塞納 (CERN) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to Cerner Corporation's third quarter 2006 conference call. Today's date is October 19, 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 [those 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, sir.

Thank you. Good afternoon, everyone, and welcome to the call. I will lead off today with a review of the numbers followed by sales and operational details from Paul Black, Executive Vice President and Chief Operating Officer. Trace Devanny, our President, will follow Paul and discuss our recent health conference, our physician practice strategy and our global business. Neal Patterson, our Chairman and CEO will join us for Q&A.

Now let me turn to the results. We had another strong quarter in Q3 with another record level of new business bookings, strong margin expansion, and good free cash flow. Starting with bookings, our bookings revenue was $352.1 million, which is 17% higher than our record Q3 '05 bookings of $301.1 million. Bookings margin was $303.7 million, which is up 21% from $251.6 million a year ago.

Note that I am excluding the $149.4 million booking for the Southern Cluster in England from Q3 '05 bookings for comparative purposes. Also note that we have not finalized our contract with British Telecom, who announced in late July that they selected Cerner as the software provider for the London Cluster in England.

We expect to finalize this soon and will provide more comments on our Q4 call. Our guidance for Q4 excludes bookings related to this contract. We will break out the bookings when we report Q4 results similar to how we did with the Southern Cluster.

Moving to backlog, our total backlog increased 21% year-over-year and ended the quarter at $2.38 billion. Contract revenue backlog ended the quarter at $1.93 billion, which is 22% higher than a year ago. Support revenue backlog was $452.3 million.

Moving to the income statement, we delivered strong revenue growth in Q3. Total revenue in Q3 was $345.4 million, up 17% compared to the year-ago period. Revenue composition was $125.2 million in system sales, $87.0 million in support and maintenance, $123.2 million in services, and $10 million in reimbursed travel.

Systems sales revenue grew 14% over the year-ago quarter with strong license software growth offsetting a year-over-year decline in sublicense software and flat year-over-year levels of hardware. Services revenue grew 23% compared to the year-ago quarter, and support and maintenance grew 16%.

Our gross margin for the quarter was 79.8% which is up about 200 basis points year-over-year and down slightly from last quarter. Year-over-year increase in gross margin was driven by strong levels of software and a lower mix of sublicense software and hardware. Our operating expenses before options expense in Q3 were $227.1 million, which is up 18% over a year ago.

The increase in total spending was driven by growth in our services organization and an increase in global spending primarily related to our U.K. activities.

Moving to earnings -- net earnings before option expense were $29.6 million in the third quarter which is up 36% compared to $21.8 million a year ago. Diluted EPS prior to options expense was $0.36 per share compared to $0.27 a year ago, a 33% increase. Note that I am excluding a tax benefit related to the sale of [sinks] from the Q3 '05 earnings results.

Our operating margin before options expense in Q3 was 14.1%, which is 150 basis points higher than the 12.6% operating margin in the year-ago quarter, and up 50 basis points from Q2 of this year. This quarter, our operating margin was impacted by about 70 basis points due to approximately 18 million, [a] zero margin revenue from the U.K. Southern Cluster contract.

Our operating margin without this contract was 14.8%, which is up 200 basis points year-over-year. This level of margin expansion keeps us in range of our [path to] 20% operating margins by 2008, excluding zero margin revenue from U.K. contracts.

Now I'll move on to our balance sheet, which remains strong. We ended the quarter with $287 million of cash and short-term investments. Total debt ended the quarter at $210 million, which is basically flat compared to last quarter. Accounts receivable ended the quarter [at] $352 million, which is up $20 million compared to last quarter.

Contracts receivable or the unbilled portion of receivables were $126 million or 36% of total receivables, which is 2% higher than last quarter. The increase in both total receivables and the contracts receivable portion is primarily attributable to our project in the Southern Cluster of England.

As we mentioned last quarter, we had some working capital requirements related to this project which are reflected in receivables. We expect the acceptance of our next release of software known as R-1 to occur early in Q1, which will trigger our ability to build for a large milestone payment.

At that point, our cumulative working capital investment and contracts receivable balance will be back to a minimum because the revenue driving this contract receivable is currently being recognized based on expenses incurred and there is no margin benefit.

Our DSOs were 93 days in Q3, which is down five days compared to a year ago and up two days compared to last quarter. Without the working capital associated with the Southern Cluster project, our DSO would be in the 80s.

Third party financings were consistent with historical levels at 8% of total cash collections. Operating cash flow for the quarter was $53 million. Q3 capital expenditures were $25 million including $14 million of property expenditures.

Capitalized software for Q3 was $15 million. Free cash flow defined as operating cash flow less capital expenditures and capitalized software was $13 million. Free cash flow before property expenditures was $24 million. The property expenditures were primarily related to our new data center. Investing activities also included $14 million for the acquisition of [both].

For the year, we still expect full operating cash flow to grow about 10% compared to 2005. While our CapEx will increase in Q4 due to the purchase of a building we mentioned last quarter and higher spending on our new data center, our full-year CapEx is expected to be below our original full-year estimate of $150 million, which should lead to free cash flow for the year of more than $45 million.

