塞納 (CERN) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cerner Corporation's first quarter 2007 earnings conference call. Today's date is April 19, 2007 and this call is being recorded.

This 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 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 headings "Risk Factors" under Item 1A in Cerner's Form 10-K together with other reports that are on file with the SEC.

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

Thank you, Tony. Good afternoon, everyone, and welcome to the call. I will lead off today with a review of the numbers, followed by sales highlights for Mike Valentine, Senior Vice President and General Manager of the U.S., and an operational update from Paul Black, Executive Vice President and Chief Operating Officer. Trace Devanny, our President, will follow Paul and discuss our global business and our physician practice strategy. Neal Patterson, our Chairman and CEO, is joining us for Q&A.

Now I will turn to the results. The first quarter was a good start to the year with strong bookings and revenue growth, good margin expansion, and strong operating cash flow growth. Starting with bookings, our total bookings revenue was $353 million, which is 35% higher than Q1 '06. Bookings margin in Q1 was $310.9 million. This is an all time high for Q1 bookings with the upside relative to our $285 million to $300 million guidance, primarily driven by our exceptionally strong quarter for managed services bookings.

Moving to backlog, our total backlog increased 27% year-over-year, and end the quarter at $2.77 billion. Contract revenue backlog ended the quarter at $2.28 billion, which is 30% higher than a year ago. Support revenue backlog was $490 million.

From a top line perspective, we delivered good revenue growth in Q1 with total revenue increasing 14% over Q1 '06 to $365.9 million. The revenue composition was $122.9 million in system sales, $93.9 million in support and maintenance, $140 million in services, and $9.1 million in reimbursed travel. System sales revenue was up 5% over Q1 '06, which is our toughest comparable quarter in 2006, as it had grown 17% over the 2005 first quarter. The slightly normal revenue growth was somewhat offset by stronger system sales gross margin growth of 7%, which was driven by growth in license, sublicense, and subscription margin.

Services revenue grew 21% compared to the year-ago quarter driven by strong managed services and professional services growth. Support and maintenance revenue grew 17%. Our gross margin for Q1 was 80.2%, which is up 140 basis points year-over-year with the increase primarily driven by the increased system sales gross margin.

Our operating expenses before option expense in Q1 were $245.6 million, which is up 13% over a year ago, with professional services and managed services growth being the primary drivers. Moving to earnings, our GAAP net earnings in Q1 were $27.6 million, or $0.33 per diluted share. GAAP net earnings include stock option expense, which had a net impact on earnings of $2.3 million, or $0.03 per share.

Adjusted net earnings were $29.9 million, or $0.36, which is 28% higher than Q1 of last year. Our adjusted EPS is $0.01 higher than the $0.35 consensus estimate, which is also the high end out of our guidance. A slightly lower tax rate of 37% versus of our projected of 38% provided some upside. The EPS would have been $0.36 cents even applying a 38% tax rate.

Our operating margin before option expense in Q1 was 13.1%. This quarter our operating margin was impacted by about 90 basis points due to approximately $24 million of zero-margin revenue from our projects in southern England and London with Fujitsu and BT. Our Q1 operating margin without this revenue was 14.0%, which is up 220 basis points compared to Q1 of last year.

Now, I'll move to our balance sheet. We ended Q1 with $277 million of cash and short-term investments, which is $32 million lower than last quarter, primarily due to the $25 million purchase of Etreby Computer Company, which we announced on February 1 and closed in March. Total debt was $208 million which is flat compared to last quarter. Accounts receivable ended Q1 at $358 million, which is down $3 million compared to last quarter due to strong cash collections.

Contracts receivable, or the unbilled portion of receivables, were $141 million, or 39% of total receivables, which is 2% higher than last quarter. The increase in contracts receivable is primarily attributal to working capital for our projects in England. Part of the contracts receivable is related to the R1 release of our software in the southern region. We expect to invoice and collect cash related to R1during Q2.

Our DSO was 89 days in Q1, which is down two days compared to a year ago and up two days compared to Q4. Third party financings were $20 million, or 5% of total cash collections. Note that without the working capital associated with the UK, our DSO would be several days lower and at an all time low. Operating cash flow for the quarter was $43 million. Q1 capital expenditures were $50 million, including $29 million of property expenditures. Capitalized software for Q1 was $16 million.

Free cash flow, defined as operating cash flow plus capital expenditures and capitalized software, was a negative $23 million. Free cash flow before property expenditures was $6 million. The property expenditures were primarily related to our new data center and the purchase of an office building in Kansas City that we discussed last quarter.

Note that the operating cash flow does reflect the decline relative to Q1 '06 that is primarily related to its approximately $22 million more in cash being paid for taxes in Q1 of this year as compared to last year, and a $15 million sequential decline and third party financing. Operating cash flow should increase significantly in Q2 and we still expect strong full year operating cash flow growth compared to 2006.

Similarly, free cash flow will increase in Q2 due to the higher operating cash flow and it will continue to strengthen in the second half of the year as operating cash flow continues to grow and capital expenditures moderate, as we expect the cash flow momentum we have exited in 2007 to accelerate in 2008 as we continue growing operating cash flow and moderating capital expenditures.

