塞納 (CERN) 2009 Q1 法說會逐字稿

Welcome to Cerner Corporation's first quarter 2009 conference call. Today's date is April 28, 2009, and this call is being recorded. The Company has asked me to remind you that various remarks made here today by Cerner management about future expectation, plans, perspectives, and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision of the Security and Litigation's Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading,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.

Thank you. Good morning everyone and welcome the call. I'll lead off today with a review of the numbers; Mike Valentine, Executive Vice President and General Manager will follow me with sales and operational highlights and marketplace trends; and Trace Devanny, our President will discuss our global business and thoughts on the opportunities associated with the HIT incentives in the Stimulus Bill. Trace will be followed by Jeff Townsend, Executive Vice President and Chief of Staff, who will provide some additional thoughts on the stimulus; Neal Patterson, our Chairman and CEO will participate in Q&A. Now I'll turn to our results.

In what continues to be a very challenging environment, we delivered mostly solid results in the first quarter. Bookings were at the low end of our targeted range for the quarter, earnings were in line with our expectations and cash flow performance was very strong. Our revenue, particularly system sales where nonrecurring revenue is reported was below our expectations, reflecting the impact of the challenging economy and what we believe is a bit of a pause as healthcare providers track the HIT provisions in the American Recovery and Reinvestment Act which became law on February 17. Despite the lower top line, we are pleased with our otherwise solid results, and encouraged by an improved forecast that reflects increased activity for the rest of the year. We are also increasingly encouraged by the opportunities created by the HIT incentives in the Stimulus Bill which we believe will help offset the impact of the economy particularly as we move to the second half of the year.

Moving to bookings, our total bookings revenue in Q1 was $333 million. Good bookings remain in services helped offset lower levels of software bookings allowing us to achieve our bookings guidance range but not our revenue guidance range. Moving to backlog, our total backlog increased 7% year over year and ended the quarter at $3.6 billion, contract revenue backlog ended the quarter at $3 billion, which is 7% higher than a year ago. Note that the contract backlog growth would have been 13%, excluding the Q2 '08 backlog adjustment related to Fujitsu. Support revenue backlog was $584 million up 5% year-over-year. Our revenue in the quarter increased 2% over Q1 '08to $392.3 million. This is about $18 million below our guidance range. The revenue composition of Q1 was $100 million in system steals, $125 million in support and maintenance, $159 million in services and $8 million in reimbursed travel.

As I mentioned, most of the shortfall in our revenue was in system sales which was down $16 million or 14% compared to Q1 '08 this decline was primarily driven by lower software sales. As you would expect sales of nonrecurring items such as software are most vulnerable to the challenging economic environment. However, as I mentioned we are seeing signs of demand picking up and expect system sales to improve as we move through the year. In fact at this time we believe our total revenues for the year will be within our prior guidance range for the year, although potentially it is lower end of the range. One thing to know relative to license revenue is that the high level of recurring invisible revenue in our business model as compared to prior years allowed us to absorb the license shortfall and still deliver earnings within our guidance range.

Service revenues which includes managed services and professional services grew 5%, compared to a year-ago quarter with a slight decline in professional services more than offset by continued strong managed services growth. The decline in professional services continued to be the result of lower global headcount in the US and lower services revenue in the UK. We did have a strong quarter of application management services bookings, which will help drive services revenue as we move through the year. In addition, activity in the UK is ramping back up. And demand related to the HIT stimulus incentives should contribute to improved services revenue later in the year.

As we have discussed previously, our efficiency initiatives such as Bedrock, MethodM and our solution center allows us to deliver high levels of value to our clients without having to increase our services head count. While this has had negative impact on services revenue growth, the success of these initiatives is reflected in continued strong growth and support revenue which increased 15% over Q1 '08. Our gross margin for was Q1 was 83.3% which was flat compared to Q1 '08, and up 330 basis points compared to Q4 '08. Our systems sales margin did decline year-over-year from 65% to 59% driven by the lower software and lower margins on hardware.

Moving to operating expenses and earnings. Operating expenses in Q1 were $260.9 million before options expense of $3.9 million. This is flat compared to a year ago. Sales and client service expenses were up $2 million or 1%. Software development was down $5 million or 7%, compared to Q1 '08, but basically flat compared to Q4 '08 if you adjust Q4 for the extra week. The year-over-year decline reflects the movement of some associates from R&D to support roles and continues efforts to control R&D expense, such as our India location. G&A expense was up $3 million or 13%. G&A expense included a benefit from foreign currency of $5.5 million, similar to the $5.6 million in benefits in Q1 of '08.

Moving to operating margins, our operating margin in Q1 was 16.8% before options expense, which is up 120 basis points compared to last year. We maintain the goal of exiting 2009 with operating margins at 20%. Look at the non-operating lines, net interest was down bout $1.5 million sequentially and year-over-year reflecting lower investment returns. This partially offset the FX benefit in the quarter.

Moving to earnings and EPS, our GAAP net earnings in Q1 were $40.8 million or $0.49 per diluted share. GAAP net earnings including stock option expense which had a net impact on earnings of $2.5 million or $0.03 per share. Adjusted net earnings were $43.3 million and adjusted EPS was $0.52. Our tax rate was 34%, which is in line with what we expected. Overall, we are pleased that we delivered solid earnings despite the lower than expected revenue. The increase in contributions over the last several years for more visible and recurring sources, such as managed services, support, and professional services have been a big help in weathering the challenging environment. These sources will continue to provide a solid base of profitability and we expect our earnings to accelerate as demand from the stimulus begins to drive higher software sales.

Now move to our balance sheet. We ended Q1 with $347 million of cash and short term investments and $100 million of auction-rate securities. The auction-rate securities balance is $5 million less than last quarter due to some redemptions. DARS balance also reflects the net impact of marketing securities to market and valuing the option provided by UBS to buy the securities at par. Our total debt is $145 million. Total accounts receivable in Q1 of $437 million which is down $32 million from Q4, contracts receivable or the unbilled portion of receivables were $161 million or 37% of total receivables, which is similar to 36% represented a year ago, and up from 30% in Q4.

