塞納 (CERN) 2006 Q1 法說會逐字稿

Welcome to the Cerner Corporation's First Quarter 2006 Conference Call. Today's date is April 20th 2006, and this call is being recorded.

The Company has asked me to remind you that various remarks made here today by Cerner's management about future expectations, plans, perspectives and prospects constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Securities and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading, "Factors That May Affect Future Results of Operations, Financial Condition or Business" in the "Management Discussion and Analysis" 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. Please proceed.

Thank you, Shamika. Good afternoon everyone. 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. Trace Devanny, our President, will follow Paul with a discussion of strategic initiatives and our global business. Neal Patterson, our Chairman and CEO, is attending a client event today.

Now, I will turn to the results. Results were strong across the board in Q1 and for the year 2005. Our new business bookings were another all-time record, and our income statement and balance sheet also reflected a very strong performance.

Starting with bookings, we had a solid booking quarter with total bookings revenue of $262.0 million, an increase of 12%. Bookings margin was up 15% to $231.8 million. We had no bookings related to the UK's Southern Cluster project in Q1.

Moving to backlog. Our total backlog increased 36% year-over-year and ended the quarter at 2.18 billion. Contract revenue backlog ended the quarter at 1.75 billion, which is 41% higher than the year ago quarter. Support revenue backlog was 430.5 million.

Moving to the income statement. We delivered very strong revenue growth in Q1. Total revenue in Q1 was 321.2 million, up 22% compared to the year ago period. The revenue composition was 116.8 million in systems sales; 80.3 million in support and maintenance; 115.3 million in services; and 8.8 million in reimbursed travel.

Systems sales revenue grew 17% over the year ago quarter, driven by solid growth of software, hardware and sub-licensed software. Services revenues grew 36% compared to the year ago quarter with the primary driver being an increase in consultants during the second half of 2005 that became fully billable this year. Support and maintenance revenue grew 13% over the year ago quarter.

Our gross margin for the quarter was 78.8%, which is especially flat compared to a year ago and up 160 basis points from Q4 '05. This sequential increase in gross margin reflects improved margins on the hardware component and systems sales when compared to Q4 '05.

Our operating expenses before option expense in Q1 were 216.5 million, which is up 22% over a year ago. The increase in total spending was driven by growth in our services organization and an increase in global spending related to our UK activities. Total spending as a percent of revenue is down 40 basis points compared to Q1 of last year, driven by services efficiencies and R&D leverage.

Moving to earnings. Net earnings before option expense were 23.1 million in the first quarter, which is up 40% compared to 16.5 million a year ago. Diluted EPS prior to options expense was $0.28 per share compared to $0.21 a year ago, a 33% increase.

Note that other income increased by 1.8 million as compared to Q4 '05. This increase primarily resulted from the renegotiation in Q1 of a supplier contract that eliminated certain minimum volume requirements and reduced a liability related to future commitments due that supplier. Excluding the other income item -- other income related to this item, our Q1 diluted EPS prior to options expense would have been $0.27 or 29% higher than a year ago.

Operating margins in Q1 was 11.4%, which is 30 basis points higher than the 11.1% operating margin in the year ago quarter. This quarter, our operating margin was impacted by about 50 basis points due to approximately 12 million of zero margin revenue from the UK Southern Cluster contract.

Therefore, our operating margin was up 80 basis points on apples to apples basis. This level of margin expansion is in the range of what we expected and we continue to target 20% operating margins by 2008, excluding UK's Southern Cluster contract revenue, with a management stretch goal of achieving that level as a run rate by the end of 2007.

Now, I'll move on to our balance sheet, which remains strong. We ended the quarter with $279 million of cash and short-term investments. Total debt ended the quarter at 220 million. Accounts receivable ended the quarter at $320 million, which is up $3 million compared to last quarter. Contracts receivable or the unbilled portion of receivables were 108 million or 34% of total receivables, which is comparable to the first quarter of last year.

Total deferred revenue increased 10 million sequentially to 104 million. Our DSOs were 91 days in Q1, which is down 8 days compared to a year ago and up 2 days over last quarter. The strong year-over-year decline in DSO is driven by strong cash collections of $342 million. Third-party financings were about 6% of total cash collections, down from about 8% in Q4 and Q1 of last year.

Strong cash collections led to strong operating cash flow of 51 million. Q1 capital expenditures were 37 million including 16 million of property expenditures. Capitalized software for Q1 was 16 million. Total investing activities were approximately 66 million, which includes purchases of short-term investments.

Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was a negative 2 million. Free cash flow before property expenditures was 14 million. The property expenditures were primarily related to completing the expansion of our existing data center and beginning our new data center.

Net cash provided by financing activities during the quarter was approximately $6 million and consisted of 6 million of proceeds from option exercises, 3 million in tax benefits from option compensation and a 3 million reduction of debt.

Note that the 3 million in tax benefits from option compensation would previously have been recorded as operating cash flow prior to adoption of FAS 123(R). As a result, our operating cash flow would have been 54 million if accounted for in this manner similar to prior years. Note that we expect capital expenditures to flatten through the year, while operating cash flow increases, resulting in positive free cash flow for the rest of the year.

