塞納 (CERN) 2008 Q3 法說會逐字稿

Welcome to the Cerner Corporation third quarter 2008 conference call. Today's date is October the 21, 2008 and this call is being recorded. The Company has asked me to remind you that the various remarks made here today by Cerner management about future expectations, plans, prospectives and prospects constitute forward-looking statements for the purpose of Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning facts that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading risk factors under items 1A in the Cerner's Form 10-K together with the reports that are in the file of the SEC. At this time, I would like to turn the call over to Marc Naughton, Chief Financial Officer for Cerner Corporation. Please proceed.

Thank you, Eric. For those of you wondering this is the Cerner conference call just in case you're wondering if you were dialed in correctly, but good afternoon, everyone and welcome to the call. I will lead off today with a review of the numbers followed by sales and operational highlights from Mike Valentine, Executive Vice President and General Manager of the US. Trace Devanny, our President, will discuss our global efforts and our physician practice business. And Trace will be followed by Jeff Townsend, Executive Vice President and Chief of Staff who will discuss innovation. Neal Patterson, our Chairman and CEO, will participate in Q&A.

Now I'll turn to our results. Bookings revenue, operating margin earnings and cash flow performance were all at or above expected levels and our outlook remains positive. Moving to bookings, our total bookings revenue was $383.6 million which is 8% above the $356.7 million of bookings in Q3 of '07.

Moving to backlog, our total backlog increased 9% year-over-year and ended the quarter at $3.4 billion. Contract revenue backlog ended the quarter at $2.8 billion which is 9% higher than a year ago. Support revenue backlog was $0.6 billion.

Our revenue in the quarter increased 13% over Q3 '07 to $422.7 million which is at the high end of our guidance. The revenue composition for Q3 was $137.5 million in system sales, $118.2 million in support and maintenance, $157.5 million in services and $9.5 million in reimbursed travel. The $137.5 million of systems sales revenue is a Q3 record and reflects a 19% increase compared to Q3 '07.

This quarter reflected strong software growth with software revenue at a record level for our third quarter. There was also good growth year-over-year in hardware largely due to an easier comparable in Q3 '07. Services revenue which includes managed services and professional services grew 7% compared to the year ago quarter driven by continued strong managed services growth.

Similar to our year-to-date performance, our professional services revenue was flat in Q3. To lower growth rate of professional services continues to be the result of slightly lower billable headcount in the US and a continued decline in services revenue in the southern region of England related to the exit of Fujitsu as the prime contractor. Growth in professional services will likely continue to ramp back up in the United Kingdom.

In addition to the impact of the southern region, it's worth noting that the success of our efficiency initiatives such as Bedrock, MethodM and our solution centers have limited professional services top line growth to some extent. These initiatives have allowed us to get more work done without increasing services headcount. This is a good thing as our clients are benefiting from lower costs and more predictable outcomes and we are also benefiting in that we are driving good margins from our professional services.

Further evidence of our services organization's ability to deliver value to clients is our continued strong growth in support revenue which increased 16% in Q3 compared to the year-ago quarter. Looking at a geographic view of revenue, our domestic revenue grew 8% year-over-year and our global revenue increased 37%. Our gross margin for Q3 was 82.9% which is up 70 basis points compared to Q2 and down compared to the Q3 -- to the record Q3 '07 gross margin of 84.5% which resulted from a multi--year low level of hardware.

Moving to operating expenses and earnings, our operating expenses in Q3 were $278.8 million before options expense. This is up 10% over a year ago. Sales declined service expenses were up 9% with managed services growth being the primary driver. Software development was up 4% which is in line with expected levels.

G&A expense was up 27% year-over-year, but included a $5.6 million foreign currency translation loss. Excluding this loss, G&A increased 6% year-over-year. The FX lost reduced EPS by $0.04 for the quarter, a much higher impact than anticipated. While the quarterly fluctuations have been significant in 2008 for the year, the impact of FX in the income statement is less than $300,000.

Moving to operating margins, our operating margin in Q3 was 16.9% before options expense. This is an increase of 60 basis points over last year. This quarter our operating margin was impacted by about 50 basis points due to approximately $12 million at zero margin revenue from our work in the London region of England. It is also worth noting that the FX loss had a 140 basis point impact on operating margins this quarter, so our operating margin excluding the impact of the FX loss would be 18.3%.

Based on our year-to-date performance, we remain on track for our goal of achieving 20% margins in 2009. Our path to 20% continues to include the assumption that we'll be able to recognize margin on our UK contracts. As I mentioned last quarter, we expect to be able to recognize margin by the end of this year on our contract in the London region which will likely lead to a one time catchup in Q4 for past margin on that project.

In spite of this one time catch up, our current expectation is that the ongoing margin from the London region will still deliver its expected contributions to our path to 20% margins. The size of the catchup increase has not been determined and we'll break it out when it occurs, and it is not included in our guidance. In the south region we continue to work under a transition agreement to support and upgrade the eight trusts that are currently locked. We are currently recognizing margin on this short term transition agreement as we do the work. While the margin on this agreement is currently more than offset by expenses for personnel who became idle when the main contract was cancelled, we expect the margin to positively contribute by the time we get into next year. Regarding status of the remaining trusts in the south, the contractual changes are still in process and it is currently difficult to make any definitive statement as to the ultimate timing or outcome but as we have said, we believe suppliers that are delivering value are well-positioned to play an active role in the program going forward.

Moving to earnings and EPS, our GAAP net earnings in Q3 were $45.0 million or $0.54 per diluted share. GAAP net earnings include stock options expense which had a net impact on earnings of $2.4 million or $0.03 per share. Adjusted net earnings were $47.4 million adjusted EPS was $0.57 which is $0.01 higher than the consensus estimate and our guidance range.