Moving to capitalized software, the $16 million of capitalized software in Q1 represents 23% of the $68.5 million of total spending on development activities. Software amortization for the quarter was $13.3 million resulting in net capitalization of $2.7 million for 4% of the total. This net capitalization rate is half of what it was a year ago and the second lowest level all time, with the lowest level of 1% occuring last quarter. Going forward, we expect the net capitalization rate to remain in the low single digits.

Now, I'll go through the guidance. Looking at Q2 revenue, we expect revenue in the $370 million to $380 million range, which is approximately 13% higher than Q2 of '06. We expect Q2 EPS before options expense to be $0.40 to $0.41 per share, which reflects growth in the mid-20% range. The Q2 guidance is based on total spending before options expense of around $250 million to $255 million. Our estimate for options expense for Q2 '07 is approximately $0.04 per share bringing Q2 to a range of $0.36 to $0.37 after options expense. For bookings, we expect bookings revenue in Q2 of $340 million to $360 million, which reflects about 12% growth over Q2 of last year.

For the year of 2007, we now expect EPS before options expense to grow in the mid-20% range, which is slightly higher than our prior range of low to mid-20% range. This expectation is consistent with EPS before option expense and the range of $1.72, which is $0.03 higher than $1.69 consensus at the time we last provided guidance. This upside is driven by the over attainment in Q1 and our expectation that the tax rate will remain in the 37% range for the remainder of the year. Our estimate for options expense in 2007 is approximately $0.15 to $0.16 for the year.

With respect to 2007 revenue, we expect revenue between $1.54 billion and $1.57 billion, or 12% to 14% over 2006. Our 2007 revenue guidance assumes approximately $100 million of revenue and expense from the contracts in London and southern England yielding no net margin as we have discussed.

I do have one administrative note before I hand the call over to Mike. Due to a conflict with a client event, we are tentatively planning to have our Q2 earnings call on July 24th, which is five days later than our normal date. We'll confirm the date and provide the DOW information after our quarter closes per our normal practice. With that, I'll turn the call over to Mike.

Thanks, Marc, and good afternoon. Today, I'm going to provide some sales highlights and then discuss HIMSS 2007 and the U.S. marketplace. From a sales perspective, we had another strong quarter with good contribution from all major segments, including academic medical centers, children's hospitals, integrated delivery networks, community hospitals, and physician practices.

As Marc mentioned, our managed services bookings were the primary contributor to our bookings over attainment of about $50 million. Notably the strength of management services was driven by a recurring trend of some of our large clients choosing to have us host and manage their Millennium solutions.

Some stats on the quarter. Our contract volume was very high in Q1 with a record 371 contracts. Eight contracts were over the $5 million mark, five of which were over the $10 million mark, 22% of our contract bookings were for new Millennium footprints. From a leading indicator perspective, we continue to see strong levels of vision center visits, site visits, and RFP activity and our overall pipeline continues to see good growth.

On the HIMSS front, we had another successful HIMSS event this year. We introduced our innovative roll venue condition solution design methodology with 23 clients bringing a clinical team to New Orleans and presenting their unique condition stories in the booth. Connecting back to their own production systems, the clients demonstrated how they address the specific condition in their organization across various clinical roles and venues using proven Cerner solutions.

With a completely different set of clients running the booth this year compared to last year, this strategy not only emphasized the benefits of roll venue condition design, but underscore the cumulative learning of a true community of users. We believe this approach continues to differentiate Cerner in the marketplace as a Company with high quality solutions and full production, a wide range of clients, and an energized community of users deriving unprecedented value from their IT investments.

Another highlight of HIMSS was a positive buzz around our Cerner Millennium 2007 release, which includes the largest set of new functions that we have ever released in a single release and we believe sets new quality standards for the industry. The new physician interface and workflow based on our roll venue condition design methodology has been very well received by the marketplace.

On the competitive front, we continue to see active competitive landscape that varies by market segment and by country. We believe we remain well positioned given the industrial strength of our architecture and solutions, and our experience at delivering real value to clients in a predictable time frame and at a predictable cost. This ability, coupled with our Millennium 2007 release being well-received, should translate into continued strengthening of our competitive position. We also believe that our ability to predictably deliver value is becoming a bigger differentiator now that we are beyond the early adopter stage in the marketplace and today's buyer places a greater value on predictability.

Looking specifically at the U.S. market, we continue to see ample opportunity for growth. With an industry adoption of fully functional CPOE still at single digit levels, there was a meaningful opportunity for us to continue creating growth as this adoption continues. We also see significant opportunities beyond CPOE such as clinical process optimization, personalized medicine, and outcomes-based condition management.

And with the largest and most strategic health care IT footprint and the deepest and broadest solution capabilities, we can create meaningful growth as our clients increase their leverage of the Cerner Millennium platform and solution suite. In addition, with services like hosting and application management services, we are creating growth by increasing our share of IT spend while at the same time becoming more strategically aligned with our clients.