In total, we still expect 2006 capital expenditures to be flat to slightly lower than the 100 million we spent in 2005 before an additional 50 million for the new data center on our campus. We also continued to expect operating cash flow growth of approximately 10%, which should allow for solid free cash flow generation.

With respect to capitalized software, the 15.8 million of capitalized software in Q1 represents 25% of the 63 million of cash spent on development activities. Software amortization for the quarter was 10.8 million, resulting in a net capitalization of 5 million or 8% of the total.

You'll note that the amortization is down slightly sequentially, even though it typically increases in Q1. This is because we are moving from multiple releases of our software each year to a single annual release. So amortization won't increase until our next annual release, which is expected in the second half of 2006.

Previously, amortization was triggered at the beginning of the calendar year, because it was not materially different than starting it from the release dates for each of several software releases occurring during the year. Now that we are going to a single release each year, the increase in amortization will coincide with that release later this year.

Note that our 25% capitalization rate this quarter is 5% lower than the year ago quarter. If we had capitalized the same percent this quarter as in Q1 of 2005, we would have capitalized 3.5 million more in software development costs, which is greater than the amount that amortization would have increased.

Moving to revenue and earnings guidance. Looking at Q2, we expect revenue in the 320 to 330 million range. We would expect 2006 revenue to be in a range of 1.31 billion and 1.35 billion reflecting a mid-teens growth rate. Our 2006 revenue guidance assumes approximately 50 million to 60 million of revenue and expense from the UK Southern Cluster contracts, yielding no net margin, as we have discussed.

The revenue from the UK Southern Cluster contract is expected to be split about 20% to Systems Sales, and 80% to support, maintenance and services, while expenses are expected to be split 80% to sales and client service and 20% to R&D. We expect Q2 EPS before options expense to be $0.31 to $0.32 per share. For the full year 2006, we expect EPS of $1.35 to $1.36 before options expense, which is $0.01 higher than our prior guidance and reflects 24% EPS growth.

Our estimate for options expense for the remainder of 2006 is approximately $0.04 per share each quarter, bringing Q2 to a range of $0.27 to $0.28 and the full year to $1.19 to $1.20. The Q2 guidance is based on total spending of around 220 million and for bookings we expect bookings revenue in Q2 of 305 to 320 million, which reflects double-digit growth over Q2 of last year, which was a record bookings quarter.

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

Thanks Marc. Good afternoon, everyone. Q1 was a strong quarter from a sales perspective. Here are some highlights. We, again, had strong bookings contributions from both our U.S. and global businesses and across all business models. From a segment standpoint, we had strength across several segments including academic medical centers, community hospitals and integrated delivery networks.

We also had strong bookings from a wide range of solutions categories including computerized physician order entry or CPOE, RIS/PAC, emergency, pharmacy and physician office solutions. Our contract volume was very high in Q1 with a record 319 contracts. We continued to secure a good number of large relationships in Q1 with eight contracts over 5 million, three of which were over $10 million. Our mix of contract bookings from new Millennium clients was 29%. Our leading indicators, we continue to look strong as we head into 2006.

We experienced strong year-over-year increases in "request for information" -- in quotes. Our vision center visits and site visits were at record levels and our multi-billion dollar pipeline remains very strong.

On the competitive front, we continue to see an active competitive landscape that varies by market, segment and country. Based on our past experience in this industry, we believe recent major acquisitions will create market opportunities, at least in the short run. We also believe our industry will continue to attract all types of competitors, but the favorable market conditions are creating a rising tide capable of raising many boats.

Cerner has a clear market position in the marketplace as a thought and innovation leader with scalable and proven solutions across a continuum of care. In addition, our size is now an advantage with over $1 billion of revenue, more than 7,000 associates, including the largest HIT development and consulting organizations in the world.

Clients want to know that the company they choose to build on will be around for more than a few years. We demonstrated the proven nature of our solutions through our innovative approach to HIMS in February two months ago. Instead of having Cerner associates man our booth, we had 37 clients demonstrating a wide variety of Cerner solutions. These were not PowerPoint presentations. Our clients were connected to their home systems and are demonstrating real solutions.

This strategy paid off because not only did it create a buzz in the conference, it also energized our clients who were showing off their systems. In fact, we have a long list of clients who asked to be included in our booth next year. We believe this unique approach of letting our clients run our booth further differentiated Cerner in the marketplace, as a company with proven solutions and a wide range of clients deriving value from their IT investments.

A brief comment on how millennium scalability is a competitive advantage. We developed Cerner Millennium as a contemporary end tiered architecture designed around a person, not around a single organization. As the buyers of HIT continue to get bigger with governments contracting for business, the proven ability of Cerner Millennium architecture to run large enterprises and even countries is clearly a distinct competitive advantage. And Cerner is also scalable with the talent, resources and technology to take on any healthcare information technology job in the world.

Operationally, we also had a strong Q1. During the quarter, we turned on 303 millennium applications, a record for Q1. This brings our total count to over 5,100 live millenium applications at over 950 facilities. We also continue to make strong progress at bringing CPOE sites live. We ended the Q1 with 467 CPOE locations live including an industry leading 97 acute care sites.

