塞納 (CERN) 2005 Q1 法說會逐字稿

Welcome to Cerner Corporation's first quarter 2005 conference call. Today's date is April 21, 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 effect future results of operations, financial condition of business" in the management discussion and (inaudible) section of Cerner's form 10-K, together with other reports that are on file with the SEC.

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

Thank you, Christie. Good afternoon, everyone and welcome to the call. I will lead off today with a review of the numbers followed by sales and operational detail from Paul Black, Executive Vice President and Chief Operating Officer, and broad market observations from Trace Devanny, our President. Neal Patterson, our Chairman and CEO will be available for Q&A. Now, let me turn to the results.

We are extremely pleased with our results this quarter. Our new business bookings were Q1 record and our income statement and balance sheet continue to reflect strong performance and progress in all of our key financial initiatives. Starting with bookings, we delivered solid new business bookings that were above the high end of our guidance and a record level for Q1. Bookings revenue was 233.8 million, which is up 8% over Q1 '04. Bookings margin was 201.4 million for this quarter. Our total backlog increased 22% year-over-year and ended Q1 at 1.61 billion. Contract revenue backlog ended the quarter at 1.24 billion, which is 24% higher than the year ago. Support revenue backlog was 364.5 million.

Moving to the income statement, we delivered good revenue growth with a continued increase in more visible and recurring components. Total revenue in Q1 was 262.5 million, up 20% compared to the year ago period. Organic revenue growth was 12%, with VitalWorks contributing about 17 million in revenue, split fairly evenly between system sales and support maintenance and services. The revenue composition was 99.9 in system sales, 71.2 million in support and maintenance, 84.8 million in services, and 6.6 million in reimbursed travel.

System sales revenue grew 18% over the year ago quarter with a slightly higher hardware mix than a year ago. Services revenue grew 23% compared to the year ago quarter, grown mostly by organic growth and professional and managed service. Support and maintenance revenue grew 23% over the year ago quarter with about that have half that growth coming from VitalWorks support revenue. Our gross margin for the quarter was in line with our expectations at 78.9%, which is up 20 basis over the year ago quarter and 70 basis points over the December quarter.

Looking at spending. Our pro forma operating expenses for the quarter were 178.1 million, which is up 19% over a year ago. Total spending as a percent of revenue is down 60 basis points over Q1 of last year, driven largely by a decline in R&D as a percentage of revenue. We expect Q2 spending to be in the low $180 million range.

Moving to earnings, pro forma net earnings were 16.5 million in the first quarter compared to 12.3 million a year ago. EPS was $0.43 per share compared to $0.33 a year ago, reflecting growth of 30%. As noted in our press release, we did take a charge for in-process R&D related to the VitalWorks transaction. This charge was 3.9 million after tax, resulting in a 10% impact on GAAP EPS.

Turning to operating margins, we delivered solid improvements in our operating margin in Q1. The operating margin in Q1 was 11.1%, which is 80 basis points higher than Q1 of '04. As we indicated in our last call, our margin expansion will be slightly lower this year, as we integrate our VitalWorks acquisition and make investments in our grid services initiatives. We still expect to drive earnings growth of more than 20% this year, with margin expansion of 50 to 100 basis points, and we maintain our management target of 20% operating margins in 2007.

Our balance sheet remains strong. We ended the quarter with 126.7 million of cash and total debt of 152.6 million. The $63 million decline in cash was driven by the 100 million payment for VitalWorks, which is paid for mostly in cash as debt only increased 20 million during the quarter. Accounts receivable ended the quarter at 284.1 million, basically flat compared to last quarter. Contracts receivable, or the unbilled portion of receivables were 98 million, or 34% of total receivables. The unbilled portion is down from 37% a year ago and flat compared to last quarter.