While some of this CapEx will push into 2007, we're still targeting free cash flow approaching $100 million for 2007 driven by a combination of operating cash flow growth and lower CapEx. With respect to capitalized software, the $14.5 million of capitalized software in Q3 represents 22% of the $65.9 million of cash spent on development activities. Software amortization for the quarter was $10.8 million resulting in net capitalization of $3.7 million or 6% of the total.

Going forward, we expect capitalized software will be in the $15 to $17 million range each quarter depending on peak development efforts on our next release and our global development work. As we discussed last quarter, our amortization will increase upon general availability of our Millennium 2007 software release which we currently expect to occur in mid-November. This will drive an increase of approximately $2.2 million in amortization in Q4, bringing amortization to about $13 million for the quarter.

In Q1 '07, amortization is expected to increase an additional $2.2 million related to this release since the amortization will be for a full quarter. However, this will be largely offset by the completion of amortization related to the $38 million of software capitalized in 2001, which was contributing $1.9 million to quarterly amortization. Therefore, amortization beginning in Q1 '07 is expected to be approximately $13.3 million per quarter.

Now, let me go through the guidance. Looking at Q4 revenue, we expect revenue in the $355 to $365 million range. This brings 2006 full-year revenue to a range of $1.35 billion and $1.36 billion, reflecting about [70%] growth over 2005. Our 2006 revenue guidance assumes approximately [$65] million of revenue and expense from the U.K. Southern Cluster contract, yielding no net margin, as we have discussed.

The revenue from the U.K. Southern Cluster contract is split about 20% to system sales and 80% to support maintenance and services, while the expenses are split approximately 80% to sales and client service, and 20% to R&D. We expect the treatment of revenue and expense to be similar for our contract with British Telecom for the London cluster. We will provide more detail on that on our next call.

We expect Q4 EPS before options expense to be $0.40 to $0.41 per share with a high-end representing a $0.01 increase over prior expectations. For the year 2006, EPS is expected to be $1.37 to $1.38 which is 26% higher than 2005.

The Q4 guidance is based on total spending before options expense of around $235 million. Our estimate for options expense for Q4 '06 is approximately $0.04 per share, bringing Q4 to a range of $0.36 to $0.37 after options expense.

For bookings, we expect bookings revenue in Q4 of $345 to $360 million. The midpoint of this range reflects 10% growth over pre-Southern Cluster bookings in Q4 of last year, which was a record bookings quarter that represented a 31% increase over the prior year.

Our initial view of 2007 is that we are comfortable with current consensus estimates of $1.69 before options expense, which reflects 23% EPS growth and is consistent with the long-term growth target we have communicated. Note that while the full-year consensus estimates look reasonable, the estimate for the first quarter of 2007 reflects about a 30% year-over-year growth, which is much higher than the other quarters. We would expect the growth rate to be more consistent throughout the year, which would equate to Q1 '07 EPS of $0.34 to $0.35 before options expense.

Our estimate for options expense in 2007 is approximately $0.04 per share each quarter or about $0.16 for the year, which is basically flat compared to this year. With respect to 2007 revenue, we are comfortable with the current consensus of $1.53 billion, which is 13% higher than 2006, and our 2007 revenue guidance assumes approximately $7 million of revenue [in] costs from the Southern Cluster contract, yielding no net margin, as we have discussed.

We've also assumed the smaller amount of revenue from the London Cluster contract. We will discuss more after we have finalized that contract. With that, I will turn the call over to Paul.

Thanks, Mark. Today I'm going to cover some of the normal sales and operational metrics and then discuss some of the things we've been doing to enhance our clients' experience with Cerner by bringing down their total cost of ownership and assisting them with their quality and safety imperative.

From a sale's perspective, we had another strong quarter with contribution from all major segments including academic medical centers, children's hospitals, integrated delivery networks, and community hospitals. Our contract volume was very high in Q3, with a record 366 contracts. 13 contracts were over $5 million, seven of which were over $10 million. 24% of contract bookings were for [near] millennium footprint and our pipeline or new footprint continues to look solid.

Our leading indicators remain favorable with strong year-over-year increases in requests for information and vision center visits, and our pipeline remains at strong levels. Our client organization had a strong Q3, getting a tremendous amount of work done with our clients.

During the quarter, we turned on 347 Millennium applications which is 50% more go-lives than the year-ago quarter. This brings our total count to more than 5,800 live Millennium applications at over 1,000 facilities. Our go-lives included 10 additional acute care CPOE sites, bringing our industry-leading total to 116. We believe this number is more than the rest of the industry combined when considering currently marketed CPOE systems that have a high-level of physicians using them.

Now, I would like to discuss the upcoming Cerner Millennium 2007 software release. It has been our core competence of developing highly successful software applications on a single architecture that has and will continue to create organic growth for Cerner. The Millennium 2007 release reflects a continuation of this ability to innovate. It also represents the culmination of some significant operational changes we implemented in our IP development organization over the past couple of years that are worth highlighting for you.