The Accelerated Solution Center, or ASC, Cerner's rapid delivery model had another strong quarter. In Q1 '06, we did more than 25% of our total conversions using this model. In the quarter, the conversions using this approach averaged nearly 12 solutions per site compared to approximately five with a traditional conversion. We also continued to enhance our services abilities by making progress on Bedrock, our [wizard-like] technology that automates the implementation and management of our Cerner Millennium information platform.

Progress in Q1 included delivering functionality for our UK projects, releasing maintenance and upgrade wizards to support a broader set of client activities and continuing to expand the number of solutions that Bedrock can impact. We continue to be pleased with the impact Bedrock is having, for example, using Bedrock on our projects in the southern region of England enabled us to reduce the time it takes to do a major part of the database build for our SurgiNet solution from 40 hours per site to 3 hours per site.

We also continued to note a significant decline in service requests after go-live, which provides further evidence that Bedrock is enhancing the implementation experience for our clients. As we continue to expand the scope of Bedrock throughout this year, we believe it will become a competitive advantage for Cerner because of our ability to further reduce our clients' total cost of ownership.

Another key element of our strong operational performance is our CernerWorks Managed Services Business. With CernerWorks, we are reducing the total cost of ownership for our clients while improving system reliability, availability and performance. In Q1 '06, our CernerWorks clients experienced overall system uptime of greater than 99.9% with the majority experiencing 100% uptime. This is a competitive advantage for Cerner.

In addition to continually improving our ability to run our data center, we are also getting good at bringing new clients live and converting existing clients from using their own data centers to using ours. For example, in Q1, we converted a major existing client with 1,400 staff beds, over $2 billion in gross annual revenues and 2,400 clinical systems -- clinical uses of our system. This client had previously hosted our solutions in their own data center but chose to have us host their Cerner Solutions because of our proven ability to provide greater reliability and performance at a lower cost.

This was our biggest conversion of an existing client and it was extremely seamless. Our ability to have near flawless conversions of major production client increases the attractiveness of our CernerWorks offerings and is a key reason we continue to have very strong demand for these services. To get a sense for the magnitude of our CernerWorks business, consider this. With over 4,000 servers, we manage over 1,400 terabytes of data for more than 160 clients that represent more than 33,000 beds and 35,000 concurrent users. This equates to running all the hospitals in the entire state of Ohio.

Financially, CernerWorks' revenue was $22.8 million in Q1 '06, which was 41% higher than Q1 '05 and on pace to be over $100 million for the year. CernerWorks also continues to drive strong contribution margin in excess of 20%.

In closing, I am very pleased with our sales and operational results in Q1 and look forward to a strong 2006.

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

Thank you, Paul. Good afternoon everyone. Today, I'm going to begin my remarks with a discussion of our global business.

While our first experience in the international market was in 1986, our global presence has accelerated in the past few years with revenue from outside the U.S. representing 10% of our revenue in 2005 compared to just 4% in 2002. We now have systems in use in 17 countries with offices in 13 countries. No other healthcare IT company has a comparable global presence. We like this position in today's environment which is an era in which healthcare IT is becoming healthcare policy, with federal governments promoting, and in many cases becoming the buyer, of clinically based systems.

In Australia, as we announced today, we were selected by the State of Victoria Department of Human Services as the statewide clinical information systems provider. This agreement will bring Cerner Millennium Solutions into hospitals all across Victoria, a state with 5 million people or about 25% of Australia's population. This selection builds on our already strong presence in Australia that includes providing the clinical solutions all across New South Wales, the country's most populous state.

In England, we are continuing to make progress as the software supplier for the Fujitsu consortium in the southern region of the National Health Services' connecting for health program. After a very rapid initial solution launch, we are focusing on delivering some additional reporting functionality that was requested by the program. We expect several additional go-lives by Q3 and Q4 of this year. Overall, we remain pleased with our progress and look forward to creating success stories for the connecting for health programs in the months to come.

We also continue to believe we are well positioned to participate in the increased levels of HIT activity that is occurring in other European countries. For example, France and Spain both have various countrywide and regional initiatives that should lead to procurements over the next 12 to 18 months, and we're working hard to successfully position ourselves in these markets. We also continue to see opportunities to expand our position in the Middle East and the Asia Pacific region.

In the United States, we continue to enjoy a strong HIT environment. The financial health of acute care hospitals remains solid with Moody's reporting in January that hospital upgrades beat downgrades in 2005 for the first time since 1997. Further, in USA Today reported in January, that profit margins reached a six-year high at an average of 5.2%. And S&P expects 2006 to be a stable year for hospitals overall.

In addition to the improving financial condition of our clients, proposed legislation that favors healthcare information technology continues to emerge. Just last week, U.S. Senator Sam Brownback of Kansas used Cerner as a backdrop to detail his vision for consumer-driven care. One of his core proposals is the Independent Health Record Bank Act of 2006. This legislation if passed would allow Americans to carry their electronic health records with them in debit card fashion, so any healthcare provider could access health records, plans and payment information at the point of service.