I'm pleased to report that DSOs in Q1 were 99 days, this is five days lower than the last quarter and down 9 days compared to a year ago. We again delivered outstanding cash flow. We had record cash collections of 278.9 million in Q1 and operating cash flow was strong at 44.3 million. Third party financings were 21 million, or 7.5% of total cash collections.

Moving down the cash flow statement, Q1 capital expenditures were 13.1 million and capitalized software was 16.5 million. Total cash used by investing activities was 131.6 million, which includes the VitalWorks payment. Free cash flow, defined in operating cash flow less capital expenditures and capitalized software was very strong again at 14.7 million. Net cash provided by financing activities during the quarter was 24.8 million comprised of 5.5 million of proceeds from option exercises and 19.3 million of debt.

With respect to capitalized software, the 16.5 million of capitalized software in Q1 represents 30.7% of the 53.7 million of cash spent on development activities. Software amortization for the quarter was 12.1 million, resulting in net capitalization of 4.4 million, about 8% of the total and about equal to the 4.5 million net benefit in Q1 of '04. For the full year we expect operating cash flow of more than 180 million. We expect capital expenditures for 2005 to be in the 60 to $70 million range, which reflects expected spending on additional data center space and the expected exercise of an option to buy office space we are currently leasing for our managed services organization. We expect capitalized software to remain relatively flat for the duration of the year.

Moving to revenue and earnings guidance, looking at Q2 we expect revenue in the 265 to 270 million range. We expect Q2 EPS to be between 48 and $0.49 per share, which is nearly 30% over Q2 of last year. For bookings, we expect bookings revenue in Q2 of between 235 and 250 million. For the full year of 2005, we expect EPS to be between $2.10 and $2.14 per share, which is up from our prior range of $2.07 and $2.12. We expect full year 2005 revenue to be in the range of 1.09 billion and 1.11 billion, up from our prior range of 1.08 billion and 1.1 billion.

I would note that our guidance does not include any impact from the proposed requirement to expense stock options. We intend to wait until the final rule goes into effect, which now looks like it will be Q1 of 2006. As a point of reference, our FAS 123 estimated impact of stock option expense for Q1 '05 is approximately $0.05 per share, or about 12% of our pro forma EPS. This is a level we believe compares favorably to the other technology companies.

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

Thanks, Marc. I will start by covering our sales and operational results and make some comments on the competitive environment. Q1 was a good start to the year from a sales perspective and strong performance across a broad range of solutions and segments. Here are some of the highlights.

We continue to have a broad range of success across our solution categories with strong contributions from access management, outcomes measurement, patient accounting, CPOE, perioperative, laboratory, and radiology. We had another strong quarter in our managed services business, which, again, represented about 20% of bookings. We signed 241 contracts in the first quarter, an increase of 17% compared to a year ago. We also had a good mix of larger contracts in Q1, with 7 over $5 million, 5 of which were over $10 million.

We, again had solid bookings outside of our install base with 25% of our contract bookings coming from new clients. Which we believe remains higher than any of our competitors. Our leading indicators also are strong. We experienced a record level of new RPs in Q1 and the activity in our vision center was also at record levels for Q 1.

Turning to operational results, Cerner had another solid quarter on the operational side of the business. During the first quarter we turned on 175 millennium applications, this brings our total count to nearly 4,000 live millennium applications at 780 facilities and further widens the gap between Cerner and our competitors. Our goal lies, again, included (inaudible) progress, bringing clients live on CPOE, Cerner now has nearly 400 live CPOE locations. We continue to make great progress at implementing CPOE at acute care sites, bringing 9 more live in Q1, which gets us to 74 live acute care sites. Cerner easily has a largest number of live sites on a currently marketed platform with more than 50% share among the top seven suppliers based on a January 2005 Hems Analytics Data.

In addition, the recently released 2005 Class C POE digest rated Cerner highly for its depth of CPOE functionality. Cerner received the highest scores in the comprehensive value proposition analysis, which is based on physician buy-in, depth of CPOE, use and patient safety capabilities. The digest also showed that Cerner Millennium has the most acute care sites for more than 50% of physicians are using CPOE and the most hospitals with more than 50% of orders entered by physicians.