Outside of our installed base, we still see opportunities to gain share. Our ability to do this is evidenced by us consistently driving about 20% of our bookings from new footprints. These opportunities often present themselves in the form of rebounds of deals where another supplier was selected several years ago and has yet to deliver. We're also seeing opportunities where clients have given up on waiting for competitors to deliver certain solutions and are looking to Cerner to fill those gaps.

These opportunities are complemented by our growth opportunities in new segments such as physician practices, retail pharmacy, and smaller community hospitals, new markets such as devices and device integration, and continued growth in our global opportunities. With that, I'll turn the call over to Mr. Paul Black.

Thanks, Mike. Good afternoon. Today, I'm going to provide global operational highlights and offer a brief update on CareWare initiatives and healthy employer services. Operationally, we've had another quarter of strong execution in our professional services organization. We turned on another 308 Cerner Millennium applications, bringing the cumulative conversions of Cerner Millennium applications to more than 6,400 at over 1,100 facilities.

Our progress with CPOE continued in Q1 with five additional acute care CPOE sites going live, bringing our industry-leading total to 131. We again received recognition for industry-leading position in the 2006 KLAS CPOE Digest, which reported that Cerner still has the most hospitals for more than 50% of the physicians use CPOE and more than 50% of the orders are entered electronically by physicians. Cerner's CPOE solution also had the highest scores in system reliability, up time, and inpatient physician satisfaction.

As measured by KLAS for the third year in a row, Cerner CPOE solutions offer the highest value proposition, which measures physician buy-in, depth of use, and patient safety. We are pleased with our results in these areas because we believe they reflect real use of CPOE and real value being created. This success is made possible by our comprehensive approach to CPOE, our implementation capabilities, our focus on adoption, maturity of our solutions, and our contemporary and scalable architecture. We are now focused on building on this success and driving new quality standards in everything we do. These higher standards are necessary.

Our solutions must always be available just as health care must always be available 27 -- excuse me, 24 by 7 by 365. Our accomplishments in our Cerner Works business are a great example of redefining standards. We have gone beyond delivering 99.9 or three 9s of system availability and are now closing in on 99.99% or four 9s, which is what we believe should become a minimum requirement for health care's 24 by 7 by 365 needs.

Our Lights On Network is another example of setting new operational standards. The Lights On Network is a surveillance system and service that monitors our client hosted and Cerner hosted systems in near realtime enabling the capability to predict and prevent some system issues before the client's operations are ever impacted.

We also audit and display areas where the clients can compare their configurations to that of our gold standard and are able to share these best practices with all Lights On Network members. We currently have 215 clients in the Network with almost 1,200 registered users utilizing the system daily to manage their production environments. Method M, Cerner's single engagement delivery model for providing value through solutions, is another element that distinguishes Cerner's operational capabilities. With Method M, we are expanding the productivity gains we have made with Bedrock, the solutions center, and our upgrade center.

With these initiatives and continued efficiencies in Cerner Works, we are striving to reduce the total cost of ownership and effort of implementing and operating systems in half by the end of this decade. In addition to reducing costs, we are also focusing on increasing the benefits to our clients.

Our current clients deeply embed Millennium in their work flows. They rely on it as a strategic enabler of their practice of medicine. As our clients go digital, there's suddenly a high level of transparency about the quality performance of their complex health care organizations. This creates both the pressure and the opportunity to make substantial rapid quality and process improvements. We can help our clients make these improvements with our Millennium Lighthouse consulting practice, which uses our roll venue condition modeling method to map out best practices for complex medical conditions.

As more of our clients create truly digital hospitals and practices, they will see significant opportunity to use Millennium Lighthouse clinical process optimization to fully reap the benefits of the investments they have made in technology. Collectively, these improvements in quality, total cost of ownership, and value creation have positively impacted our success in the marketplace.

Further, our ability to leverage our robust architecture, solutions, and operations is an important enabler of our entry into new markets such as community hospitals, surgery centers, and physician practices.

Now I'd like to provide a brief update on our CareWare device and device architecture initiatives. Our CareWare architecture allows medical devices to be connected to the EMR through a USB-like connection. We demonstrated the power of this connectivity in a big way at HIMSS with our smart room, the hospital room of the future, where all devices are connected, the EMR is a single source of truth and the clinician and patient experience is substantially improved.

Device manufacturers recognize that our clients want their Millennium EMR to be the single source of truth for all information about a patient. As a result, we have a lot of interest from the device manufacturers who want to be certified on the CareWare architecture. And sales of our MDBus in Q1 were impressive given the early nature of this initiative, which shows that clients value and architectural approach to the merger of health care IT and the biomedical industries.

As we have discussed, we are also rolling out a line of medication dispensing devices called CareWare Rx Station. These devices enable a seamless work flow that compares very favorably to a cumbersome work flow associated with competitive approaches. We are making good progress on this line of devices and are developing a strong pipeline of prospects. We currently expect to be shipping production units by the end of the year.

A final area I would like to discuss is our healthy employer services. As we've discussed, we think there's a lot of friction in health care. This friction creates significant levels of unnecessary costs that employers ultimately pay for. Cerner has already made great strides in demonstrating the ability to remove friction from the health care system.

