塞納 (CERN) 2004 Q4 法說會逐字稿

Welcome to Cerner Corporation's fourth quarter 2004 conference call. Today's date is February 3, 2005 and this call is being recorded. The company has asked me to remind you that various remarks made here today by Cerner's management about future expectations, plans, perspectives, and prospects constitute forward-looking statements for the purpose of the Safe Harbor Provisions of the Security and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements, may be found under the heading "Factors That May Affect Future Results of Operations, Financial Condition or Business" in the 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'd like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation.

Thank you. Good afternoon everyone and welcome to the call. I'll lead off with the review of the numbers followed by sales and operational data from Paul Black, Executive Vice President and Chief Operating Officer and some broad market observations from Trace Devanny our President. Neal Patterson, our Chairman and CEO is traveling but he is dialed in and will be with us during Q&A. Now I will discuss the results.

We're extremely pleased with our results this quarter and for the full year. In the fourth quarter our new business bookings were strong and our income statement and balance sheet continue to reflect strong performance and progress in all of our key financial initiatives. The quality and visibility of our revenue continues to improve. We had great success at expanding operating margins and our operating and free cash flow generation was outstanding.

Starting with bookings, we delivered strong new business bookings this quarter with $244.8 million of bookings revenue, which is up 13% sequentially. This is slightly lower than the record $255 million in the year ago quarter, but recall that our Q4 2003 bookings included more than 50 million from an unusually large contract. Our normalized year-over-year bookings growth excluding the 50 million impact in Q4 is about 20%.

Our full year 2004 bookings revenue is up 13% to 917 million. Bookings margin was 210 million this quarter, an increase of 6% sequentially. Some large hardware sales into our existing client base increased hardware bookings compared to the first three quarters of 2004, resulting in a lower gross margin for both bookings and income statement as compared to those earlier periods.

While this interrupts a trend of lower hardware sales created by more of our clients selecting the Cerner hosted applications in our data center, we will need a couple of quarters to determine if our efforts to sell hardware back into base can continue to generate this level of business. Our total backlog increased 23% year-over-year and into Q4 a 1.54 billion. Contract revenue backlog ended the quarter at 1.19 billion, which is 20% higher than a year ago. Support revenue backlog was 347.7 million and margin on a contract backlog was 1.15 billion. Margin on software support was $311.2 million for a total backlog margin of 1.46 billion.

Moving to the income statement, we delivered solid revenue growth in Q4 and the full year with a continued increase in more visible and recurring components and we also stayed on track to deliver our long-term margin expansion targets with the quarterly operating margin of 14.8%. Total revenue in Q4 was 248.2 million, up 9% compared to the year ago period. The revenue composition was 99.6 million in system sales, 62 million in maintenance and support, 79.3 million in services, and 7.3 million in reimbursed travel.

System sales revenue grew 10% over the year ago quarter and 6% for the year. The annual growth number reflects a decrease in hardware sales of 18% as compared to 2003 while software revenue increased 14%. Services revenue, which includes managed services grew 15% compared to a year ago quarter, and was up 13% for the full year capping off an outstanding year for both our professional services organization and our managed services business.

Support and maintenance grew 3% over the year ago quarter and 15% for the full year. Note that support and maintenance revenue had a tough comparable this quarter because we had an extra week in the Q4 '03 quarter, which added about 4 million of revenue.

Adjusting the prior year for this, support and maintenance revenue growth would have been a 11% in Q4 and 17% for the full year. Moving to gross margins, the stronger hardware sales in Q4 led to a slightly lower gross margin of 78.2% in Q4, but the full year gross margin of 78.8% is up approximately 200 basis points over the last year reflecting the lower mix of hardware for the full year.

Moving on to spending, I have to remind everyone as I discuss full year results for spending and earnings, I will be excluding the prior period adjustment related to accrued vacation pay that occurred in Q3 of '04 and again on sales of Zynx in Q1 of '04.

Our total operating expenses for the quarter were a 157.4 million, which is up 1% sequentially and 4% over a year ago and in line with our expected spending levels. Full year spending in 2004 totaled 615 million, which is 8% higher than 2003 levels.

Total spending as a percent of revenue declined a 120 basis points in 2004 primarily driven by leverage of our sales and client service spending. We expect Q1 spending to be in the low 170 million range including additional spending related to our VitalWorks Medical Division acquisition and a normal Q1 sequential increase in spending due to restart of payroll taxes and increased amortization expense.

Note that this increase was not as apparent going from Q4 of '03 to Q1 of '04 because of the extra week in Q4 of '03. Moving down to income statement, net interest and other expense was about 600,000 less in Q4 compared to Q3. This difference was driven by higher interest income resulting from higher interest rates, a higher level of invested cash in the quarter, and the interest portion of the payments received during in the quarter on our choose and book contract, which provides for the payment of interest on certain deferred contract payments.

The purchase of VitalWorks for $100 million cash on January 3 were a trend these amounts closer to historical levels. Moving to earnings, net earnings were, 21.4 million in the fourth quarter compared to 16.8 million a year ago. And EPS was $0.56 per share compared to $0.44 a year ago, reflecting growth of 27%. Full year EPS was a $1.73 or just 47% higher than in 2003. Again these numbers are before the accrued vacation pay adjustment and the gain on sales of Zynx.

Turning to operating margins we delivered strong improvements in our operating margins in Q4 and in the full year, a 190 basis point increase compared to Q4 of '03 and a 310 basis point increase for the full year. We're extremely pleased with our progress and margin expense in 2004.

Our Q4 operating margin of 14.8% is the highest-level since 1995. Our full year margin of 12.4% was driven by a very sustainable top line growth rate of 10% and methodical improvements to our more visible revenue streams. Specifically in our professional services organization, which makes up about 28% of total revenue, we increased the contribution margins from 15% in 2003 to 23% in 2004.

