塞納 (CERN) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Cerner Corporation's third-quarter 2004 conference call. Today's date is October 20, 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's discussion and analysis section of Cerner's Form 10-K, together with other reports that are on file with the SEC.

At this time, I will turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Sir, over to you.

Good afternoon, everyone. Welcome to this call.

I will lead off today with a review of the numbers, followed by sales and operation detail from Paul Black, Executive Vice President, and broad market observations from Trace Devanny, our President. Neal Patterson, our Chairman and CEO, is also with us and will be available during Q&A.

Now, I'll discuss the results. We are very pleased with our results this quarter. Our new business bookings were solid. 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 significantly improving cash flow.

Starting with bookings, we delivered solid new business bookings this quarter with 215.8 million of bookings revenue, which is 6 percent higher than the 203.9 million in the third quarter of last year. We are pleased with this performance, given (indiscernible) an exceptional level of bookings in Q2 and that Q3 is typically slower due to healthcare industry buying patterns. It is also worth noting that our bookings revenue is up a strong 21 percent year-to-date compared to 2003.

Bookings margin was 198.9 million this quarter, an increase of 11 percent of the year-ago quarter. As has been the case all year, our bookings mix contained good levels of software, professional services and managed services but declining levels of hardware. This is reflected in the fact that bookings margin as a percent of bookings was 92 percent this quarter versus 88 percent a year ago.