While on the topic of CPOE, I would like to comment on the study that was published in the March 2000 journal of the American Medical Association, or JAMA. This study suggested that CPOE systems can facilitate medical errors. The disturbing thing about this study was that it was based on research conducted at only one institution using only one system. This system was one of our competitors' CPOE systems and had a separate pharmacy system connected to it via an interface.

The study gave further proof to a point we have been making at Cerner for decades. Healthcare requires a common architecture and intelligent design to automate and approve its core processes. In a case like the one examined in the JAMA article, desperate systems are interfaced, attempting to create a single work flow between departments and likewise attempting to create a common shared data from multiple points or origination. Healthcare is simply too complex. The interfaced approach is awkward and unsafe.

That is why our pharmacy, CPOE and nursing work flows emerge from and feed into the same common architecture, the same electronic medical record, all of these work flows have a single source of truth for allergies and drug nomenclature and nothing gets lost in the translation between two different classification systems. The same order details are seen by all clinicians as their work flows and their process process models demand. The orders are not translated between different databases. Because data is not interfaced, changes made by one clinician are seen in real time by all other clinicians. This is a critical element to insuring safety. We believe this approach is the only way to safely meet healthcare's complex requirements.

Now I'll comment on Cerner's professional services business. We continue to make progress at improving our productivity and profitability of our consulting organization with a strong year-over-year increase in services operating margins. As we have discussed, a key to our significant improvement in our services organization is the maturity and improved quality of our intellectual property. We now have more predictability in consulting, which makes a big difference on our ability to efficiently get projects done and deliver our value to clients.

We are also continuing to focus on improving our delivery approaches and driving more projects to the accelerated solutions center, or ASC. The ASC is Cerner's evidence-based rapid delivery model that benefits both Cerner and the client by providing predictability around implementation time lines, functionality delivered and overall costs. This approach is both more cost effective for our clients and more profitable for Cerner. It is a competitive advantage for Cerner.

As we have discussed, we are also working on an initiative we call Bedrock, that is a system that will fundamentally change the way we implement and operate millennium. Simply put, we are building a layer of technology to build and manage our Cerner Millennium information platform. We anticipate that the Bedrock system will reduce the labor costs of implementing our systems by as much as 50%. This approach has a potential to reduce implementation times to less than six months for typical hospital, and to a much shorter timeframe for physician offices. This substantive and change for our clients will change both Cerner and our industry. We have already tested portions of our Bedrock system with alpha clients and are very pleased with the results.

In summary, I'm extremely pleased with Cerner's strong start to 2005 and we feel good about the things we expect to do for the rest of this year.

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

Thank you, Paul. Good afternoon, everyone. Today I will provide some broad market observations and give an update on our strategic initiatives.

The opportunity in healthcare IP marketplace remain significant. Healthcare remains the largest single component of the United States economy. Many states are now spending more dollars on healthcare than they are in education. Yet they must balance their budgets, forcing tough decisions in each state capitol. The hard demographic facts have not changed either. The baby boomers have not yet hit the system with full force, and when they do, the system may not be ready. In short, healthcare remains in crisis.

Because something must give if this trend is not changed, healthcare information technology, or HIT, is entering the realm of healthcare policy. Federal and state governments are looking for a relief valve and we believe HIT is the answer. There is broad bipartisan support for making fundamental changes to how the healthcare systems works that extends from Hillary Clinton to Newt Gingrich.

Federal Reserve Chairman, Allan Greenspan, recently chimed in during testimony before the U.S. house budget committee where his comments demonstrated a remarkable insight of the potential of HIT. In his comments he stated, And important efforts are under way to use the capabilities of information technology to improve the healthcare system. If support and promoted, these efforts could provide key insights into clinical best practices and substantially reduce administrative costs. And, with time, we should also gain valuable knowledge about the best approaches to restraining the growth of overall healthcare spending.