We had an objective to synchronize all of the major operational organizations inside Cerner with the ever-growing needs of our global client base and to ultimately improve our clients' overall experience of doing business with Cerner.

Last week at our health conference, we unveiled the first release that incorporated this new level of focus. Cerner Millennium 2007 is the 15th major release of our unified Cerner Millennium architecture, and it's a version that incorporates unprecedented levels of client feedback in every step of the development process.

We received regular feedback from more than 200 clinicians throughout the development process to ensure we identified the best way to support seamless workflows. We use process modeling at the role, venue, and condition levels to guide our design and development and to help us identify the enhancement that would have the most dramatic impact on usability in adoption.

One of our objectives of this release was making it easier for physicians to manage their hour-by-hour daily workflow. Some highlights of PowerChart enhancements that improved that physician experience include an intuitive, simplified user interface that remains consistent across venues of care, support of workflow from the physician office to the hospital setting, and a breakthrough feature called Since Last Time that highlights new information and anticipates physician behavior.

While a key focus of the 2007 release is a physician, we also improved the functionality and user experience in many other areas. In total, the release includes more than 8,000 new features. With this release, we changed the frequency of producing a major release, setting the expectation with our clients that we will deliver a major release based on published top-down objectives.

We believe that producing major releases every nine to 18 months is a realistic timeframe for the rest of this decade. This gives our development organization the ability to introduce major new innovations such as CareAware devices; a universal medical device bus; frictionless payment systems; state and communitywide health information networks; [gnomic] systems; condition management systems; and other innovations that will drive our organic growth.

The 2007 release also reflects an improved testing methodology. We tested this release more thoroughly than any previous release in client specific scenarios and configurations to maximize software usability, performance, and uptime. Based on the response to the release so far, these efforts appear to be paying off.

In addition to great feedback from our testing partners, the response at our health conference in Orlando last week was extremely positive. We have never seen our clients more excited. We know we still have a lot of hard work to do and our clients have high expectations, but we have great momentum. Unlike our competition, we are building off a decade of experience with Millennium, which has been successfully deployed around the world.

We have a running headstart. I believe this release will strengthen our leadership position because it addresses most area's competitors have used against us in the past, such as the physician user interface. It also strengthens what is already the most comprehensive suite of solutions offered by any health care IT provider on a contemporary common platform.

It is important to understand that this release and our overall strategy of moving towards fewer releases should also lead to several operational benefits to Cerner, including getting much more leverage out of our research and development dollars because we aren't testing and certifying new functionality on multiple major releases each year. This will also lead to much more efficient support as a number of different releases our clients are using declines.

Another very important improvement announced last week was our end-to-end lifecycle management methodology called Method M, which is a cookbook on how to implement and maintain Cerner Millennium systems. This will be an element of Cerner's unique ability to deliver value to clients in a predictable manner from a cost, functionality and time to safety standpoint.

We create this predictable experience by incorporating our Solutions Center Rapid Delivery model, our Bedrock wizard, [that ought to make] much of the implementation and management of our Cerner Millennium platform, our Cerner Works Managed Services business that improves system reliability, availability and performance; and our large and experienced professional services organization.

We also announced a free service for all clients to monitor their systems as part of our Lights On network. This network enables over 700 built-in Millennium timers to constantly measure performance 24 hours a day, allowing for quick identification of and reaction to issues with service levels. It also allows for each client to benchmark their system performance with other client's and the Cerner certified standards.

Each of these initiatives that I have discussed help drive a lower cost of ownership for our clients and help reduce Cerner's cost structures. By providing industry-leading functionality on a common platform and delivering it in a predictable, efficient manner, we are able to reduce our costs to a point that allows both Cerner and our clients to benefit.

We believe this client centric approach to expanding margins appropriately aligns our focus with our clients' needs. From a competitive standpoint, our market continues to be competitive with all competitors targeting Cerner. We believe we are maintaining our leadership position in this environment by continuing to improve our competitiveness with the innovations and the operational improvements I've discussed.

These initiatives will build on our ability to deliver predictable speed-to-safety for all clients. One good example of our reputation of being able to deliver is the selection by Sharp HealthCare that we announced on September 6. Sharp, one of the largest health-care systems in California, is opening a new state-of-the-art digital hospital in 2008, and chose Cerner to replace their existing supplier because they have confidence in our ability to deliver on time and on budget.

In summary, while we are always working to improve on our organization, we like our competitive position. Our proven software and delivery capabilities makes us a safe choice for the pragmatic fire that exists in today's early majority, a majority [by our phases] of the clinical and financial IT adoption.

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

Thank you, Paul. Good afternoon everyone. Today I would like to discuss three topics -- our global business, our physician practice business, and highlights from our recent health conference and health care leadership forum.

On the global front, we have made significant progress since our last call. During the quarter, Choose and Book, the national appointment scheduling system for the NHS in England that we are delivering with our partner, Atos Origin, exceeded 1 million bookings since program inception. This important milestone reflects continued adoption by the clinical community.