He also introduced the Medicare Payment Rate Disclosure Act which seeks to create transparency around medical costs. These two changes, coupled with health savings accounts, hold the promise to create a so-called shopping effect in health care for the first time. As an employer, we support Senator Brownback's legislation since we believe it can help reduce cost and improve safety for our associates. As a healthcare IT provider, we view this legislation positively because of the important role information technology will play in creating a national health record bank, while providing true transparency to the cost of care.

The better news, however, is that Senator Brownback is not alone. Almost 60 pieces of legislation have been introduced in this Congress on HIT. These bills propose facilitating HIT investments by offering incentives such as direct grants, favorable tax treatment, reduced Stark and anti-kickback rules, HIT loans and differential reimbursement. While it is unclear exactly how the legislative process will unfold in the months ahead, it is evident that there is strong bipartisan support for HIT initiatives in Washington. Moreover, as is typically the case, the significant number of bills being introduced is a leading indicator relative to future congressional actions on this issue.

One key area that can be impacted by the government's legislative focus on HIT is the physician office market. We believe we are nearing an inflection point that will accelerate adoption of EMRs inside physician practices. Physicians are dealing with an evolving care environment, which will require such capabilities as e-prescribing to handle the millions of new Part D patients with multi-tier formularies. In addition, EMR adoption should increase at the certification process by the Certification Commission for Healthcare Information Technology, or CCHIT, and the enactment of the recent Stark laws play out.

In 2005 Cerner made significant strides in advancing our strategy to provide low-cost, high-value services directly to the small, mid-size physician office markets. Most of these practices lack access to much of the capital and information technology expertise enjoyed by larger organizations. Therefore, Cerner is committed to bringing these organizations world-class solutions and services without the burden of investing in and managing the enabling technology platform.

Offering a large scale utility-like solution that makes use of a share operating environment allows us to lower cost and connect physicians with each other and the people they serve. And while it is early, we are very pleased with the level of interest we have seen in this offering so far in 2006.

Another strategic area for Cerner is our role in creating regional health information networks. One of the large systemic issues in healthcare is the need to coordinate care costs across all parts of our fragmented healthcare delivery system. As we have said many times, we believe that information technology will be a part of the solution to these issues. It is less clear by whom and how these solutions will be developed and delivered in the United States. Cerner has taken a thought leadership role in critical area.

In the state of Tennessee with our partners Shared Health, we have developed and implemented a community health record for each of the members of the statewide TennCare Medicaid program. Today nearly 1.1 million citizens of Tennessee have a community health record that is accessible by their personal physicians and emergency departments across the state. In addition, we expect more than 1.5 million citizens to have community health records available by the middle of 2006.

This may be the largest [re] of its type anywhere in the United States, the only one that has been accomplished in Tennessee. The state of Kansas just announced a similar program featuring a community health record for the state's Medicaid population in Wichita, Sedgwick County, all enabled by Cerner Millennium.

In addition to these state-based initiatives, Cerner has also facilitated the creation of its first of its kind employer driven approach to coordination in Kansas City. American Century Investments, Applebee's International, Sprint-Nextel and YRC Worldwide are among the private sector employers who have committed to join [Health-E Mid-America]. In doing so, they will provide their employees a portable personal health record that holds the promise of improving the quality and completeness of care they receive in venues across the Kansas City metropolitan area.

As you may remember from previous calls, Cerner has taken a leadership role through our national program to connect all children in the United States who have Type I diabetes with their physician caregivers. Today, we have implemented this offering with more than 40 participating healthcare organizations, who have, in turn, registered more than 6,000 children in the network. These numbers are growing every week.

While we are providing the service for free, we believe that this is an effective demonstration project for other condition based utilities and we consider this an emerging business model expansion opportunity. There is little doubt that information technology will play a significant role in solving challenges faced by people with chronic illness.

Before closing, I'd like to discuss our CareAware healthcare device initiatives we announced in February. As an electronic medical records become the single source of truth for providers, the context of almost all medical decisions will reside in the EMR. This same context drives almost all clinical processes, making the ability to seamlessly integrate the medical records -- excuse me -- the medical device and the EMR a critical need.

In our view, most healthcare devices in existence today are either too smart or too dumb to fit the capabilities of the rapidly evolving healthcare information infrastructure. Either they are over engineered and overly complex, or they lack -- or they are lacking adequate technology to take advantage of available clinical information. A new generation of healthcare devices is needed.

Cerner recognizes -- recognized this large and emerging opportunity and in less than one year design and manufactured the prototypes of a new line of medication dispensing devices called CareAware RxStations. Based on our CareAware device integration architecture, our introduction of the CareAware line at the recent [IMS] invention was a major success. Hundreds of people attended private demonstrations. Most of them who saw instantly understood the benefits and recognized that the Cerner Millennium EMR would be the single source of truth for the complex physician, pharmacist, nurse interaction that occurs during the medication process of ordering, dispensing and administration.