Given this expanding focus on HIT, there is an increasing likelihood that both Washington and the states will increase incentives for healthcare providers to invest in digitizing hospitals and physician practices. We believe that they will use their role as purchasers of healthcare to create these incentives and we are helping create the business case that can prove the value of these incentives.

As we have mentioned in previous calls, Cerner formed a coalition with General Electric, Hewlett-Packard, Xerox and Johnson & Johnson in 2002. This coalition sponsored the Ran Corporation creation of an econometric model that demonstrates the impact that widespread IT adoption could have on U.S. healthcare expenditures. Results of this study should be published in a high quality peer review journal soon. And, we believe this study should, and will, get the attention of policy makers in Washington.

On the world stage, governments with centralized forms of healthcare delivery are increasingly reaching for HIT as the tool for necessary transformation. The boldest example of this is great Britain's Connecting For Health initiative. As you know, Cerner was selected, along with consulting firm Atos Origin for the national appointment booking program known as Choose and Book. We continue to successfully deliver on time and on budget against this important project. We have also continued to deliver value to Newham and Homerton two large trusts in London. We believe this successful execution positions us very well for future opportunities, both in the United Kingdom and around the world.

As our industry gets more attention from state and national governments, more companies will look for ways to participate in our sector. The competition is always fierce. From the largest big caps, to the acquisition-based rollouts, to the truly entrapreneural companies, we are not lacking competition. However, we feel good about our ability to expand our competatives going forward, and we plan to continue leading, not following. One of the best measures of our ongoing competitiveness is that we continue to generate about a quarter of our contract bookings from new clients in Q1.

Now, I would like to comment on some of Cerner's strategic initiatives and recent innovations. One innovation we discussed previously is our Lighthouse solution. The foundation for Lighthouse is our easily accessible and properly designed electronic medical record database that enables complete transparency and provides the light house to illuminate the critical facts among a sea of data. Lighthouse uses this data to help clients optimize clinical processes and enables changes in physician and nursing behavior that will not only save money, but improve care. This solution will dramatically impact the waste, duplicity and variance in healthcare process. This approach has been well received by chief executive officers, chief medical officers and chief financial officers.

Another area of innovation I would like to comment on is our work in supporting the scientific advancements around the sequencing of the human genome. It is strongly believed this sequencing will unlock future discoveries in clinical medicine for generations to come and lead to fundamental changes in how clinical medicine is delivered. With the introduction of millenium helix in 2004, Cerner was the first company in the world to deliver a solution with the ability to store, represent, and manipulate the data representation of personal general gnomic information. We did this by extending our proven memorandum architecture that today manages the clinical and phenotypic information of millions of people.

I also want to provide some more information about our grid services organization that we announced in our last call. There is an increasing awareness of the need to create community-based longitudinal medical records connecting all the pieces of a person's record into a coherent, logical data set that can be used to coordinate care for an entire lifetime. Cerner is leading these efforts by providing a set of innovative solutions in our grid services organization. Our goal is to connect hospitals, physician's offices, clinics, pharmacies, laboratories and homes to a common and secure architecture. In 2004, we made meaningful progress towards laying the foundation for this organization.

The four grids include:

The condition's grid service. In October 2004, Cerner announced our pledge to provide every child in the United States with juvenile diabetes a personal health record and a secure connection to their physicians. Within 100 days of the announcement, the majority of pediatric endocrinologist in the United States have agreed to be a part of the first ever national personal health record network. This service is being provided free to the families and their physicians through 2015. We are very excited about the impact we'll have on the lives of these children, leveraging technology to better manage their affliction. We believe that this system of care will represent a future model for managing chronic conditions.