Third-party financings were $10 million, which is about half of normal levels. Despite the lower third party financings cash collections were a record in Q1 at $458 million. The lower third-party financings did contribute to the increase in our contracts receivable as the cash received from third-party financing usually is for balances that would be in contracts receivable. Note that our balance sheet still reflects billed and unbilled receivables related to the Fujitsu contract that represented over 10% of total receivables. While we still do not know timing of when Fujitsu and the government will unwind their contract allowing us to finalize items with Fujitsu, we currently expect to fully recover these receivables. However, they will have a negative impact on DSOs in the meantime.

Despite the record cash collections and decline on receivables, our DSOs still increased from 92 days last quarter to 102 days this quarter. This increase was driven by the large sequential decline in revenue, which is annualized in the DSO calculation and the lower level of third-party financings. With respect to revenue levels, our DSOs would have been basically flat compared to last quarter. We believe this quarter DSO is an anomaly and expect it to decline going forward. Operating cash flow in the quarter was very strong at $98 million. Q1 capital expenditures were $43 million and capitalized software was $18 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software was also strong at $37 million, up $34 million over Q1 of 2008. While cash flow will likely be lower in Q2, given the lower level of receivables, this quarter's cash flow is a strong start to the year, and positions us to meet our target at more than $100 million of free cash flow in 2009.

Moving to software, the $18.3 million of capitalized software represents 26% of the $70 million of total spending on the billable activities. Software amortization for the quarter was $13.1 million, resulting in net capitalization of $5.2 million or 7% of the total. Consistent with what we said last quarter the increase in amortization related to the release of the Millennium 2007.18 release going live during the quarter was basically offset by the completion of the amortization of the amounts capitalized in 2003. Q2 amortization expense should increase by about $2 million compared to Q1. Since we will have a full quarter of amortization related to the new release. This will bring amortization to between 15 million and $15.5 million beginning in Q2.

Now I'll go through the guidance. While the economy did have some impact on our results in Q1, particularly revenue, our overall outlook for the year remains intact. We continued to provide a wider range, given that the uncertainty remains, but we believe that the most challenging quarters may be behind out. Looking at Q2 revenue we expect revenue in the 415 million to $435 million range. We expect Q2 EPS before options expense to be $0.52 to $0.58 per share. Q2 guidance is based on total spending before options expense of around $270 million. Also, our guidance assumes we had no material negative impact from foreign currency exchange. Our estimate for option expense for Q2 '09 and 2009 is approximately $0.03, and $0.12 to $0.13 per share respectively.

Moving to bookings guidance, we expect bookings revenue in Q2 of 370 million to $410 million with the midpoint of that range reflecting basically flat bookings compared to Q2 of last year. Looking at the full year 2009, we maintain our guidance range for adjusting EPS before stock-option expense of $2.40 to $2.50. We also maintained our 2009 revenue guidance of 1.75 billion to $1.8 billion with a bias towards the lower end, given the lower Q1 revenue.

In closing, we are pleased with our result in Q1, including solid bookings in a tough environment, continued progress on our margin-expansion initiatives, delivering earnings in our guidance range despite lower revenue and strong free cash flow reflecting the continued overall health of our business. With that I'll turn the call over to Mike.

Thank you, Marc, good afternoon, all. Today I'm going to cover sales and some operational highlights and also some marketplace trends.

From a sales perspective we had a solid quarter given the very tough macro environment. As I'll discuss more in a minute the economy continued to impact hospital spending this quarter. We also saw some clients pause as they monitored and awaited clarity on the HIT incentives in the American Recovery and Reinvestment Act. Our bookings revenue for Q1 was $332.8 million which is at the low end of our guidance range. Our deal mix included 10 contracts of over $5 million, 7 of which were over $10 million. 14% of bookings came there outside of our Millennium installed base. This is lower than historical levels, but this is more of a function of less deals getting done in the quarter than a major change in the marketplace. In fact, we continue to feel very about our competitiveness particularly with some of the change and uncertainty at some of our competitors and we have a good pipeline of new footprint opportunities, so going forward, I would expect our mix to return to similar levels as we had in 1998.

As Marc mentioned, we had strong levels of managed services bookings with much of it coming from our existing clients choosing to have Cerner take over the management of their Cerner systems. We also had good levels of application management services or AMS bookings. Recall that AMS goes beyond what we do with traditional managed services as we are helping clients manage not only their technology, but also their applications. We are also engaged in discussions with clients about further extending our services through our IT Works organization. Which leverages our operational capabilities and infrastructure to take on additional IT functions for our clients. We are targeting clients who are committed to serving as our strategic HIT provider and looking to complete that journey in the most efficient manner. IT Works represents a substantial revenue opportunity as we convert more of our client's current IT spend in to Cerner revenue.

This is also a significant opportunity to tighten our alignment with key clients, accelerate the expansion of our installation footprint and inevitably replace competitor's solutions. Our success with Cerner Works and AMS combined with the substantial opportunities associated with our IT Works offering are defining the next generation of our client relationship model. In general our business models are becoming more directly aligned with the success of our clients. For example, our Lighthouse Clinical Process Optimization service facilitates clients leveraging investments they have already made on digitizing their environments to drive more efficiency and optimize outcomes, create quick measurable ROI.

Based on early proof points, we are willing to align our payments with the client's results. There are a significant number of opportunities for us to create this deeper client alignment and share in the efficiency gains created by Lighthouse in a way that creates a strong return for both Cerner and for our clients. Additional opportunities -- opportunities exist for us to work with our clients in creating regional networks to facilitate broader interoperability allowing for things like help directed banks, this differentiates our client in the region as well as providing a new business opportunity for Cerner. The collective power of our alignment across our client base is currently reflected in our lights-on network, which monitors more than 2 million Millenium users and billions of clinical transactions and creates a near real-time evidence-based technical network.