We also brought two additional hospital's trusts live in the Southern Cluster. Each go-live has proven to be smoother than the previous events as we show solid process improvement, leveraging experience from previous implementation. As a result, we expect to continue bringing one to two trusts live each month over the next several months.

As we mentioned last quarter, we were also selected by British Telecom to replace their previous software provider in the London region. We are excited about this opportunity and believe our experience in the Southern Cluster positions us well for a fast start.

As Mark noted earlier, we expect to have a final contract soon and will provide more detail on our Q4 call. We also continue to grow our presence in Australia. After signing a contract in the first quarter to become the statewide clinical IT provider for the state of Victoria, we recently expanded our role in New South Wales, the most popular state in Australia.

Our ability to expand our business here was driven by the successful implementation at numerous pilot sites over the past couple of years. In France, you may have heard that France Telecom succeeded in getting the French government to restart the countrywide electronic medical record procurement process that had been expected to be completed in the first half of 2007.

Cerner was a short listed supplier in the original procurement and it is our understanding that a new procurement process will launch soon. While the restart could cause this initiative to be slightly delayed, we believe the French government will continue to favor companies with a successful track record.

That said, we continue to be well-positioned with our proven architecture and intend to vigorously compete for this business. I also wanted to comment on our PowerWorks physician practice business. Our subscription model continues to gain momentum in both our existing base and with new physician practice clients. In fact, we had more new footprints in Q3 than we did in all of 2005.

We believe the enhancements to our physician workflow that Paul discussed earlier will add to our success in this marketplace. Further, we are in partnership discussions with a large number of hospital and health system clients who are developing their physician alignment strategies in light of recent Stark Law amendments.

Now, I would like to comment on Cerner's health conference. Last week we hosted our annual client gathering in Orlando, Florida. It was not only the largest gathering in the Company history with more than 3,300 attendees from 735 client organizations and eight countries, but the largest user group meeting of its type in our industry.

There were also 80 other health-care companies exhibiting in our Solutions gallery, making the meeting a major tradeshow as well. In addition, in our state-of-the-art Solutions gallery, hundreds of our clients partnered with Cerner to demonstrate their solutions in systems live from the tradeshow floor. A walk through this gallery quickly brought clarity to our altogether tagline which signifies that together with Cerner, our industry partners and our clients are achieving more real results with our Millennium architecture than the rest of the industry combined.

Beyond the solutions gallery, hundreds of clients, industry experts, Cerner associates and suppliers presented their successes and key technologies in a variety of panels and sessions with the total number of educational sessions far exceeding the number offered at the annual Health Information Management System Society or HIMSS conference.

The feedback from the attendees sent a powerful message that our vision and our commitment to our Millennium architecture continue to be on target, delivering the right solutions that our clients must have to solve critical quality and patient safety challenges.

During our CEO Neal Patterson's keynote address, he demonstrated a live example of what we describe as a new transaction. In the live example, Neil demonstrated how Cerner can eliminate the need for the traditional clipboard currently used in a physician office to document health insurance and family history. He also demonstrated the ability to facilitate payment for the physician services instantly, potentially eliminating billions of dollars in wasteful administrative costs.

In this demonstration, Neil's personal health record and health plan information were immediately available with a swipe of Cerner's health plan card as part of the Health-e network. We further demonstrated how the claim could be instantly adjudicated for payment at the point of care, with the member being charged for his portion and the balance being paid by Cerner -- in this case, the payor under our self-insured and self-administered plan.

The copay and deductibles are then handled by health reimbursement accounts and Visa accounts, which are both accessed by the same card. The key here is that this all occurs within minutes, not weeks or months. We estimate this approach to transaction health-care could reduce the cost per transaction for physician from $8 to $0.10, and reduce the cost of the payor or employer from $4 per transaction to $0.30.

Clearly, this disruptive technology will impact several existing business models that revolve around the current payment system. However, we are convinced that this is a better approach -- the right approach.

Finally, this demonstration put an exclamation point on Neil's key message to our clients, which was that altogether, we all need to be disrupted and force change across all areas of the health-care industry that eliminate errors, variance, waste, delay, and friction.

With that, I will now open it up for questions.

(OPERATOR INSTRUCTIONS). Atif Rahim, JPMorgan.

Just going back to the amortization that you've laid out, as you roll out the new version of the software, I think $2 million seems kind of a number that just incorporates the 2005 capitalized software. So, does that mean you won't be amortizing what you've capitalized in '06? That's kind of the first question.

And secondly, if you could just elaborate on the London region. Are you doing any work there at the moment for GE -- I'm sorry, for [BT]? And if so, any revenue being recognized there? Thank you.

Relative to the software that was capitalized during 2006, absolutely a portion of the software that was capitalized in 2006 we'll begin amortization as we roll -- because it was related to the Millennium 2007 release. So the numbers we provided would reflect the portion of the 2007 release work that was done within 2006 and a fair amount of that work was done during this year.