The second grid is regional grid services. We believe there is an urgent need to coordinate care for entire populations of people across large geographic areas. Dr. David Brailler calls entities to do this, Regional Health Information Organizations, or RHIO's. Cerner was already implementing a statewide version of this concept even before the RHIO strategy was announced, leveraging our millenium architecture. Working in a progressive, public, private partnership with a major commercial payer and a state government, we've built and are deploying an electronic community health record that could potentially reach 1 million lives.

This creation of an electronic community health record is expected to improve the coordination of care and save both the payer and the state a significant amount of money. Through the elimination of redundant diagnostic procedures, the elimination of medically unnecessary diagnostic procedures and treatments, the prevention of costly medical errors that harm individuals and add costs to the system, the detection of fraud and abuse and the reduction of emergency department admissions. Look forward to more details on this initiative in the near future.

The third grid is the physician grid service. The majority of the doctors in the United States are in a small physician practice with ten or fewer doctors in the practice. We (indiscernible) our footprint into smaller physician practices with the VitalWorks Medical Division acquisition that closed at the beginning of this year. Our vision for small physician practices is to create a highly scalable, next generation digital practice and to become the low cost, high valued service provider to the U.S. physician practice market.

The fourth and final grid is grid -- transaction grid services. There's a middle layer in healthcare who's core function is the pricing and paying of claims. The ultimate payer for healthcare remains the employer, their employees and the government. Today most large employers self insure their population, yet they still must absorb significant administrative costs. There is a lot of inefficiency or friction in this middle layer that contributes to administrative costs, consuming nearly a third of every dollar spent on healthcare in the United States. Cerner is working to improve the current method of payments and remove this friction from the process. We will do so by entering electronic data interchange business while continuing to work on new innovations and methods of payments.

Now, to close, I would like to reiterate that we're very pleased with Cerner's performance in the first quarter. And we're very encouraged by the outlook for our company and the healthcare information technology industry.

With that, I'd like to turn the call over to the operator for Q&A.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered, or you wish to withdraw your question, press star followed by two. Press star-one to begin. Please stand by for your first question.

And your first question comes from Steve Halper of Thomas Weisel Partners. Please proceed.

Hi. Trace, you reference the EDI business just now. Do you plan on building that capability yourself, or acquiring some capabilities outside in the marketplace?

Hi, Steve. We actually have some of that capability that we acquired through the VitalWorks Medical Division acquisition, and we will continue to augment the efforts that they began to fill out our solution.

And do they have substantive back end connectivity or do they rely on a third party?

Today -- this is Marc. Today they currently rely on third parties primarily, but we are very pleased with the level of knowledge and skill sets that those associates have and we think it's -- we're able to rely on them to start building out that capability internally.

Okay, and just on the day sales, and then I'll go. Marc, could you tell us why day sales were declined, below 100 days?

Strong cash collections clearly, we are focused on getting DSOs down. That means collecting cash. That means getting contract terms that get cash in the door faster, particularly relative to license sales. We had over 95% of our payment terms for license sales were date-based again this quarter. So, it's really a management technique. We centralized our cash management teams within finance and that and projects are going well.

And you would say you're getting better terms.

We're getting better terms. When software works, you can get good payment terms and we're seeing that, seeing that come true for us.

Great. Thanks.

And your next question comes from Sean Wieland of Piper Jaffray. Please proceed.

Hi, guys. Can you -- I want to go into a little bit more details on the VitalWorks acquisition and the progress on the integration of that acquisition. Could you possibly quantify the opportunity that this new strategy brings, and are you just going to be sticking to the small practice market, or -- and do you see it as an opportunity drive sales in the hospital environment, just add a little more detail there. Thanks.

Sean, we've had, as you know, we've had the capability to manage large physician practices for many years and have done so very successfully in the market. As we indicated when had we made the VitalWorks acquisition, we believe physician connectivity is a very important to the success of digitizing hospitals and automating and digitizing physician practices around the country and frankly around the world. So, we believe the VitalWorks acquisition will give us a huge presence in the lower end of the physician practice marketplace. It will augment very nicely where we've been very strong over the years in the larger clinics, and of course, the provider environment so. So, we like that market a lot. We intend to be the player in that arena and will continue to work hard to make sure that our connectivity amongst physicians is the best in the marketplace.