Not included in adjusted net earnings or EPS, but worth noting was a lower than expected tax rate of 34% which benefited net earnings by about $1.4 million. The lower tax rate was related to strong income levels from global regions that have lower tax rates. The benefit from this lower tax rate was more than offset by the unusually high FX loss of $5.6 million which after tax had a $3.7 million negative impact on the net income. If you normalize Q3 by using a 36% tax rate and excluding the FX loss, adjusted EPS would have been $0.59 for the quarter, an increase of 28% compared to adjusted EPS reported in Q3 '07. We'll note on the tax rate, we do expect it to remain lower in Q4 due to the reextension of the R&D credit. Using 34% to 35% is a reasonable range.

Now I'll move to our balance sheet. We ended Q3 with $297 million of cash and short term investments and $102 million of auction rate securities. The auction rate securities balance still reflects a reduction from par value of approximately $4 million.

We continue to view this impairment as temporary due to the underlying credit rating of the securities and our intent and ability to hold the securities until the market recovers. In addition, UBS indicated they will buy back our auction rate securities at par in 2010 which provides further assurance that we will be able to liquidate. The average tax exempt yield on the IRS for the year is over 4.5% and once again, that's a tax exempt rate. Our total debt is $174 million.

Since some of you asked about our debt and the rates on it, I'd like to remind you that all of our debt is privately placed and has fixed rates with a weighted average of 5.8%. We also have a $90 million line of credit on which we have no outstanding balance. The rate on the line is based on LIBOR or prime, so we would not be subject to the current elevated LIBOR rate if we used the line. Total accounts receivable ended Q3 at $431 million.

Contracts receivable or the unbilled portion of receivables was $121 million or 28% to total receivables which is down from 38% last year and up slightly from an all time low of 25% last quarter. Third party financings were $25 million or 6% of the $436 million of total cash collections. Note that our balance sheet still reflects billed and unbilled receivables related to the Fujitsu contract to represent over 10% of total receivables.

Although it will be some period of time before Fujitsu and the government unwind their contract, and we settle with Fujitsu, we currently expect to fully collect these receivables. However, they will have a negative impact on DSOs in the meantime. Our DSO was 93 days in Q3 which is up three days compared to last quarter.

Operating cash flow for the quarter was $48 million. Q3 capital expenditures were $20 million and capitalized software was $17 million. Precash flow defined as operating cash flow less capital expenditures and capitalized software was $11 million. As we previewed last quarter, we expect operating and precash flow to decline in Q3 compared to the record Q2. But we are still on track to meet our target of $80 million to $100 million of free cash flow for the year with $58 million of year-to-date precash flow and Q4 typically being a strong cash flow quarter.

A couple of other notes on cash flow, we did purchase about $4 million of stock back during Q3 and we still have $41 million remaining on the authorization we announced in April. Also we spent $4 million on an acquisition during the quarter purchasing a small company within electrical property that facilitates computer automated coding. As Jeff will discuss later, there are similar applications for this technology and we have already seen the benefits from bringing it into Cerner.

Moving to capitalized software, the $17.1 million of capitalized software in Q3 represents 24% of the $72 million of total spending on development activities. Software amortization for the quarter was $13.2 million, resulting in net capitalization of $3.9 million or 5% of the total. As we indicated last quarter, we expect the release of the next iteration of Millennium to become generally available in early 2009. This will trigger an increase in amortization expense of about $4 million to $5 million per quarter. This increase will be partially offset by the completion of amortization of amounts capitalized in 2003 which will reduce amortization by about $3 million per quarter, leaving a net anticipated increase in amortization expense of $2 million per quarter.

Now I'll go through the guidance. Before going through the numbers, I want to note that we cannibalized our guidance ranges this quarter to allow for any impact of potential financial market volatility we might have. While our pipeline remains strong, we believe healthcare is likely to be more resilient to tough economic conditions than most segments. We think it's appropriate to allow for the possibility that some clients could delay decisions in this time of macroeconomic uncertainty and tightening credit markets.

That said, we are biased toward the high end of our guidance which is based on our normal forecast process. We have a good track record of delivering against our forecast. We also believe our high level of recurring and visible revenue and our largely geographically diverse client base will help us minimize the impacts of the economy. Looking at 4Q revenue, we expect revenue in the $435 million to $460 million range which is about 13% growth over last year.

We expect Q4 EPS before options expense to be $0.58 to $0.64 per share. As I previously mentioned, guidance does not include any catchup of margin related to our contract in London. Any catchup margin will be upside to our quarter results and guidance assumes we have no material impact from foreign currencies.

The Q4 guidance is based on total spending before options expense of around $290 million. Note that our Q4 ends on January 3 which includes 14 weeks instead of 13 which is why there's a higher than normal sequential increase in expense and revenue. Our estimate for options expense for Q4 '08 and 2008 is approximately $0.03 and $0.12 per share respectively. Moving to bookings guidance, we expect bookings revenue in Q4 of $410 million to $440 million with a midpoint of that range reflecting growth of about 5% over Q4 of last year which was an all time high bookings level.

Now I would like to provide our initial thoughts on 2009. Based on the early version of our 2009 plan, the consensus estimate for revenue and earnings both appear reasonable with top line growth of approximately 10% and bottom line growth of approximately 18%. I noted that achievement of our 20% operating margins in 2009 would drive greater than 18% earnings growth which positions us for upside, but we believe it's prudent to remain conservative at this point.

I'd also like to give a sense for how we are looking at long term cash flow generation. While we will spend less than $150 million on capital we originally estimated for 2008, I think modeling $150 million of CapEx for the next several years is reasonable with it being likely lower than that in some years and slightly higher in others. It would basically flat CapEx with continuing good earnings growth, our free cash flow should continue to grow at strong rates over the next several years.