Our total backlog increased 28 percent year-over-year and endedQ3 at 1.46 billion. Contract revenue backlog ended the quarter at 1.13 billion, which is 34 percent higher than a year ago. As far as revenue backlog, it was 335.6 million. Margin on the contract backlog was 1.08 billion, and margin on support backlog was 300.8 million, for a total backlog margeein of 1.38 billion. Looking at revenue for the quarter, we continue to see a healthy shift to a more visible and recurring component. Total revenue was Ttr 12 percent Tc Revenue composition was 82.9 million in system sales, 61.9 million in maintenance and support, 78.2 million in services and 8.1 million in reimbursed travel. Looking at the growth rate for the revenue categories, services revenue, which includes managed services, grew 17 percent compared to a year ago. (indiscernible) maintenance, our most visible revenue, grew 19 percent. System sales revenue was up only 3.4 percent over Q3 of '03. There is a fundamentally positive shift going on inside our business model, which has impacted the growth of system sales, and we want to highlight this shift in the call today. More and more of our clients are not (indiscernible) operate the technologies sitting inside the traditional computer firm and our contracting with Cerner provides this service. We're seeing our plan and expectations in the remote-hosting managed services portion of our business, which is directly impacting the growth of our system sales line on the income statement. As we have discussed previously, the lower growth rate of system sales is a result of declining hardware sales. System sales includes software license revenue, sublicense revenue, hardware and subscription revenue, the software license revenue and hardware making up about 80 percent of total system sales revenues. Software license revenue, which is a key to future growth in Professional Services and support revenue, has increased more than 20 percent in Q3 and year-to-date as compared to 2003. Hardware revenue is down more than 30 percent, both in Q3 and year-to-date. Also, the decline in hardware revenue can be attributed to ongoing declines in hardware prices, which reduces the hardware mix in the deal. The decline is primarily the result of more clients choosing to use our managed services offering, which has experienced growth of about 50 percent in bookings year-to-date, well ahead of planned levels. While the reduction in one-time hardware revenue impacts near-term topline growth, the replacement of that (indiscernible) managed services contract contributes to a significant growth in backlog and creates a more visible and more profitable managed services revenue stream. This is the main reason our backlog is growing faster than our revenues, and we like this shift. One way to illustrate the impact of reduced hardware revenue is to look at the growth in system sales if hardware was completely eliminated from the number. Without hardware, system sales growth would be about 20 percent year-to-date instead of 4 percent with it included. Total revenue growth would be 17 percent year-to-date without hardware, instead of 11 percent. This illustrates that the components of system sales (indiscernible) the growth of our other revenue streams continue to grow at a healthy clip. The mix shift from hardware managed services has a positive impact on gross margin, which increased 16 percent over Q3 of '03 to 186.1 million. This is 80.5 percent as a gross margin percentage, compared to 78 percent a year ago. Year-to-date, our gross margin percentage is 79 percent of revenue, compared to 76 percent last year. The majority of the increased gross margin is driven by an increase in system sales gross margin, which is up about 300 basis points both in Q3 and year-to-date. Let's move on to discussing spending. First, as we noted in our press release, there is a prior-period adjustment of 3.3 million related to accrued vacation pay, the cumulative impact of which hits the G&A line of our GAAP income statement this quarter. I will talk further about the adjustment in a moment, but as I discuss our spending operating margins and earnings, I will be referring to results before this charge as reflected on the Pro Forma income statement attached to our earnings release. Our total operating expenses for the quarter were 156.3 million, which is up 12 percent over a year ago. Sales and client service (indiscernible) accounted for most of the increase as R&D and G&A were basically flat sequentially. The primary driver of the increase in (indiscernible) client service spending was an increase in personnel expense related to the change in the review cycle, where the majority of our associates receive their annual compensation increase. For Q4, we expect a smaller increase in sales of client service spending and for total spending to be in 157 to $159 million range. Continuing with results, net earnings were 16.9 million in the third quarter compared to 12 million a year ago, and EPS was 45 cents per share compared to 33 cents a year ago, reflecting growth of 36 percent. Again, these numbers are before the accrued vacation pay adjustment. Turning to operating margins, we delivered strong improvement in our operating margin in Q3 with a 240 basis point increase over Q3 of last year and a 160 basis point sequential increase to 12.9 percent. Year-to-date our operating margin is 11.5 percent, up from 8.1 percent in the first nine months to 2003. We remain pleased with our progress towards expanding operating margins and we continue to target a goal of 20 percent 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 percent, which remains imminently attainable based on our Q4 outlook. A key component of our margin expansion strategy is expanding professional service margins from 2003 levels of 15 percent. In 2004, we're targeting 20 percent contribution margins from Professional Services and we are on track so far, as they were more than 20 percent in Q2 and Q3 and are now slightly over 20 percent for the full year. We also have an opportunity to generate margin expansion by leveraging investments we've made on our Millennium platform and solutions, as we plan to grow R&D spending at a slower rate than the topline going forward while still expanding our rate of innovation. As a result of these areas of leverage, we continue to believe that 20 percent opening margin is an achievable goal for Cerner. Let's move onto the balance sheet. The balance sheet continues to strengthen. Cash ended the quarter at 160.9 million; that's a record free cash flow this quarter. Our total debt ended the quarter at 135.1 million. Accounts Receivable were 262.4 million and Contracts Receivable, or the unbilled portion of Receivables, was 87.1 million, or 33 percent of total receivables, which is down from 88.8 million and 34 percent of total receivables in Q2. DSOs for the quarter were 104 days, which is down 8 days compared to a year ago and up 1 day sequentially. Going forward, we expect DSOs to remain within a few days of Q3 levels and we maintain a longer-term goal of getting below 100 days. Turning to our cash flow performance, we followed our record performance in Q2 with an even bigger Q3. We had strong cash collections of 228.1 million, our third-highest ever. Operating cash flow was a record 45.2 million. Traditional client collections were the primary driver of this strong performance, as third-party financings were at normal levels of about 12 million in the quarter, or 5 percent of total cash collections. Moving down the cash flow statement, Q3 capital equipment expenditures were 9.7 million. About half of that was related to equipment purchases for our growing hosting business. (indiscernible) expenditures were 2 million and capitalized software was 14.3 million. We also spent 1.5 million for a small lab outreach company during the quarter, bringing the total cash used by investment activities to 27.5 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was a record at 19.2 million, and net cash provided by financing activities during the quarter was 5.3 million. That primarily relates to option exercises. Looking at Q4, we expect operating cash flow to remain strong, and we expect full-year operating cash flow at the high-end or above our original target of 120 to 140 million for the year. Looking at CapEx, we anticipate Capital Expenditures for Q4 will be up sequentially. We expect we will still be free cash flow positive. With respect to capitalized software, the 14.3 million of capitalized software represents 31 percent of the 46.6 million of cash spent on development activities. Amortization for the quarter was 10.5 million, resulting in net capitalization of 3.8 million, or 8 percent of the total. Before moving to guidance, let me provide some more detail on the adjustment related to accrued vacation pay. As stated in our press release, we determined, during a review of the process of calculating the liability for accrued vacation pay at the end of the quarter, that the accrued vacation pay liability on our balance sheet was understated by 3.3 million relating to periods prior to 2004. While we had fully accrued for all vested vacation that will be subject to pay-out upon termination, we had not accrued for accumulated vacation that can be used in subsequent periods by our associates in excess of the vestment about that would be payable upon termination. The expense, if properly recorded for 2003, would have increased 2003 earnings by 1/10 of 1 million and would have decreased net earnings by 4/10 of 1 million in 2002, 0.6 million in 2001 and 1.2 million in 2000. The cumulative impact on net earnings is a decrease of 2.1 million. Because the impact of prior years' annual financial statements was not material, Cerner recorded an additional expense of 3.3 million, which is 2.1 million after-tax, or 6 cents per share, in the 2004 third quarter to appropriately reflect the liability as of October 2, 2004. As I indicated, the liability for vested vacation that would be payable upon an associate leaving Cerner was fully accrued. Cerner associates can receive a cash payment for up to 80 hours of accrued vacation upon leaving the Company or are allowed to accumulate and carryforward to future years up to 160 hours. The expense adjustment in Q3 corrects the cumulative impact of the theoretical value of this cumulative vacation hours in excess of 80. The use of vacation by associates is included in salary expense in the period the vacation is taken. The additional liability created by the adjustment is non-cash in nature. We have excluded the $3.3 million adjustment from our Pro Forma income statement as it relates to prior periods and is not reflective with spending trends. The pre-tax impact of the adjustment on 2004 is a benefit of $12,000. Moving to guidance, looking at Q4, we expect revenues in the 242 to 247 million range, which is about 9 percent higher than Q4 of last year. Keep in mind that we gad about 6 to 8 million of additional revenue in Q4 of 2003 due to the extra week in the quarter, so the apples-to-apples growth is about 11 percent year-over-year. We expect Q4 EPS to be between 54 and 55 cents; this is about 25 percent over Q4 of last year. For bookings, we expect bookings revenue in Q4 of 225 to $250 million. Our Q4 guidance brings full-year 2004 EPS to $1.70 to $1.71 and reflects about 45 percent year-over-year earnings growth compared to 2003. Note that this is before the 5 cent gain on the Q1 sale of Zynx and the 6-cent impact of the accrued vacation adjustment. Q4 guidance brings full-year revenue to a range of 920 to 925 million, which reflects about 10 percent year-over-year growth and is in our original full-year guidance of 920 to 940. (indiscernible) attaining the low end of our revenue guidance and the high end is the result of the decline in the hardware revenue that I discussed earlier. I would also like to provide our initial 2005 guidance. For 2005, we currently expect EPS to be between $2.05 and $2.10, which reflects year-over-year growth of 20 to 23 percent. For revenue in 2005, we currently expect it to be in a range of 1.01 billion and 1.03 billion, or 10 to 12 percent growth. We also expect to show continued improvements in operating and free cash flow in 2005. With that, I'll turn the call over to Paul.