We have several ongoing initiatives inside this organization that we believe will allow us to expand it's contribution margin to 30 plus percent. Paul will discuss the drivers of the progress to date in the ongoing initiatives in a moment. We also continue to make progress of expanding profitability and other recurring components of revenue, such as managed services and subscription, and we still have a lot of opportunity to leverage our R&D investments in G&A spending. As a result, we still believe our longer-term goal of 20% operating margins is achievable.

Let's move to the balance sheet, which continues to strengthen. 2004 was the best performance in the history of our company from a cash flow standpoint. Cash ended the year at 189.8 million after record operating and free cash flow for the fourth quarter and full year. Our total debt ended the year at 130.7 million. Accounts receivable ended the year at 282.2 million and contracts receivable or the un-billed portion of the receivables was 96.9 million or 34% of receivables.

DSOs for the quarter were 104 days, which is flat compared to Q3. When we still have a longer-term target getting DSOs under 100 days, we proved in 2004 that our business model could generate strong cash flow with DSOs in the lower hundred day range. On that note, now let me talk about our cash flow performance.

We delivered our strongest quarter ever. We had record cash collections of 256 million in Q4 and operating cash flow at a record 55.7 million. Traditional client collections were the primary driver of this strong performance as third party financings were at normal levels at about 15 million in the quarter or 6% of the total cash collected.

For the year, we generated 168million of operating cash flow, which is 25% higher than the 134 million operating cash flow in 2003 and 28 million over the high end of the target we provided at the beginning of the year. Note that we received less benefit from third party financings in 2004 than compared to 2003, as our third party financings actually declined from 59 million to 53 million in 2004.

Moving down to the cash flow statement, Q4 capital expenditures were 18 million, largely comprised of equipment purchases for our growing hosting business. And capitalized software was 14.2 million. Total cash used was investing activities was 32.2 million. Free cash flow, defined operating cash flow of capital expenditures and capitalized software was a record, again, at 23.5 million.

Net cash provided by financing activities in the quarter was 2.9 million, which was comprised of 7.5 million of proceeds from options exercises less 4.6 million of debt reduction. With respect to capitalized software the 14.2 million of capitalized software in Q4 represents 30% of the 47.2 million of cash spent on development activities. Amortization for the quarter was 10.5 million resulting in a net capitalization of 3.7 million or less than 8% of the total.

For the year, we generated record free cash flow of $53 million. From the quality of earnings standpoint, its worth noting that our free cash flow exceeded our net earnings from Q4, and was only 11 million less than our full year net earnings. This is the closest correlation between the earnings of free cash flow in our history and is indicative of our improving earnings quality.

Looking at Q1, we expect operating cash flow in the range of 30 to 40 million. For 2005, we expect operating cash flow in the range of 170 to 180 million. For CapEx, we anticipate capital expenditures for 2005 to be in the $60 million range up modestly from 2004, but note that higher than expected growth in our demanded (ph) service business could impact that number. We expect capitalized software in 2005 to be in the low 60 million range up very modestly compared to 59 million in 2004.

Let me move to guidance at this point. Looking at Q1, we expect revenue in the 250 to $255 million range, which includes 15 million from the VitalWorks Medical Division acquisition, which we would now refer to as Cerner Physician Practice. We expect Q1 EPS to be between $0.41 and $0.42, which is about 25% over Q1 of last year and for bookings, we expect bookings revenue in Q1 of 215 to 230 million with VitalWorks having little impact on that number given the recurring nature of their revenues.

For the full year of 2005, we expect EPS to be between $2.07 and $2.12, which is up from the prior range of $2.05 to $2.10. We now expect full year 2005 revenues to be in the range of 1.08 billion and 1.1 billion, which is up from our prior range of 1.01billion to 1.03 billion and that primarily related to expected contributions from VitalWorks medical division.

Note that we're still working through the purchase accounting for VitalWorks, which closed on January 3, and at this point our guidance is approximately 7 million of revenue with no earnings benefit. Our preliminary review indicates that while the acquisition will accretive on a cash earnings basis, the amortization of the purchased assets will offset most of the cash earnings and make the acquisition break even the slightly accretive on a GAAP basis in the first year, and will be increasingly accretive in 2006 and beyond. I would note that our guidance does not include any impact from the stock options. We'll clearly comply with any final rule and break out the impact as necessary.

As a point of reference, our FAS 123 estimated impact of the stock option expense for 2004 is approximately $0.20 per share. It would 12% of the 2004 EPS, a level we believe to compare favorably to other technology companies. Before handing the call over to Paul, I would like to remind you that we are having our investment community meeting during HIMSS at the Dallas Hyatt on February 18 at 8:00 a.m.

At the we planed to provide more detail on improving the visibility mix of our revenue, provide an update on the margin expansion plans, discuss several of our new strategic initiatives including the integration of VitalWorks medical division and give you a chance to ask questions about some of our clients. Please contact Allan Kells, if you're interested in attending and not on the distribution list. This contact info is on the investor's section of our website. With that I will turn the call over to Paul.

Thanks, Marc. Q4 was another strong quarter from the sales prospective and 2004 was a year in which we set many new records and performed well in many areas of the business. Our overall results reflect depth, breadth, and maturity of our solution offerings. Here are some of the 2004 highlights. We signed 302 contracts in the fourth quarter, another new record and an increase of 79% year-over-year compared to 169 year ago.

For the year, we signed 942 contracts compared to 584 a year ago an increase of 61%. We had a good mix of larger contracts in Q4 with 8 over $5 million, 3 of which were over 10 million. We again had solid bookings outside of our install base of 29% of our contract bookings coming from new clients, which we believe remained higher than any of our competitors.