In closing, we are very pleased with our results in Q3 including strong bookings growth, strong revenue growth, including record system sales of software levels, continued progress on our margin expansion initiatives, strong earnings growth in excess of 20% and continued generation of free cash flow positioning us well for our full-year target of $80 million to $100 million. With that, I'll turn the call over to Mike.

Thanks, Marc. Good afternoon, all. Today I'm going to cover sales, operational highlights, marketplace trends and our Cerner health conference.

From a sales perspective, we had a strong quarter. In Q3, we had $383.6 million of bookings which is an all time high level of bookings for our third quarter that doesn't include UK bookings. We had good seismics with 11 contracts over $5 million, nine of which were over $10 million.

We had very strong bookings contribution from outside of our Millennium install base with 37% of contract bookings coming from new Millennium footprints, our highest level in over four years. Our RFP activity in pipeline is strong with a good level of new footprint opportunities, so I would expect to continue to see new footprints making solid contribution to our total bookings. We also had another strong quarter of vision center activity and earlier this month held our largest and best ever health conference in Kansas City which I'll talk about a little bit later on.

While our core business remains strong and healthy, the new innovations are also beginning to drive new business in new market areas. Today I will comment specifically on how we are expanding our boundaries into the medical device area. In the third quarter, we continued to advance our CareAware platform both from a capability standpoint and from a market awareness standpoint. Our CareAware MD BUS device connectivity solution allows medical devices to be connected to the MR through a USB-like plug and play connection and is beginning a near era of interoperability between devices and the MR. The level of client interest in this solution remains very strong and we signed several new clients in Q3.

The third quarter also included good progress with RxStation, our medication dispensing units. We completed our second implementation of RxStation during the quarter and signed another large testing partner. Our pipeline has continued to grow and we are well-positioned for contributions from RxStation to accelerate after we get a core set of reference clients up and running.

We are also using a CareAware architecture to connect other technologies common in the healthcare environment including HVAC, lighting, entertainment and the Internet creating a contextually sensitive smart room. It includes our recently introduced My Station, making the patient and family an integral and informed part of the care process. We signed three new clients for smart room pilots during the quarter. All of these client pilots serve as pointers to their desired future state where our big opportunity is for entire facilities to be built or converted to smart rooms.

Our Smart Semi, better known as the traveling smart room, had another busy quarter visiting over -- visiting about 40 more locations. The Smart Semi has now made 64 stops with 4,600 client attendees since launching in May. We have been extremely pleased with the enthusiasm it has generated in our client base and with new prospects; many times with the CEO bringing their board members in for a private tour showing the direction IT is taking healthcare.

The Smart Semi returned to Kansas City for our health conference and was a big hit inside the convention hall at our solutions gallery. As a reminder, the Smart Semi is part of a unique marketing campaign for our CareAware suite of solutions including MD BUS, RxStation, My Station and other solutions that collectively allow us to show smart hospital rooms of the future and a complete redesign of the care experience. An interesting note is that recently a number of medical device organizations have approached us to form reseller agreements, seeing our committed long-term strategic relationship with our clients and our ability to add tremendous value to their solutions. We plan to pilot a few of these relationships which allow us to resell medical devices as part of connectivity bundles that will simplify purchasing for our clients and create another source of revenues for growing Cerner.

Now I'll update you on some operational progress. We had a good quarter delivering solutions to our clients. I believe the advanced use of IT by many of our clients is creating a gap in the industry that will only widen as our clients continue to adopt more wide space solutions and services.

A good example of a client's successful use of IT is eastern Maine Medical Center which recently announced they are this year's winner -- only winner, of the Nicholas C. Davies organizational award for excellence. This prestigious award is given to select hospitals in the country for effectively using information technology to improve the safety, quality and efficiency of patient care. Examples of achievements through IT that contribute to them being selected include improving the ratio of electronic to written orders from 5-1 to 14-1, eliminating 160 minutes from order writing to pharmacy receipt of orders and decreasing the average time for pharmacists review by 52%, decreasing medication incidents by 27% over two years, saving physicians and other providers 40 to 60 minutes on daily rounds, improving core measure performance for AMI, heart failure and pneumonia, decreasing hours spent abstracting data by 50% and leveraging our lighthouse clinical process optimization services to drive significant growth in case volume and improvements in average length of stay and percent of orthopedic patients requiring transfusions.

Another example of our clients' advanced use of IT is their presence in the 2008 Leapfrog Top Hospitals List with 22 of 33 named hospitals being Cerner clients. A lEapfrog Top Hospital fully meets Leapfrog standards for CPOE, ICU staffing and fully meets or has made significant progress towards safe practice guidelines. To conclude on the operational front and said very simply, our clients are achieving more through their partnership with Cerner than others in their regions are with competitive solutions and it's having a meaningful impact to their businesses.

Now I'd like to discuss our Cerner health conference which took place earlier this month. More than 7,000 total attendees including hospital clients, physician practices, industry partners and Cerner associates participated in our annual client conference. Attendees this year came from 47 states across the US, 13 countries and five continents.

This year's conference theme was Come Together which relates to how healthcare professionals, employers, government leaders and Cerner associates work together to achieve optimal benefits from IT. The conference amplified our all together brand positioning where Cerner clients shared their industry leading experience firsthand with other attendees. This year we had 505 client speakers and 416 education sessions with more than 60% of the sessions qualifying for continuing education credits for physicians, nurses and other healthcare professionals. This total not only greatly eclipses other comparable HIT supplier events, it also exceeds the educational session counts for the largest industry association event such as RSNA, HIMS, CHIM or AMIA. For many organizations, this has become the event they attend each year.

In closing, I'll make some comments on the status of the US marketplace. Overall, we believe the fundamental drivers for IT demand and adoption remain firmly intact. The fundamental impact our solutions have on safety, efficiency and costs drives an internal commitment to rank our projects over just about every competing priority. Most of our clients also believe they must continue forward to meet current and future regulatory requirements.

