塞納 (CERN) 2009 Q4 法說會逐字稿

Welcome to the Cerner Corporation's fourth quarter 2008 conference call. Today's date is February 9, 2010, and this call is being recorded. The Company has asked me to remind you that various remarks made here today by Cerner's Management about future expectations, planned perspectives and prospects constitute forward-looking statements for the purpose of the Safe Harbor Provisions of the Security and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading Risk Factors under Item 1A in Cerner's Form 10K together with other reports that are on file with the SEC. At this time I'd like to turn the call over to Mr. Marc Naughton, Chief Financial Officer offer Cerner Corporation. Please proceed.

Thank you. Good afternoon, everyone. Welcome to call. I will lead off today with a review of the numbers, Mike Valentine, Executive Vice President and Chief Operating Officer will follow me with sales and operational highlights and marketplace trends, then Trace Devanny, our President, will discuss our global business. Trace will be followed by Jeff Townsend, Executive Vice President and Chief of Staff who will discuss innovation and our long term strategic direction. Neal Patterson, our Chairman and CEO will join us for Q & A. Now let me turn to results.

By many measures, Q4 represents the strongest results in our history and positions us well for a solid 2010. Our bookings were at all-time high levels and more than $200 million over the high end of our guidance. Our income statement performance was compelling with revenue exceeding our guidance, operating margins reaching a long established goal and adjusted EPS above our guidance at $0.04 over consensus, even with a higher tax rate that impacted EPS by $0.02. Our cash flow performance was also at record levels of free cash flow for both Q4 and the full year.

Moving to the details, our total bookings revenue in Q4 was $680 million which is 68% higher than Q4 '08 bookings and an all-time high, including record levels of software, professional services and managed services. Bookings in the quarter benefited from the previously announced Tenet and Universal Health Services contracts which were factored into our guidance at risked-down levels. In addition, we had a booking related to our second IT works contract, which was not factored into our guidance. In total, these three bookings were about $250 million compared to about $150 million that have been factored into our guidance, so the upside to bookings beyond these contracts was still about $100 million over the high end of our guidance. Note that even without these three large contracts, our bookings would have been within our guidance range, which is reflective of the broad strength in the quarter.

The strong Q4 bookings helped bring full year 2009 bookings to record levels of $1.8 billion, which is 19% over 2008 bookings. Our total backlog increased 21% year-over-year and ended the year at $4.21 billion. Contract revenue backlog ended the year at $3.59 billion, which is 23% higher than a year ago. Support revenue backlog was $621 million, up 7% year-over-year. Our revenue in the quarter was $466.3 million, which is up 14% sequentially. Total revenue was flat compared to Q4 '08 levels, which is included $29 million of UK catch up revenue and had an extra week, the results of about $20 million of additional support and services revenue. Adjusting for these items results in 12% growth year-over-year.

Full year 2009 revenue was $1.67 billion, which is flat compared to unadjusted 2008 revenue and up 3% compared to 2008 revenue adjusted for the UK catch up and extra week. The revenue composition for Q4 was $172 million in system sales, $123 million in support and maintenance, $164 million in services and $7 million in reimbursed travel. System sales revenue was up 45% compared to Q3 and up 16% year-over-year, with record levels of software offsetting the decline in hardware sales. Services revenue, which includes managed services and professional services, was down 4% compared to an unadjusted Q4 '08 and up 9% after adjusting for the UK catch up and the extra week. This growth was driven by strong growth in managed services with professional services down slightly year-over-year.

As we have discussed, the lower professional services revenue during 2009 has been driven by a lower billable headcount in the US, lower services revenue in the UK and the weak economy. However, we expect professional services revenue to rebound in 2010 due to strong bookings in the second half of 2009 and a strong outlook related to stimulus activity. Our support and maintenance revenue was down 10% compared to an unadjusted Q4 '08 and up 2% after adjusting for the UK catch up and the extra week.

As assessed last quarter, support and maintenance revenue growth has been impacted by the shifting of services revenue that was previously treated as support to professional services as part of our transition to working with BT instead of Fujitsu in the southern region of England. Maintenance revenue has been impacted by lower levels of technology resale with many existing clients on hardware support switching to our hosting option. Additionally, support revenue has been impacted by the limited amount of software growth in the first three quarters of 2009 and limited annual CPI increases. We expect support revenue growth to improve as we move through 2010 and beyond due to our record quarter for software bookings and strong stimulus outlook.