This process often includes multiple modifications and changes in order status, as clinicians interact to provide the best care for their patients. Because of this connection to Cerner Millennium, each CareAware RxStation device is at all times aware of the right person, drug, dose, route of administration and time for a medication order, as well as who is assigned to administer the medication. Our competitors' devices require a cumbersome workflow for the hospital staff and [dual means] of formulary information, a potential source of error and delay.

Thus, most clinicians who have seen the CareAware devices are enthusiastic about the potential impact on quality for their organizations. We're excited by the early interest in this -- in our first healthcare device. We'll be working with all the clients through 2006 with broader availability beginning in 2007. Initially, we will focus on over 150,000 -- over 150 plus millennium founded clients who can achieve the quickest benefit. Longer term, we expect to make them available to clients with other pharmacy systems.

In closing, we feel very good about Cerner's current position in the HIT market. Just as important, we are excited about the seeds we are planting now for our continued success as a leader in driving the future configuration of healthcare in the United States and around the world. We think the next 10 years will separate the HIT companies capable of investing wisely to solve tomorrow's needs from those who are here to meet today's needs only. It will separate those who produce results from those who cannot.

Cerner will continue our role of leveraging key strategies and innovation to create new solutions making healthcare delivery safer, more efficient and of the highest possible quality. With that I'll close and turn the call over to the operator for Q&A.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Atif Rahim of JP Morgan. Please proceed.

Hi. Thank you. Perhaps you can start off with the physician [inaudible - accent] of your subscription style offering. Could you just elaborate on perhaps on the how many doctor you have online at this time and what your goal is maybe by the end of 2006? And then, secondly, just on Bedrock, how many clients were using it online this quarter and again what do you expect that to go up to by the end of the year? Thank you.

Why don't I take -- this is Trace Devanny -- I'll take the first part of the question and defer part two to Paul. I thank you for the question and as I mentioned, we're very excited about the momentum we've realized in our physician office solution business so far in 2006. It looks very promising and we expect continued success. We don't release the number of doctors or more specific information about our success in that.

On Bedrock, Atif, we're going to have every client that comes through our Cerner implementation methodology. That will be - a core aspect of our methodology will be depended of Bedrock. So it'll be safe to say that in the future, all clients will be using Bedrock during the deployment and the maintenance of our solutions.

Okay. I mean, okay, thanks for that. Paul just rephrasing the first question. Perhaps anything in addition to what you said, perhaps, maybe the percentage of -- the overall percentage of clients that you have, how many do you think are using the physician offering or how many do you expect to use them, just maybe a rough guess? Would it be 5% by the end of the year or some kind of target?

There are over 600,000 -- I'm not sure what the number is total physician in the U.S. and it's very difficult for us to give a percentage. We're doing -- we're successfully deploying the solution in physician office practices of single practitioners and those with literally hundreds of physicians.

So we have a very aggressive goal of reaching a high percentage of those physicians through these electronic connections in the next 24 months but would not be willing to release the number of physicians.

Okay. Actually I think in -- this is Marc. It's really not going to be a material impact from a financial statement purpose through '06. This is a new offering we're releasing that's getting a lot of traction. A lot of people are interested in it. But we're very early in the game to start talking about subscription levels and those types of things that you might see from similar style businesses. So it will be through probably in '07 before we're at a point that we're going to be able to provide that kind of data.

Okay. Thank you.

Your next question comes from the line of Steve Unger of Bear Stearns. Please proceed.

Hi. Good evening. Just three questions. I think I'll just rattle them off in the interest of time. First it looks like you did a great job of selling into new clients. Paul, could you give us some color as to where you're selling that into? Is it medical or academic areas? Is it IDNs or is it community-based hospitals?

Secondly, is there any way you can quantify the state of Victoria contract and when you expect it to start rolling out? And then, third, it looks like there was a slower draw off the backlog in the first quarter. Could you just comment as to whether something got delayed or was there something material as to why the backlog conversion wasn't as high as it was in previous quarters? Thanks.

I can go ahead and start with the backlog. I don't think, Steve, there was anything relative to the rollout of the backlog that was unexpected or delayed relative from our standpoint. I think if you look to book-to-bill ratio or something like that it's -- it was slightly lower this quarter -- about 1.1 book-to-bill comparatively. But overall, the backlog increased.

Keep in mind, we also have revenue coming out of the Southern Cluster contract that's relative to book-to-bill would make, you kind of would exclude since those bookings tend to be sporadic. That would get to about a 1.2 and if you look at our guidance I think, our book-to-bill would be increasing as you go to Q2. So I'm not sure that there's anything -- as I reviewed the data -- in our backlog that would indicate that things -- anything was rolling out slower than we were expecting.

Yes. Okay.

This is Paul. Steve, on the question on where -- where from a geography standpoint both in the U.S. and outside the U.S., we had good performance and in balance performance as I said in my comments, which we're very pleased about, our ability to rely on the global marketplace to consistently deliver on a quarter-by-quarter basis. Inside the U.S., we got the academic, medical centers and hospitals as well as IDNs.

So it was previous balance across all three of those that those -- all of those market places buy differently and they're looking for different things. And probably, they're looking for a broad suite of solutions that they can rely on to help transform their clinical processes. And we feel pretty good about our ability going into those segments, market to them separately and distinctly and be able to prevail there.