Just a few examples of these requirements and pressures on hospitals to adopt IT include facing a review of charges by the Medicare regulatory audit contractors better known as RAC audits and being required to pay back unsupported charges, complying with ICD10 diagnosis and procedure coding requirements, improving processes and systems to reduce the impact of never events which are conditions that are no longer reimbursed at cost after a patient is admitted and complying with paper performance and paper reporting requirements which are now starting to include HIT requirements such as the nine HIT recently recommended by the national quality forum.

Overall, with our help, our clients are making tremendous progress using our solutions to automate more of their processes across their enterprises. And as will Trace will discuss, the current political environment doesn't seem to be a threat to healthcare IT because it has bipartisan support due to the focus on rising healthcare costs and the widely known cost saving benefits of HIT. Hospitals also remain operationally sound, but as Marc mentioned we are monitoring the market closely for any impact of the credit market issues. In Q3, we did have a few contracts slow down due to these issues as the client management teams paused their contracting process to work on their short-term financing strategies. In all these cases, the clients have found solutions to their shor- term problems and are proceeding with their initiatives.

Our quarter results were still very strong demonstrating the strength of the breadth of our businesses, the size of our client base and our participation in the broad worldwide marketplace. While times are full of uncertainty, our clients are resolving the short-term issues with access to debt and our forecast for the next few quarters are currently composed of the necessary components I believe it takes to deliver the predicted results. But we certainly understand the possibility that a sustained recession and credit crunch could start to impact our client's ability to invest in IT.

As Marc said, we've tried to factor these into our risks -- factor these risks into our guidance for Q4 by widening the guidance range. But overall, we have believe that we are well-positioned to continue delivering solid results even in a tough broad economic environment. With that, I'll turn the call over to Trace.

Thanks, Mike. Hello, everyone. Today I will discuss some good progress in our international business and some thoughts on the upcoming election.

On the global front, demand for healthcare IT continues to strengthen driven by many of the same factors facing the US healthcare system; safety, efficiency and productivity. This was illustrated in our healthcare conference earlier this month which included clients from 12 non-US countries. Financially, we had strong global results in Q3 with our revenue growth rebounding after facing tough comparables in the first half of the year.

I would now like to comment on developments in the quarter beginning with the Middle East. Last quarter I highlighted several important goal lines in the Emirates of Abu Dhabi and indicated this success positioned us well for continued progress in the Middle East. I am pleased to report that we, in fact, did build on this success and were recently selected by the Ministry of Health and the United Arab Emirates to provide a broad Millennium suite of clinical and administrative solutions. The Ministry of Health sets healthcare regulations and healthcare policy for private and hospitals in the UAE. It currently runs 12 public hospitals and 60 primary care healthcare centers in the northern Emirates, including [Starga, Ajman, UAQ, Rasell Kirma, Bujera], and a portion of Dubai. This is a landmark opportunity for Cerner's efforts in this region. Given the breadth of this important announcement, I believe we have the chance to become the standard for care across the entire Middle East.

Another global highlight this quarter was continued progress in Australia, a very important market to Cerner with significant new potential. As you may remember from previous calls, we have been working on both New South Wales and Victoria for a number of years. In New South Wales, we had a significant go live under the New South Wales EMR program at St. George Hospital, a 605-bed teaching facility and a major trauma center that is part of the southeastern Sydney and Illawarra health system.

In the state of Victoria, we finalized our build work and executed an agreement to implement Phase I of the EMR deployment at our first health service site. In addition, the health smart program of which Cerner is the ACIT partner has reached another major milestone with lead agencies, Eastern Health and the Royal Victorian Eye and Ear Hospital committing to implement the health smart clinical system solution. Finally in Queensland, we extended our relationship with Uniting Care Health, one of the largest not for profit private healthcare organizations in the country.

Moving to Europe, we had an important milestone in France with the signing of our first ever hosted client outside the US, the private/public partnership between [Anoch] and [Malensian] Community Hospital. As we have discussed previously, the French government has introduced several significant new regulatory requirements. These requirements are designed to curb excessive medication use, modify reimbursement based upon DRG versus fee for service and to make a person's medical record available upon request. This has created demand for access to critical patient information via an electronic medical record.

Our remote hosting offering is an important delivery mechanism in the current French healthcare environment as it allows caregivers and critical hospital staff to focus on clinician adoption and change management without having to worry about management technology platform. The target market for this offering is significant with approximately 3,000 small to midsized hospitals in France that are likely to view our host offering as a way to manage these ever changing regulatory and technology requirements. Also note that we are partnering with Hewlett-Packard on the hosting component as we do not intend to build our own data center at this time.

In the United Kingdom, both political parties held their annual conferences in recent weeks. Cerner's executives that attended both events heard a set of public policy prescriptions where information technology solutions clearly will be a central enabler. The ongoing trend toward patient choice continues at the forefront of this agenda. Choose and Book, our national E scheduling solution managed in conjunction with our partner [Atoss Origin] has achieved more than 11 million bookings since its inception and set records for daily volume several days during Q3.

Much like markets in the rest of the world, clinical quality indicators and increased performance measurement continue to be the policy mechanism for improvement. The pace of these expectations can only be achieved with a more robust clinical information platform which continues to drive the local demand for Cerner's capabilities. Working very closely with our partner British Telecom and our experience with the national program to date, we continue to pursue opportunities to accelerate these benefits.

With the US presidential election approaching, I'd like to briefly comment on US politics and healthcare. The United States is grappling with escalating consumer expectations and spiraling costs. The next president is facing the largest budget deficit in history with healthcare spending at over $2 trillion, representing roughly 16% of our gross domestic product with no slowdown in sight. For that reason, healthcare should be at the forefront of our domestic policy dialogue.