Looking at revenue by geographic segment, our domestic revenue increased by 18% to $401 million. Global revenue was $65 million, which is down 48% compared to an unadjusted Q4 '08 and down 31% after adjusting for the UK catch up. In addition to the UK catch up, we also had some very large global hardware sales in Q4 '08 which if normalized, would lead to the global revenue decline being about 10%. Regardless, it's still disappointing, but not entirely unexpected, level of global performance. As we've indicated throughout 2009, our global revenue was been impacted by a very difficult global economy. As Trace will discuss, we remain optimistic that our global business will rebound and resume being a contributor to our growth.

As a preview to the annual update of our detailed business model that we'll provide at our March 11 investor day, I'd like to provide you with total revenue and growth by business model for the full year 2009. License software was flat compared to last year at $254 million,with strong Q4 growth offsetting declines in two of the first three quarters. Technology resale was down 12% to $152 million, reflecting a tepid environment for capital purchases most of the year. A tough comparable due to some unique large 2008 hardware sales and a continued bias towards selection of our hosting services instead of hardware purchases.

Subscriptions and transaction processing increased 5% to $99 million. Professional services revenue was $397 million, which is down 11% compared to unadjusted 2008 revenue and down 6% after adjusting for the UK catch up and the extra week with the decline driven primarily by the previous (inaudible) slowdown. Managed services was up 24% to $247 million, driven by strong demand for our hosting services. Support maintenance was $493 million, which is up 4% compared to unadjusted 2008 revenue and up 8% after adjusting for the UK catch up and the extra week in 2008. And reimbursed travel was down 19% to $30 million, reflecting a lower level of professional services travel. We'll go into more business model detail at our investor day.

Moving to gross margin, our gross margin for Q4 was 83%, which is up 180 basis points year-over-year and flat sequentially. Our system sales margin was up over a 1,000 basis points year-over-year, nearly 900 basis points sequentially, with a strength driven by record levels of software and declines in hardware. Our gross margin for the year was 83.2%, up 100 basis points. Looking at operating spending, our Q4 operating expenses were $289.2 million before stock compensation expense of $4.6 million. This is up 6% compared to a year ago and 9% sequentially.

Full year operating expenses were $1.1 billion, which is flat compared to 2008. Sales in client services expenses were up 1% compared to Q4 '08 and up 8% compared to Q3 '09. The increase from Q3 to Q4 was driven by Cerner health conference expenses, depreciation and incentive compensation. For the full year, sales in client services expenses were down 1%. Software development expense was up 7% compared to Q4 '08 and 12% sequentially. The increase from Q3 to Q4 was driven by higher amortization expense, lower capitalization of software and higher incentive compensation. For the full year, software development expense was down 1%. G & A expense was up $10 million, or 45% year-over-year and $4 million, or 14% sequentially. Almost all of the $10 million year-over-year increase in G & A is due to reduced gains related to foreign currency. The sequential increase was primarily driven by property taxes and profit-sharing expenses.

Moving to operating margins, our operating margin in Q4 was 21.0% before stock compensation expense. This is up 340 basis points compared to last year and 260 basis points compared to Q3 '09. Our full year operating margin was 18.5%, and we continue to expect a 20% operating margin for the full year of 2010. Those of you that have followed us over the years will recall that we have been working toward a goal of 20% operating margins since 2003 when our operating margins were 9%. So we are proud of exceeding our 20% in Q4 and being on target to deliver 20% for the full year 2010. Beyond 2010, we believe we'll continue to have leverage in our business that can drive margin expansion.

Moving to earnings and EPS, our GAAP net earnings in Q4 were $60.5 million, or $0.71 per diluted share. GAAP net earnings include stock compensation expense, which had a net impact on earnings of $2.9 million or $0.04 per share. Adjusted net earnings were $63.4 million and adjusted EPS was $0.75 which is up 15% compared to Q4 '08. For the year, adjusted net earnings were $204 million and EPS was $2.43, up 11%. Our tax rate was 35.5%, which is about 1.5% above our projected level, due primarily to lower international earnings. The higher tax rate reduced our net earnings by about $1.5 million, or $0.02. We are projecting a tax rate of 35% for 2010.