Moving to other highlights for the quarter we continued our momentum with our Care line suite of solutions including a number of the sale of MB Bus device connectivity solutions outside of our installed base, which further proves that these solutions can be an entry point in the competitive basis. We also continued our fast start in the device resell initiative with another good quarter of contribution from reselling devices, and we have more clients sign up to pilot our Rx station medication dispensing units. The success of our Care Aware initiatives reflects our ability to successfully enter vertical markets. We have found that being able to align sales, services, and development resources across certain vertical markets makes us stronger, more agile competitor within those markets, and can also accelerate our ability to fill white space within our existing base and more effectively pursue opportunities outside of our base.

Other verticals where these agile business units are targeted include women's health, clinical care, surgery and anesthesiology, emergency, revenue cycle, workforce management and Lighthouse clinical process optimization. Operationally, we had a strong quarter delivering value to our clients. I would like to highlight the recent accomplishments of one our clients that I think is a great example of our differentiated ability to deliver value to our clients. Mercy Hospital, and Medical Center, in Chicago was recently designated a stage six hospital on a HEMS EMR adoption model, this puts them in the top 0.5% of all hospitals in the US. Most impressive is the fact that they accomplished this by implementing 21 Cerner Millennium solutions in just 14 months. When according to HEMS this level of automation takes most hospitals seven years to realize. This was accomplished by leveraging our solution center which allows clients to envision, design, build, and deploy Cerner solutions by utilizing its standardized scope and project tools, provided structure, discipline, predictable implementation experience. They also leveraged our MethodM implementation methodology which draws upon proven practices from literally thousands of past implementations to deliver projects with discipline, predictability and efficiency.

Mercy's speed to value was also aided by their choice of Cerner Works managed services which provides unparalleled system performance and allowed them to avoid upfront hardware costs and ongoing technology risks, by using Cerner state-of-the-art datacenters. Mercy is clearly a shining example of our strategies coming together to set a new bar on deliver for the industry and for Cerner the timing couldn't be better with many of the health systems that will now enter the market looking to get to meaningful use in a timely and cost effective manner.

With HEMS in Chicago this year, we were able to arrange a full schedule of tours for prospective clients at Mercy. Where we also had our SmartSEMI to demonstrate our device connectivity and other capabilities of our Smart Hospital room of the future. This combined with our highly successful CIO night, and 26 clients participating in education session, allowed us to get a great deal of value and interaction with clients during the week of HEMS without the traditional presence on the trade show floor, which as we have discussed before was no longer providing meaningful value to us.

In summary, we believe the progress our clients have made at using information technology to advance quality, safety, and efficiency of care is creating a gap in the industry. Mercy is a perfect example of this. As I mentioned earlier, now is a good time to be providing the market with many proof points for delivering these kinds of capabilities in a predictable manner.

Now I'll make some comments on the US marketplace. As reflected in our lower top-line growth this quarter, the economy did have an impact on our results. We continue to see healthcare delivery organizations that are doing fairly well operationally, but many of them have reduced their budgets, as they deal with a reduction in their foundation investment portfolios caused by the general financial market decline. They are also very focused on maintaining strong cash balances to enhance the debt rating and control their cost of capital. While this pullback in spending impacted our top-line results this quarter, I believe we have fared better and are better positioned than most other companies.

The healthcare organization remain focused on strategic spending that generates a return on investment. And as we have indicated in the past, our HIT initiatives are viewed as being highly strategic due to the role they play in improving safety and efficiency, reducing costs and meeting regulatory requirements, and as you all know, the value of HIT investments has not gone unnoticed by the Obama administration. With the passing of the American Recovery and Reinvestment Act in February the US Congress made it clear that they view HIT as strategic. As Trace will discuss in just a minute, we believe this act represents the largest opportunity in the history of the industry and we are very well positioned to benefit from it.

So in summary we really view Q1 to be an intersection of what amounts to be somewhat of a bipolar business environment. By that I mean, coming into the year, we were seeing several -- seeing a general move towards reductions in our operating costs and capital spend. However, post the stimulus announcement in February, we saw the market start to move in a positive direction. Many of the same core strengths that have allowed us to weather the tough economy, including our large and diverse client base, proven ability to deliver value to our clients, and the strategic strict value of our solutions, will also help us to flourish as the stimulus spending begins to ramp up. With that, I'll turn the call over to Trace.

Thanks, Mike. Good afternoon, everyone. Today I will discuss our international business, and provide comments on the American Recovery and Reinvestment Act, or ARRA.

Begin with our global business we had a very solid start to 2009. Starting with England, we continued to make steady progress in our participation with the National Health Services countrywide HIT initiative. In the London region, with our prime contractor BT we received good news in February that we could reinitiate implementation work that had previously been put on hold. The key to our success has been a greater emphasis on a more flexible implementation approach with a specific local configuration. An approach in which we will continue to focus with high expectations for continued success. In the southern region, BT has taken over as the prime contractor for the 8 trusts that have previously gone live with Fujitsu. We have now working directly with BT on those 8 trusts. In addition to those 8 BT has signed an agreement for four additional trusts providing us the opportunity to significantly expand our presence across the southern region.

In Australia we had another important go-live in New South Wales and we continue to ramp up our efforts in Victoria. Other noteworthy global success in Q1 includes strong bookings in Canada, where we booked our first managed services agreement and, again, in the Middle East where we continue to extend our market share lead. Overall we continue to be very pleased with our global progress and in spite of a tough economic climate, believe we are positioned to have a good year abroad.

I would now like to discuss the American Recovery and Reinvestment Act and provide some color on the potential impact it may have on our business. First, I want to provide some background on the stimulus package as we believe that this opportunity may be underappreciated with some elements that are not completely understood. Some of the key provisions of the act support an investment of approximately $35 billion to advance the adoption of health information technology. The investment is predominantly directed toward Medicare and Medicaid providing incentive payments for hospitals and physicians, to adopt qualified electronic health record technology. It is estimated that approximately half of the incentive dollars will go to hospitals and half to eligible professionals, which will primarily be physician practices.