As a self-insured employer, in 2006 we eliminated our insurance company third-party administrator and became the first employer to utilize the healthy exchange. This approach is proving to take friction out of the process of paying providers. It is also improving the experience for our associates with a single healthy card facilitating payment to providers and pharmacies, and the administration of health reimbursement accounts and flexible spending accounts.

On our last call, I mentioned that we also intend to franchise our healthy employer based clinic model. We believe other employers will find the productivity and cost savings we have achieved to be a compelling reason to adopt our approach. We have had a number of health system and hospital clients, as well as Fortune 500 companies, express interest in Cerner's approach to an on-site clinic for their employees.

And I am pleased to report that we have been selected by a Fortune 100 technology company to provide them a fully automated clinic. We are pleased by our early success here and expect this area of our Company to deliver results in 2007. With that, I'll turn the call over to Trace.

Thank you, Paul, good afternoon, everyone. Today, I'm going to highlight our global progress, our physician practice business, and make a few closing remarks. On the global front, we had another strong quarter with strong bookings and revenue growth driven by success across multiple regions. In England, the adoption of a national choose-and-book scheduling and referral system provided by Cerner and consulting firm Atos Origin continues to progress and the system recently exceed a high water mark of three million bookings.

In the Connecting For Health program, we as the software provider in two regions, representing 40% of England, continue to make progress in bringing sites live. Since our last call in February, we have brought solutions live at two more trusts, totaling 18 sites. We now have a total of 24 sites and 99 solutions live. In addition, we expect another go live within the next 30 days.

We acknowledge there are still some ongoing reports in the British press about delays and adoption throughout all of England. While there are still some minor delays and normal post go-live issues, we are pleased with the significant progress within the past three months, and we are comfortable that we'll continue to do so by working closely with the trusts, DNHS and our partners.

In France, we built on the momentum of a strong 2006 and signed two significant contracts during Q1, including the largest public hospital system in Marseilles. We also expect meaningful additional opportunities in France as the government has announced intentions to double HIT spending over the next five years. Our first quarter also included the signing of our first client in Spain, which we believe will position us for more business in Spain and other Spanish-speaking countries around the world. Overall, we continue to believe we are the best positioned global HIT company. We have the most proven, scalable, and mature health care IT architecture and solutions in the world where there is no one dominant competitor across the many markets in which we compete.

I also wanted to comment on our PowerWorks physician practice business. 2006 was a breakthrough year for this business. As we have discussed previously, Cerner launched our $595 per physician, per month offering for automating a physician practice to include the critical electronic medical record. Today, only about 15% of physician offices have an EMR. This approach has been well received and led to a significant increase in bookings and new pipeline throughout 2006. And this momentum has carried into 2007 leading to a strong Q1.

Notably, we are continuing to see traction with many of our acute care clients as they use their Millennium PowerWorks solution set as a strategic platform to link to community-based physicians. Q1 success included a very large academic medical center purchasing PowerWorks for this purpose.

We also continue to improve our ability to deploy solutions efficiently for our physician practice clients. For example, we completed nearly 60% more physician practice implementations in the first quarter of 2007 than the first quarter of last year with roughly the same number of implementation personnel.

We accomplished this by leveraging our web-based training and teleservices model. And most importantly, the speed to value created by this approach has contributed to a higher level of client satisfaction. We believe this demonstrated ability to quickly and predictably deliver these solutions will contribute to our ongoing momentum in this market.

In closing, we are pleased with our start to 2007 and believe we remain the best positioned health care IT company. In addition to being excited about our near term opportunities, we are equally energized by the potential of our numerous strategic initiatives. We believe the next decade will include another wave of growth for Cerner as the Cerner Millennium architecture increasingly becomes a global platform supporting employer services, devices, pharmaceutical development and clinical research. With that, I will open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Ross Muken with Deutsche Bank. Please proceed.. Please proceed.

Good afternoon, gentlemen, congratulations on a good quarter.

Thank you.

I have -- we've -- I've heard a lot of rumblings coming out of some of the public hospitals that have been LBOed relative to significant increases in health IT spending. If it's the case that there's sort of new owners there have decided to really ramp-up their investment across the board, do you think -- I know it's a small percentage of the total hospital base -- but do you think that has any potential impact on sort of adoption rates at some of the other hospitals within the domestic market? Or is that sort of such a small piece of the puzzle it doesn't really add much in terms of new customers?

This is Marc, Ross. I think overall we're not expecting to see a whole lot of demand driven by that. It is our belief, though, as these systems become more proven and deliver the benefits that for-profits are going to, obviously, take advantage of that opportunity to increase the efficiencies. But it's not a market that we're thinking near term is going to drive a lot of growth, but over time we think it could be.

So we shouldn't expect to see any new RFPs come out of any of those players?

I think in the next 12 months you might start seeing them kind of testing the markets. I don't know if you'll see them go full housewide CPOE, but probably start testing the market for technology that they've really been out of the market from for quite some time.

And just quickly on the MDBus product, can you sort of talk about the rollout there? I know you said clearly you had a lot of interest coming out of HIMSS. Could you talk about when that might start to contribute to the P&L, and in terms of if we have any better sense on sizing or how that business model actually is going to work?