So, there's no, no change at this point in the existing, in your existing ambulatory strategy with the Power Chart, right?

No. We continue to -- VitalWorks will augment at the low end of the marketplace our already successful efforts around Power Chart Office. So, we're continuing to push on all cylinders, and this will only make us get there -- allow to us get there quicker.

Got it. Great, thanks.

And your next question comes from Michael Baker of Raymond James. Please proceed.

Yeah, just a couple questions. First off, just your general views of Accenture's purchase of Cap Gemini's North American operations, do you anticipate any disruptions in implementations and maybe just a general sense of business levels with each company?

This is Paul Black. I wouldn't expect any disruption there that the folks that we've been working with from Cap Gemini. We have a good relationship with them and I wouldn't expect that to change anything in the North America marketplace.

Okay. Can you update us where you stand in terms of number of feet on the street as it relates to sales force?

This is Marc. We have a practice of not disclosing the number of feet on the street that we have for competitive reasons. We've been pretty consistent with that over the years. And so unfortunately, I won't let Paul talk about that on the phone.

Okay. Thanks a lot .

And your next question comes from Anthony Vendetti of Maxim group. Please proceed.

Thanks. Can you talk a little bit more about the details surrounding the Bedrock initiative, and, the, how exactly that would reduce the implementation time? And, Marc, if you could talk a little bit about how that's factored into your guidance or not factored in, is that upside of the new guidance that you issue today.

This is Paul. The Bedrock initiative has been something we've been working on now, we've been talking about for quite a while. It's a, if you will, a computer system that actually builds and does a lot of the database builds for the implementation which they require humans to do that. So it is, there is another, if you will, big turn with regard to productivity that we can expect out of the amount of time it takes ourselves and our clients in order to deploy our system.

So we're, again, as I said on the call, pleased with that progress and the early returns from some of our Alpha initiatives have been pleasing in that they are in line with what we expected, the productivity yield, and that will have pretty interesting impact for us on some of our very large clients that are taking millennium out to multiple sites over today, which is a longer period of time and measured in years, we would expect to bring that down substantially.

Is this similar to GE Six Sigma initiative, something similar, is that -- ?

Actually not really. That's more of a consulting approach. This is a computer system, if you will, that builds our system to deploy it in a more expeditious manner. We will use best practices, and we will use knowledge that we have from other sites where we have done early learning and continued learning on -- still got some closed loop quality context to it, not just dissimilar to Six Sigma, but the Six Sigma worked that I've seen, is important in good work, but it's usually performed by people and process improvement versus this is actual computerization and automating the processes that are in place today.

Anthony, as far as the guidance impact, we've been pretty clear that for 2005, we're really not assuming any benefit from the Bedrock initiatives.

Okay.

Still rolling out. We're -- early returns are good, but for it to get to the level of adoption that it will have an impact, right now we're expecting that really to be an '06 impact.

Okay. Great. Thanks.

And your next question comes from Andrew Weinberger of Bear Stearns. Please proceed.

Yeah, could you just give us a little more color around the core business excluding VitalWorks, just trying to track margin improvement in the core business, if you could strip out VitalWorks? And then a quick follow up.

Yes, Andy, I think the tall level, at least at the revenue level, we indicated that VitalWorks had about $17 million contribution to the revenue. So, I think if you look at overall revenue growth, we still had strong --

well, I was more focused on the margin.

If you're looking at all the way down to the net, to the pre-tax earnings line, VitalWorks, basically,y delivered to plan this quarter, which was to deliver slightly accretive earnings, that would have offset some of our grid spending initiatives. So, they didn't contribute much to the bottom line, which was our expectation. So, hence you see relative to operating margins, the lower, slightly lower operating margins that we predicted as we talked to analysts relative to announcing the VitalWorks transition.