To qualify for incentive payments healthcare providers, physician practicers and hospitals must meet eligibility requirements, and demonstrate meaningful use of a certified electronic health record system. Current legislation provides flexibility for the secretary of HSS to further define meaningful use of an EHR. To date it has initially been defined to include the use of ink prescribing, the importing of clinical quality measures and the use of EHR technology, which if properly implemented is designed to improve the quality of care to an improved care coordination process. Additionally, the legislation clarifies that a qualifying EHR system must have the capacity to capture patient democratic information, record a medical history, provide clinical decision support, allow for physician order entry, facilitate quality recording and be interoperable. We think these definitions are important, and Jeff will provide some additional comments on our belief that there needs to be a high bar for qualified EHRs and meaningful use.

Assuming a high bar is maintained, and we sincerely hope that it will be we think the incentive structure makes it very likely that we will have a nearly digitized US health system by the middle of the next decade. Hospitals and physicians can qualify for incentive payments beginning in 2011, physicians must qualify by 2012, and hospitals by 2013 to receive the maximum incentive payments over a four-year period. The incentive payments are designed to fund a meaningful portion of the upfront investment by hospitals and physician practices while the carrot associated with qualifying percentage is attractive, the stick comes in to to play in 2015. At that time hospitals and eligible professionals will be penalized with lower Medicare reimbursements if they are not yet meaningful users of certified EHR system. We believe few healthcare organizations can afford to admit all these powerful incentives. This creates a substantial opportunity for Cerner and our industry. While it is difficult to estimate the exact timing and amount of impact on our business we believe it could be a significant contributor to our core business going forward. In addition, work in this environment with providers be looking to qualify for incentives I believe our installed base of clients will be a tremendous asset.

To provide some perspective, let me share some numbers pertaining to our footprint in healthcare and then quantify what the incentives could mean by that base. Cerner solutions are licensed by nearly 1700 hospitals in the US representing 29% of the total US hospitals. More than 3300 physician practices representing more than 30,000 physicians in the US, more than 500 ambulatory facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics, and surgery centers. Nearly 600 home health facilities, and nearly 1500 retail pharmacies. We believe our footprint is the broadest and most strategic in healthcare. Most of our clients will have an opportunity to qualify for incentives of some type. After conducting a detailed analysis of our larger health system clients, and their employee physicians we estimate there is approximately $6 billion of Medicare/Medicaid incentives available to them, ranging from approximately $10 million to over $200 million per health system. In addition to this, we estimate at least $2 billion of incentives will be available to our PowerWorks physicians, ambulatory facilities and hospitals with a smaller millennium footprint. Clearly, not all incentive dollars from our clients will be spent on Cerner solutions and services, but I think it is important to understand the magnitude of the opportunity.

Up to this point we have had many detailed reviews with our clients about their specific incentive opportunity, the solutions needed to qualify for the incentives and about the exposure to penalties if they are not proactive and qualify in time. These discussions have been very encouraging and have validated our belief that a stimulus opportunity is substantial. We also believe that the opportunity outside of our client base is significant. There are a large number of healthcare providers who have either not bought systems or are continuing to use legacy systems from suppliers who have been promising to deliver a more modern platform. This opportunity for incentives as well as the risk of facing penalties has the attention of these providers and we think the next few years will present a big opportunity to expand our presence in the US. Clearly we feel we are well positioned in the hospital and health system markets with our large diverse client base and proven track record of value creation for our clients.

As it pertains to our physician market, we really like our position with our low-cost, speed to value ASP model, which you now are seeing other suppliers try to replicate. As we have already proven with our ambulatory service centers our PowerWorks model can also be leveraged for more than just physician practices. This capability significantly expands our range of opportunity related to the stimulus bill which includes incentives for such areas as Federally qualified health centers, public health departments and critical access hospitals. Further, we see the stimulus as an event that will provide an opportunity to work with other stakeholders to development innovative approaches to deliver on healthcare to populations which traditionally have been underserved in rural and urban America. The ARIA provisions for community health centers, condition management, education, broadband, and telemedicine provide new opportunities for Cerner to continue to help transform the delivery of care in the United States.

In summary, we are on the front end of the biggest HIT opportunity in our 30 years as a Company. More importantly, if the stimulus funds are used wisely this investment could create the level of systemic change in the US healthcare system needed to address a number of serious issues. Thus creating a more efficient, safe, and higher quality system for our families, communities and the nation for generations to come. With that I'll turn the call over to Jeff.

Thanks, Trace. I wanted to add to Trace's comments on the HIT incentives in the American Recovery and Reinvestment Act, wrapping on some of our prior discussions around the strategic nature of HIT to our clients and how all of this ties together some of our core strategic investments. While the stimulus is a substantial inventive, our clients are on a journey. Over the last few quarters we have discussed the EMR investments by our clients in this economic climate, and how many of them have continued to fund this as one of their top strategic initiatives. For those the stimulus is confirmation of their strategic journey. For those that are stretching their journey during this economic window the stimulus has triggered a rethink of their timing assumptions. For all of our clients, the reason for investment and the impact of a digitized health system has not changed. Starting with the IOM report on patient safety, followed by the increasing demands of pay for performance measures to name a few, the case to proceed faster continues. Now there is both a significant incentive and a trailing penalty.

At this point in time, there is a lot of focus on the term meaningful use within the stimulus package, which is yet to be defined but has a due date no later than the end of this year. The danger is that many see this as a definition of an end point rather than a preliminary minimum requirement on the journey. While the end criteria may be very technical in definition and will include requirements for interoperability there's some simpler visible experiences that demonstrate meaningful use, such as no pen is being used to place orders, and no clipboard in the waiting room for your medical history. In HCIT talk this would be CPOE, medication reconciliation, and the interoperability to support health record banks.