Thanks, Marc. I will start by covering our sales and operational results, then make some comments on the competitive environment. Q3 was a good quarter from a sales perspective. As Marc noted, we delivered bookings revenue for the quarter of $215.8 million, which is up 6 percent over bookings in the year-ago quarter. This is an all-time record for bookings in Q3, which is a seasonally tough quarter. Our year-to-date bookings are up 21 percent. We signed 206 contracts in the third quarter, compared to 136 a year ago. We had a good mix of larger contracts, with ten (inaudible) $5 million, three of which were over $10 million. We continue to see success across a broad range of solution categories with strong bookings in access management, outcomes measurement, knowledge and discovery, patient accounting, intensive care, surgery, CPOE, pharmacy and laboratory. We also continue to have success with our managed services business, which as Marc mentioned is ahead of plan and up approximately 50 percent in bookings year-to-date. We continue to have good levels of bookings from clients that are new to Cerner. In Q3, 28 percent of our contract dollars came from new clients, and this percent has remained in the 25 to 40 percent range for several years. This is a hallmark for Cerner. No other company in this industry delivers this kind of consistent performance in new business. Our leading indicators continue to look strong as we head into the final quarter of 2004. We had very strong levels of RFP in the quarter and our multi-billion dollar pipeline remains very strong. (indiscernible) business and client business to our vision centers are at an all-time high and our field-based client presentations are up significantly year-over-year. Operationally, Cerner had a terrific Q3. During the quarter, we went live with 293 Millennium solutions, bringing our total count to over 3,400 live Millennium applications and more than 670 facilities, further widening the gap between Cerner and our competitors. To go live during the quarter included 38 different types of solutions at facilities throughout the world at a variety of different types of healthcare organizations. Further evidence of our delivery capabilities and breadth of solutions is that we now have 15 different major solution categories that have been brought live more than 100 times. Four major solution categories have been brought live more than 200 times. Again, this is unmatched in the industry. Moving to Computerized Physician Order Entry, or CPOE, Cerner now has 351 live CPOE locations, setting a pace of nearly double 2003 levels, a commitment we made to you earlier this year at. The notable CPOE conversion in the quarter was the project at the University of Pittsburgh Medical Center, UPMC. UPMC, a $5 billion organization and one of the largest health systems in the world, as well as the largest healthcare provider in western Pennsylvania, was recently recognized by Information Week as the leading and most innovative technology program in healthcare and having the fifth most innovative technology practice amongst all the nation's most innovative companies, not just healthcare companies. As part of UPMC, Saint Margaret's Hospital is driving a franchise model, leveraging a wide breadth of Cerner solutions for implementing process amortization in patients seeking (indiscernible) across the UPMC community hospital and regional physician offices. On September 12, 2004, UPMC and Saint Margaret's rolled out CPOE, advanced clinical documentation, pharmacy with medication integration, and medical records publishing. The conversion was met with many enthusiastic physicians who started using CPOE before their scheduled time. On September 15, just three days after the conversion, there were approximately 900 unique users on the system, of which 115 were physicians. The physician usage today is above 95 percent. This is the second significant CPOE implementation at UPMC, the first occurring with the Children's Hospital at UPMC, where today they are averaging 99 percent physician usage. Several other UPMC implementations and initiatives are underway. A cloud on the horizon is around the increase in competition for a trained and qualified workforce. If healthcare increases its focus in HCIT, there's an increasing demand for talent. Interestingly, the number one competition of our Cerner associates is with our own clients. Our commitment to growing talent through campus recruiting, followed by excellent classroom and on-the-job training, continues to be our current supply of high-quality talent. I would like to update you on our continued progress without revenue cycle solution, ProFit. In Q3, we signed two new ProFit agreements. Cerner also completed two new conversions of ProFit in Q3 and we now have 18 live ProFit sites. Both of the Q3 conversions were in California, which demonstrates our ability to handle the specifics of California billing in the state Medicale (ph) program requirements. Most impressive it the exceptionally smooth go-live in post-conversion experiences at the Children's Hospital of Orange County. This client is already producing clean bills and was most recently in attendance at the Cerner Health Conference less than two weeks post-conversion. We've made great progress in improving how we implement systems in our clients' complex environments. A major initiative has been our accelerated solutions center. The ASC is Cerner's evidence-based delivery model for Professional Services implementation. It benefits both Cerner and the client by providing predictability around implementation timelines, the functionality and delivery and overall implementation costs. This unique approach in deploying solutions has credit value for our clients. In the past year, we have more than doubled the number of facilities in the solutions bought live using this approach and now have taken 40 facilities and 425 solutions live through ASE implementation. We believe we can yet continue to raise the bar in implementation methodologies in systems maintenance approaches. We're working on a current initiative, which we call bedrock (ph), that is the system that will fundamentally change the way we implement and operate Millennium. Bedrock is both a methodology and an investment in intellectual property that we believe will advance Cerner's use of data and content and significantly lower the complexity and cost of implementing and operating Cerner solutions. We believe bedrock will transform our industry's approach to systems implementation, reducing the design, build and maintenance costs by 50 percent and reducing time-to-implementation to us little as four months. The proven nature (inaudible) of Millennium and the proven and mature nature of Millennium and the experience of our associates are what makes it possible for us to accomplish this initiative. We believe we will significantly widen the gap between Cerner and our competitors, who are still focused on stabilizing their disparate systems or aging platforms and reengineering unsuccessful strategies that included trying to cut corners on research and development. This is why we continue to feel good about our competitive position. We still face a competitive environment, where aggressive pricing and unwise contract commitments are tactics used by some competitors, while others try funneling medical technology with their Information Technology. Ultimately, we believe our proven ability to deliver value to our clients will prevail. I would not trade our position with anyone. In summary, I would like to reiterate how pleased I am with Cerner's strong Q3 results. We're not standing still; we're getting stronger every day. With that, I will turn the call over to Trace.