Beyond just the spending challenges coverage, access and quality will remain major themes in the healthcare debate. Politicians and policymakers all agree that the current system is unsustainable and leaders of both parties expressed commitments to the intelligent use of information systems in improved health outcomes and correspondingly drive down costs. We believe this consensus and insight positions Cerner well in almost any policy environment.

We believe that the fundamental transformation of healthcare delivery will include new models of care delivery dealing with chronic conditions which are consuming an increasing amount of our healthcare dollar, new models of diagnostic medicine, changing the boundaries of traditional silos such as laboratory, radiology, cardiology and pharmacy, the evolution of personalized medicine driven by increased utilization of genetic diagnostic medicine, a new economic commerce model that will fix the misaligned incentive structures in today's traditional medicine and rewards appropriate high quality care, a modern surveillance system replacing the antiquated methods used today to protect public health and a fundamental change in knowledge discovery in the speed and dissemination of new knowledge into the mainstream practice of medicine. And as you might have guessed, we strongly believe that healthcare IT will be the driver of each of these fundamental changes in the US as well as every country around the world. In short, we believe the next decade looks both exciting and opportunistic for Cerner.

Before turning the call over to Jeff, I wanted to provide a quick update related to our healthy employer services organization. I am pleased to report that our first health center client, Cisco Systems of San Jose California, will be opening their life connections health center next month. This will be a fully automated employee-based health center based on Cerner's own successful on campus model.

Cisco's health center will be staffed by eight providers and numerous other staff, and will be available to over 40,000 Cisco employees and dependents. We are excited to help our partner achieve the same improvements in quality, efficiency and access to care that we have achieved with our clinic. With that, I'll turn the call over to Jeff.

Thanks, Trace. Today I'm going to discuss some major progress on innovations we highlighted to our clients at our annual health conference as we use this venue to push the boundaries of our solution offerings, share successes with our clients and help create their future state roadmaps. Throughout the event, we used two platforms to collaborate and educate on both current and future innovations.

The first being the education sessions with more than 95% of the 416 sessions being led or co-led ball clients and industry partners. The others through hands on interactions in our solutions gallery highlighting over 100 collaborative industry partners. This year we introduced a very different experience for attendees, showing care delivery in action across multiple smart room venues, consumer health, maternity, critical care, physician office and diagnostic medicine. In addition, two venues were introduced to highlight the capabilities across rooms with the smart nursing unit that could track and monitor patient activity and context across all of the smart rooms, and a device management venue to track and manage all equipment across the solutions gallery.

As we've highlighted in previous calls, this setting brought to life several of our five box initiatives. One of the more complicated venues, maternity, was introduced during the conference and represents a collaborative development effort across 13 different client organizations. One of the initial testing partners for this solution is UAB Health System. Not only does this solution require the coordination of medical devices and multiple types of media, it also involves a multi-patient set of scenarios to automatically move clinical information between mother and baby which could be as many as 60 independent clinical elements as well as the ability to perform clinical decisions support across patients.

In the physician venue, we highlighted a joint development initiative with the University of Missouri around the concept of a virtual care delivery model they call the medical helm. At the center of this innovation was the introduction of an embedded development platform within Millennium called the M pages. As we've discussed before, we've reached a critical mass of information within the medical record turning the focus to getting the information out, creating the one contextual face-up story of the patient.

With the collaborative story of U of M physicians, this is not only a view of clinical information, but also includes expected plans of care in realtime compliance for the patient, all patients under that physician's care and the targets for the entire physician group. The most exciting part of this innovation is the ability to put this adaptive technology in the hands of our clients, unleashing the expertise at the point of care. This is one of several technologies that we believe launch the next era with our clients where they will be directly involved in the development of the next generation of solutions.

It has some parallel concepts with the web 2.0 movement. During the conference, we announced the formation of code works which is a development ecosystem that will allow our clients to develop, collaborate and share their innovations. The attraction of developers and their subsequent contributions will improve the value of existing solutions beyond what can be achieved organically inside Cerner. Additionally, this approach should ultimately lead to new business opportunities for Cerner as we package and promote the collective learnings of the code works community.

Another technology which will be a contributor to the code works ecosystem is iAware. This solution was first prototyped and demonstrated at last year's conference. Children's Hospital of Pittsburgh demonstrated their use of this solution in critical care along with more recent enhancements such as hands-free voice navigation and for those clients from outside the US, foreign language capabilities.

One of the more significant elements of this architecture was its quick install with the most recent implementation occurring in less than three weeks from code delivery to production use. As Mike highlighted in his CareAware comments, the MD BUS platform is playing a significant role in the expansion of our solutions moving the boundaries from the medical records centric workflows to the design to the entire care delivery process. We've now moved from designing efficiency by removing clicks to designing efficiency that removes steps. In other words, the number of times a nurse goes back and forth from the unit to the room and the delay that occurs in that process.

This platform is much more than simplifying the connection and collection of data. To highlight a few examples with the collaboration of our industry partners, we demonstrated programming IV pumps off of clinical orders in the electronic medical record. A patient follows prevention protocol, interacting with the [Hillrom] bed and iAware alerting and how the patient is able to interact with the entire environment and caregivers using My Station which is built on Microsoft's X box.

Last I wanted to highlight a new open layered technology that Marc mentioned which we acquired with the purchase of a company called [Window Logics] which strengthens our revenue cycle offerings immediately. The solution was created through 15 years of research and development of Mayo Clinic, was tested and validated by Johns Hopkins University. Using natural language processing to parse through clinical notes, it then applies contextual rules to drive more accurate and efficient reimbursement through automated coding.

In addition at the conference, we demonstrated how the NLP component of this technology can change the landscape for clinical search by bringing clinical meaning to the unstructured clinical documentation, helping aid research, clinical trials and potentially provide a bridge to interoperability constraints as the personal health record becomes more pervasive. Having the most active client base in the industry with constantly growing expectations has positioned us to push the boundaries. In 2008, we've been able to generate significant proof points for the next wave of innovations from solutions that live in the cloud to changes in the care delivery at the bed side. With that, I'll turn it over to the operator.