Now moving to our balance sheet. We ended Q4 with $559 million of cash and short-term investments. Our short-term investments now include $95 million of auction rate securities that were reclassified to short-term so they can be liquidated at par in 2010. Our total debt is $121 million. Total accounts receivable ended the year at $461 million, which is down $9 million from Q3. Contracts receivable, or the unbilled portion of receivables were $135 million, which is down $30 million from Q3 and now represents 29% of total receivables compared to 35% in Q3. Note that a Q4 -- during Q4, the receivable related to the Fujitsu contract was reclassified to other long term assets because we now believe that a resolution between Fujitsu and the NHS is unlikely to occur in the next 12 months. Despite the uncertainty about the timing of when Fujitsu and the government we'll unwind our contract so we can finalize items with Fujitsu, we still expect to fully collect those receivables.

Cash collections in Q4 were a record $478 million, with third party financings of only $7 million. DSO in Q4 was 90 days, which is is down from 105 days in Q3. About 12 days of this improvement was related to the reclass of the Fujitsu receivable with the rest driven by strong cash collections. Operating cash flow for the quarter was a record at $108 million. Q4 capital expenditures were $41 million and capitalized software was $19 million.

Free cash flow defined as operating cash flow less capital expenditures and capitalized software was also a record $48 million. Full year operating cash flow was $347 million, up 23% over 2008. Capital expenditures and capitalized software for the year were $131 million and $78 million, respectively. Full year free cash flow was $138 million, which is 33% higher than 2008. Our free cash flow as a percent of net earnings has increased from 22% in 2007 to 55% in 2008 and then to 72% in 2009, reflecting a strengthening in earnings quality. We expect to continue growing free cash flow going forward through growth and operating cash flow combined with keeping capital spending in the $130 million to $150 million range.

Moving to capitalized software, the $19 million of capitalized software in Q4 represents 25% of the $75.7 million of total spending on development activities. Software amortization for the quarter was $17.8 million, resulting in a net capitalization of $1.2 million, or 2% of the total. As I previewed last quarter, amortization increased $900,000 compared to Q3 as a full three months of the amortization related to 2007.19 release was reflected. In Q1, amortization should decrease about $2 million to approximately $16 million, primarily driven by the amortization of what was capitalized in 2004 being completed, partially offset by an increase in amortization of other non-core releases. Amortization will ramp back up in the Q2 timeframe when our next release becomes generally available.

Now I'll go through the guidance. Looking at Q1 revenue, we expect revenue in the $420 million to $435 million range, with the mid point of this range representing 9% growth over Q1 '09. For the year, we expect revenue between $1.8 billion and $1.875 billion, reflecting 10% growth at the midpoint. We expect Q1 adjusted EPS before stock compensation expense to be $0.57 to $0.62 per share with a mid point reflecting about 15% growth. For the year, we expect adjusted EPS of $2.80 to $2.90, with the midpoint reflecting 17% growth over 2009. The Q1 guidance is based on total spending before stock option expense of approximately $280 million to $285 million. Our estimate for stock compensation expense is approximately $0.04 for Q1 and $0.16 to $0.18 for the year. Moving to bookings guidance, we expect bookings revenue in Q1 of $380 million to $410 million with a midpoint of this range reflecting 19% growth over last year.

In closing, we're pleased with our results in Q4 and 2009 including record bookings in revenue, delivering over 20% operating margins and strong earnings growth and record free cash flow generation. Finally, I'd like to remind you we are having our investment community meeting on March 11 here in Kansas City. If you are interested attending and didn't receive the e-mail invite, please refer to the investor section of cerner.com. And with that, I'll turn the call over to Mike.

Thanks Marc. Hello, everyone. Today I'm going to provide some observations on the US marketplace and operational and top line highlights for the quarter and for the year. Starting with the marketplace, 2009 started on a difficult note with a level of activity through the first three quarters of the year impacted by the economic downturn and a pause as the market digested the stimulus act. The environment was much different in Q4 with improving access to capital and enough clarity around stimulus to drive big decisions and a return to Q4 seasonality, where providers were looking to complete agreements before year-end.

