all of them are different when you do CPOE. We're quite pleased with our ability to listen to our clients and then deliver value.

Okay, and just in terms of general headcount trends there, because I know you had some big hiring years, I guess it was like '02 maybe, and '03, are things leveling off there in terms of just absolute head count additions or not?

Yeah, Ray, it's Marc.

We probably have about 1600 consultants, and that's been consistent for about the last year. The neat thing about the increase in margins is that those 1600 consultants are about 15% more efficient or more utilized than they were a year ago. So for the same spend, we're driving out 15% more revenue from that group. And that was our expectation as we looked to drive more contribution margin from that team.

Perfect. Great.

And then my other question was around cash flow. I want to make sure I heard -- I believe campus CapEx is around $2 million. So I guess we can assume that's close to winding down, and is the $10 million other CapEx sort of a good ongoing run rate for the foreseeable future, do you think?

Yeah. I think, Ray, we've kind of indicated we would be around $50 million -- $50 million of CapEx for this year. Obviously that includes some campus. So I would expect to be somewhere around in the $10 million -- low $10 million, you know, $10 million to $12 million range on an ongoing basis.

Once again, in this quarter, half of our $10 million of equipment was probably related to our managed services business and funding that. So if that continues to grow, the difference in that estimate would be based on expansion of that business, which is going to drive revenue. But I think it is fairly consistent to say that once campus and billings gets down to a low level, absent anything unique in that space, $10 million to $12 million of equipment spend a quarter probably is in the ballpark.

And what are your plans on further debt repayment over the next several quarters? Is there anything required or even optional that you might do?

No, our debt is privately placed so there's a make whole provision that makes prepayment of the debt exorbitantly expensive, so we basically have a debt payment every April. The last one -- we made one this quarter of $19 million. I think we've got a couple more at that level and then we'll beginning to pay off one tranche and it will start decreasing after that.

But again, it's only once a year, every April.

Exactly, every April is when the debt payment, there are no other debt payments during the year.

Thank you.

We'll take two more questions, please.

Your next question comes from Sean Wieland of WR Hembrecht.

Thanks.

Questions on the bookings number. You give us some metrics, a breakdown of the $240 million. I'm wondering if we could just kind of complete the circle. If you can -- you told us $30 million in managed services. I think I figured out about $29 or $30 million from a third party. Can you give us an idea what came from system sales or licensed revenue, what came from professional services?

Yeah, Sean, this is Marc.

Once again bookings and matching up with the revenue side is pretty difficult. I mean, there's no -- the revenue is going to be coming out of the backlog, the booking's going to feed the backlog, the mix that goes into the backlog can be different than, obviously, than what is coming out of the backlog. So, I'm not sure I can really give you any -- anything that would give you a better estimate of what the breakdown to those was. I think we were stressing the amount of managed services bookings because that tends to be somewhat incremental when you're looking at what we were doing a year or 18 months ago. But the rest of the bookings mix is not necessarily going to go drive the -- is going to be different than what is driving to the income statement.

Okay. Well then, how about, then, another -- coming at it another way. If you were to take system sales as a percentage of total bookings and professional services as a percent of total bookings, can you give us an idea what that trend line -- what those trend lines look like?

Not without doing some calculus here. Let me -- I can look at some of the numbers, just to see if there's something I can do that gives a better sense number-wise, but right now -- trying to match those two up is something that is not necessarily going to yield a benefit from an analysis standpoint as far as I can think of.

Okay. Then another quick question.

You said you got 15% better productivity in professional services this past year. What do you think you can get in terms of productivity gains, looking forward? Can you get another 15%?

I think our expectation would be to drive out another 15%.

Okay, great. Thank you very much.

Your final question comes from Julie Peterman, Wachovia Securities.

Hi. I was wondering, first of all, if you could tell me how many of your CPOE clients fully meet the Leapfrog standards. And, like, if you can give us any more color on what it will take for them to meet those standards.

Julie, this is Marc. It's a little difficult -- all of the Leapfrog standards include more than just CPOE. There's [undiscernible], there's a variety of other things, so --

Just the CPOE standards.

Gosh, we -- this is Trace.

We talked with our success in the Seattle market, which I think is very unusual. I don't have a number for you, Julie, that would tell -- that could give you an accurate, even -- I think even hand grenade close as to where we are on that number. I'm not even sure if you ask the clients they could be really specific, and we have over 300. So we're -- I think we're there faster with most of our clients than anyone else and we will continue to be. We're very focused on that, and our clients, I think, appreciate that. But I don't -- I'm sorry, I don't have that number.

Okay.

It's a little more how they decide to implement it at this point, since Leapfrog is more of a guideline than a code at this point, so.

Right.

And then also, I was wondering if you could tell me the number of salespeople that you have, and potentially break them down into new sales, account managers, product specialists or something to that effect?

Sorry. We don't give that out, Julie.

Okay. Thanks.

You bet.

Thank you.

I'd like to just make -- this is Trace Devanny here, a quick closing comment on on today's Summit, hosted by Secretary Thompson in Washington, which Neal Patterson is attending. Secretary Thompson and David Brailer, our National Coordinator for Health Information Technology, released today the first outline of a ten year plan titled "The Decade of Health Information Technology," a proposal that calls for the creation of health IT infrastructure including electronic health records and a network linking these records nationwide. Secretary Thompson goes on to say, "The creation of a healthcare IT infrastructure has the potential to reduce total annual spending on healthcare by 10%, eliminate medical error, benefit the medically underserved, improve privacy, monitor public health, provide decision support to the healthcare professionals, accelerate biomedical research, and offer consumers more control over their healthcare."

I want to make just a very strong statement that we're very supportive of the visibility that both the President and Secretary Thompson are bringing to this very important subject. Not only are we please with the visibility, we're very supportive of their efforts, and we expect to be aggressively participating in helping to move these important announcements into play.

So with that, I want to thank you all for being here on the call and wish you a good day.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes your call. You may now disconnect.