We continue to have a broad range of success across the solution categories with several recording record years, including access management, outcomes measurement, patient accounting, home health, I.Q. health, pharmacy, perioperative, laboratory, and radiology.

We also experience strong results from the hospital, children's, and academic segments. Our ability to sell across such a broad range of solutions distinguishes us from our competitors, and it reduces our alliance on any single solution or segment in the given quarter. We had another strong year in the managed services businesses and a record quarter and record quarter end year in our subscription models, which includes businesses such as executable knowledge Cerner Multum, Cerner Apache and Cerner Project Impact.

Collectively managed services and subscription bookings accounted for about 24% of our total bookings margin in 2004 compared to 20% in 2003 and 15% in 2002. This continued shift in mix provides greater visibility going into 2005 and beyond. Our leading indicators continue to look strong as we head into 2005. We experienced year-over-year increases in RFP volumes and our annual levels of vision center visits and (inaudible) visits are at all time highs.

Our multimillion-dollar pipeline remains very strong and our top three tiers of the pipeline continue to experience meaningful annual growth, which improves visibility as this portion of the pipeline continues the deal that are furthest along in the procurement process. Our great results on the operational side of the business continued in Q4.

During the fourth quarter, we turned on a record 354 Millennium applications compared to 204 in the year ago quarter. For the full year 2004, we have turned on 1,079 Millennium applications, a 22% increase over 2003. This brings our total count to over 3,750 live Millennium applications and nearly 750 facilities further widening the gap between Cerner and our competition.

The goal lies during the quarter included 39 different types of solutions at a variety of different types of health care organizations around the globe. Further evidence of our delivery capabilities and breadth of solutions is that we now have 17 major solution categories that have been brought live more than 100 times, 4 major solution categories brought live more than 200 times and 1 solution nearing the 300 mark. Again this is unmatched in this industry.

Moving to CPOE, or Computerized Position Order Entry, Cerner ended 2004 with 378 live CPOE locations, which is nearly double the level we were when we entered 2004. In 2004, we increased the number of live acute care CPOE sites by 141% and increased physician office and clinic CPOE locations by 73%.

We're most pleased with our progress of implementing CPOE at acute care sites, which are more complex than ambulatory sites. Prior to 2004, we brought up 27 acute care sites on Cerner Millennium CPOE over a period of four years. During 2004 alone, 38 additional acute care sites were brought live to bring the total site count to 65. This success continues Cerner's trend of dominating the important CPOE market. Cerner easily has the largest number of live sites on a currently marketed platform. We expect our leadership gap to widen because we plan to double, again, a number of live acute care sites for CPOE in 2005.

Cerner's leadership in the market was also reinforced in December, when costs of leading health care information technology research firm identified Cerner as the top choice when respondents named a company they would consider first if they could start fresh today and select a supplier for CPOE. This is the third year in a row that Cerner has received this distinction. In addition, in January of 2005, Cerner Millennium power chart was the highest category in the CDR orders and charting based on clients primary and detailed client satisfaction indicators.

These recognitions show strong results for both existing clients and for perspective clients. I will now comment on Cerner's professional services business. As Marc mentioned, we made significant improvements in the profitability of our consulting organization with its contribution margin increasing from 15% in 2003 to 23% in 2004, what's more impressive is that we increased the dollar amount of the contribution margin from 34 million in 2003 to 59 million in 2004. Of note, we entered 2003 with approximately 1,800 consultants and we finished the year with 1600 in 2004.

This is an increase of more than 70% of contribution margin with 11% less head count. Several factors have contributed to this turn around. To increase our level of focus of managing this aspect of our business during 2003 and by 2004 has made several fundamental improvements in our ability to track and manage our projects. For example, we started compensating services and associates based on client level profitability, which increased the write-offs and non-billable activities.

We've also benefited from our regional structure as it has allowed our services associates to be closer to the clients to making it easier to maximize time spent at client sites. We have also continued to improve our delivery approaches, including our accelerated solution center or AFC, which is Cerner's evidence-based rapid delivery model that benefits both Cerner and the client by providing predictability around implementation timeline, functionality deliver, and overall implementation costs.

We more than doubled the total number of conversions performed in the AFC during 2004 and this process accounted for more than 20% of our total conversion activity. Also, we are implementing 12 solutions per site on average to AFC compared to 5 on average using the traditional implementation approaches. This approach is more cost effective for our clients and more profitable for Cerner.

Therefore, we plan for more and more of our projects to go to the AFC. It's a distinct, competitive advantage for Cerner. The other key to our significant improvements in the services organization is the maturity in improving the quality of our intellectual property. This maturity has come after working through several lower margin projects on newer solutions such as ProFit, PAX, and CPOE.

We now have much more matured code in these areas, which make a big difference on our projects. It's a pretty simple formula. When the code works and you have right people and processes in place, you deliver more value to your clients. Our clients are paying us for this value, and it is reflected in our strong cash flow and earnings performance.

Even with all the progress we made in our approach to delivering solutions, we believe we can continue to raise the bar in implementation methodologies and system operation approaches. As we discussed last quarter, we are working on an initiative that we call Bedrock, which is a system that will fundamentally change the way we implement in operate Millennium. Bedrock is both a methodology and investment and an investment in intellectual property that we believe, will advance Cerner's use of data and content and significantly lower the complexity and costs of implementing and operating Cerner solutions.

We believe Bedrock will transform our industry's approach to system implementation, resisting design and build costs by as much as 50% and potentially reducing implementation time to less than six months for a typical hospital into a much shorter time frame for physician offices. As part of our broader services offerings, our management service business had another great year in 2004.