This is Paul Black, it's a traditional business model, and we had some contribution from that in Q1 on specifically on the MDBus and the CareWare element. On the Rx Station, you're not going to see that contribute probably materially this year, but on the -- we have expectations that the MDBus, both the device certification element of that, as well as the ability for us to do connectivity of the existing devices in our clients' organizations to the CareWare Bus back to the EMR, you will see results from that this year.

Great. Thank you very much.

Sure.

Your next question comes from the line of Atif Rahim with JPMorgan. Please proceed.

Hi, thanks. Just a quick question on the gross margins. I know last year this is kind of a multi-year low that we had on the system sales margin, which is about 61.5% and you're up slightly from that. I guess last year there was pretty much a good mix of hardware in the revenues. Is that still the case? I'm just trying to gauge because the margin improvement was --

When you look at gross margin you'll see we'll have improved over, I think the year ago quarter. Primarily hardware, we talked about, Atif, it would start kind of equalizing. We had a big push for hardware, we started delivering a little over a year ago. So hardware was basically, if you will, fairly equivalent. The margins were a little bit lower than probably they were a year ago. But the enhancement in the system sales margin was due to license and the subscriptions. That was the main driver of that enhancement there. Hardware was basically the same to a little bit negative relative to the margin.

Okay. And then with regard to bookings, I think you said managed services are a big contributor. I think there was a comment later about that being about $50 million? Is that correct, is just it the $50 million was --

What we said was that the over attainment, which was in excess of $50 million over the top end of our range. The majority of that's attributal to the managed services. So clearly there was some managed services bookings within our numbers, as well. We don't break out the breakdown between those separately, but we are identifying the additional 50 to bring in primarily managed services in addition to the amount that would have been in our core expectations.

And what are the margins on that business like?

The margins are about 25%, if you look at our business model slide.

Okay. Thanks.

Your next question comes from the line of Julia Thies with Thomas Weisel. Please proceed.

Yes, hi, it's Steve Halper. Just quickly on the bookings in the quarter, was there any additional bookings related to the London contract?

Steve, this is Marc. There were no additional bookings related to the London or the southern cluster contract. The next booking for those is probably the southern cluster when we get R1 pretty much through the approval process, that will trigger another booking. That is likely, we believe right now that will occur in Q2. So there will be a booking impact there. And as we always have been, we'll identify that separately. Our guidance does not include anything from that in our guidance as we've typically done. It'll be an additive item to our guidance.

So once you get R1 approved, then that goes back to your comment you can invoice and collect cash?

That is correct. Our expectation is we will invoice and collect cash in R1 in Q2.

Is it possible that you invoice and don't collect cash until Q3?

Anything is possible, but our expectations are that we will collect cash.

Okay. Great. Thanks.

With CIBC World Markets, your next question comes from [Edward Rein.] Please proceed.

Yes, actually this is Charles Rhyee. I just had a question on the system sales, obviously, I understand you're seeing it as a tough comp versus the 1Q of '06, but if I look at it over a two-year period, looks like you're averaging about 11% year-over-year growth. You spend a lot of time talking about the big opportunity in the U.S., as well as overseas. Is it reasonable to think that we can see system sales growth start to accelerate beyond this low double-digit range?

Yes, I think if you look at '07 clearly from a margin and revenue in the 5% to 7% range, you will see improvements in that as we go through 2007. We would expect to clearly get back up into the double digit range as we will for the year. I think we set our minds reasonable and somewhat conservative revenue growth guidance. We'll be back in double digits to the extent that we over perform, there could be upside to that.

Okay. Thanks, and just one more question. On the contracts receivable, you talked about a $141 million, I think at the end of 2006 at about $133 million. Is that whole difference really just related to here in the UK and we could expect that number to change once if you can get this R1 approved?

Yes, keep in mind in the UK, what you will see is we'll have a billing related to R1, but we'll also have additional revenue coming out of that contract. So the UK has fed the increase in the contracts receivable and to the extent that payments exceed revenue, that'll have a beneficial effect on contracts receivable, to the extent that they're equal, it'll have no effect, and then to the extent in any quarter revenue is an excess of cash, it'll increase the contracts receivable. So currently in Q2, it's probably a wash at the end of the day.

Okay. Thanks a lot.

Your next question comes from Richard Close with Jefferies. Please proceed.

All right. Congratulations, guys. Very good quarter. Talking a little bit about the bookings performance in the managed services, just in trying to look at that versus your, or going into the second quarter guidance. If you had unusually strong growth in the managed services, why wouldn't that continue and then lead to sort of a sequential bookings growth in this second quarter?

Well, our guidance does include a growth -- basically year-over-year relative to bookings. The key for us is when you over attain by $50 million relative to some key hosting contracts, our guidance does not expect to replicate that. We expect to continue to get hosting business, but these are a couple of large hosting contracts that were attributed to that. It isn't unique, it isn't a one time event. It's just in Q2, there is not the same level of that expectation that we delivered in Q1.

Okay, are you seeing anything in the marketplace, I mean, are there additional hosting contracts out there that you're competing for that would be similar maybe in size to what you achieved here in the first quarter?