There needs to be two axis to the measurement. The first being the functional capability and the second being adoption, measured as use of the system. While pilots are a valid approach to stays deployment and learning, they are not a proxy for meaningful use. The targets should be closely linked to the objectives of the broader healthcare reform agenda to ensure that longer-range strategies around chronic disease management are built in. It should not require another round to accomplish this.

As the country proceeds on this journey, Cerner believes increased transparency of learning and adoption is key, using our lights-on network we have been expanding our measurement and shared benchmarking capabilities from technical performance and configuration measurements to measures of functional use. The collective learning of over 2 million Cerner Millennium users can have a significant impact on the speed to adoption with over 19.5 billion application transactions measured in 2008, 2 billion of which were clinician orders. Over the summer in preparation for our healthcare conference, we are expanding this platform to measure work flows and end-user experiences to more rapidly expand this experience sharing platform. Overall we believe that the bar is set appropriately high for meaningful use, and qualified to EHRs, the return on the HIT stimulus investment could be substantial. To understand the potential return you need to envision what type of change will be created with a completely digitized healthcare system and how society should benefit.

We have published our view of the direction of reform nd the future state of such a healthcare system in a short paper called the ABCs of systemic healthcare reform, which for those of you are interesting is available at Cerner.com/ABCs. In this paper we describe how up to $500 billion per year could be saved in the US healthcare system by fully digitizing and optimizing healthcare delivery. Most healthcare executives we have spoken to agree with our views, that properly directed HIT investments his can produce positive positive systemic benefits for healthcare delivery. If we do this right, we have a modern, affordable, frictionless, and high quality healthcare system in the next decade.

The opportunities created by digitizing our healthcare system position us for acceleration of many of the initiatives we have started in this decade. We have always said that the core EMR is only the beginning. It is the infrastructure that will enable a host of sophisticated future solutions and services. While we have clients at some of the highest levels of automation, including paperless and filmless, they have a list for the next wave of innovation, creating a smarter system. As we have outlined in what we call the four-box, our pharma initiatives will benefit from a digital healthcare system that will fundamentally change the discovery of new knowledge, impacting clinical trials and surveillance systems for medicines in active use. Our CareAware platform of devices and device connectivity initiatives will benefit when the medical device industry becomes more a part of the HIT industry, and our employer and government initiatives stand to accelerate with the opportunity to completely redesign the fundamental commerce of healthcare, eliminating the friction that consumes more than 30% of precious resources connecting governments, employers, and consumers directly with their healthcare professionals, and facilitating the whole process based on personalized needs of the individual.

In summary, we are on the front end of an unprecedented opportunity. If HIT investments are made wisely Cerner, our industry and our society will realize the substantial benefits. With that I'll turn the call over to the operator for the Q&A.

Thank you. (Operator instructions) Your first question will come from the line of Charles Rhyee with Oppenheimer.

Thanks for taking the question. I wanted to talk about the managed services business here. Obviously at HEMS there is a lot of talk from a lot of the vendors on providing hosting options, subscription pricing and things like that. And as I look at the managed services business here for you guys, can you give us a sense on -- you talked about the strength in bookings in the quarter. Can you give us a sense on the share of the bookings in the quarter coming from managed services?

Yes, this is Marc. That stays between 15 -- 20, 25%. That was probably a little bit toward the higher end of that range during the quarter. Pretty consistent with what we have been seeing, though.

When we look at the shortfall of the systems sales line? Have you seen any sort of a shift in clients really, looking for the managed service option, in this case we're going to see a stretching of the revenue recognition. In other words how much of the shortfall in system sales would you attribute to, maybe greater managed services?

This is Marc, really the key, Charles, for our managed services is it doesn't replace software with some type of subscription approach of any type of revenue. We do a normal revenue deal -- a normal license deal, which basically they buy the license, they own, the license, and rather than selling equipment for them to run it, we enter into a hosting agreement, where we provide the services and location and do the hosting. So the reality is managed services bookings actually, normally will draw with some level of licensed softwares as well. In this quarter that was not necessarily as much the case as it -- as normal, a lot of the sales -- sales this quarter were back in the base, which a lot of those people have already laid in some level of software. So the enhancement of managed services didn't drive a lot of licensed software. Going forward, our pipeline is showing us an uptick in licensed software, as well as managed service opportunities.

Charles this is Mike, just to add a few comments to it. The -- what you also see is about 90% of our net new footprint clients will go with a managed services hosted option. It's actually our lead with preferred option. It has become the same for our prospects. Within that contract, we generally give then a high degree of predictability of what their future would cost them if they expand the software. That would be the direct linkage back into software. They understand what the hosting fees would look like for their future software road map.

So just so I can be clear here, so if you sold a managed services deal, and there's -- and they are buying the licensed portion -- let's say, the license was $5 and the managed service piece of our time was $10 that $5 we recognize that as traditional upfront services revenues? So the larger portion of that's not stretched over the life of the hosting component?

Yes, that is correct. Our clients actually want to own the license. They want the freedom if for some reason they want to take it back and run it in their own data center, they have that capability and for the most part to maintain that they buy a perpetual license just like our stand-alone clients.

In terms of the guidance, can you give us a sense of the activity you have seen in InFocus, clearly your second quarter suggests that we should see an uptick both in the bookings sequentially, and in the revenues, and maybe you can just give us a sense there on what you are seeing so far in April?

Yes, this is Mike again. We have got a great start to April, so it's probably the best start we have had a in long time relative to contracts in the door. So we're feeling good both about what transpired and was built up in Q1 and what we see in the pipeline growing downstream in the back half of the year. So that feels very good, and then in terms of our connectedness to our clients, we went through a pretty exhaustive campaign to make sure that our clients fully understood our interpretation of the stimulus, and yet potential opportunities for them and where we did perceive gaps and projects that will full those gaps. From a margin perspective, the bipolar nature we talked about, as we came in to the year seeing some downward trends, and we -- about midterm in the quarter it started going the other direction and in April and beyond it looks to be headed the other direction, so that feel goods.