While uncertainty about healthcare reform remains, the fact that the High-Tech Act is separate from reform and has moved forward on schedule, reduces the risk to the HIT sector that might be associated with healthcare reform. We believe that in all scenarios of reform, healthcare IT will continue to be viewed as an important element that is required to facilitate any meaningful transformation of healthcare. Regarding the stimulus act, I'd like to provide our current thoughts on how we expect it to impact us. Relative to meaningful use, the interim final rules that were released as expected at the end of 2009 had no surprises and continue to keep the bar at a level that will drive tangible benefits from the invested stimulus dollars. In terms of certification, Cerner Millennium Solutions went through CCHIT preliminary ARRA certification testing on January 15, 2010. Our generally available solutions passed certification on almost all eligible provider and hospital components. We will have incremental testing to complete in the late Spring or early Summer as the final rule is completed.

As our Q4 results illustrated, the stimulus opportunity is becoming real and has increased a level of activity both inside our base and with new footprint opportunities. We believe the next few years will be a major opportunity to expand market share, and we really like our position because of our readiness -- because of the readiness of our solutions relative to most of our competitors and our unmatchability to deliver value in a predictable time frame and at a predictable cost.

Moving to our Q4 results. As Marc mentioned, our bookings revenue in Q4 of $680 million was a record. These bookings included an all-time high number of large contracts with 20 contracts over $5 million, $15 of these were over $10 million, which is six more $10 million plus transactions than any quarter in our history. We also had a very strong level of new footprints with 36% of our bookings coming from outside of our core millennium installed base. This is a great indicator of our competitiveness, which I believe is very strong right now.

Investments we made over the past several years at improving the useability of our solutions, hardening code quality and creating efficiencies in our delivery capabilities are proving to be big differentiators in the marketplace. A good example of these capabilities leading to success in the marketplace are Tenet Healthcare and Universal Health Services contracts that were signed in Q4. Our broad and integrated suite of solutions combined with our proven about to deliver value at a predictable cost were important factors in the selection by these very well respected for-profit health systems. Beyond our very strong market presence with large health systems, we are continuing to make strides in the community hospital market.

Q4 was another good quarter of results in this market as we continue to see demand for our scalable ASP offering. We see meaningful opportunities for growth in this market and have steadily gained traction through the last few years. The recent announcement by Fisher-Titus Medical Center and Magruder Hospital is a good example of small hospitals looking to Cerner Solutions for achieving meaningful use and beyond. Fisher-Titus and Magruder are independent community hospitals that collaborated on the automation of their hospitals to develop best practices for technology deployment and begin to coordinate care in their region. After their upcoming go lives, they will both become completely digital smart hospitals just 10 months after starting their projects. This will launch them into the top 5% of automated hospitals and provide yet another proof point for Cerner's capabilities.

In the physician office market, we had a good 2009 with 20% bookings growth, a strong increase in our pipeline, increased competitiveness, including several wins against top competitors and increased traction with distributing our solutions through our health system clients. We expect to build on this in 2010 with stimulus-driven demand picking up and with the added capacity we've gained through our CDW channel relationship. When looking at growth opportunities over the next several years, capitalizing on the stimulus driven demand for core clinical solutions inside and outside of our install base will be a major component. However, I think Cerner will have many other contributors to growth, both during and beyond the stimulus era.

Cerner is known as an innovator in the marketplace. A goal we are setting for ourselves is to remain the leader through the demonstration of continued innovations that set the bar for what meaningful use standards should look like beyond 2015. Having the ability to provide solutions beyond meaningful use not only makes us a more attractive option as providers assess their long term strategy, it also provides us with another meaningful growth driver beyond the core EMR.

One example of this organic growth opportunity is in the device space. In the past few years, we have expanded our traditional technology resale business into a business that creates connected medical device architectures. This approach has positioned Cerner at the forefront of extending the EMR to include medical device data capture. Today there are certified sites across 36 clients that are live with the MD device connectivity architecture, including clients outside of our Millennium install base.

Also in 2009, our RX station medication dispensing cabinets reached a new stage of maturity and have successfully administered well in success of 1 million medication orders. And we had a strong year with medical device resale helping offset some of the decline in traditional hardware resale. We now have eight value-added resaler agreements in place for medical devices, and we expect to continue growing this business which allows our clients to go through one supplier for both their devices and device connectivity solutions.

In 2009, we successfully launched more than 10 Agile business units in which we aligned sales services and development resources across certain vertical markets to make us a stronger, more agile competitor within markets that represent meaningful wide space opportunities with existing and future clients. A good example of where this focus has paid off for us is our women's health business unit which signed 22 clients in 2009, displacing the top best of breed competitors in many of these clients. Additionally, we have substantial growth opportunities in new service offerings that capture a larger percent of our clients existing IT spending. These services leverage our proven operational capabilities and the success of our Cerner Works managed services business where we have demonstrated the ability to improve our client service levels at a cost that is at or below levels that they are previously spending.