Okay, and does VitalWorks, did they add any bookings in the quarter?

I think the total bookings for VitalWorks that we had in our original guidance was about 8 million and that's what they delivered during the quarter.

All right. I guess the core book to bill is kind of slightly below last year at about the 1.35% level. and, it looks like you guided bookings of 4% or so at the high end. Is it really what you see the core business growing at about 4%? And then there's a couple big, kind of monster deals out there and you hope to get one or two of those a year to kind of get that overall yearly book to bill up above, or at the 1.4 level or so?

Andy, I think our-- the concept, when we give booking guidance for us is to give our best conservative view of what we think bookings in the next quarter will be. The reality is that we usually-- bookings are either in our range or over that range, as they were this quarter, so there's usually more likelihood of an upside surprise. The businesses out there, the market is still hot. So, I think the one to three book to bill, I think you could expect to see higher than that levels going forward, and once again, bookings will be based on whatever contracts we get in the quarter. This is our best view today on a conservative basis.

Okay. Perfect, great.

And your next question comes from Andy Draper of Draper Research. Please proceed.

Thank you very much. Marc, a question on the expense level. If I remember correctly, when you gave guidance for the first quarter, you were looking for, I think, it was low 70s, not a lot higher, a little bit higher. Was there anything specific that surprised you, in terms of some higher expenses? And then just I think you said low 180s for the second quarter. Trending out, is there any one place that you think is doing better relative to your plan or not as well?

I think, Andy, relative to trending out, obviously going from 178 to the low 180s is a nominal increase in spending. We hit the normal Q1 impact of restarting payroll taxes, all the things that hit us and bump up Q1 spending. I think we had a little bit more spending, probably, in the VitalWorks acquisition than we expected. So, I think those were probably the difference between our original guidance and what we ended up with. We also had higher numbers on the revenue side than we were expecting, too, obviously, driving out the somewhat above guidance net earnings.

But there shouldn't be anything unusual in the spending as you look to trend it out going forward. We're pretty-- now we've got VitalWorks integrated into Cerner, I think you'll see the similar trends that we've been able to track in the past.

Okay. Great. Thanks.

And your next question comes from Lisa Gill of J.P. Morgan. Please proceed.

Thanks. Actually, it's Atif Rahim for Lisa Gill. Had a question on your managed services booking. Could you provide any granularity there as to the percentage of manage service bookings this quarter, to the bookings, as well as the revenues contribution?

The-- I'm not sure that I've got the revenues side contributions, but I think if you're looking at it, it's about 20% of bookings with what managed services booked, and that's pretty consistent with what we've seen to contribute recently.

Okay. All right. And the revenue number, you don't have that?

I don't have it in front of me, Atif. It's probably -- it's not a big number at this point. I would guess it's between 15 and 20 million.

Okay. Thanks.

And your next question comes from James Kumpel of Friedman, Billings, Ramsey. Please proceed.

Hi, good afternoon. Paul, can you talk a little bit about the different product lines in terms of traction uptake. You guys announced, in a very timely way, a nice uptake of your lab system at Long Island Jewish earlier this year. I wanted to sort of get a sense of the relative contributions labs and ProFit and PAX and CPOE and the rest of it.

Relative contribution, as I said in my comments, access management, which is our registration scheduling of those applications still are doing well on stand-alone basis and also going back in and cross-selling to existing clients that might have started out four or five years ago with a lab radiology, pharmacy (inaudible) system or something like that. Our average client today has billed, oh, only five of our applications and up and running. So there's still lots of opportunity, which you'll see us in every single quarter work on cross-selling additional applications and that's the-- been a very good strategy for us. Again, the ones that are in there, people are pleased with, happy to see us come back and they give us an opportunity to go back and cross-sell.