So it's not just the '05 component. There was an '05 component, but it's also a lot of the '06 work is going to be rolled up into that number. So we'll include that and basically should be the number that kind of stays relatively constant until the next release, which we've indicated could be in a range of nine to 18 months following the release of Millennium '07.

Relative to the London world, a little bit constraint on what we can discuss relative to that. Clearly the information we provided on our prepared comments indicated that we are still waiting to finalize a relationship with BT and we'll be able to comment more fully on that when we get to that -- when we get that done and get to our Q4 release.

Steve Halper, Thomas Weisel partners.

Could you give us an update on RxStation and CareAware?

This is Paul Black. We had that at the health conference and it continues to -- specifically, the RxStation continues to receive a lot of interest from clients. We have three alpha clients that are signed for that and we will be deploying that, and we expect to get results from that business model sometime in the 2007 timeframe -- in the late 2007 timeframe.

When are the three alpha clients going to be deployed?

We're still working on the specific dates. We want to make sure we take our time on this rollout and get the best possible truly product in this case -- as it's got lights and electricity going to it -- available for our clients. So we're looking to kind of put those out probably early in '07 and then get through that testing phase and be able to deliver on the first set of clients who have expressed interest in contracting for those toward the end of '07.

And lastly, how much of a presence are you going to have at ASHP Pharmacy Show in December with -- are you going to be showing the product there?

It will absolutely be in our booth on the floor. We've expanded our booth in order to make room for it. So you bet we'll be there.

James Kumpel, Friedman Billings Ramsey.

Can you talk a little bit, Paul, about the kind of activity you are seeing in some of the departmental solutions in pharmacy, radiology labs, recently eclipsed [as] management basically was highlighting that after years of denigrating the lab segment that they see growth opportunity there and I'd also be interested in your comments on the ICU segment as well.

Yes, the competitive marketplace has always been there. We've had a lot of good competitors over the years. It's not something that's new. Depending upon the solution that we're selling, depending upon the segment -- and by segment I mean whether it's a children's hospital, an IDN or a community hospital, you see different competitors there, and then depending upon the geography therein, whether it's south, the north, Australia or the U.K., we see different competitors there, and most of the times they're different. So I kind of preference all my comments with that. So there's a lot of good competitors out there in the marketplace. That's not something that we're seeing that's new.

With respect to the clinical centers, the lab radiology, pharmacy, surgery, the intensive care, there's a continuing solid demand for all of those solutions either in a combined, if you will, clinical cluster type of a purchase or in a single net-by-net or department-by-department purchase or an enterprisewide multihospital purchase. We continue to -- because of our breadth and depth -- we continue to compete very effectively in those marketplaces, in hospitals, in IDM's, and children's hospitals and academic medical centers.

Can you comment a little bit about the integration, I guess, of your Cerner Works Ambulatory Solution into the Millennium 2007, how that differs from the way it's delivered today?

This is Trace Devanny. We have, as you know, we purchased Vital Works early in 2005 which has been a very good move for our Company. We have a very focused attack on the physician market in 2006 and beyond, and we will, in fact, move many of those clients as quickly as we can from the legacy base that we acquired through the Vital Works acquisition to Millennium as time permits and as they are able to make the move.

So, do you have kind of like a one year timeframe or two year timeframe for that, generally?

No, typically that's not how those clients buy the solution. So as they become -- as the requirements -- they go beyond the physician practice to include EMR and lab results, radiology images. As those additional requirements become more in demand, that's when you'll see more wholesale activity moving from the Legacy group into the Millennium camp.

We have great demand in both segments of our ambulatory offering. So we're very bullish. As I mentioned in my comments, very bullish about our work there.

Sean Jackson, Avenel partners.

Can you just talk about, given the international opportunities you have, how are you allocating your own resources to meet those? Are you typically hiring people that are locally there or are you taking people from the states? Could you just comment on that.

On the question about how we staff emerging markets and actually mature markets overseas. The design is to have an entirely national organization on the ground in-country. And that's been our goal when we first entered the country over 20 years ago and that's our goal today.

Now, occasionally, there are requirements for specialized talent to show up in these new countries in some of these emerging markets to augment and teach the local -- the nationals, that is, Cerner Millennium and some of the deep skill sets required, but there has not been an impact on the U.S. model for our global expansion in a number of years.

And also, can you just comment on some of the non-U.K. opportunities and not only the magnitude of those in Australia, France in particular, but also how the business models are arranged. Are they similar as with the UK, where you're going to have a period of no margin business for a while or is it something different?

We're very pleased with our growth across the globe. Typically, each country is different and they have a different reimbursement model, but the way we approach the country is, as I mentioned a moment ago, with locals, with nationals, staffing and building our capabilities on the ground.

So in regard to how do we view the market? As I mentioned, we've been very pleased with our success in New south Wales, the largest state in Australia. We are moving that success into Victoria, the second-largest state in Australia, and we are very engaged in South Australia, West Australia and Queensland and their initiatives that we expect to see some results for in the next 12 to 24 months.