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of Bret Jones with Leerink Swann. Please proceed.

Hi. Good afternoon. First a quick question on the credit market and what kind of impact. I know you said that it's in flux and it's hard to predict. But when we think about the two deals that slipped out of Q3, is it safe to assume those were larger deals And I was just curious, now that you said they've resolved their credit issues, have those deals closed?

Yes, Bret, this is Mike. First of all, thanks for attending the health conference. Good to see you and secondly, I didn't actually say two. I said there are a couple deals that have pushed -- that moved out, but there's also several that moved in.

On their decision, they were able to work through their financials to come up with a scenario that works for them in each one of those cases so far. As to whether they signed yet or not, we don't comment on that. I'll hold off on that until we get together in 90 days.

Okay. Fair enough. When we do think about the credit market, then really my bigger concern is the weaker hospital --the operating metrics within the hospitals. Which segments of your business concern you the most in term of deals pushing the outer cancelling and I'm talking add-on sales, core clinical or some of your other product lines?

I'll answer it again. I'll let Marc take a shot if he needs to. We're worried about all of them. Obviously we want all of the new business we can get. Specifically, what we're developing a stronger radar around is the new business.

We have stronger relationships on the installed business side, but we want to make sure that we have extra sensitivity to net new footprints coming in the door . We've had a series of meetings over the last couple weeks to develop what we believe is a tighter radar around some of their actions and activities to keep them on the radar and keep us moving the ball downfield. Those are the ones that I think I would describe as the most sensitive

This is Marc. I think when we really look at our install base, probably more than 80% of that funding comes out of current operations and is not tied to a significant financing. It's part of a capital plan that normally -- part of the annual capital plan. The new deals are the ones that are primarily part of not only an IT project, but those hospitals doing some other activities. Between those -- for that purpose, those are the ones going out.

As we've talked in the past, a lot of our clients that are in the middle of doing a procurement and looking at some of these options already put their financing in place. Once they worked their way through the ARS issues that we were confronted with at the start of the year, we really -- I'd say getting down to where there's only a couple of deals that are impacted in a quarter where the basically the taxes at bond market completely dried up, bodes well for us relative to be able to have our clients financed. We're also offering -- continue to offer the ability for them to finance through our partners.

As most of you know, we've used GE in the past. They were out of the market at the end of this quarter, but we still placed our normal amount of funding through our other partners that we have in that space and they are hungry for additional credits that these hospitals represent.

All right. Thanks. That's very helpful and then just two quick questions for you, Marc. Do you need the southern cluster to contribute in 2009 in order to achieve the 20% operating margin target?

What we've indicated is that turning on margin in London and then the transition agreement that's in place and continuing to support the eight trusts that are live in the south, and the ability to take margin on that contract gets us very close to the margin that we were expecting to generate in '09 relative to our UK contract. With that as a backdrop and the likely resolution of the southern cluster sometime in 2009, we feel pretty good at maintaining our 20% outlook for 2009.

All right. Great. Then lastly, I just ask -- I know you have a partial hedge in the UK. I'm wondering where is the greatest foreign exchange exposure and how should we think about this looking forward as we're trying to assess what types of impact would be as we progress throughout the rest of the year?

The reality is that the inner company accounts drive a lot of the FX impact and the biggest inner company accounts are in US dollars, London, pounds and Euros. It's the interplay between those three currencies, depending on our inner Company balances. It is actually very difficult to predict one way or the other what that interplay and based on the balances, exactly what the impact is going to be.

If we could, we'd certainly be letting people know what our best view is. But it is something that for the most part you just -- it's a combination of so many things that it's very difficult to predict. That's why we have indicated that certainly in our -- this quarter we covered a very large loss and still delivered results. Our guidance doesn't anticipate another large loss, but it is difficult to predict.

But do you anticipate hedging more of the exposure or no?

The income statement impact is not economic. It is all book keeping and so we don't hedge on economic issues. The London -- the debt we took to hedge the payments we were going to receive in pounds down the road was a true economic hedge and therefore, we put that in place, But just to -- for the income statement to not have an FX impact through an economic hedge would actually cost money doesn't make any sense.

All right. Great. Thank you very much.

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

Could you tell me whether the UAD was a 3Q or 4Q deal? And then I have another question.

Yes. It was a Q3 deal.

It was, okay. Marc, I think the estimates that are out there consensus for '09, is there a variety of contribution from the NHS in terms of operating profit. What's the Company view on how much we should be modeling in for margin contribution there?

What we've indicated is that the numbers that show up as consensus for earnings and revenues are numbers that we're comfortable with. You guys are the ones doing the modeling, so my sense is, that's -- that would probably be something that you all have already factored in to some extent.

At this point really early in our '09 planning process, we can give you a high level comfort with the numbers that are out there with an indication that given that they don't reflect the 20% rate margin, we think there's some potential upside to them. But I can't really give you a specific, given that we're just indicating that comfort with consensus any sense of exactly what any element of our business is contributing to that.

Okay. Would you give us that guidance next year perhaps in terms of the specific contribution from there?

We have never given the specific contribution relative to our guidance but certainly, once we get more clarity with the UK, we should give you enough that will allow you to box in your models in that space.

Okay. All right. Thanks. And then a question for Mike, perhaps. In terms of the deal he said that with the hospital that did slow down their purchasing decision. Could you give us any idea of the demographics around those, what kind of hospitals they were or what geographies that happened in?

Yes. They were -- let me see how to best describe them. One was a multi-entity facility -- or organization. Another was an academic. There were a handful of others that I would describe as a community that actually worked through their situation in a timely enough fashion to complete within the quarter.

Geographically, they were dispersed across the US. They all solved their problems in their own way. I think that answers your question.