Richard, this is Mike Valentine. What I would say is that the concept of Cerner owning more of the infrastructure, whether that be the technology through our managed services hosting business or taking on more of the application responsibilities through application management services, that concept is being embraced by the marketplace. Both our existing client base and in the prospect world, as well.

So it's a good fit for the industry, and so your question -- do you see other big deals coming down the pipe, we have a lot of big clients that are out there today that are not hosted that this model has their attention. So we will -- we continue to lean on this model as the right way for Cerner to execute, and for our clients to execute together, so we're going to keep pushing it. And it's -- it seems to be a great fit for the marketplace.

Okay. But just to be clear, there were a handful, a couple major contracts that led to that $50 million in outperformance?

Yes, I wouldn't give a specific answer, this is Marc, relative to whether it was two to four. But there was some large contracts, as Mike said, we have large contracts remaining in the pipeline. Q2, we are currently not predicting any significant one for Q2. And therefore that's what our guidance is based on.

Okay. Great. And with respect to implementations, you talked a little bit about opportunities, maybe from difficulties your peers are having. Maybe if you could elaborate a little bit on that. And then maybe characterize your own implementations currently?

Yes. I think that -- this is Mike, again. I think what you're referencing were my comments. We are seeing and hearing more and more noise in the marketplace around our competitors having challenges in two fundamental areas.

One is around implementations in the ability to execute in that space and deliver. And I think we're getting, we're getting lift and we're getting acknowledgement and credit for our track record of delivering, and I think Paul touched on the stats in that space.

As we get more and more credit and awareness of the progress and the execution in that space, it is becoming a competitive component in our discussions with our competitors. The second aspect of that there's also noise around whether our competitors' architectures can scale, perform, expand to support the complex type solutions that we're addressing here, and that's also giving us opportunity for discussions in the competitive marketplace.

Okay. Thank you very much, and congratulations, again.

With FBR, your next question comes from James Kumpel. Please proceed.

Hi, good afternoon. With regards to the international bookings, particularly the one in Spain, I was curious about the companies that you're competing against in the RFP process. Are there international companies that you're seeing consistently? Or are there a lot of home grown software vendors that you're running up against?

This is Trace, it's a little bit of both. There's a lot of small players in every market in Europe and around the world that have made a living for years. But we also see the large players, the Siemens, the SAPs, the McKessons that you -- as you typically would expect to see in the global marketplace. So the answer is both.

In France, what do you think was the -- was the particular deciding factor on that GE/Medisys deal?

Well, this is Trace again, that was a very interesting opportunity. We had competed very, very aggressively for that business, had indications early on that we had been selected. I think at the end of the day, it became a price battle in many ways and also one of local politics.

So we think that the companies that won the business, Telus being the large defense contractor as the prime, Medisys being the primary source of IP, intellectual property, will have a very difficult time delivering -- seeing the experiences we've had in other parts of the UK and other parts of Europe, I think it'll be a tough delivery for them at a very aggressive price. We wish them well, and we will standby and watch very carefully.

I guess my final question would be on the ambulatory front with PowerWorks. Can you talk a little bit about, quantify the kind of bookings, year-over-year bookings growth that you've seen this year versus last and what you think might be a reasonable trajectory in 2007?

This is Marc. We, just for Trace, add some color -- Jim as you know, we haven't talked about PowerWorks bookings. It's not a number we disclose. The trend and trajectory is very good, Trace you --

Yes, I think we have been very pleased, as I mentioned in my comments, with a breakout year in our $595 hosted model. There's only about 15% of the physician marketplace has an electronic medical record. We think we have not only the scalable platform, but the client reach and the brand name to make a significant impact on that emerging opportunity. So we're very, we're optimistic that we will continue to do well and that we've struck gold with the model we have launched and that's the ASP hosted model.

Great. Thank you very much.

Your next question comes from George Hill with Leerink Swann. Please proceed.

Hey, guys. Good afternoon, I have a few questions. I'll try to be quick. First one is for Mike. Mike, any chance you want to say which competitors are having problems deploying in the market that you're being called in to fix?

I think we're -- the easy answer to that is those that are launching with their new platforms.

Okay.

Is probably the best way to describe that. And the ones that have -- I'll leave it at that.

Okay for Trace or Marc, we were expecting from the last call the acceptance of R1 in this quarter. It sounds like the acceptance and cash receipt could wind up slipping to this quarter. Can you talk about the risk that the project in its entirety slips out further with profitability not being recognized in '09?

Yes, this is Mark. I think the R1 was just working through some of the administrative hoops, which we expect and it slipping by one quarter as you might understand, George. And the lengthy project of this nature is not a big deal. I think we continue to work with the NHS, with Fujitsu and BT. We continue to deliver. So as long as we're delivering, we would not expect to see any major issues relative to our economic performance on slippage. Today, we're happy where R1 is and we'll look forward to invoicing and collecting cash on it in Q2.

Okay and my last question is kind of a combo question. Is there any chance you will give us any color into the bookings mix, maybe the breakdown between how much is software, how much is consulting, how much is managed services, how much is subscriptions? And also, you guys have put up, looking through my model here, 25% almost bookings growth in '05, 15% bookings growth in '06.