One of these new services is Cerner IT Works, which is a suite of services that improved the ability of a hospital IT department to meet their organization's needs while also creating a closer alignment between Cerner and our clients. As we announced last quarter, the first Cerner IT Works client was signed in Q3. And in Q4, we signed our second client, University of Missouri following the memorandum of understanding we announced in Q3. Cerner IT Works allows for Cerner's role to expand beyond Millennium Solution and accelerates the time frame for meeting stimulus meaningful use requirements. A second new service is Cerner Rev Works, which includes solutions and services to help healthcare organizations with their revenue cycle functions.

In 2009, we made great progress with our patient accounting solution, including improving the features and functionality, signing 14 new clients, and ending the year with 61 live sites. With Cerner Rev Works we're building on this progress to go beyond patient accounting. We are creating a clinically driven revenue cycle process that increases reimbursement, accelerates cash, lowers cost, insures compliance and eliminates waste, friction, and delay. In summary, Cerner IT Works and Rev Works represent a major contextual change for Cerner. They represent vehicles to significantly enhance our alignment with our clients. Their strategies, goals and objectives become ours and ours become theirs, and we become linked in a common identity. These new businesses require much more than just running the clients' IT organization or revenue cycle operation. They require becoming fully aligned and motivated to improve the performance of the clients organization. So in addition to representing substantial revenue opportunities for Cerner, these initiatives make us much more strategic to our clients and allow us to innovate at the edges of healthcare and help move the meter in healthcare quality safety and efficiency.

In closing, I am pleased with our Q4 results and I believe we are entering the stimulus era as the best positioned Company to not only gain share and grow as the EMR has adopted, but also as the best positioned Company to create growth beyond meaningful use. With that, I'll turn the call over to Trace.

Thanks, Mike. Good afternoon, everyone. Today I would like to provide an update on a significant shift in my area of focus going forward and then discuss our international business.

As most of you know, I spend a lot of my time traveling to many of the more than 25 countries where we currently do business . While it is very important that we seize the opportunity created by the stimulus in the United States, we must also continue to advantage our position as the HIT leader in the rest of the world. It goes without saying there is great interest around the globe and the extensive healthcare reform and stimulus funding activities in the US. This global climate will offer significant strategic opportunity for Cerner in the next three to five years. As such, I'm excited to say that I'll be relocating to London to spearhead an increased focus on global markets and opportunities which show the long term promise of even surpassing the current United States market potential. By having Cerner's President on the ground in Europe, we're sending a strong message about the importance of and our committment to being a true multi-national Company, as we pursue the many large country-wide opportunities presented by healthcare across the globe. This announcement has already been recognized in many of our international markets as a positive sign of committment to our global business. Note that while I will be spending most of my time overseas, I will still be in the US a fair amount as I will be maintaining many important relationships with US clients as well as other duties.

Moving to our results, as Marc mentioned, our global business had a difficult fourth quarter and year. This was, in part, due to a tough comparable global revenue having grown at a 47%, five year compound annual rate through 2008. Make no mistake, the weakened global economic climate had a big impact on our 2009 results. However, despite these recent soft results, I am very bullish about the many opportunities that we are currently working to grow our business. Again, international growth is strategic to our Company's long term success. My relocation to London sends a strong message about our belief in healthcare transformation around the world. This increased focus will pay dividends in the future, and I'm most pleased for the opportunity to continue to lead this effort from our London office.

On our last call, I highlighted the importance of operational execution as the lynch pin for market leadership. Specifically in England, I noted that we had important conversions that would further differentiate Cerner as the one provider that is truly delivering results on a scalable current technology platform. I am pleased to report that both Kingston Hospital NHS Trust in London, which is inside the national program, and the new Castle Upon Time Foundation trust which purchased outside the program were successfully converted in the fourth quarter. While there continues to be speculation about the direction of the NHS program, the need for technology to play a central role in NHS modernization continues to accelerate, and Cerner's delivery capabilities and committment to the marketplace have not gone unnoticed, so I believe that our work with the NHS Trust will continue to expand as we deliver demonstrable benefit to the trust.