Okay. Perfect. Thank you.

Okay.

Your next question comes from the line of Charles Rhyee with Oppenheimer. Please proceed.

Thanks for taking the questions here. Just getting back to -- as you're talking about the expectations for next quarter and certainly as you've given your initial look on 2009. Marc, when you talked about trying to build some conservatism obviously with the current state of the markets. When you think about the range you just gave, particularly on the down side, can you give us more sense on what you're embedding? What would be effective to the bottom then? What would you have to see in terms of bookings in the environment for your customers?

The key point we're making is we've gone through our forecasting process. We do a very thorough job of that for people to look at Board approvals. We look at where the funding is relative to the deals that we're forecasting and we feel very comfortable as I indicated at the high end of our guidance range.

What the lower -- the spread is just to indicate we don't know what we don't know. There's unknowns in this quarter that are unique relative to the history of the Company. We think from a credibility standpoint for us to laser in on a $0.02 range in this climate would indicate that maybe we're not paying as much attention as we should. We see the business in our normal course as being strong, these health systems having access to capital, being on long-term projects to get to the benefits of automation. We think given the environment and given whatever the new administration comes in the likelihood they will be supportive of that, we feel very good about our position but we wanted to let people know that there's risks that we aren't aware of today that could impact us.

There's nothing specific and I can't really give you a breakdown in bookings that gives you an answer to how we would hit the lower numbers. I just tell you that we like the high end of our guidance range, but we want to be appropriately aware of the situation.

That's fair. Are you seeing any changes-- certainly you have visibility certainly in the current quarter -- I'm sorry, third quarter and currently going into the fourth quarter. As we think about 2009 and in the terms of your selling efforts, have you seen any changes maybe in the length of the sales cycle? Is there any sense that people might be taking a little more time to think about things given the light of the current situation?

This is Mike. I'll answer that. No. We really aren't. I think that the processes remain main pretty consistent. Some of the factors that are driving decisions have evolved over the last year, but the processes are consistent and the timeframes are pretty consistent.

Okay. Then as you think about that 2009 guidance and have you -- how much of your '09 revenues would you say are pretty much already booked given your current backlog?

Today we're really giving you a general sense of where we are looking at relative to our plan. When we come out and do our Q4 call in Q1, we'll have a much better idea -- be able to give you some more details relative to that. We'll also have our business model view of the year which will help you also in understanding those elements.

At this point, we're not really taking detailed information on that and we normally don't do that as well. We're certainly have done enough work that we're comfortable with where our consensus is today. That's the normal way we open up the next year is in Q3 with that indication if we think it's appropriate, which we do.

Okay. Fair enough. Last question is what's your assumption for tax rate in the fourth quarter? This quarter seemed a little bit lower than --

I said it was 34%, 35%.

Okay, great. Thanks a lot, guys.

Thanks.

Your next question comes from the line of Glen Santangelo with Credit Suisse. Please proceed.

Thanks, Marc. I just wanted to follow up on that guidance question just one more time. It sounds like what you're saying in the fourth quarter there is some level of uncertainty, but are you anticipating by promising 10% revenue growth and 18% EPS growth next year that you think it's going to be more of a temporary situation? As you look at your pipeline out into 2008, you don't think the current credit environment probably plays or has that big of an effect next year?

Based on our normal forecasting process, we go through four quarters and so we've gotten a pretty good look into '09 currently. These are 12 month sales cycles, so we do have the ability to get some views out. Based on what we've done on our forecasting, we're able to support our preliminary '09 plans. We did put a wider range on the guidance in Q4 because we do think we're in a unique potentially shorter term environment relative to credit markets.

Marc, as you look at that at the backlog you're looking at for 2009, are you seeing any change in your historical patterns in the sense that could more of that growth be coming from international sources versus domestic or vice versa? Basically what you're seeing in the near term here is it impacting the -- all your international markets of similar to what you're seeing in the United States?

Our international markets have a different set of issues in some cases and in some cases there's -- in most cases, they're government funded. There's significant access to capital in those. They aren't quite -- at least the clients we're working with certainly aren't subject to of the [vigories] of the credit market as much as our US clients are. We look to the global market to be certainly a growth area for us going forward. Our '09 plan will look at continuing to grow our global business, especially as Trace mentioned, some of the successes we've had globally as we look to roll out of '08.

And last question, was that United Emirates deal -- was that in the third quarter backlog? Did I hear that correctly?

It was a booking for the third quarter.

Okay. All right. Thanks a lot, Marc.

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

Yes. Thank you. Two quick questions. First, Marc, I was wondering if you could just update us on how much revenue in the quarter comes from bookings sold in that particular quarter.

Yes. I mean I have to --

It's trended down towards 10%, correct?

Yes. It's pretty consistent with what we've seen historically, 10% ish.

Okay. Thank you. And then if we look at the new footprints obviously that was very good in the quarter. If we ex out the UAE contract, would that have been more in line in terms of the percentage of bookings with respect to new footprints?

Richard, this is Mike. It would have been consistent with where we were for the last three or four quarters which is in the mid- to upper 20%. The bump with the UAE transaction definitely put us into a different set of digits.

Okay. And then if we look at the contracts over $5 million and $10 million, just remind me, are those all new clients or does that include existing clients as well?

That includes existing as well.

Okay. Thank you very much. Congratulations.

Thank you.

Question comes from the line of Anthony [Patron] with Maxim Group. Please proceed.

Just a couple couple questions; one on housekeeping. If I look at the cash balance just to start with, what was the average price of buybacks this quarter if you have that available?

We'll have that in our Q. It was probably -- as you know, we announced our buyback and the price went up pretty dramatically with our results. I would say that it had to be probably in the low 40s.

Just walking through the cash balance here last quarter, you had about 291 available cash and closed out here 297. Cash was actually up. You generated operating cash during the quarter, yet if we do the math on four million shares at around 40, I'm just trying to figure out --

$4 million.