Our managed services business, which includes the hosting of Cerner applications for our clients as well as other services such as disaster recovery add another outstanding year. With this contribution of revenue growing 47% to $50 million. While this business model started with the focus on community hospital, we have expanded to meet the needs of clients of all sizes.

After just over three years since we started the managed services business, we have 120 clients relying on our data center for application hosting or a variety of other technology services this. This is very good business for Cerner because it generates a highly visible and increasingly profitable revenue stream that we believe will be over $100 million by 2007.

Now, I'd like to discuss the conversion example from the fourth quarter. Borgess Medical Center part of the Borgess health alliance and a member of Ascension Health, the largest Catholic non-ProFit healthcare system in the country. Borgess recently implemented Cerner's virtual ICU solutions that have enabled medical staff to monitor neonatal, pediatric, and adult ICU patient's 24-hour a day from remote locations.

Clinicians are equipped with the latest technology at the point of care, including alerts to risks, dangers in a negative physiological trend. A single electronic health record is used by clinicians throughout the hospital hand remotely to view, chart, and order document care, which optimizes work flow and saves time.

Medication administration is also automated via bar code technology to ensure that the right drug and the right amount are distributed to the right person at the proper time via the appropriate avenue. In addition, the software provides outcome measurement reporting to help the critical care staff make the best operational decisions.

Moving to an update on ProFit, our patient accounting solution. In Q4 we signed four new ProFit agreements. Cerner also completed several new conversions in ProFit in Q4, and we now have 22 live ProFit clients. Both our early and more recently converted ProFit clients are seeing substantial improvements in operations. For example, one of our alpha clients has seen over a 20% reduction in AR days as compared to a pre-conversion level.

More recently one of our children's clients brought up Profit in their clinics and achieved a 23% reduction in AR days shortly after conversion. As we have said before, our approach to revenue cycle is unique because ProFit is an enterprise application that has been architectured to support all health care venues, including hospitals, clinics, physician offices, reference laboratories, and home health. This gives Cerner the unique capability to provide a single bill for a broad range of health care services.

On the PAX front, Cerner added 4 new clients in the fourth quarter. We also converted 4 clients in the quarter, bringing the cumulative number of converted PAX cites to 52 at the end of 2004. We continue to see success in this business, with implementation timelines decreasing significantly and the sales pipeline flourishing. Of note of the quarter, Cerner signed its first unified risks PAX client in Ireland and added another to our family of U.K. clients, both of which are slated to convert in 2005.

In summary, I'm extremely pleased with Cerner's strong Q4 and full-year 2004 results, and we feel great about the things we expect to do in 2005. With that, I'll turn the call over to Trace.

Thanks, Paul. Good afternoon everyone. I would like to give my perspective on Cerner's success in 2004 and provide some broad market observations. Before I get started, I would like to communicate a couple of role updates. As you know in 2003, we converted the client organization into a regional client centric structure we referred to as CINC (ph) Cerner & Cerner.

Paul Black was the in charge executive for the United States. CINC has worked very well for us. Effective immediately Paul Black has achieved the additional responsibilities of Chief Operating Officer reporting to me. Paul will have responsibilities for our client organization worldwide our growing management services business and the core intellectual development organization.

Paul has been instrumental in driving that strong top line growth for Cerner over the past ten years and he had a positive impact on our Cerner's organization when he assumed responsibility for him at the beginning of 2003 as part of our move to the CINC structure. Paul will prove responsible for creation sales, and delivering external solutions to clients.

Mike Valentine formerly President of our mid American CINC will assume Paul's former responsibility as executive in charge of the United States with the CINC presidents reporting to him. Mike will report to Paul. This is a realignment of the executive responsibilities at the top and has little impact on the internal client facing organizations.

Not the Neil Patterson's role has not changed. I would also like to announce the creation of a new business unit inside Cerner called Grid Services, which would report to me as President. I will cover the functions of this new unit later in my remarks. But first let me discuss art of success in 2004.

Marc and Paul covered much of the sales and operational success we had in 2004, and we are clearly pleased with our progress on those fronts. But as reflect on 2004 there are also several developments in the marketplace and inside Cerner that I believe are important steps towards major changes in the health care information technology industry.

In many ways, 2004 was a defining moment for the health information technology industry. President Bush began the year by proclaiming in the State of the Union Address that every American should have a personal health record within the next 10 years. Last night he reaffirmed that goal.

Last spring, the President created a sub cabinet position at the department of Health and Human Services to spearhead that effort. Last week in Cleveland, he assured it would be funded. At the other end of Pennsylvania Avenue, progress has been equally swift.

Last summer, Senator Hillary Clinton and Majority Leader Frist took to the pages of The Washington Post to opine in bipartisan fashion that information technology is essential to solving the health care crisis. As both parties laid out their agendas for the 109th congress last week, both signaled a strong commitment to help information technology.

Finally 2004, saw more widespread adoption for pay for performance conversion system for both hospitals and patient offices. Employers such as General Motors, Delta Airlines, UPS, Verizon, General Electric, and Boeing led the way, both at the company level and through the leapfrog group standards.

On Monday, the Center for Medicare and Medicaid services added its voice to the course announcing the first ever Medicare pay for performance initiative for doctors. 2004 was, in short a very exciting year of increased focuses on HIT. And we believe recent events suggest that the momentum will not only continue, but accelerate.

So where does Cerner fit in to all of this activity? We strongly believe Cerner is well aligned to play a leadership role in the transformation of our healthcare system. The core of this believes revolves around a billion dollars we have invested in R&D over the past decade. This investment has yielded the industry's only comprehensive health care architecture. Yet in 2004, we believe that we took the proper steps to move beyond just having the right solutions built on the right architecture.