Thanks, Paul. Today, I would like to make some broad market observations and give some highlights from our recent health conference and healthcare leadership forum in Orlando. We remain very excited about the healthcare IT marketplace and the leadership position we enjoy. The industry and Cerner specifically continue to benefit from the focused healthcare providers (indiscernible) on using CPOE to drive major patient safety and quality initiatives into their organizations with the ultimate goal of becoming completely digital or paperless. In addition, we continue to benefit from our clients' increased desire to have a common architecture spanning clinical, management and financial solutions. For some time, we have communicated to you the wild cards we see in the marketplace. Historically, we've seen the attention that medical errors was getting, which have led to the now widescale engagements on CPOE. Over the past several months, many new wild cards have emerged that may have the potential to further accelerate demand in healthcare Information Technology. They would include the following -- the creation of a subcabinet position inside the Department of Health and Human Services that was filled by Dr. David Brailer and clearly demonstrates the U.S. government's recognition of IT's value proposition in modernizing our healthcare system and Dr. Brailer's focus on improving the ability of healthcare organizations to invest in Information Technology. Secondly, the bipartisan coalitions that are gaining momentum, such as with Senator Clinton and Majority Leader Frist, to place an editorial in the August 25th Washington Post that focused on the important role information technology needs to play in lowering costs, improving quality and empowering consumers. Thirdly, President Bush's goal that every American have a personal medical records at the end of 10 years and his recent comment in the debates that 20 percent of the cost of healthcare could be eliminated through the widespread adoption of IT in healthcare; more widespread adoption of the pay-for-performance compensation systems that could drive near-complete digitization medical records for both hospitals and physician offices; and finally, increasing activity by employers, such as General Motors, Delta Air Lines, UPS, Verizon, General Electric and Boeing, who are helping to drive wider-spread adoption of a leapfrog group standards (sic), including CPOE. Our belief is that the core drivers in our industry remains strong and that some of these wild cards will be played -- was strengthened after spending time with nearly 2,500 clients last week at Cerner's health conference and with over 200 healthcare leaders at our leadership forum the prior week. There were several sessions at these conferences that validated our view that momentum in healthcare information technology is gaining traction. Dr. David Brailer, the national healthcare IT coordinator, addressed our leadership forum and highlighted the need for information technology across the spectrum of care, making it very clear that this push for IT is here to stay. His passion was matched by Dr. Mark McClellan, Director for the Centers of Medicaid and Medicare Services, who said that information technology and pave-for-performance programs are the cornerstone to CMS' strategy to improve access, reduce medical error, and reduce costs. Attendees also heard from Richard Granger, Director General of the National Health Service in England, who conveyed the enormity of their project to automate IT across England. There are clearly several similarities between what Dr. Brailer and Mr. Granger are trying to accomplish and to that point, we like our position on both sides of the Atlantic. We also heard from Kent Goehl (ph), President of Class (ph) Enterprises, at our leadership forum. Class Enterprises, as you may know, is the leading market research firm focused on the performance of health information technology suppliers. Kent's share data on CPOE that confirmed significant demand and yet, there is very still very low penetration. However, were pleased to see that Class' preliminary 2004 results once again show Cerner as the supplier most often considered for CPOE and that Cerner has shown the biggest increase in the number of verified live CPOE sites. Now, I'd like to provide an update on our progress in Great Britain on our NHS project. Cerner is executing very well on the e-bookings or choose-and-book system, and have continued to meet all milestones on time. There are live transactions occurring daily that are benefiting both patients and clinicians as we continue to roll out to thousands more general practitioners. Clair Mitchell, a program director for the NHS who is in charge of the choose-and-book initiative, was a speaker at our conference. She confirmed that Cerner had in fact met all milestones on time and indicated that a recent demonstration to the Minister of Health went extraordinarily well. We've also been successful in London at the Newham (indiscernible) Foundation Trust, who selected Cerner last year as their partner to implement an EPR solution prior to the NHS national procurement process. On September 30, we completed Phase I of this project and user participation has been excellent with plans underway -- already underway to begin Phase II. This conversion is a major milestone for our efforts in the UK, as this could be seen as a measuring stick for the ongoing implementation sponsored by the NHS national program for IT. Also at our health conference, CEO Neal Patterson discussed our roadmap for the future. He discussed our current initiatives as well as our future direction as a company. The bedrock initiative, which Paul discussed previously, is just one example of where we are working on transforming ourselves for the benefit of our clients. The genesis of this initiative was in 2003, when we were competing for some of the major NHS contracts in the United Kingdom. We believe the only way we could have profitably delivered on these contracts was to significantly reduce the cost of implementing and operating our solutions. We will deploy this bedrock innovation first in the physician services marketplace with plans to more aggressively address this market opportunity soon. Another initiative that Neal discussed is called Lighthouse 1 (ph), where we are creating a unique, data-driven re-engineering consulting practice. We are using the very rich data captured by Millennium as well as our healthfast (ph) benchmark data to identify major improvements in the clinical, operational and financial performance of our clients. We believe this will become a high-value consulting practice beginning next year that will further differentiate the Millennium platform in the market. We are also working on innovative ways to work with major payors to create a new tier of services that we believe will reduce the significant friction and ultimately the cost out of the healthcare system. Like the physician services marketplace, the business model for working with payors will likely be a recurring revenue model that will be additive to our current business model. I would also like to share with you an exciting announcement that was highlighted last week in Orlando regarding our national program for type 1 diabetes. Through the program, Cerner will work with our client partners, specifically but not limited to our many pediatric clients, to provide personal health records, or PHRs, and a secure physician connection to every child with type 1 diabetes in the United States. This will enable caregivers to better monitor, control and treat this chronic condition. The goal is that this will result in a national network to help improve health outcomes for children with diabetes. (indiscernible) children hospitals of Grand Rapids Michigan and part of Spectrum Health, who implementing Cerner's PHR in 2002, is already realizing the value of this method of diabetes disease-management. They are seeing the significant benefits as a result of the improved communication between the caregiver and the child. As this initiative expands, we believe it will clearly prove the value of a secure personal health record to reduce morbidity and mortality rates and significant cost savings. Note that most of the $25 million estimated cost for this initiative over the next ten years is not incremental to our planned R&D spending. In fact, we plan to spend $1 billion on R&D over the next five to six years. I should also note that this level of R&D spending is not a significant change from today's levels and does not in any way alter our path to 20 percent operating margins. What it does allow us to do is continue fueling our growth engine so that we can maintain our long history of creating organic growth through innovation. In summary, we're very pleased with Cerner's performance and excited about the outlook for our company and our industry. We continue to believe that Cerner is the best-positioned company to help healthcare providers significantly impact the tremendous challenges ahead. In fact, we expect more IT impact on these challenges in the next five years than we've seen in the last 50. We are excited about the opportunity to play a leadership role in this transformation of our nation's largest industry. With that, I'd like to turn the call over to the operator for Q&A.