You're off to a real strong start at the beginning of '07, but we're really only looking for 12% or 13% top line growth continues to be the guidance. I know that you guys are probably conservative. But can you help us reconcile what the strong, and I guess that's part of the last question, the strong bookings growth and the slower than bookings growth revenue guidance?

Well, I think, George, we talked obviously in Q1, a good example is, the over attainment is managed services. So those revenues are highly predictable. They roll out over a long period of time. Great business model for us, but they're not going to have a lot of current quarter impact.

I actually like the model where a significant portion of our bookings is not required to go in and deliver the results for the current quarter. But they're being added to our backlog to deliver future value.

Relative to providing more detail on the bookings, I think our industry-leading transparency today is in my opinion adequate. We do break down as you know on annual basis from a revenue perspective all the business models, which I think gives people pretty good view relative to the contribution from each of those elements. I think today we'll probably continue our current practice.

Okay, then I'll just jump in with a little more. How do you guys feel about employment capacity? Do you have enough capacity? Do you need to hire more?

We're very comfortable with the level of associates we have to deploy our -- in all of our projects both globally and the U.S.

All right, guys. Thanks.

Your next question comes from Anthony Vendetti with Maxim Group. Please proceed.

Thanks. You had mentioned a booking in Spain. Marc, was that in the first quarter booking number or no?

Yes. It was the first quarter and it was our first footprint in a Spanish-speaking country , and we're very pleased and think there's a very, very good market opportunity beyond that first new

Was that one of the bookings, one of the eight over $5 million, or one of the five over $10 million?

It was not included in that list.

Not included in that list? Do you want to give a range?

[LAUGHTER] Given that we're just entering that market, we just as soon not tell our competitors the size of the deals that we're able to drive there.

Can you say the city in Spain that it was in?

The client was [Marina Salud] in Valencia.

Okay. And Neal this is for you. you touched upon this at HIMSS, but can you talk a little bit more about what that opportunity is in self-insurance, and rolling that out to other companies? I think it was mentioned that you signed up a Fortune 100 company. Can you talk about what that opportunity is and in terms of what the potential is down the road? I know it's very early, but what you see the size of that opportunity being?

Anthony, this is Neal. First of all, the, in Paul's scripted comments, he made reference to a Fortune 100 company, that was not for any TPA or any insurance service there. That was really, has to do with basically employer-based clinic.

Okay.

Just to parse that. And secondly, I think we both know that the potential in the market in the flow of funds is quite large. We're very early stages there. We're using ourselves, Cerner, as our pilot. We all will go home this evening and think everybody here in the room here's married, yes, all married in this room. And if our spouses weren't happy with the service, we would hear about it.

So we think we've made -- as a Company, we grow this Company based on being able to innovate, we use really IT and architecture kind of as the center, of the nexus of that innovation. We think there's a lot of friction, an awful lot of waste in how we pay. Those of us as the employer level how we fund pay for those services at the provider level.

So we like what we're doing. It's working well, it's very early stage. As I said, both you and I, Anthony, know it's very large potential.

Sure. Sure. Okay. Great. All right. Thanks.

Your next question comes from the line of Sandy Draper. Please proceed.

Thanks, and good afternoon. Just three, hopefully, pretty quick questions. First, I think is for Mike. On your comments around the hosting business and the size, just to be clear, are these going to be competitive deals where one of your customers would host with someone else? Or is it pretty much a decision to host with Cerner or do it by the customer themselves?

Sandy, it depends. This is Mike. It depends, predominantly the clients look to us as the sole provider of this. There are situations where they're looking at broad outsourcing. But clearly what we're proposing to them and what they're embracing is out tasking. A piece of it.

There are good examples in the marketplace where we have an outsourced client where we will take the Cerner piece just because of our track record of performance around SLAs, the predictability around costs, we can do things that a traditional outsourcer is unable to do because we literally own the platform. And so we have several situations where our clients are outsourced. And yet they still carve off the Cerner portion and give it to us to manage.

Okay. Great. That's very helpful. And two just quick financial questions, I think, for Marc. First, can you just remind me, Marc, on the hosting and managed services bookings is that capped at one year, I can't remember is it a life of the contract [rolled up]? How are you accounting for that in the bookings number?

Yes, most of the managed services bookings are for a five to seven-year period contract. And for the most part that's present valued. So it's the full value of the contract, but we present value it back to today in order to kind of give an apples-to-apples comparison on present values.

Okay, so going back to George's question, because those are longer term, that would be a pretty substantial reason for why when your bookings are going faster since it's a five-year present value, not a one-year, that you would see a delay between bookings and revenue?

Yes, absolutely. It's a reason those are going to our backlog. And the length of our backlog is -- the time it takes for our backlog to come out lengthens it a little bit because of these five to seven-year projects. Once again, it's a great model for us to be in. We're well positioned to go get that business. And we have lots of clients who still are not hosted in our data center.

Okay. Great. And final question. You've been sort of running at about $13.3 million in amortization of software for a couple quarters. I can't remember if you've given a quarter when you think you'll see that step up in amortization?