Consider the U.S. government's focus on creating the national IT infrastructure; we've proven the ability to deliver at a national level in England to choose some book program a countrywide transaction system that will coordinate scheduling for more than 50 million people in Great Britain. On the President's desire to have a personal health record for all Americans, Cerner has made a bold first step with our juvenile diabetes initiative.

Through this program Cerner will work with our pediatric clients and all others with an interest in juvenile diabetes to provide personal health records or PHRs in a secure position connection to every child with type I diabetes in the United States. This will enable better monitoring, control, and treatment of this debilitating and chronic condition.

The goal is that this will result in a national network to help improve health outcomes for children with diabetes. As this initiative expands, we believe it will clearly prove the value of a secure personal health record through cost savings and reduced morbidity and mortality rates.

In addition, physician offices have become a focal point in the push to ensure that medical records follow the individual; giving clinicians the real-time access they need to make the best possible clear decisions. We also made a bold move in this face through our acquisition of VitalWorks medical division in the creation of Cerner Physician Practice.

This acquisition which brings along 3500 physician practices and 30,000 physicians, built on our already substantial hospital affiliated physician client base, giving us an additional reach across the entire spectrum of the $4 billion ambulatory market. We now reached over a 130,000 positions. This acquisition also aligns with our long-standing vision centered on a community health model that focuses on the individual, not the encounter.

Our goal is to become the network for health care information in major metropolitan regions of this country, connecting families, physicians, hospitals, clinics, laboratories, and pharmacies. Another important development is the emerging business case for a national IT infrastructure. I think many of you noticed the Wall Street journal's recently published story entitled "The Hi-Tech Curve."

This article documents the path of University of Pittsburgh medical center; a long-term Cerner client has filed an request to automate their health care processes. The article discusses how UPMC's experience provides a road map for other hospital systems trying to transform itself and how UPMC has worked with Cerner among other suppliers to be successful in driving both tangible and intangible results.

UPMC states that technology has increased its Medicare reimbursement because of more accurate cost reports. Further more, it has enabled them to cut pharmacy costs by $1.5 million at its largest hospital, by eliminating duplicate or erroneous subscription orders.

In total UPMC says its IT initiatives have yielded a 10% average annual return for the first five years. We are very pleased to be associated with an innovated leader like UPMC, which created the business case for investing and health care information technology. We believe there will be continue -- they will continue to be more proof points for healthcare IT.

Specifically Cerner, GE, HP, Xerox, and Johnson & Johnson co-sponsored a Rand study that began in 2003 and will be published within the next two months. We believe this study will make the most comprehensive and compelling economic argument for systematic IT investments in healthcare ever delivered.

I would now like to reflect on our position globally. 2004 was a record year. While the year started with us learning that we had not been selected for the last of the major regional contracts with the National Health Service of England, we rebounded quickly and focused on delivering on the countrywide (inaudible) contract we had won. We also had successful conversions at Newham and Homerton, two large trusts in London and sold other business in the UK during 2004. And 2005 is lining up to be another good year for our global business with opportunities in the UK, Germany, France, Spain, the Middle East, and the Pacific Rim.

I have a brief comment on the competitive landscape. Overall, we believe that overall competitive environment has remained fairly consistent over the past couple of years. And given the overall strength of the market, we believe there's room for several competitors to have success going forward. We still see basically the same varieties, competitive tactics, including some aggressive pricing and aggressive commitments to develop and deliver new software as well as the bundling the medical technology with the software.

For Cerner, specifically we continue to feel good about our competitiveness today and we feel very good about our ability to expand our competitiveness going forward. One of the best measures of the ongoing competitiveness is that we continue to generate about one-third of our contract bookings from new clients in 2004.

We believe we can expand our competitiveness as we continue to deliver on wide scale CPOE implementations. I would now like to highlight some of Cerner's other initiatives, which we will begin to discuss in more detain at HIMSS on February 15.

One area of focus is that we will continue to evolve and enhance our architecture so as to guarantee reliability beyond anything our competitors are capable of. We'll continue evolving our web offerings as well. We'll continue to leverage our architecture and experience in application hosting to broaden our service offerings in areas such as application management services and health desk.

In addition we are focused on enhancing the clients the value clients get out on our solutions. Bedrock, an initiative, which we have previously discussed, is one example, as it will significantly reduce our client's implementation of operating costs.

And other initiative is the creation of the unique data driven reengineering consulting practice. We're using the very rich data captured by Millennium as well as our health fact benchmark data to identify major improvements in the clinical, operational and financial performance of our client. We already have some powerful proof points with our the first client, the Mayo Clinic of Jacksonville.

We believe this will become a high value consulting practice this year, that will further differentiate the Millennium platform and our services capabilities in the market. We will also see growth opportunity through data initiatives as we continue to mine more data that the pharmaceutical companies will find increasingly useful.

In addition to these initiatives, we have created a new group inside Cerner focussed on 4 areas that we believe offer significant growth opportunities. We're calling these organizations Grid Services with the term, Grid, representing the utility-like potential of the services to be offered by this organization to cover large communities of users. I will be the Senior Executive responsible for this organization.

The 4 Grids within this organization include, the position and metro grid will focus on leveraging our - on our acquisition of the VitalWorks Medical Division and delivering a broad range of financial and clinical solutions to position offices.

Our offering will be hosted and offered at affordable monthly rates with minimal upfront fees, which we believe is essential to gain meaningful adoption of EMRs in physician offices. Our goal is to connect the 100,000 physicians to this grid by the end of this decade. Number two, the state and regional grid will drive our state regional health information organization or RIO strategy and deliver our next version of E- prescribing.