Similar execution was evident in the Middle East where we had another successful go live as part of the SEHA system-wide HIT upgrade. We have now deployed systems across all SEHA hospitals and clinics in the Emirate of Abu Dhabi, making SEHA the only fully electronic health care system in the Middle East, a very important milestone in the region. Also in 2009, we continued to expand the presence of Cerner millennium solutions in other parts of the world. With convergence in Egypt and Chile, Millennium is now live on six continents. In addition, solid progress was made in other countries, including new clients and additional go lives in France and Spain, additional conversions in Australia and our first ever hosting agreement in Canada. In summary, while there was disappointing aspects to our 2009 global results, I still believe we advanced our position as a leading global HIT company and positioned ourselves for a return to solid growth in 2010 and beyond. I look forward to keeping you updated on our progress. With that, I'll turn the call

Thanks, Trace. Looking back on 2009, I'm pleased with what we accomplished from an innovation standpoint. As Mike discussed, we are well positioned to deliver against meaningful use requirements as well as take our clients beyond the EMR. This, along with additional services such as IT Works and Rev Works, presents strong growth opportunities while creating strategic alignments with our clients over the next several years. I also believe we made good progress at advancing initiatives that will be the foundation for another leg of growth this decade.

Beginning this year, I will take on responsibility for several of these initiatives which we collectively refer to as the acronym CERN, which stands for consumer employer research and networks. It is across these combined markets that we must leverage our progress on existing initiatives to build towards the new middle which, was the topic of Neal's key note as our last healthcare conference and included in my comments last quarter. Last year, we published the business case for the new middle and a white paper called the ABCs of Systemic Healthcare Reform. 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 so that care can be delivered in a coordinated and frictionless manner. Over the course of 2009, we shared the launch of several new initiatives that give us a good start to creating a new middle and changing the way providers, employers, governments and consumers interact with healthcare. I'll briefly describe some of these initiatives today, and we'll go into more detail in our investor day on March 11.

Over the years, we have leveraged our connectivity to our clients to create a network that helps manage and monitor client technical environments as well as creating a common platform for learning and improvement. We've referred to this as the Lights On Network. Learning from this platform lead to the creation in 2009 of uCern , a contextual collaboration platform to which we quickly connected almost all of our core clients. By allowing end-users to engage both inside and outside their organizations, this platform has extended our knowledge ecosystem to the edges where our solutions and services meet healthcare delivery.

In 2010, we expect to extend this platform to the consumer or patient in the context of their healthcare experiences. uDevelop and uCern store are additional initiatives that helped us connect with our client base and move our research and development efforts to the edges of healthcare where physicians and nurses interact with patients in context of the health condition. Recall that uDevelop is a collaborative ecosystem to support a unique audience of engineers, both Cerner associates and external developers. In the uCern store is a place for providing quick contextual access to innovations, developed by Cerner and others, allowing for innovation to be accessible beyond the boundaries of IT, reaching the end-user community. The ability to connect clients across our base in interoperability capabilities through our Cerner hub are important differentiators as clients look at the interoperability requirements for stimulus funding.

It also enables the creation of regional networks to facilitate broader interoperability, allowing for things like personal health records, population health management and chronic disease management programs. In 2009, we also expanded our footprint and capabilities in the employer space which is an important element of our long term strategy, given the amount of healthcare costs paid by employers. Our acquisition of IMC Healthcare expands our clinic offering to include occupational health while also establishing a relationship with 15 employers, some of which are very large. This gives us a great opportunity to grow these employer relationships to include other healthy employer services, such as on site pharmacy, condition and wellness, management programs and benefit plan designs. These services are designed to help employers control expenses associated with the help of our employees. We have proven the ability to do this at Cerner where we have held costs flat over the past several years while improving the health of our associate base as well as measured by cholesterol levels, BMI, blood pressure and glucose levels. In the future, these proof points and employee relationships will be important as we look to change the current inefficient model for transacting healthcare.

In summary, my focus over the next several years will be leveraging the accomplishments of all these initiatives as building blocks for new middle to healthcare. Through these connections and networks across employers, consumers and providers, we believe we can help create an entirely new healthcare system that will introduce much needed competition for our current insurance based infrastructure.