Yes, I'm sorry, can you repeat the question, Sandy?

For the software, the amortization of capitalized software, I think you've been running around $13.3 million the last two quarters. Is there -- is that going to stay flat through the end of the year and step up in the first quarter? I can't remember, is it actually take another step up like last year in the third or fourth quarter?

That will continue. The things that will impact the amount of software amortization is the release of a -- a new release of Millennium, which occurred last November. So that's stepped up the amortization.

And then as items that have been previously capitalized hit their five-year life, they will drop off. And they will drop off basically in the Q1 time frame. The December 31st will have been when that last year of their life amortizes and you'll see it coming out of the number in Q1. The Q1 number you see now is a pretty good estimate of what you'll see for the next four quarters.

Okay, great. Thanks.

Your next question comes from Steve Unger with Bear, Stearns. Please proceed.

Hi. Good evening. First off, was there any acquisition-related revenue from Etreby, and was there any meaningful charges to uncollectible accounts in the quarter?

No, and no.

No, and no. Very good. And then in terms of the number of physicians that are paying a $595 subscription for PowerWorks, can you give us some color on that, Paul?

Trace, if you want to provide some color, just so you know, Steve, we don't talk about the numbers. We talk about general trends as we roll out our new model. So I don't know that we can provide any color that doesn't have numbers that would be helpful at this point.

Okay. And then lastly, this is like the first, I would say, first time that you have missed, I guess, the upper end of your revenue guidance in the quarter in a couple of years now. Was there -- is there a surprise to you in terms of implementation delays in the quarter or something? Or is this just the way the backlog is rolling out now?

Well, Steve, if you understand our business models, it isn't a surprise, the mix can change somewhat if you look at our gross margin, obviously, gross margin was higher. The revenue was, this is a complex business and we estimate, give you our best estimate of what revenue's going to be. When we're in the range we feel like we've done a pretty good job of estimating it.

There is no impact on revenue from delays in any projects that I'm aware of at all. So the revenue we drive out -- we've kind of managed this business on a margin basis because revenue can fluctuate depending on the mix of the business when you have software all the way to third party software all the way to hardware. So from our standpoint, it's within the range we expect it to be, and we were pleased that earnings were a penny over what we expected them to be.

Okay. Fantastic. Thank you.

Why don't we take one more question?

Your final question comes from the line of Sean Wieland with Piper Jaffray. Please proceed.

Hi, thank you. Two quick questions. One, the outperformance in managed services, could you characterize the kinds of deals, or types of customers that these are with, existing customers versus new customers or large, medium, small? If you can kind of help me understand that a little bit?

Yes, Sean, this is Mike, again. I would say, we have a pretty broad mix at this stage. As you probably recall when we first launched the managed services business, it was to get into the community hospital marketplace. And now, we see a full mix of the segmentation. So the segmentation of the clients themselves.

And we see a mix of whether they come from -- they've been hosting the technology and they moved back. And they moved it to the center, data center. A large portion of our net new footprints are now hosted in our managed services business.

And then I gave the example of a client that is outsourced is now moving business to us. So we get a mixture of that on a quarterly basis. And that was exactly the case in Q1.

Okay. Thanks. That's helpful. And then related to the UK, what's the next billing milestone beyond the delivery of R1? Is it the delivery of R2, and what is the timing on that?

We bill all the time for various elements of the UK contract. There are chunks of revenue tied to various elements. I'll be honest, I couldn't tell you off the top of my head when the next one comes in. We are continuously billing for a variety of things. These are just milestone events that generate a booking for the next segment, which is why we highlight them to this group. And when there's cash tied to them, it helps you all to find one that occurred. These aren't just one-time events and that's the only cash we get out of these things.

Okay. So what is -- when are you expected to build margin or to recognize margin on the UK now?

Yes, we've consistently indicated that 2008 is when we expect to have no remaining undelivered elements. That's the key trigger for when we will start recognizing margin. The entire margin of the contract will get recognized over the remaining revenue of the contract at that point. But it's been 2008 since our initial announcement of the contracts.

So that hasn't been pushed back at all?

It has not changed.

Okay. Great. Thank you very much.

With that, this is Neal. With that, let me close the call first by saying thanks to you all for taking your time and your intellect in following our Company here and kind of maintaining this dialogue that we have every quarter. I think what we're doing here and we're certainly what we're trying to do, I think we are creating a strategic footprint, IT footprint out -- basically the core of the largest sector in the economy and every economy across the globe, that's health care delivery. And so, that strategic footprint is going across the globe.

We're strengthening our business model. We'll give up some growth in top line to make sure that the that we have better visibility and [recurrability] inside the revenue model and the business model. We think we got lots of opportunities in this wonderful intersection of IT and health care to continue to innovate and grow this Company.

We will always say to you that what we do is very hard. Health care is hard, IT is hard. We are at that intersection that I can attest to, though, as a Company we're getting better every day at what we do. I like the broad trajectory. Again, thanks, and until next time.

Ladies and gentlemen, thank you for your attendance in today's conference. This concludes your presentation. You may now disconnect. Good day.