(OPERATOR INSTRUCTIONS). Steven Halper of Thomas Weisel Partners.

Relative to your 2005 guidance, what would be the bookings target, considering Q4 bookings at this point look like they're going to be flat, year-over-year?

Keep in mind that Q4 results of last year did include a very large ascension transaction, which was I think around $50 million, so the fact that Q4 bookings guidance is relatively flat year-over-year is still we believe to be pretty strong guidance. We don't really give bookings guidance out more than a quarter out, as I think you are aware of, so I think that it's not appropriate for me to comment on the bookings. I think the numbers though would indicate that we're not building into it any heroic growth. As we normally do with our guidance, we will look for opportunities as we gain more visibility to revisit our guidance and adjust it appropriately.

Just one follow-up -- is it realistic to think that you would still have a positive book-to-bill throughout the year?

Yes.

Okay, thank you.

Lisa Gill of J.P. Morgan.

Thanks very much. Just in looking at your expectations for bookings in the fourth quarter, Marc, I understand that Ascension was in there last year. Does that mean that there's no potential large deals in the pipeline this year?

Secondly, I was wondering if you could just comment on your opportunities around remote hosting and how much was in your bookings for this quarter.

Then lastly, if I can slip one more in? On the third-party financing side, I was wondering if you could repeat that number and also just give me a better understanding of how that's working. Are you guys doing any of the underwriting as third-party financing is concerned?

Let me answer the third-party financing question first, and maybe Paul could take a little bit of the discussion about Q4 big deals. The third-party financing was 12 million, and that is -- the way we do that, Lisa, is basically it's negotiating kind of as we do in the contracts, so when you talk about underwriting basically -- these are nonrecourse items to Cerner; these are basically financings by the clients in lieu of more aggressive payment terms that we would require. The financing allows them to spread their payments over time.

Relative to Cerner, we get our check upfront. It creates deferred revenue on the balance sheet, and then we don't have any recourse relative to the payment schedule on that. So, (indiscernible) certainly understanding the underwriting part was but it is not recourse to Cerner.

So are you basically setting them up with someone like a GE Financing or someone else that's actually taking on the financing of this?

Correct.

Do you have a specific partner? Is it GE or is it different partners that you use?

We have a variety of the people that we can use; GE is one of those partners.

You know, the IBM Credit Corporation used in the last quarter, especially when we do hardware, so that's pretty convenient for us, Lisa.

On the big deals, we are continuing doing a lot of movement in the marketplace right now as people are buying clinical clusters, as we talked about in the past, where they've actually (inaudible) a large number of good-sized transactions we expect to close in Q4, thus our guidance. I don't know that I can give you any more clarity than that other than (indiscernible) through the last three days the forecast for Q4 (inaudible) feeling pretty good about it.

But it doesn't sound like there is a really big contract like an Ascension again that would potentially really drive things in the fourth quarter. Is that the correct way to look at it?

Probably the easiest way for me to answer that is our guidance does not presuppose a giant deal coming in in order to meet that number. That might be your question.

Okay. Just on the remote hosting, can you give us an idea of what you've been able to sign in the quarter, what your expectations are, going forward? More importantly, who are you competing with in that segment of the marketplace today? Is it the ones that are doing outsourcing like a Pero (ph) systems, or is it just that the usual suspects on the information technology side?