France, one of the largest, if not the largest, health-care IT spend in all of Europe and a country that's very focused on clinical quality. We think you're going to see in '07 a great deal of market opportunity emerge in spite of the fact that French Telecom just kind of stonewalled, for at least a short time, the countrywide electronic medical record initiative.

We have numerous initiatives across the board going on in France. In fact, we were just selected at the American Hospital in Paris and we're very pleased about that. We expect to see continued growth in Germany, very bullish on Spain. We like our business in the Middle East. We have emerging opportunities to expand on our Malaysian presence across Southeast Asia.

So broadly, I think our model and our Millennium architecture serves those markets very well because we're the only proven technology that can scale to manage prospectively a large population.

Relative to kind of the accounting, if you will, for that business, [in] many of the countries it will be the same as the U.S. They will purchase a license and they'll have support -- they'll have implementation services, hosting services just like our U.S. clients today do.

For some of the nationwide procurements such as the French DMP project, it's likely that that's much closer to looking like the U.K. procurement. Keep in mind that that's a -- only focused on an EMR for the country, so it's nowhere near the size and scope or dollars that one of the U.K. Clusters would be.

But there are other big opportunities within France that would be more like our normal business model. So there's no set standard as to how we will approach those, but the majority of that business can be very similar to the U.S. from an accounting perspective.

That was helpful.

Sandy Draper, JMP Securities.

A little bit of a follow-up to Sean's question and maybe this is best for Paul. When you look at the quarter, you guys obviously pulled in more big deals than you have in awhile. Can you give us any color on -- were any substantial number of those international versus U.S.? And if it is in the U.S., was there anything that you think was either Cerner specific or industry specific that allowed the pickup in some of these bigger deals?

The mix of where we got the business from didn't really change from a global versus a U.S. marketplace standpoint. I think there's a good recognition in the marketplace that execution matters and our ability to continue to turn systems on to give value for our clients is being recognized pretty broadly across the U.S.

So from our install clients, they're acquiring more solutions, they're filling out more of the white spaces we've talked about in the past, the cross-selling efforts that we've had underway for a long time and our new business efforts in a number of different areas have also been paying off. We feel broadly that execution is a great competitive strategy for our Company.

Richard Close, Jefferies & Co.

Yes, I was wondering if we could talk a little bit more about the ambulatory side of it. Can you talk a little bit about the sales force you have focusing on the doctor market, physician market? And then, with respect to the Stark legislation, maybe your plans there -- you mentioned you were working with a couple of larger hospital groups to sort of go after the ambulatory market. Maybe additional details on that front, please.

Relative to sales force, we never release nor are we interested in releasing the number of people we have focused on a given market. I will say we have a specific sales force for the lower end of the physician office practice marketplace as well as coverage from our existing territorial model, if you will -- the Sink model. And that's working very well and it worked very much in concert depending on the size of the physician office opportunity.

The Stark legislation has clearly been of help to the provider organizations as they consider ways to construct a physician alignment strategy. As you know, we have a very large share of the large complex IDN's, academic medical centers, the various players across the provider marketplace. So therefore, you would expect and we are delighted to see a great number of those people now with Stark laws being loosened a bit, at least appear to be loosened, that there's a lot more interest, a lot more dialogue and a lot more planning going into the efforts to support the physicians in a given marketplace.

How do you think your product compares against the other electronic health record providers at this point? Is it fully developed? Do you have enough of a penetration out there to get additional sales word-of-mouth and maybe some thoughts?

We sold more physician office systems solutions in Q3 than we sold in all of 2005. So the momentum that our brand brings to that marketplace and the focus that we bring to that marketplace, not only through our Vital Works acquisition, but through our long-standing support of, on the Millennium platform, the physician office requirements. We're very optimistic that we will continue to take market share there.

Is the offering complete? The software is never completes. There's a number of things that we do that others can't do based on our clinical strength. We can extend into the image management and distribution capture of not just the radiology department but cardiology and ultimately orthopedics, women's health, and oncology. So we're expanding the horizons of what the physician office will be able to absorb in their electronic medical record.

Today there's about 20% of the market that has an electronic medical record. We think that number will grow to 75 and 80% over the course of the next five years. We fully intend to lead that charge.

Then finally, on the New South Wales, you said you received additional business there. Can you quantify any additional gains in Australia?

At this point, we're not able to talk in more detail. We look forward to being able to providing more facts around that in the coming months.

Anthony Vendetti, Maxxam Group.

Mark, I was wondering if you could provide a little more color on exactly how the Southern Cluster is rolling out and the milestone in terms of payments and when that's going to switch over. Are we still looking at late '07, early '08 when you expect to see a switch over to becoming more profitable there?

Yes, relative to our expectations, we've always kind of indicated that we would expect it to be the last half of '08 before we deliver our three, which is the completion of the software that's required under the contract. And until that time, we will not recognize any margin on that business. We'll take revenue equal to our expenses. That expectation has not changed.

We'll actually probably deliver the software earlier in '08, but it does go through a very rigorous testing process. For example, R-1 was delivered several months ago and it is still completing its testing process and should be certified early in the year, as I indicated, which would trigger some milestone payments from a cash perspective. But as far as recognition of margin, our expectations on the last part of '08 have not changed.