The condition and disease grids will drive our condition or disease management strategy. Recall that last October we announced that we would re-create an operate a national network connecting every child in the United States who has Type I juvenile diabetes with a secure connection to his or her physicians.

Today we estimate that we have the majority of the pediatric endocrinologist in the United States indicating that will use this network. The fourth component of our grid services organization will be the transactional services, which focus on the great opportunity to develop a business supporting the processing and management of transactions throughout health care.

We believe this organization will deliver new ways to transact health care and will significantly reduce the waste and friction in our health care system. Note all of our new initiatives fit well with our financial focus to improve the visibility of our business model, as they are all based on some type of recurring or per member charge.

I have one final announcement before closing. We are pleased to report that former US Senator John C. Danforth has rejoined our board of directors effective today. Senator Danforth brings an invaluable experience from his 18 years as a US Senator, where he was a long-time member of the Senate Finance Committee.

Senator Danforth recently stepped down as US Ambassador to the United Nations afforded him the opportunity to rejoin the Cerner board. Now to close I would like to reiterate to you that we are pleased with Cerner's performance in 2004, and we are most encouraged by the outlook for our company in the health care and IT industry. With that I would like to turn the call over to the operator for Q&A.

Thank you sir.

[Operator Instructions].

Your first question comes from Steve Halper of Thomas Weisel Partners.

Bookings guidance for Q1 was that correct $215 to $230?

That's correct, Steve.

Sure. And if you look out on a year-over-year basis I mean it's the low end is flat -- the midpoint is up 3%. Do you feel as though you're starting to get tapped out in terms of the growth and what you can do on the bookings front?

Well, Steve I think the guidance, as you know when we go with the New Year where somewhat on the conservative side. We had a very strong Q4. And I think our guidance kind of reflects that. We have historically been kind of at the top end of our range. We ended Q4 that way.

So, I think the marketplaces there. I think -- our forecast meeting that we held a couple of weeks ago says that there is lot of business to go get done. I think we are trying to kind of give you the best conservative view of what we think that pipeline is going to deliver.

Was there anything in the year-ago quarter that is of significance in Q1?

I don't believe so. I think they're fairly comparable relative to any major deals or any large size deals.

Sure. And lastly, is there a reason why you did not include that number in your guidance in the press release?

Operator error. No, there's no reason we did that. It was in one of the earlier versions and some how got edited out.

Okay.

So apologies for that.

Not a problem. Thanks.

Your next question comes from Lisa Gill of JP Morgan.

I am (indiscernible) for Lisa Gill. A question about the interest income in the quarter. Could you elaborate on how the interest income was derived from the choose and book program and do you expect SG&A at the same level going forward?

Yes, the choose and book program contains, that contract contains certain provisions they defer payments to us. And we received one of those payments in Q4; it's a pretty sizable payment. The good news is that the government actually pays us interest on those deferred payments.

So, there was a significant chunk of interest that came in with that payment. Now that we have delivered on all the milestones, the deferred payments are pretty much taken care of, and at this point it's we're kind of into the normal quarterly role forward of that contract. So we shouldn't see any big impact like we did this quarter going forward.

Okay. Just a second question on. You said your goal was to double the number CPOE sites you have, I believe it was 65 in '04. Can you provide any clarity on what percentage you have already contracted so far of that 65 that you plan to get live in '05?

Excuse me this is Paul Black all of those are under contract and in process.

All right, that's great, thank you.

Your next question comes from Jim Kumpel of Friedman Billings. Please proceed Sir.

Hi, this is Jim Kumpel. I just wanted to ask if you could highlight the grid strategy a little bit and offer up some sort of timelines on the different segments, particularly in getting the number of physicians up to 100,000. It seems like a pretty aggressive goal.

Jim this is Trace Devanny, the grid strategy is real today for Cerner. We're aggressively pursuing a number of opportunities across all 4 of the segments that I described. We're heartened by the President's raising of the visibility relative to RIOs, for example.

We clearly believe that is the juvenile diabetes program is very consistent with the approach of Dr. Brailers discussion regarding electronic medical records across all of America. We're very excited about VitalWorks acquisition. We believe the physician community is the key to fixing much of what's wrong with health care. We're very, very pleased with all the initiative we find that are underway.

We're expecting to have hopefully 100,000 physicians booked by the end of this decade. So, we have -- an additional 100,000 I should say, we have a very substantial number that we enjoy today. Very aggressively pursuing the physician market across all fronts.

Does this reflect then on what we should be expecting on the sales and marketing front or the product development front? Or is it sort of you know, an extension of the existing trend line that we've seeing for the past couple of years?

You will see a more aggressive intellectual property development focus from Cerner. You'll see much more aggressive sales focus from Cerner. And you'll find our competitors to only be more intense going forward and beginning with 2005.

Jim this is Marc. From a relative -- from a spending standpoint on R&D (ph). The good news is that we're at a stage in our development that we can carve off part of the 15,000 persons development organization and have them goal focus on these new initiatives without significantly increasing our R&D spending.

So, the actual work to go extend the Millenium platform here is part technology and part solution in application. But you won't see us -- we're going to pursue these initiatives without significant jumps in our R&D investment.

That's reassuring.

Yes, it's all within the existing business model as we continue to take our basic Millennium platform --

Right.

Extended into new markets. That's the leverage that we've develop in this business model.

Hey Marc this is Neal. I might add, too, that we're going to cover this in more detail at HIMSS, but we're also going to change the business model in really all of these areas too. So -- which we think is going to get quite a bit of traction there or so. There is some strategies we're taking there. We wanted to get the structural change out to you all now, and then we'll talk much more about it at HIMSS.

Thank you. I guess the final question for me is if you wouldn't mind is that you guys reduced the number of consultants by 11% year-over-year and I wanted to understand what was behind that and if we're expecting to see consultants flat this year up, down?