Who we compete with -- typically the competition is whether or not they buy the equipment and put it on (indiscernible) themselves, or we buy the equipment and we put in Cerner's location and we run it for them. It's really not a (indiscernible) the normal people that do 'outsourcing' and (indiscernible) pull together and go run (indiscernible) process. It's relatively a straightforward decision, and we show them the pros and cons of doing it either way. We offer both ways of doing it. We like it when we host it for them; we have a little bit more control.

Back to the predictability point that I was making earlier, I can show higher levels of client satisfaction and I can also show higher levels of uptime when Cerner runs those applications.

Just last week, going back too, can you just give us an idea of what you were able to sign this quarter and your expectations, going forward?

(Multiple Speakers) -- it's probably somewhere around 20 percent of the bookings revenue number.

You expect that to stay pretty close to that, going forward, Marc? Is that --?

It continues to grow. It continues to be a good offering, so I think that is a data point as of now. (inaudible) will keep an eye on it as we go forward but it should be -- probably stay somewhere in that range, depending on the demand.

I'm sorry, just one last thing around that is are the deals usually three or five-year length period of time?

They usually probably average five -- (Multiple Speakers) -- five to six.

Anthony Vendetti of Maxim Group.

Yes, I just have a couple of questions. Marc, if you can just talk about whether or not there were any revenues this quarter from the UK bookings contract? Also maybe Paul you can answer how many tax contracts you signed this quarter and also talk about competitive displacements, either a percentage or a number of them that occurred this quarter.

You were breaking up a little bit. I think the question was -- (technical difficulty) -- or choose and book as it is called -- impact and then -- (technical difficulty). Do you want to do the -- (technical difficulty)?

We had four tax -- (technical difficulty).

Four tax contracts?

Yes, sir.

Competitive displacements?

A bunch that was -- we represent that in the 28 percent of the dollars that we talked about, but there was a bunch from everybody we typically compete with, as we've done in the past, a host of different competitors that we are displacing this quarter (inaudible) -- (multiple speakers).

Were you being specific on tax displacements or -- (multiple speakers)?

No, I was talking about -- (multiple speakers) -- that was total displacements, but I'm sorry, Marc. I missed what you said. The revenue from the UK bookings contract, was there any recognized this quarter?

From the UK booking, it will be about 1.6 million a quarter, and it will be ratable would be -- is the expectation.

Over how many years approximately?

Probably longer than you will be -- (multiple speakers).

Then Ill be following it? (LAUGHTER).

(inaudible) contract.

Okay.

It's a long time.

James Kumpel of Friedman Billings.

Can you remind us where you are at in terms of cash flow from operations year-to-date?

Yes, let me -- operating cash flow year-to-date is 112.6 million, and the free cash flow year-to-date would be 29.3 million.

Okay, 29.3. It's essentially, just to recount or just to recap what you talked about in the fourth quarter, you're going to be at the high end of cash flow from operations' original target but you will be looking at higher capital expenditures, so the free cash flow number may or may not be higher?

Well, we indicated in the comments that we expect to deliver free cash flow. I think we want to -- this quarter at 19 million was very, very strong and I think our comments are designed to indicate we don't think it's going to be 19 million but we will be free cash flow positive.

Okay. Can you give us sort of a sense, in that 242 to 247 million of rev, what sort of level of hardware revenues do you expect and so what would that kind of imply on the systems side?

Well, I think you probably will see a similar breakdown, relative to the elements of the revenue, from systems sales in the support and maintenance and services, reimbursed travel; those will probably be fairly consistent. There might be a little bit of an uptick on systems sales. We are obviously focused on -- we understand our (indiscernible) services not going to deliver a lot of hardware but we absolutely have clients who use hardware and currently run Cerner systems, so we're looking at ways to go pull back some of that installed base hardware and work on increasing those (indiscernible). That could impact and bring in systems sales increases higher than what you've been seeing but I think using the estimate as the percentage you've seen to date is probably accurate.

This is more of an operational question, but could you guys sort of give us some metrics to highlight the operating impact of the rapid installation or rapid implementation strategies you've been undertaking maybe in terms of average installed time today versus a year ago, versus two or three years ago? Or would that be a possibility maybe in future quarters?

Yes, Jim, I would probably say that I don't think we have that at our fingertips right now (indiscernible) provide (indiscernible) so why don't we take that as kind of a to-do to look at as far as relative to (indiscernible) the -- we continue to get projects done very timely. The problem is, you've got a variety of projects, some of which are very big and take longer times and others which are smaller and take shorter times sort, so it's kind of like an average selling price for us.

I guess this will be my final one, and that is, we saw a spurt of all kinds of large 9-figure, 10-figure contracts over the last year or so. Are you seeing any change in the nature of that as we approach the end of the year and going into 2005 or are you seeing just sort of a broadening of the market and maybe a dissipation of those unusually large deals?

I'm not seeing a dissipation; I'm actually seeing the volume and interest as represented through our fees, represented through vision center business, as represented by this demand that we typically see expressed in the marketplace as being high. We also have strategies where we create our own demand that drives -- (technical difficulty) -- get through without having to go through the formal process. That feels great in the clients that I touch every week, and that's a global statement but it -- (technical difficulty) -- global clients as well.