All right. Thanks for the comments guys.

And your next question will come from the line of Michael Cherny with Deutsche Bank. Please proceed.

Hey, guys.

Hey, Michael.

So I just had one quick question regarding the numbers, Marc, I might have missed this, I apologize if I did. Did you guys do anything on the share buyback during the quarter?

We did not.

Okay. That was easy, and then I guess this kind of follows up on Charles's question regarding the stimulus and what you are seeing in terms of trends, the end markets given some of the pressures around the capital environment do you have your clients coming to you now and saying that we can't buy everything now, we can't buy the whole system, but we need products X, Y and Z to allow us to make it through the next six months? Everybody on the call, I think sees all the (inaudible) service and everything that's out there and seems like there are certain products that people need just to kind of bridge the gap? And have you seen any change in trends in terms of customer interest in some of those products?

This is Mike again. I think Jeff said it pretty well. The -- about a third of our base it was justification to stay the course, so it was further incentive to keep going in the uncertain times. But another third, it was viewed as a reason to go accelerate. And some of those as Jeff mentioned in his comments had even stalled out. So I was on a call just a week and a half ago with a CFO from a community hospital in Pennsylvania, and he is absolutely using this as something to go back to his Board with in a May Board meeting, and map it out, and we're going to help him by mapping the -- our payment flows to what he would expect seeing out of the meaningful us incentive payments going forward under the stimulus.

Great. Thanks, guys.

Yes.

And your next question will come from the line of Steve Halper with Thomas Weisel Partners. Please proceed.

-- on the efforts for the PowerWorks applications, which are targeted and services which are targeted towards that position area?

Steve, can you repeat the first part of that question? You were cut off before the--.

Yes, I was looking for an update on how the PowerWorks solutions are -- have performed in the quarter and what the outlook there, and what you are doing on stimulus-related activities there?

Steve, this is Trace. We continue to be very pleased with our ASP model. I think the relevance of that model is now greater than ever in the marketplace, and I think we continue to see increased levels of activities around how these physicians connect with the providers. So as you heard from my comments there's well over $2 billion identified in our install base of physicians, where we can go directly at them with stimulus opportunity. So yes, that has equal levels of interest as had our provider clients.

Yes, Steve, this is Marc. I think Q1 wasn't a big change relative to actual business that we got signed, but once again, there is -- we are having a good conversation with -- not only existing provider clients, but looking at physician groups that we think will be attractive ways to get in. Even including ambulatory centers that don't get any money directly, but our aggregation of physician who are all each going to get their own dollars. So our client base is going to connect us, we think even beyond just what the stark opportunity was to a subset of physicians that could grow our market, and we are offering the type of application, the ASPs, small-upfront investment that those guys are looking for.

Just as a follow-up, how much investment are you doing in that area from a product standpoint, or is the product, done and you just have to tweak it here and there?

It's pretty much done, we have got our certifications. We're fully certified both ambulatory, and on the inpatient basis, finishing up the finalization of that in May, so the solution is ready to go to market and fully certified.

Great.

Your next question will come from the line of John Wheeling, with Piper Jaffray.

Hi, it's actually Shawn. So a couple of questions on the stimulus. You mentioned that customers are pausing awaiting clarity. Exactly what are they looking for clarity on? Is it the definitions of meaningful use and certification, and what are they worried about?

This is Mike. The -- the one -- I wouldn't say that people have paused because of the stimulus, I would say that the folks that have already paused because of the economic climate in their environment, are now looking -- there is a third of the base that is looking to wait -- kind of wait it out, and see what the meaningful use bar is, to continue on their journey, but I would categorize those as the most conservative audience of the thirds that I talked about.

Okay. So could you just go over that again. I may have missed that. So a third of the base is waiting to see what meaningful use is. And what are the two-thirds?

In ascending order, the first third is -- they are staying the course. They are the ones that have always stayed the course, many of them may have started a journey recently, so they feel that they are going to further use the funds to further reinforce the decisions they made upstream. The second third are the ones that are setting -- using this as a reason to accelerate through some of those timelines. So it's the example that I spoke of in Pennsylvania where they view this as a funding source to go help them finish their journeys in accelerated fashion, and then there's another third that is a conservative audience, that they were probably stalled out to begin with for whatever reason and may have been sold out for multiple years and they are taking a wait-and-see attitude. Which is essentially they are not prospectively taking action, they're going to wait to see what the meaningful use bar is to see if they are already qualified. And then once they receive those funds, they may take action.

So what is your best estimate for when we should see an acceleration of bookings because of the stimulus?

I think you'll start to see it we're lucky we're seeing it now. So I think the action that we saw in the month of April, many of those, you can map directly back to a confidence level that's been generated by the stimulus. So I think it will start now and it will continue to ramp in to full force in the second half of the year, and, again, as Jeff mentioned, I think -- we're hopeful that the -- that this just inspires confidence that the decisions they made were the right ones, and they are going to continue on with their journeys, and this will continue to be a moving bar in terms of what the definition of meaningful use will be.

Okay. And what kind of up-front investment is going to be required by you guys to execute on this opportunity?

From our side relative to--?

Yes.

I mean, we currently have a very good structure relative to the solutions center methodologies in place that allow us to meet a lot of this demand with existing in-place associates. So we don't expect a lot of expense impact relative to gearing up to these projects. We're used to doing these, we're doing them very quickly, as the Mercy example that Mike talked about indicates. So at least -- initially you won't see our expenses going up in anticipation.

And Shawn, the other thing we're doing in there in the new footprint space is is we're very clearly mapping out the slots that we have available, and if you are looking to get to a certain level, if you are pinning your hat on a certain level of being meaningful use, here is when you need to get started, so we're giving clients the lead time so that they can -- or prospects the lead time so they can secure, lock into a spot in the solution center to go get going.

Okay. Last question. How many slots do you have still available so the customers can get the full benefit.