This is Neal, let me I'll do one piece of this and either Marc or Paul, you can pick it up. That's just basically the productivity gains that we got in that area that was all attrition for the most part, or reassignments for the company. We came out of 2003, the first quarter of 2003 and we faced the outline to see how you're going drive the margin expansion, which a key part of that was productivity. So you're just seeing productivity there.

Jim this is Paul Black. We also, in Q-1 of 2003 in the 1800 as I mentioned there compared to the Q-4 '04 of 1600. In the 1800's we had a bunch of overhead or staff that was not billable.

I see, Okay, thank you very much.

Your next question from Ryan Stewart from Piper Jaffray. We ask that you limit yourself to one question each. Thank you.

Sorry, may have to sneak two in. Trace, if you would not mind, just quickly, could you just talk about your payer strategy? I heard some interesting things relative to some work in the Medicaid space. But also from the transaction perspective when you talked about connectivity, you talked about a lot of the constituents but didn't mention payer.

That might have been left out unintentionally. Do you see an opportunity from the revenue cycle management with VitalWorks and everything else you have there to - one; do some interesting things on the connectivity side, you know, tying revenue circle, right into payers but then secondly some of the things that might be going on in the Medicaid space?

Ryan it's Neal. Let me grab the first couple parts of that. The short answer, Ryan, is certainly that the payer is part of a shift in strategy that I was referring to a second ago. And we'll go more deep -- in HIMSS. And then certainly from the revenue cycle, the inherent transaction is generated both in physician's office and in the hospital and the commerce around that transaction is another part of that shift in the business model. And which is all part of the grids services that Trace outlined.

Okay great and relative to payer that's something that has been in place prior to taking the clearinghouse business in from VitalWorks?

Short answer is yes.

Okay. And then just Paul, on the PAX front you got 4 new deals, 52 at the end of 2004 and you mention risk PAX. What do you see relative to 3-D and 4-D visualization? First off, congratulations on the COO.

This is Trace, Ryan. We were pleased with our PAX performance in 2004. The number that we indicated are 52 was a U.S. number. We also enjoy over 100 PAX sites in Europe. And the answer to your question about 3-D and 4-D capabilities, we clearly are moving in that direction, have some capabilities there today. But we intend to be a full boat (ph) supplier of D solutions across all of the imagining and image management requirement.

More of the billed strategy there than a partner? Perhaps a bit of a hybrid?

We ultimately we believe, as you heard us speak of our multimedia foundation of the images that come from cardiology, oncology, radiology, and all of the various clinical disciplines, those images must be available across the continuum of care. You will see that strategy play itself out across any care venue that has any type of image or waveform requirement.

Okay great, thanks a lot, guys.

Your next question from Sandy Draper of Draper Research.

Thank you very much. Just one quick question for Marc, and then a broader question maybe for Paul or Neal. Marc, I think you covered it in your comments of the spike in interest income. What led to so much higher interest income?

Basically there was a higher invested cash balance. The cash balance was very strong throughout the quarter this quarter. Interest rates, obviously, crept up. We're getting some good returns on that. And then really, a big piece was the choose and book contract where we received a fairly large deferred payment by contract they had to pay us interest on that payment.

And that's really the biggest piece of the delta. And once again, that was really relating to kind of getting stuff media mild stones that start the more regular payment stream on a quarterly basis from that. So that's the explanation for the differences. It's something you don't -- I don't expect to see that kind of bleb going forward.

Okay, great and then on a broader aspect, I don't know if you guys have seen the work coming out of the new, I think it is probably HIMSS Analytics and Mike Davis from Gardner just did a recent presentation. And one of things that left me scratching my head a little bit just based on what I have been hearing on seeing the marketing, certainly what you guys are talking about in terms of positive trends in growth.

They were suggesting from their survey that hospital IT budgets have not broadly increased. I just love to hear whoever wants to comment on that is do you think they're off. Do you think there is a reason that even budgets have an increase that you're seeing generally, you know, better performance from a lot of vendors and is there any way that you can reconcile what the HIMSS Analytics group is saying and versus what we were seeing a little bit in terms of results?

Sandy this is Paul. I have not seeing in detail the HIMSS Analytics presentation. So unfortunately I'm not able to comment on that in depth. What I can tell you is that the probably in the U.S. market place for sure the average client presently were in the last two or three years are clearly spending money on IT and they're increasing monies I think at an increasing rate given the fact that they need to either connect their internal organization or they are trying to get after a broad community basis to all of the constituents in that community. So I apologize I'm not completely familiar with that report. I'm not seeing a decrease in spend.

If I can make a quick comment, HIMSS Analytics presentation does show Cerner certainly having a very dominant position or certainly a dominant play in the CPOE space. In addition, one other dynamic is that you're seeing more spend on the clinical side of the spin ledger from these budgets as opposed to the historic spend on the financial side so, another reason why we are optimistic and bullish in our market place.

Sandy this is Marc. I go to (inaudible) my CFO meetings in health care and all the people I'm interacting with are all spending more money on IT and primarily clinical next year. I know when I meet with large investors, often times there's everyone is doing their own surveys and the majority of those surveys that I'm at least aware of are also pointing to more spend. So I'm not quite sure how the HIMSS survey says that it is going to be flat. That's the first I've heard of that data point in everything I have heard so far.

To get full cycle, I'll rotate in here too. I think and Trace hit at the - clearly the rotation of the spend felt from historically financial systems over into the clinical systems. So clinical side is where the money is being invested. But secondly, I think you were talking about a percent of the spend. The market is very broad right now. So many, many more people are in and buying and investing and putting in new platforms. So where in the past it was really more earlier adopters or you know, well healed organizations. So, its a very broad based set of activities out there right now.