So it's just going to be offset -- expenses will offset any revenues until that point. When you actually get to that point, can you talk about what that contribution margin would look like?

Basically the margin of the entire contract, the profitability of it, will be spread over the remaining revenue. So, given a normal profitability of a deal, if half of the revenue has been recognized on expense equals revenue basis, the remaining half would have potentially 50 to 75% higher margins than normal because of the spread of the profit over the remaining revenue. So it will be a good contribution to our operating margins and our earnings once that kicks in.

And the last question on that is so, when we get to that point at the end of '08, what was the breakout that -- in terms of how much of that contract will be recognized as revenues and expenses right at that point? Is that going to be the 30%? I'm trying to figure out what that point is.

Basically we've been recognizing about [$15] million of expense kind of a quarter, so it will probably be $60 to $70 million a year and if you do the math to get to then, it's probably $200 to $250 million of revenue equal expense on a contract that we thought would be in the $400 to $500 million range ultimately.

Duane Pfennigwerth, Raymond James.

Can you tell me what the physician office revenue was for the quarter? I guess it's trended around $16, $17 million a quarter.

It's very consistent with that, Duane.

Is there any way you could breakout sort of bookings or give us a metric around that? And I guess if not now, given the commentary that you sold more this quarter than you did in all '05, is that something you might consider?

Yes, I think we are still early in the rollout of the hosted PowerWork solution to physician offices. So at this point, it is a very small additional contribution. It's a subscription base so it comes in on a recurring basis, so in any one quarter it's not going to be a big revenue impact in the near-term.

But certainly when it becomes something that's worth taking into account relative to the analysis of the Company, we'll start trying to provide some view of that. Today, it's just kind of relatively flat, maintaining its client base, expanding on placing PowerWorks clients, but it's still such a small contribution that I think any focus on it today isn't really worth a lot of time.

In terms of international as a percent of revenue and bookings, do you have any sense for us there?

Relative to the quarter or going forward?

The quarter. Yes.

Yes, I think this quarter we had a -- given the revenue equal expense, we probably ended up with midteens of our revenue coming from the global environments, so we've seen continued increase kind of two years ago that was in the 10% range and now that's basically heading -- as Trace Devanny is very eager to explore those global markets will tell us. He'd like to see that get quickly to 20% of our revenue as our revenue continues to grow, but right now it's in the midteens.

And can you just common generally, I guess ex the U.K., what the operating margin profile of that business would be?

I actually don't know right off the top of my head. It is not inconsistent with the rest of our business. We went through a period of time when that business was not profitable, but with the resurgence of Australia and the Middle East and those businesses, particularly even including Canada which sometimes we -- is so close to us we don't really view with our global vision, if you will.

It's very consistent with what we do in the U.S. It is contributing to the bottom-line.

And then lastly, just a question for Paul. As you look at the new footprint percent of bookings, it looks like you made some progress there sequentially this quarter. As you refocus your message on execution and sort of total cost of implementation, I'm wondering is that a level we should expect? Or internally do you think you can make sort of upward movement on that number? Thank you very much.

My expectation from our team is that we win 100% of the business, so anything less than that I'm always disappointed in and that's the conversation that we have internally all the time. So we will continue to do very good work for our install base, execute and deliver value, turn on systems to help them make their old systems and physician office practices more safe, and we will go out and try to recruit more clients every day with them and through them and with our own sales force.

And I think when you look at our data, our pipeline, there are still lots of new opportunities, new clients, that exist in that pipeline. So, we feel just being able to drive current levels or between our historical levels is kind of the 20 to 35% doesn't seem unreasonable given the pipeline we're looking at.

Stephen Unger, Bear Stearns.

Just first question, I'm under the impression that you're going to be able to leverage your existing R&D in the U.K. for the BT contract. Does this mean theoretically that that's a higher profit contract?

Given that we don't have a contract yet, I really wouldn't be able to comment on the profitability of that contract. The concept certainly would be that we would leverage the work we're going to do through R-0 to R-3 in the London Cluster and have the majority of that work be a carryover from the Southern Cluster.

Have you already -- have you proved that out that your application in the Southern Cluster will carry over?

Once again, we have not completed a contract with BT and so we really can't comment a lot, but our expectation of the requirements they will have, we expect them to be fairly aligned with what the Southern Cluster requirements are.

When you start generating or recognizing profit in the Southern Cluster, will you be able to generate or recognize the profit then in also the London cluster at that time?

Clearly our goal would be to have our software deliverables aligned sufficiently so that delivery of all the required software for any U.K. clusters we would be participating in by that late '08 date would be likely.

So that would be somewhat coordinated. In terms of the Sharp HealthCare deal, that was a nice takeaway. What was the driving force behind it? And is that a one off transaction or is there something or some other contracts that you're working on near-term?