Laboratory business, had another record quarter. So, that, every time I talk to you folks in the last four or five quarters, it's been very solid. So, laboratory information systems for us has been a -- continues to be a very strong piece of business just on a standalone basis, so that is-- we continue to be extraordinarily pleased with that. The Hewlett component that Marc, I mean Trace talked about is (inaudible) and interesting to those folks. But, just a solid quarter over quarter basis for standalone clinical information systems. (inaudible) the breadth and depth that we offer. Depends on what kind of (inaudible) you're looking at is a Hallmark of our ability to produce consistent results that we do produce.

Okay, and can you talk a little bit about whether or not that CPOE article at that one site regarding TDS, Eclipse TDS system, whether that's actually changed kind of the tone of the selling experience of your clinical systems and whether or not that's given you any kind of a leg up, at least within the quarter?

It didn't give us necessarily -- it didn't change our tone. As I said in my comments, pretty much made our, the point we've been trying to make for a long time is that these systems have to be architected, they have to be built, have to be conceived and they have to be operated by people that have been doing this for quite a while that have the (inaudible) administration process in their mind when they built these systems, something that we've been talking about for a very long period of time.

Our first pharmacy system was deployed in 1986. So this is something we've been discuss fog a long point, period of time. We've talked (indiscernible) about the fact that we've actually lost business in the past because we've been relatively fervent on the point that if you're going do closed loop at the administration process, which is the core of what a clinical physician order entry system is, you have to have pharmacy. And the absence of that will create lower adoption, or in this case, this article talks about it actually you can generate errors. That's not something that we're seeing with our systems.

I guess finally, as it relates to the UK, obviously there's been a number of headlines about the progress of implementations and delays for all sorts of systems, including bookings, as well as all the LSP systems. Can you talk a little bit about your interactions with Granger, and that group there, and what the likelihood is that you see of some of those clinical systems implementations maybe loosening up for sort of a revisit for potential of you guys getting involved?

Yeah, this is Marc. I think the, probably our statements relative to that would be limited to indicate that we're very pleased with our performance on choosing books system, that we've met all the proofs of solution milestones and so we're very happy with that. Paul mentioned the Newham and Homerton, or Trace might have, successes we've had and so we like our performance in the UK. We believe we're well established for any future opportunities, but beyond that, we're-- we probably won't comment.

Fair enough. Thank you very much.

And your next question comes from Duane Pfennigwerth of Raymond James. Please proceed.

Thank you. Can you talk about any plans you might have to enter the small hospital market and timing around that? And secondly, what areas you might look to acquire into? Thanks.

Yes, Duane, it's Marc. Could you define the small, how small do you mean?

I guess less than 200 beds.

This is Paul. We have-- we've been in that marketplace for a long period of time. We sell standalone laboratory radiology pharmacy systems into that marketplace and have for a long period of time. Four or five years ago, we came up with a specific package for the small hospital, which, in that package included a set of financing and approach to the deployment of and the packaging around solution sets that that marketplace we felt was attracted by. And that has actually been an extraordinarily important piece of our growth over the course of the last four to five years. So, we have done quite well in the small and medium hospital marketplace.

The other thing that we do that many of the other folks in the space don't do, which distinguishing us there, is that we will also operate that system through our remote posting capabilities back here in Kansas City. So, we feel quite good about our approach to that marketplace, and the marketplace has responded in kind by awarding us with a substantial number of contracts over the course of the last four to five years there. So that's an important piece, Duane, of what we do.

Okay. Great. Thanks. And in terms of acquisitions, it might look interesting to you at this juncture?

We probably wouldn't share that with anybody at this time. But thanks for asking.

Okay. Thanks.

At this time, I appreciate everybody calling in. We'll go ahead and close the call, and once again, if you've got additional questions, feel free to call Allan Kells, Director of IR, or myself at Cerner. Thanks for your time.