So you're still seeing new client wins in the academic area?

Yes.

Okay.

Yes we are. And that's -- whether that's a broad based thing or a departmental level, we have a substantial number of different solutions that are out there that in some cases where people still buy on a best of breed, which is a small percentage of the marketplace these days. But in academic medical centers, you'll find departments being able to have and supported by their own budgets, we'd still prevail in a single solution bake-off and we still do well and prevail in those marketplaces as well.

Steve, regarding the state of Victoria in Australia, we don't disclose contract details. Suffice it to say, it was not our largest contract in the quarter. The broader message I think that we're trying to deliver is that the second-largest state in a country of 20 million people representing 25% of the population, coupled with the 6.5 million people in New South Wales gives us about a better than 50% market share opportunity for the clinical automation opportunity in the country of Australia. So we're very excited about the upside there. But as I say we don't disclose contract details.

Great. Nice job. Thanks.

Thank you.

Your next question comes from the line of George Hill of Leerink Swann. Please proceed.

Hey, questions for Paul or Trace, whoever wants to get in to this. I guess, first is can you talk about the bookings number and managed services sales versus software license sales, number one.

And number two, you guys touched a little bit on your international opportunities -- we know the demonstration projects are going on in France right now, and Spain is rumored to be RFPing soon. Can you talk about the initiatives in those countries and maybe provide a little more color on the initiatives in France?

Yes. George, this is Trace. Why don't I take the first -- the second part of your question first. Regarding the European opportunities, particularly France and Spain, you're absolutely right there is significant activity both at a local, municipal and national level in both countries. I think the bigger country of the two of course, is France.

And I think you'll likely see a bigger numbers, bigger opportunities coming out of France. Maybe not necessarily in '06, but certainly late '06, early 2007. We expect some success in both of those very critical countries in the continent of Europe. So we're working hard and expect some success. Paul, do you want to --

And, George, on the bookings, we were very pleased with our bookings performance overall. And I think I gave color on the breakdown there that the managed services component of that continues to have a lot of interest and we will continue to do well there. Again, our performance inside of that sector of our business has been quite good from a delivery standpoint and from a client satisfaction level.

When you're talking about 99.9%-plus uptime in some cases a 100% up time, you're going to get a lot more clients who are interested in that offering. That's one element of it. The other element of it is that from a total cost of ownership, we actually can run our systems because we're able to move -- if you will the unit cost of those down. Given our economies, we're able to show our operations. In most cases, we can do it for them a little bit more effectively and efficiently than they can and there's a lot of buzz in the marketplace about that offering, which is a client to client "word of mouth" sale.

Yes. I definitely hear a lot about that. I might have missed this, if you touched on it in the call but could you talk about the percentage of bookings from new customers versus existing customers?

Yes. It was 29%.

Okay. All right. Thank you.

You bet.

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

Hi, good afternoon. I just wanted to actually touch on one of Steve's questions before. I think he mentioned that it looked like there's a slow drop from backlog. I actually got to the conclusion because it looks like the first time, really the backlog hasn't really moved sequentially, and I was curious if you could comment on maybe some of the changes in the revenue mix and the nature of new contracts that might explain it?

This is Marc. As I said in my review of the backlog, I didn't note anything that was unusual. Our bookings mix was fairly consistent with what we've seen in prior quarters relative to license, services and hardware. So relatively speaking, I think the one new thing that we were surprised by anyway relative to the roll out of it, I think --

Would you comment on maybe what do you think it may --?

Well, I mean as I look at we had 41% year-over-year growth in our backlog. So I think that's probably the best comment I can make relative to the strength of our backlog and how it's rolling out.

Okay. Maybe you can talk a little bit about maybe some timelines in Australia for potentially other opportunities? And you'd already talked about maybe 12-18 months in Spain and France. But can you give us some sort of sense of opportunities in Australia? And also maybe some opportunities in the UK given some [buy-sell] difficulties?

Jim, this is Trace again. Clearly, the Australian activities, it's very difficult to predict how governments will act and react to market -- changing market forces. We are very active in Queensland and very active in Western Australia and feel very good about the momentum we will get in those activities based on our success in New South Wales and in Victoria.

So we're seeing more-and-more government led activities around health care reform and I think the more momentum you see and the more momentum you see in our direction, the better we feel specific to Australia. Regarding the England and the NHS, we continue to work very hard on our project there in the southern region, very hard on our chose-and-book activities as well as other various individual opportunities that are being worked by our teams in England. I don't want to comment on our competition. Certainly, are supportive of program itself.

We laud Prime Minister Blair for his courage in taking on a countrywide transformation of health care delivery. We are there working everyday to make sure that he's successful in his vision of creating a healthier safer environment for the people of England. Aside from that, I wouldn't want to, on my colleague competitors.

I guess last one is -- do you guys view Rios as discrete, standalone profit opportunities or do you do more as demonstration projects for large scalable opportunities down the road?