We think that the environment is good out there in the United States for people who have not been executing against their deliverables for us to go in and be able to get some more marketshare specifically. On this one, there was an impending event with a new hospital that was coming out of the ground where they wanted to make that all digital, and that was a -- that helped them rethink their strategy and what Sharp was -- what they wanted to deploy there.

But broadly, in the marketplace, as I've said in the past on these calls, there's a bunch of people who have sold a lot of stuff and much of that stuff over the last three or four years has not yet been turned on, and I think that those discussions with their current supplier as time marches on gets harder and harder. At some stage there becomes an event that allows them to rethink what their current strategy is. We are planning on that happening more frequently over the next 12 to 36 months.

And then my final question. I appreciate the time. New wins in the quarter, Mark, could you let us know what the mix between fixed fee and fee-for-service implementations?

Yes, it was consistent with what we've seen previously. A little over 20% of the deals, primarily the ones that are going to be implemented in our Solutions Center are coming in fixed fee. We really haven't seen a ramp-up of that.

We talked a little bit about the Bedrock tools and those things, perhaps moving us -- will move us to a higher degree of fixed fee business, but as we've also indicated, we're going to make sure that we prove out that model before we move. So, it's consistent with what we've seen historically and doesn't represent at this point a move toward more fixed fee.

[Dushawn Botrovic], Canaccord Adams.

My question was actually on the Bedrock initiative. You touched on it briefly, but are you seeing any signs at all that the ability to provide the Bedrock is helping you to win more business? Or is it just too early at this stage?

The Bedrock functionality that we have in place allows our clients to realize a lower cost of deployment both on the expense that they would pay to Cerner as well as expenses that would be associated with their own internal staff -- building database, on building reference tables, building order management tables and the like.

The Bedrock functionality allows us to be more competitive in almost every marketplace that we are in -- in the ambulatory marketplace, in the small, medium size hospital marketplace, academic medical centers, children's hospitals, etc. It also is a pretty important tool for us and a solution for us from an ongoing maintenance standpoint with regard to a large production clinical information system does require ongoing maintenance, and this allows their staff to maintain their systems with less effort.

We are seeing very good results from the deployment of this approach and this methodology and this solution that we think is going to lower the overall cost for our clients and make us more competitive on the high end of the marketplace as well as the low end of the marketplace.

Last question is on the partnership announcement with visual technologies coming on the heels of the [Gold] Associates acquisition. Could you may be discussed the go-to market strategy a little bit with these types of -- or Biotech drug development type products and initiatives, maybe touch on that a little bit?

I've got to admit I'm not familiar with the visual technologies partnership announcement. We'll check on that and we'll get back to you after the call.

There's quite a few people we're partnering with who, for them, this is a very big relationship and for us it's just a continued strategy of driving toward pharma, driving toward those opportunities. So you'll see us and there will probably be a variety of announcements by those companies that they're partnering with Cerner in some way. It's great for them to be able to announce that. For us, it's something that is part of an overall strategy but not something worth looking at discreetly for each of those companies separately.

Why don't we take one more question given the time we have.

Ross Muken, Deutsche Bank.

Just to sort of touch upon the previous question, although nothing specific to that one company, can you just sort of talk about how what's developing now in personalized medicine and pharmaco gnomics or your whole life science strategy, how that plays in a bit with your ambulatory and clinical strategies as well? Because I would assume, given your position in all three of these markets you're sort of uniquely positioned there.

Ross, this is Neal. They were pointing to me. That's a great last question. We certainly believe that personalized medicine, if you well, is kind of a next click. At this stage, much of the industry is focusing on digitizing, if you will, their medical records and those processes around it.

You've studied us, as I believe you have, you watched us probably two years ago announce that we extended our data model of the Millennium architecture to include the genotype. So we called it -- the brand name we put on it was the Helix. So we extended the kind of internal of Millennium several years ago at the data level and then there's a whole bunch of work that's kind of quiet, because it's down in blood banks and it's down in clinical laboratories, that you're not seeing a whole lot of, but it's very important work over the last two years.

All of this is really the foundation for this next generation of personalized medicine. We certainly believe that physician practices -- although most of them don't know it yet -- most of the medications will be prescribed -- will be pharmacogenetically tested against your genotype and to get the right dose and, if you will, the right drug. We think there's a whole bunch of other medicine that will be personalized in the clinical decision-making.

So, we're a big believer in this is a general direction. I will have to admit to you it doesn't move the meter a great deal at this stage. Now, there was an announcement we did make -- making sure I have the announcements right. But we did -- at our health conference, I don't know if you were there, but at our health conference, we had a Company [criligin] and in the distribution relationship.

So we're working with people that are doing both the diagnostic side and the interpretation side of genetic medicine. So we think this platform we're building out in the physician offices, if it's not this decade, it will be the early part of next decade, they will learn to appreciate all the work we've done to get them ready for personalized medicine. So, it will be a bigger deal than it is today, and I think it will ultimately be a real big deal.

Congratulations, guys, on the good quarter.

With that, I guess I got the mic. I'm going to close the call. We appreciate your time and attention in following our Company and really our journey through this. So, thank you very much. Have a great day.