That's a great question, Shawn. We're ready for the next question.

All right. Thanks.

Thanks

And your next question will come from the line of Anthony Vendetti with Maxim Group. Please proceed.

Continue on the stimulus package, on the hospitals I think you mentioned the opportunity for the hospitals, they are your customers is anywhere from $10 million all the way up to $200 million, I would assume that's with the larger integrated delivery networks, but can you quantify that a little bit more how you come up with those figures, and exactly when do you have to qualify for the hospitals vis-a-vis the EMRs? The stand-alone EMRs for the individuals with PowerWorks?

Why don't I take a shot, Mike, and you add color to that. We launched immediately upon the February 17, stimulus date, the legal date of launch with very specific per-client studies about what it could mean to an individual client, and as I said in my comments anywhere from a low end $10 million all the way up to $200 million for a large health system, so those are very, very real numbers we have delivered probably half -- maybe more than half of those presentations have been delivered up to this point with really great reception. And that comes from across the management team, Neal, all of us have been delivering these messages. And as I say, they're very, very well received.

What was the second part of the question. The count off of their activity levels for Medicare and Medicaid patient volumes, so it's pretty transparent how to do the math per site.

As you came up with $10 million to $200 million, and the opportunity for them to start qualifying for the stimulus, does that vary because they are a hospital versus being an individual doc?

No, it's all fiscal year 2011, so October 1, 2010.

To be completed by 2015, or the penalties become the stick.

All right. Great. Thanks.

And your next question will come from the line of Atif Rahim with JPMorgan.

Hi, thanks. I guess just tagging on to the prior question, how much of the opportunity do you think would be realizable? I think Chris, you mentioned the hospitals and physicians would get would be about $6 billion, $2 billion respectively but some of the clients would get the most cash, probably have the best consult systems out here so they wouldn't necessarily be buying more from you, so what do you think would be what you would realize from these proceeds?

If I could predict that, I would probably be in a different line of work. It's very difficult to say. The Medicare, Medicaid levels of activity have dictated what we believe is the opportunity on a per-client basis. Some of course are much further along than others. Some might describe the one-third, the one-third, the one-third. There are some that will qualify today. There are some that are along the journey. And there are some that are still trying to figure out what to do next. I don't think that I could put an actual number. We think it is $8 billion is the number we have identified between the hospitals and the physicians, and those are the employed physicians, and then an additional $2 billion for the non-employed physician.

Atif this is Marc, if you are going to do a testing to the wind, half of that should be something that we can go address, based on where our clients are relative -- keep in mind that's just our existing client base. We have a fairly strong pipeline of new clients, and we particularly see certain participants, competitors in this environment, that if the bar is set high enough, are not going to be able to deliver solutions that meet that bar. So we think there's -- and there's, we are well positioned to go after more of the market. So let's assume half of that $8 billion comes to Cerner over that time period, we think there's still upside to that. We think there would be more potential based on that. And that would be over a three or four-year period.

Understood. And then separately, a question on the UK, could you mention what the contribution was to EBIT this quarter? And then with the BT contract coming -- I guess the relationship there getting better, does that change what the contribution is going to be for 2009?

From a financial side, the revenue is going to be kind of in the $15 million range, and the contribution -- contribution margin of that is going to be 2.5 million to $3 million. And that will be consistent over the life of the contract, based on the long-term contract percent of completion rules. So that won't change. Clearly the excitement for us is the fact that we went into the year with that kind of a logjam, and now the things that were standing in our way, London being able to proceed with their implementations, the south being settled as to how it is going to go forward. Those are now done and completed. And we can work on those, be successful, and go look for more opportunities within the program. So we actually think we -- a lot of progress got made, it's not going to show up in the P&L in the near term other than just the continued contribution that we have seen over the last few quarters.

All right. That's great. Thanks a lot.

And your next question will come from the line of Frank Sparacino with First Analysis. Please proceed.

Hi. Trace, I just wanted to ask you about NHS in terms of what has changed now in terms of the local specific delivery model, which to me suggests a higher level of customization and maybe less repeatability as you start to work your way through NHS, but I just wanted to get some further clarification on that, if I'm thinking about that in the right sense?

I'll offer a quick comment and then ask Jeff to add some technical color. The challenge we face has been the layers on which we must work in order to get to the client. We as a Company have always done really well when we work directly with our clients. I think what we have begun to be able to do is custom and locally customize the solution to a much greater detail, to a much greater level, and that's I think at the end of the day what the clients are most interested in. So we are working hard with individual trusts. I think you have seen some of the success from that and I think that will be the model we'll live off going forward.

Yes, and I'd describe it, and it has been published, but it's the -- you have to piece lots of articles together to get it but it's-- the original procurement was somewhat of what I would call a tops down, one size fits all. And it's a standardized approach. There is still elements of that in place, but when you see the term locally configured that really means local trust is going to have a lot more flexibility to take the standardized model and make some adjustments to do it. And where we think, as Marc said, we're getting increasing momentum is our ability to then go faster in some of those deployments versus the prior model of everything being approved centrally before it can go out is a fundamental shift.

Thank you guys.

And your next question will come from the line of Gene Mannheimer with (inaudible). Please proceed.

Thanks for taking the question. Just continuing along those lines with respect to the Southern cluster of England. Is that to say that there would be more than one prime contractor in the South, are you still expecting a single vendor to be chosen? Thanks.

Yes, the South, of course, has moved from Fujitsu to BT, that's well documented. So we clearly are the partners with BT, and although I think there has -- there is flexibility to buy outside of the program, that is the direction, and that's what we hope we will see going forward. But the trusts do have the ability to step outside of the program in the Southern cluster.

Okay. And then also along the international bend with respect to Australia, it sounds like you had some progress there during the quarter, is this driven by any regulatory changes in the country, or just -- can you elaborate on that? Thanks.