The buying pattern has been relatively constant from the standpoint of CPOE still looks very high. That's very important for our clients to have a clinical system, out there that is electronic, that allows us to eliminate waste (indiscernible) and the errors that are out there in healthcare today. We are also seeing them morph to strategies using those systems to connect on physician office practices, which is a concept that has been -- not a new concept but people are using that strategy today to connect.

The last thing I would say is that I'm very pleased with the business uptick we're getting from the managed services piece, which was not a piece of business we were getting two years ago. We are also seeing a big interest in our revenue cycle. Once we've implemented our solutions with the ASC (ph), many times they're coming back because of that solution going in as well and asking for more and looking at our revenue cycle of fleet of applications.

Andrew Weinberger, Bear Stearns.

Hey, guys, a quick question with regard to R&D expense and capitalized software. This is the first I think in about 17 quarters we've seen R&D essentially flat. In terms of capitalized software, the rate was down about 200 basis points or so, about 2 pennies of earnings it seems to -- you know, you seem to have eaten up by not capitalizing as much. What drove that and how should we expect that trend to continue?

I think we've been pretty public about our goals to work to flatten R&D spending. We have a very effective force innovating our solutions where we think there's enough people there to continue to move on to work on new things. I think you've seen the percentage of the probably was 33 to 132 and 31 this quarter, so you've seen a little bit. I think probably it was 33 in Q1, 32 in Q2 and 31 this quarter, so you're seeing a little bit of the decline. A little bit of that is just working on our web (ph) experience solutions and some of that is new stuff that is in the design phase that is expensed rather than capitalized. So, we're still innovative but of course a little bit less of that is subject to capitalization.

But the net cap rate this quarter seemed to fall sequentially about 200 basis points. Was there I guess anything in particular that drove that or is that just the continual goal towards 7 percent?

It's primarily a function of the overall cap rate going down and falling, so we've always believed that a net cap rate in the single digits is a requirement to be an innovative company, so we are very -- the net cap rate (inaudible) 2.5 million or so, $2.4 million is becoming fairly inconsequential in the scheme of our income statement.

Great. In the bookings for the fourth quarter, you guys are targeting essentially sequentially flat bookings, not -- actually not the extension deal last quarter. Do you have a -- (Multiple Speakers)?

Not sequentially.

I'm sorry, year-over-year flat. Do you have I guess any target for what bookings margin should be in the December quarter? It seems like bookings margin seemed to have been growing a lot faster than pure bookings dollars over the last several quarters, given the amount of services growth.

I think, with the hardware impact we're seeing, somewhere around 90 percent is probably a reasonable estimate to use as your gross margin percentage on bookings.

Sean Wieland, WR Hambrecht.

Hi, thanks. Two quick questions, if I could? One is, could you point to any factors in the market, any macrolevel factors, that are driving the transition to a managed service model? It's a concept that has been around for decades, and your managed service business certainly has taken off. Anything in the market that you can point to as to why that's happening now?

Well, I'm not sure we are the right ones to ask in the sense that we've only been in the market with this offering for the last two or three years. But what we're doing is relatively unique in the sense that the only thing we are offering to manage are our applications, so we are creating a fairly clean operational side to this, and this is as opposed to what other people do -- is I will run your apps for you -- I mean, the more traditional outsourcing. By keeping it clean, we get really kind of extraordinary efficiencies. Then I think there's the -- the client intuitively understands that we are probably going to be better at operating something that we built than they would be, or anybody else. I think it's just a proposition that we went out with that is fairly compelling, and I think it's got a lot of legs. We are pleased with it. It frankly slowed -- it slowed our growth down, though, on the topline a little bit, but on the other hand, it really just kind of strengthened the quality of our business model too, which has been an objective that we've stated with you all for certainly the last couple of years.

Does it lower the total cost of ownership for the client to elect to go with managed services?

In a perfect world, it absolutely does. When I'm saying a perfect world, if there is -- our ability to run this on an incremental basis versus their ability to really take on these applications and run them -- we are clearly, on an incremental basis, lower than they are. The world isn't perfect, so they will sometimes have investments on data centers that they cannot, in the short term, get out of. In the short term, I think it's marginal, and I invite Trace or Paul to comment here. I think it is clearly advantageous on our side. Then we can prove that we can actually -- will do it better, too, so the quality will be there.

In the long term, it's pretty substantial if they can get out of the business of running applications.

Is there any interest from your part as to start hosting other applications, other vendors?

You know, we talked about that and we have looked at that, so the way you ask the question is there interest -- I mean, we have explored it. We like our model and kind of the cleanliness of our model, so we're not that excited about jumping over there and doing a traditional outsource.

I would add one comment to Neal's and that is you're seeing, in our industry, like you see in most industries, a lack of talent, a shortage of technology-trained talent. It's a tough measure coming out of college. I think we're seeing some impact at the college level as well. Historically, healthcare has not been able to pay what traditional for-profit organizations have paid for that same level of talent. So, I think you find, with the complexities of some of the challenges they are faced with in the meds administration and other parts of clinical automation, you find that they want to get back to the basics of running their organizations and leave the complexity to someone who knows it best. In that case, it's Cerner.

I should say, too, Sean, just to take the opportunity to say it, that the investment we have now in basically state-of-the-art data centers as part of our infrastructure -- that investment, we're going to use the leverage into other market prices where we need to have low-cost models. We've broadly mentioned or briefly mentioned the physicians market space. We're going to be quite innovative and go very broad in kind of the lower end physician. This was a major capability that got us in the smaller-sized community hospitals, too. So we have taken this investment, turned it profitable and used it also to expand segments and markets that we can sell to now at lower cost points.