We think very -- we think that the U.S. government is on the right path toward creating an electronic medical record capability for all Americans. And there's any number -- Jim as you know there's any number of Rios in play today. Physician based, in our case, we have a very successful Medicaid based defined population we're working with. Clearly, there's municipal governments, there's employer based Rios. And there's varieties of others that aggregate populations - defined populations.

But we see that very much a part of our strategy. We've been successful at a country level aggregating large populations. And so Rios are nothing more than that. So the strength of our millennium offering is our ability to scale to manage large populations. So we very much feel as though - we're supportive of the direction of the government. We'd like to see it go faster; we'd like to see more funding. But nonetheless, we will continue to support the direction and feel very much it's a part of our business model.

Yes. And I would just make the point of whether we think it's a science project or real business. The TennCare Rio that we are currently hosting is a significant revenue stream for us today. So it might be somewhere around $6 million to $8 million of revenue that's coming in today from that Rio and we see that as a -- that's on an annual basis. But we see that as an opportunity absolutely to get into a marketplace.

It's core to our business model.

And profitable.

Absolutely.

Absolutely.

Okay. Great. Thank you.

Your next question comes from Sandy Draper of JMP. Please proceed.

Thanks. Just a couple of questions. First one, I think probably for Marc. Marc, when do you expect the spending on the new facility, the second data center, to unwind? Does that get finished up by the end of this year or does that spread out into '07?

The principal spending on that will be '06. It will probably commission in early '07. So there will be some carry over. But the majority of the heavy spend there which is the construction component of it, the provisioning will happen in '06.

Okay, great. Thanks. And longer term are there any other major CapEx type spends out of the sort of normal operational CapEx that you would envision? Obviously you've done a fairly significant campus expansion. Is there more that you could see or at this point do you feel like once you get that data center done, you're in pretty good shape for at least a few years?

We -- clearly from the view of the manage -- of our CernerWorks hosted business, this second data center brings with it a significant amount of runway because keep in mind we also just completed on an existing data center an expansion. So between the two of those, that should give us runway for a period of time that we would not have to invest a lot of dollars in infrastructure relative to that business. So other than just the normal growth of the company from a headcount and campus basis which would not be anywhere near those types of dollars, you are correct. You should get some respite from the -- from our capital spending once we get -- kind of get through '06 and get into '07.

Okay great. And then Paul, can you remind me, what was the total value of the Fujitsu contract?

The total value was about 200 million.

Okay. And then when you look at you --

And that would be relative to what we've booked so far. The total value of that contract over time would be somewhere in the 400 to 500 million range. Sorry.

Okay. Right. So it's 400 million to 500 million total. 200 you've booked so far, you will expect some lumpiness. I think you said before just in terms of timing of the rest of that hitting on the bookings and you'll give us indications.

But in terms of revenue recognition, is -- when we look at the 20% sales, 80% support and maintenance -- when you look out longer-term, once you've got the system installed and running and you start to get the system licensed, what would a mix start to look like there in terms of how it would impact the P&L?

We'd probably have to address that when we get to that point, Andy. Right now, it's kind of tracking based on the expenses we incur. So it's kind of where the people are that's driving the expenses. But in essence a lot of that is just a provision of software on a hosted basis for them.

So we'll let you know where that's flowing through the income statement. But at this point, it's a little bit early in the game to tie that down, because it's -- given that it's probably, mid '08 before we start recognizing margin on it and really after that before it settles into its recurring nature going forward.

Okay. Great. One last quick question and I'll drop out. The Australia contract, was that a first quarter contract or was that in the second quarter?

It was Q1.

It was a Q1 deal. Okay, great. Thanks.

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

Hi. Thanks. You mentioned in the commentary on the competitive landscape that, I think I got this quote right that recent acquisitions will create opportunities in the near term. I was wondering if you could just expand on that a little bit?

Yes. This is Paul. Historically, when a couple of companies come together that gives a client of those two companies a chance to take a pause and make sure that they are current - they're aligned with the new executive management team that the new company that is acquired what they thought was a vision or a strategy. They want to make sure that that has been validated on a going forward basis, number one.

Number two, depending upon who is the successor if there are two -- two or three different technologies that are being merged together, the successor technology will create an opportunity in the marketplace for people to actually go and look versus just doing an upgrade, because as you know in this industry, an upgrade is a relatively important thing to consider from a software expense standpoint, from a hardware in some cases, and then from a operational or transition from one system to a new system.

So it creates a pause for the clients to rethink potentially the strategy and also creates an environment -- financial environment that they would want to look at the entire landscape versus just unilaterally following what the supplier that they had previously done business with. And we've seen that time and time again over the course of my tenure here at Cerner. It creates an opportunity for Cerner if we capitalize on it.

Now, have you seen specific opportunities that you're going after, that there are specific customers that are in the hunt or are going out to bid because of this changing landscape?

Yes. I wouldn't probably broadcast exactly where, but there are a number that are on our radar.

Okay, great. And then, Marc, I kind of missed it, your explanation on the other income increased 1.8 million for negotiation. Can you just expand on that a little bit?