No, no fundamental regulatory changes in Australia. I mean, they, like the rest of the world have been strung by the economic climate, but I think what we're doing is turning on systems in new South Wales where we have had a contract for many years successfully. Victoria has had a change in leadership, which we think has worked to our advantage. And that has jump started the line of business that we won there a couple years ago as well. I think it's a little bit of the alignment of the stars, it's the time and place or the types of solutions that Cerner brings. Our success is well-known, and we are the -- I would consider us to be the team to beat in Australia. But other than elections and change in leadership which happens frequently in that country, we're just executing, turning out systems and being recognized for it.

Great. Thank you.

Why don't we go ahead and take one more call -- or one more question.

And your final question will come from the line of Sandy Draper with Raymond James.

Thank you very much. Most of my bigger picture questions have been answered. Just had a question, Marc, in terms of the guidance for the revenue, obviously you are expecting a pretty good recovery ramp in the back half of the year. When I look sort of what you are looking at for EPS, and where sort of gross margins would be. Are you expecting more hardware to come back in the back half of the year? Because it looks like you need to get to your numbers, and not go too high. I imagine your gross margins have to come down if you are going to get to the low end of your revenue range. I'm just wondering if the reason you expect the revenue ramp is higher hardware which would sort of depress the margins?

Not significantly. We were at 83% for Q1, I think if our gross margins are in the 81% range, you are going to find it pretty close to our guidance. Obviously, we look at some -- there's some opportunities here, and if software and licensed software comes back, that's going to help those gross margins as well. But I think without any major changes -- because we certainly don't really look for hardware to be a larger contributing factor than it has been in the last couple of quarters, so I think you'll see some changes, maybe some sublicense software impact that would get us to somewhere around the 81% gross margin range, which would put us in range of our revenue guidance.

So the 81 is for the quarter and for the year or is that just a full year?

Probably end up around 81 for the year. Someplace in that vicinity would be my rough estimate. And it will vary a little bit by quarter on how we get there.

Okay. And I got on the call a little bit late. So did you make any commentary about where the margins came in. Obviously your system sales were light, but your margins held up pretty well, just trying to understand was there any mix in there, or what drove the pretty good margins relative to the lighter revenue?

Basically, if you are talking about the margins on system sales. That was lower -- the gross margin from that was lower relative to what was in the year-ago quarter. A lot of that was the mix between hardware and software, obviously lower software mix, and then also the margins on the software and -- sublicense software and hardware that were lower, so.

Okay.

That was the impact. It was mix, and then the contribution from each of those elements.

Okay. Super. Thanks.

With that let me turn the call over to Neal for closing comments.

Thanks, Marc. Thanks, guys. So good. I think you are hearing from us that, it was a very good -- I was a good quarter based on all of the fundamentals that we were facing with coming into the quarter. There were a lot of fundamental, almost the game-changing aspects of what happened during the quarter, with the legislation that basically funded and pretty much mandated full adoption of HIT in US healthcare system. So -- and if the -- if that all plays through, which, is now law of the land, and we believe it will play through, there is going to be a very -- the nature of this next decade has changed here during this last 90 days, so -- but I don't think we should lose sight to the fact that from a policy point of view, I don't think policy in this country is -- in the US is finished with regards to healthcare. There is going to be another major set of policy that is going to come. So I don't think the only change we're going to have in the US healthcare system is full embracing of HIT.

And then, also, so there's another big shift that's going to come. And you -- you all should be contemplating trying to understand what that is going to do to -- to healthcare -- healthcare delivery, to Cerner, and all of the other companies you follow, because it's pretty significant too. But I think if you play through that, it's -- it will basically be a world that is focused on a set of principals around, transparency, quality, safety, and efficiency. Because if we don't drive efficiency in healthcare and delivery around the world, then, there's going to be a lot of countries in trouble, including the United States.

So the next decade is a pretty exciting decade for us. I really think we -- we clearly make mistakes and could have found shorter paths from A to B. But we are very well positioned to enter this next decade, so when we look out to -- if you will, we look out to the year 2020 or our vision for 2020, we just think the next 10 years is going to be pretty dynamic, and we really believe we have set it up pretty well from things we have done and we invested in. Not that we have done it perfectly, and not that it without be a straight road.

So we like where we're at. We like what happened in the last 90 days. We would be silly not to say that, and in -- fundamentals changed, and we actually didn't cause it to change, because of what we're doing inside -- but it did certainly change our environment, so -- so there are a lot to do. This year the absorption of what has happened is just beginning, and we, I think as Mike said, it will be last half of the year before it's all kind of completely in, but there's not a lot of negative to it.

Now there will be, I have got the Business Week article in front of me and they made sure they didn't get a picture where I was smiling. Which I have gotten a little bit of ribbing from here. I look pretty upset. But there is going to be a lot of people who shoot at this level of investment. But everyone in those stories in there, there's another big -- not all of the facts will get into the papers. This is all happening, every client I talked to -- we're really kind of funding here this kind of -- or when we create the program to basically do the math -- somebody asked us how we did the calculations.

We used a computer, and we read the legislation, and we built the models, and -- what is funny is I talked to more CEOs these last 45 days than I've talked to in any 45 days. I have talked to a lot of CEOs on any give 45 days but I talked to a lot now and everybody basically -- because these are very large clients -- I got the privilege of talking to some -- most of our largest clients, they all felt they were on this path, they put their reputations and in many cases their careers at risk with their Boards on these paths. And this is fundamentally a validation that they were on the right path, and in many cases they are going to get a check in the mail that paid for all of it or a big chunk of it, so they are all feeling very good. It will generate a lot of business. We don't know exactly what percent.

But we still got to get fully absorbed because the bipolar nature, the economic -- the environment -- with the hard environment, we were doing okay in it, but it wasn't the most -- I think I ended last call, basically saying, hey, if we could change it, we would like to have a better environment. But it is an environment where we are still winning. And most people are staying the course with us. But it was affecting everything. So with that, thanks for your time, and we'll talk to you in 90 days.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.