Does that play into -- which is my second question -- David Brailer's Rio (ph) concept of what he did in Santa Barbara and other projects similar to (indiscernible)?

That is a brilliant question. I think, though, you need to ask David that question? (LAUGHTER). We are very open with Dr. Brailer and we are very current in communicating with him, so he knows what we're doing and where it's different than what he is articulating. I think we're pretty clear. We try to be very clear with him where we think we are saying it different than he is saying it, but at the end, I think he would be quite excited if what we're talking about works. We believe it will work. We're very supportive of what he's talking about.

Great. Thank you very much.

Ryan Stewart of Piper Jaffray.

This is actually Newton Juhng for Ryan Stewart. Not to beat a dead horse here, but with regard to the Ascension health and your announcement last week about Tennier (ph) $1.3 billion outsourcing contract, I'm just wondering about how you're going to be working with them in order to roll out your own Millennium systems.

The outsourcing agreement -- (technical difficulty) -- exact same discussion that we were just having in that CSE (ph) is going to be outsourcing people, computers and applications that are in existing non-Cerner applications (inaudible). Cerner signed -- as per our agreement with Ascension, where Ascension will be remote (indiscernible) hosting the Cerner applications. So that was actually a big relationship for us last year, and we continue to have a hand in that throughout the course of 2004, as other Ascension ministries have also signed up for applications, for implementation and for hosting.

Okay, great. Thank you.

Sandy Draper of Draper Research.

A couple of questions -- one, Marc, I apologize. I got on a bit late. Can you just give me the unbilled receivables number again and the Professional Services component for revenue?

Yes,

I guess while you're looking, I will ask my second question. Have you guys ever -- probably contemplated -- but would you ever be willing to break out the hardware number? Obviously, with what looks to be a fairly material shift or trend going on in terms of analyzing the business, it would certainly I think help us to have a sense of where hardware spikes were, where they are not. If not, maybe help me understand, was there one specific quarter where this trend started taking off and so, theoretically, you cycle other the easy comp and your systems (indiscernible) re-accelerates, or is that maybe not the right way to look at that number?

Okay, I think that's probably -- I mean, as we go through probably the next couple of quarters, you start seeing more normalization of the hardware element. So, as the managed services -- we started the managed services business three years ago and it has grown significantly. We started really seeing it in kind of the last 12 to 18 months, where the big turn-ons have happened -- they are happening in our datacenter rather than (indiscernible) client but not coming back and buying a chunk of hardware when they turn these on; we are hosting it. I think that, in two quarters, that kind of plays out to where it becomes more normalized and you won't see this negative impact coming through because we will have been through that and the comps will be -- have that impact within it.

So you would assume that your systems sales growth in '05, assuming all else being equally and bookings are there, that your systems sales growth would be better in '05 than '04 because of that comp factor?

Yes because basically you will already have the impact in it in your '04 system sales. Yes, that's exactly right. The unbilled receivables or contract receivables was 87.1 million in the quarter, which is clearly 3 percent of total receivables, and that was down from 88.8 million and 34 percent of receivables in Q2.

Okay, and the Professional Services revenue?

The services line on our income statement is what you're asking?

No, the component that the -- the extra break-out you give for revenue.

Sorry, 78.2 million.

Okay, then last question and this is just sort of one I ask every two or three quarter, probably there for Neal or Paul. When you look at the potential risks out there, market risks probably most tightly related to reimbursement levels for hospitals, the threat of potential increased competition, or just internal execution, how would you rank or discuss the risk to you guys executing against your plan?

Rank it compared to prior years or --? The short of it is I think we feel -- we are sitting here pretty -- we like where we are at. Nothing is ever easy but operationally, things have never been better and we are actually going to move the meter. We will shock some people how we're going to move the meter next on the operational side.

In the marketplace, we've got a large, competent, highly motivated sales force. In the IP side, what we're doing for the development side is we are adding -- we are adding capabilities to this architecture that people aren't even thinking about right now, I mean, so -- around the cardiovascular, in cardiology, in oncology, so we're getting so deep and broad in this space that it's becoming very compelling. Our competitiveness has never been stronger.

Then you know, as I said, the other thing is we are going to -- we are investing and going into new -- as we've always done here; we are investing and making very good progress and going into brand-new segments of marketplaces that will continue the growth here.

On the contrary, I think what we're saying, too, to you is that we're going to be conservative here in how we look at the future. We are right in the middle of an election; we are within days of knowing are we changing or not. I think most sides will have to invest in healthcare, so even though I think we've got a budget issue, I think healthcare may get hit some in that but in all cases, I think there's a strong belief that we need to invest in IT. How the government plays in that investment model I don't know, but I have never seen a more -- a better environment for Information Technologies, both at the federal level, at the state level, inside these very large enterprises and all the way down to the communities and including smaller doctors' practices.

So I think our competitiveness is at an all-time high and is going to increase. The marketplace is as strong as we've ever seen it. You know, there's always wild cards when you're dealing with the flow of funds into healthcare, so whether we have another balanced budget (indiscernible) or -- and it hits our clients. We are not sensing that but anything is possible, so we are fundamentally feel pretty good here (sic), Sandy.

Okay, great. Thanks, Neal. That's helpful.

Based on the time frame here, we're pretty far past the end time, so we're going to cut off the questions at this point.

We thank you very much for joining us on the call and obviously Allan and I are available for any questions you might have afterwards. So thank you very much.

Ladies and gentlemen, thank you for joining us on the conference call. You may now disconnect your phone lines.