Okay.

Not shares.

Just to clarify. Okay. In terms of -- if I go down, in terms of the UAE contract, what is -- it seems that that's a larger contract than what you usually used to doing. If it is so, what is the outlook for the implementation cycle on that contract?

This is Marc. The UAE contract is equivalent to a large health system deal in the US, so it's not unique in any way. It is -- from an implementation standpoint, we are going to apply all of the efficiency tools we have. We're going to use the solution centers to do a lot of the build, Method M. We're actually well set up to be successful in that -- in getting that implemented. It's not unique in any way relative to a large health system in the US.

Moving on just quickly here as announced during the quarter just out of CMS that they had launched a new incentive program in conjunction with some federal and state health agencies, was really geared toward the small midsize physician practice office. Obviously it seems that you're well-positioned to benefit from this program with PowerWorks. How much of that is included in the guidance? There is a November 26 application deadline for that program and if you can quantify the fourth quarter impact. More importantly into '09 and also as a follow-up, what is your outlook on the small physician practice side of the market given the tightness and the underlying credit markets at this time?

For us, we deliver on the ASP model, so that really has essentially zero impact for us in the current quarter.

For PowerWorks.

Okay. Well, not in the current quarter. It's not instituted until I think it goes into effect in fourth quarter and then beyond where each physician will --

It still would be anticipated to have a pretty small effect. We don't see it driving a lot of new business to us at least at this time.

All right. Great. Thank you very much.

We'll probably take a couple more calls. We apologize for the length of our comments today -- you could probably tell we were fairly excited about the results and wanted to talk about them at length. Once again, apologize for that but let's take the next call.

Your next question comes from the line of Andy Draper with Raymond James.

Great. Just a couple questions. I missed the OpEx guidance for the fourth quarter. What number did you say?

We said that we would be at the 80 to 100 for the year and that we were at 58 now.

Wait, no. For your operating expenses, sorry, for the quarter?

Oh, 290.

290, okay. Great. Second question, any reason the support backlog was flat sequentially or anything to explain that? Obviously you stepped up. You had a good support revenue, but I'm just trying to figure out why maybe the backlog didn't fill there.

I'm sorry, can you reclarify that? I'm not sure I'm getting your question.

Yes. Well, I had -- at least on my spread sheet your support backlog was 600 for both this quarter and last quarter, $600 million. I'm just trying to figure out why there wasn't a step-up in support or is that just maybe some of the UK coming out following after the other from last quarter?

Yes. It's going to vary, Sandy. It's a calculated number, right? It's really based on a variety of things. We check back with you after the call. I don't have that number.

Nothing that you're aware of to read into that there's anything going on there?

No, no.

Okay, great. My last one and I'll let somebody else jump in. When you look at professional services trying to understand your comments, is there a timing period at which or a point at which you cycle and you expect professional services to grow? I'm just trying to think without getting specific '09 guidance. Is this something you would definitely expect to start rebounding in '09 or just trying to understand the flatness now and when you'd expect that to step up.

The logic would be that some of these contracts that we're signing as we're having a strong finish to the year, there will be professional services related to those and we do expect the UK to start ramping back up during '09. All of the indicators would indicate that we should start seeing positive growth in our services business, both globally and then as we have seen recently growth in our domestic as well.

Okay. Thanks.

Why don't we go ahead and land, and turn it over to Neal for some closing comments.

Thanks, Marc. I was looking for somewhere to add some commentary in the Q&A, but the team here was doing a great job, so just a couple reflective comments here at the end. Actually this reminded me a little of ten years ago as Y2K was approaching and everybody was quite nervous and wasn't sure whether the world was going to come to an end or not, or at least all computers stopped working. That didn't happen and we didn't think it would happen.

We're all -- everybody is a little nervous with these kind of times around us, but I think it needs to be -- it's been said and I'll restate it. People don't choose to be sick and you choose to whether you buy the new car or the new refrigerator. But healthcare, there's not a lot of choice to it. If we are in for a recession or we are in a recession, it will probably impact healthcare but it's not going to impact it the way it does other industries. Our clients -- and then their choice of another C.A.T. scan or whether they're going to automate their whole clinical practice and prepare for the future, we come out on top of that when our clients prioritize their use of their capital.

And the credit markets,we watched that very closely and it grabbed the attention of some management teams that we work with daily. But I personally deal with my clients and they all got pretty innovative pretty fast. They really didn't lose their focus on what their major projects were and it really had -- it grabbed their attention, so that wasn't always the best thing, but it didn't change their attitudes to what we're doing with them. There's more uncertainty in these times than there has been, but we are a very -- we have the greatest scale, the best scale of any company in this industry. Our global footprint is a positive here.

There's always something happening somewhere that's both positive and negative somewhere in the world, so having the diversification at the footprint level and at the -- our global reach, it's certainly a positive here. Our business model has changed a lot over this last ten years and almost all of those changes are better. They provide for us and over this last ten years we have delivered frankly, very good predictable consistent results. When we say it's going to happen, we have a very good track record of it happening.

We always are going to put the caveat at the end. These are forward-looking statements, but we moved a lot -- the company, in the last ten years. And frankly, the next ten years if nobody's going to stop in this day and time to think through what's going to happen the next ten years, but how information technology, how integral it becomes in healthcare delivery and the levers and opportunities to really make fundamental changes to healthcare -- those levers are going to create a lot of opportunity for us going forward.

We have a very good team here at Cerner. It is -- we have proven that we not only can manage a company as we grow it, but we've also proven that we continue innovating and create new opportunities for us around IT. We're going to continue to do that. With that, I'll close because I'm sure you guys have got other things to go do plus write up the reports, but thanks for your attention and we'll talk to you in 90 days.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect, and have a good day.