Yes. It was basically the liability that came over during the -- from the VitalWorks acquisition relating to a long-term contract where -- that included minimums from one of the company's that we used to process invoices and send out billings relative to our physician clients.

As that liability was related to the minimums in that contract, we renegotiated that contract in Q1, eliminated the minimums, reduced the fees, and based on that, that liability was taken off the balance sheet and ran through the income statement. We ran through other income just because it was kind of a one-time impact and we thought it would be more transparent and better placed in the other income section.

Okay. So we should expect that line to go back to a normal run rate in the second quarter?

Absolutely. Yes.

Okay. All right. Thanks a lot.

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

Hi, thanks. I don't know if you're still breaking it out, but what was the contribution from VitalWorks?

Yes. We haven't -- aren't still breaking it out, but it's -- basically, it's very similar to what -- the revenue is fairly flat, so it would be fairly similar to what we -- you would have seen the prior quarters we've announced, though. Kind of in the $16 to $17 million range and be pretty consistent.

Okay. And can you tell me how you go to market? I mean you obviously have a sales force selling to hospitals, are you now calling on independent physician practices? And separate from that, where do you sort of define the lines around your target customer base -- so in other words, is it physician practices that currently have some sort of financial relationship with an acute care hospital?

This is Trace, Duane, let me try to answer that for you. We are -- with the acquisition of VitalWorks as you know, we acquired in excess of -- relationships in excess of 30,000 physicians. So we are perfecting a telex -- telesales capability that we consider to be best-in-class for our business and are working many of these opportunities through the phone with demonstration capabilities via the Internet. So our cost of sales is very well managed.

So yes, the answer to question is we are, in fact, going after specifically those that are in our camp today with our new solution and going after every competitive opportunity that we can as well with a very specific and very dedicated sales force. Now having said that, we also had a very large army with our broad Cerner population of sales professionals that also, of course, are selling to the physician community each and every day.

Duane, we basically can go from one or two physician practices up to a 500 physician clinic with a variety of our solutions and obviously that will depend on -- the sales force will depend on size of the deal.

Great. And can you say, I mean, are you winning net new deals in terms of hospitals that are looking to deploy this out to physician offices that they own?

Absolutely, absolutely. Physician outreach is a very important part of our business, and we're having very good success in that environment.

And all that would be based on a subscription model?

Not all of it. No, we will -- depending on the needs of the individual hospital provider and their associated physician or not, we will offer them to sell them the licensed software, or we'll run the subscription model. We've been particularly pleased with the subscription model adoption, but we, obviously, make both available.

Thanks very much. That helps with that. Marc, just curious if you could review the amortization change for us again one more time?

Yes. The -- our practice in the past is to have multiple releases of our software over a year. And in the past we have chosen -- taken January 1, kind of treated that as a single release date, because the average of all of these releases was basically the same as treating it annually as released on January 1.

As we've moved to an annual release date, where we're only going to have one release per year and given that that release is scheduled for the last half of 2006, we would've created a difference in the amortization, if we had continued to use our old calculations, start amortization on January 1.

So while for some of our expense in 2005, we did start amortization on January 1, all the spending that's capitalized relating to our '06 release will continue to be capitalized until that release occurs. The difference in the two methods became too great. And at that point, you've got to go to the pure GAAP model, which is starting amortization upon release of the release.

So we would expect it to bump up in some future quarter this year?

Correct. And what you had seen previously in the January 1 period would be something that you'll now see in the quarter in which the release gets done. And we'll try to give you as much color on that as we can so that your models can be adjusted appropriately.

Thank you very much.

Why don't we take --

The next --

-- one more question.

Okay. Your next question is coming from the line of Richard Close of Jefferies & Company. Please proceed.

Great. Thanks. I'll keep it quick here. I just want to -- just a little housekeeping. With respect to the Bedrock, I just want to be clear, I think, with respect to what Paul said. I think in the fourth quarter, you had 17 clients using Bedrock. Are you saying now 100% are using Bedrock solution?

100% of the new clients that come through the ASC Model, will be using the Bedrocks as part of our methodology.

Okay. And then if we look at conversions, I guess, in the first quarter, for all of 2005, I think, a 20% of conversions were done with the ASC. Is that -- where does that stand now?

About 25%.

Okay. And then, just to be clear, I think, on the CernerWorks area, I believe you said 20%-plus profitability. In '05, I thought you guys were at about 25% contribution margin. Is that where you are currently?

Yes. We're basically targeting above 20% and that will range between 23 and 25% in any given quarter. So it continues to deliver at the level that we're expecting for the business.

Okay, great. Thanks for taking my questions.

And with that, maybe, I'd ask for a couple of comments from Trace to close the call.

Yes. Thanks. I'm - we're very pleased with our performance in Q1 of 2006. We think we've positioned ourselves for a really solid year. We love the dynamics of the marketplace. The healthcare of our clients is improving. And I think the broad legislative agenda that is -- the broad legislative agenda that's being played out in Washington clearly serves our purposes very, very well.

I think broadly, as a company, we continue to execute both here and abroad. And we're very pleased with that success to-date. So we appreciate your chance - a chance to be with you this afternoon, and we look forward to a successful 2006. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.