Okay I appreciate the color thanks, guys.

The next question from Andrew Weinberger of Bear Stearns.

Hi, there are two quick questions one was you were briefly looking at the margin expansions expectations in 2005. It seems like the VitalWorks acquisition is going to hinder market expansion. At what point should we expect those revenues to make their way up towards the corporate average?

And then the second question with regard to -- it seems like your peers are continuing to have strong sales like you are the, but it seems you are foreshadowing some potential implementation problems they may soon run into. Am I hearing you right with regard to that?

Andy, this is Marc. Let me handle the VitalWorks part of that. We're not changing our ultimate end goal that in 2007 we'll deliver 20% operating margin, certainly our goal is for an annual number certainly at least for one of the quarters in that in 2007. I think what VitalWorks does is probably just changes that ramp a little bit. Our expectation in '06 is that that business will be contributing at something close to the corporate margin rights.

So we pretty quickly get back to that point. And keep in mind when you look at the guidance that we provide at this point, we're still looking at earnings growth over 25% and obviously the main reason for the VitalWorks impact is the non-cash amortization. So, we're still very pleased with that acquisition and it will have an impact a little bit in 2005, but we are not changing ultimate destination relative to 20% operating margins.

And then just a second part in terms of some of the implementation troubles you guys seem to have already passed. I mean do you think that sort of the cycle that some of your peers soon run into?

This is Paul. Some of our competitors have already announced that. We track pretty tightly every time we win, every time we lose. We know when we lost it, what day it was when the contract was signed and we go periodically back there because we have other solutions to go talk to that client about and we get pretty good detailed information about status. On average, they are taking longer than what we would have contracted for.

Great, thank you.

Your next question comes from Michael Baker of Raymond James.

I had a follow-up to the PAX discussion. I was wondering if you're beginning to see a change in the market where historically that decision largely resided within radiology and now it's moving to the C level, that's being CEO -CIO given the advancements in the underlying technology. And then secondly if you can give us some sense of your expectation for installs both domestic and international in 2005.

This is Trace Devanny. Relative to PAX, we feel good about our position. We have had not only great success in perfecting the solution, we're not done but we're perfecting the solution in 2004 and have great expectations for continued momentum in 2005. I don't know I want to predict what the number wills be. I don't think I'm able to do that. But I certainly believe we will continue to grow the business.

Relative to the interest and who's making the decisions about a PAX solution, it clearly has extended itself across the executive suite. And that's primarily because it affects a great deal more of the organization than just the radiology department. As you're familiar with, there's very few with the number of radiologists in a given organization is relatively small.

Yes there is cardiologist, there is general practitioners, there is women's health, ob-gyn, orthopedics, everyone they have a need or instant in reviewing films clearly now is weighing in across that decision process. We were very pleased to have our first site choose a Cerner's multimedia foundation capability in a non-Cerner site so as a stand-alone solution, that contract was signed in the fourth quarter. So, we're gaining traction, not only within our client organizations, but now beginning to see some good insights into non-Cerner footprints.

Thanks for that update.

Based on the time, let's take one more call.

Your last question comes from Bill Haus of Advest Inc.

Thank you. Guys, about the position in metro grid, a lot of the other players in the space are struggling with cost of implementations and the delivery of service levels. How will you go about developing it a differently and what you might be able to leverage the millennium.

This is Paul. As I mentioned earlier we expect that our consulting practices combine with intellectual properties, we are going to built systems that actually build in and install systems will give us a great advantage built on the leveraged ability of Millennium but also reducing the amount of time it takes to put the systems in, and reducing the amount of costs for the potential Clines to go and deploy them.

We're pretty confident that we can get something in the level that it's the typical 2 to 3 physician office practice can afford and they'll be very interested in this solution offering from us including its price.

Paul, what do you believe the current penetration of a clinical-type solution would be into the existing 130 or so physicians that you currently reach?

I think that most of them have a physician office-billing package. I think very few, less than what is typically thrown around on the CPOE market on the acute care side. Very few of them have a clinical data repository.

One last question, on the hiring environment and the skill set side, how are you guys looking going into this year and any challenge there is or turnover situations?

This is Paul again, from a turnover situation; the numbers are not any greater than -- substantially greater than they've been in the past. We have a lot of - very important pipelines built to bring people into the company. Marc can give you an update as to exactly how many people we plan to hire in 2005.

I could but I can't -- wont. But it is divisive to say that the access to human capital for us is certainly good. We have a very geared up HR. We do our own recruiting. We hit all of the campuses. Our goal is to bring basically a lot of new talent on the campuses and put them in our solutions factory on the Cerner campus, teach them Millennium in a controlled environment, while their actually doing billable work. It's effective and we are delivering on all of the recruiting targets.

If I can, you talked about expanding and enhancing solutions. I know you spoke about some success on ICU and cardiology, ontology and so forth. But can you give us an update on how those new areas are going, or at least enhancing those areas as the last one?

I think that -- I mean those areas are still not big contributors to the overall numbers. But I think they're very important proof statements because they actually -- you never know the decision maker is going to be in a health system. And sometimes it's the guy running the ICU. If you can get on basically be the system of choice for him, you can also be the system of choice across the clinical spectrum. So, it just gives us that one more benefit versus competitor that is you don't have the breadth of solution.

Another option, a point of leverage for our Millennium investment, very --those solutions becoming more and more important as Marc said. But we again, leverage our Millennium investment to gain access to those very important immerging markets.

Great, congratulations on a good quarter, and congratulations, Paul, take care.

Thank you. Thank you everyone for being on the call. Marc will be available for questions you might come up with as you look at our numbers. Thank you very much.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.