In this new system, the new middle will facilitate the sharing of relevant clinical and financial information between payors, consumers and providers, resulting in enhanced care and reduced friction. Consumers will have a personal health record giving them ready access to information on both the price and quality of the care they receive. This record will have the consumers' complete medical history and be capable, including a predictive model of future needs based on his or her genetic code. Armed with this information, consumers would have financial incentives to focus on controlling chronic conditions and reducing future maladies. With more complete patient information, providers can focus on preventive rather than reactive medicine. They will also be able to communicate instantly with the rest of the patient's care team and receive immediate point of payments for the delivery of appropriate care rather than waiting weeks or months while claims work through the reimbursement process.

Finally, the segments of our society that pay for care, employers and governments, would receive a rational health system, one that eliminates variance, cost, and waste, while maximizing the quality of healthcare for all of us. With that, I'll turn the call over to the operator for

Thank you. (Operator Instructions) Your first question comes from the line of Michael Cherney of Deutsche Bank. Please proceed.

Hey, guys, congratulations on a great quarter.

Thanks, Michael.

So I want to dig in a little bit to this bookings number. Mike, you obviously talked about a number of large contract wins, you talked about some new competitive situations. For especially the large contract wins, were these more greenfield opportunities or replacements of legacy systems or kind of -- just give us a little more characteristic of what lead to some of these contract wins?

Well, I think, Michael, at a high level it's a result of an ongoing investment that we've made in specifically the two transactions that I think you're referring to, UHS, and Tenet , a longer term investment in the for-profit space and developing a business on that front. Both of them had levels of HIT automation in place, both had some suppliers, other suppliers in the mix with different strategies. So I think that for the larger two, it's a result of some longer term investments that paid off. Just the sheer volume of larger transactions, I think is reflective of a combination of new footprints coming to the marketplace, existing clients finishing their journey and our percent of -- capturing percent of spend strategies coming to fruition. So where the average transaction is larger, obviously, one we can define more of the road map and to get more of the spend at that transaction point. So I think this quarter represented a great example of all of that coming

Absolutely. And then just a question of the margins that relates to the first question as well. Obviously, I think everyone here is excited to see that you guys broke through that 20% operating margin but going forward, you obviously have a lot of new business to put in place. Can you tell us a little bit about the dynamics of the tradeoff between some of the significant new business wins you have and what that means for the margin profile of the overall business?

Yes, this is Marc. The deals that we've signed this quarter were very consistent from a pricing perspective. We're not seeing a lot of pricing pressure out there. We're kind of winning on our capabilities, and this will feed not only the software, but feed the services. And a lot of these that haven't elected managed services yet are future candidates for that, so we don't expect any degradation to our margins and in fact, as we fully utilize what we had talked about as a bench in the services space, we actually think that could be positive relative to our margin and help us get to a 20% margin for the full year of 2010.

Thanks, Marc, that's helpful. And congratulations again, guys.

Thanks.

You have a question from the line of Glenn Garmont of ThinkEquity. Please proceed.

Yes, thanks, good afternoon. Marc, just trying to understand the relationship between here that very impressive bookings number and your revenue growth guidance for this year. I'm just wondering obviously, significant upside on the bookings side, the 10% revenue growth outlook sort of consistent with where it's been. What's preventing sort of greater flow through there? Are you sort of constrained on the implementation side, or is it the mix of bookings? Are there more services in the bookings? Just trying to understand the linkage there.

Yes, I think, good question. Clearly, some of the mix relative to some of the longer term deals from a hosting and IT works perspective, those feed the income statement over a longer period of time, normally five to seven years, so that's one impact. Some of these larger transactions, particularly in the for-profit space, probably have projects that will go on over a period of years, and the professional services from those will flow into the income statement over that three plus year period of time. So obviously, the big chunk of bookings, very excited, puts it in our backlog. But as we roll forward, it certainly helps support the view we've had for 2010. But keep in mind, we try to be somewhat conservative on doing our plans relative to expecting more business than we kind of seen in the past, and I think this year, we've been even more careful just to make sure that our numbers are solid and deliverable, So we're -- in this economy, we would be pleased with 10% growth on the top line, 17% growth on the earnings line, and we haven't factored in a whole lot of upside from the stimulus and the numbers we provided that could happen. But relative to the big booking in Q4, it's going to have a multi-year impact, and that's why you're not seeing a huge amount flow through in 2010.

Okay, very helpful. I'll step aside. Thanks Marc.

Thanks.

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

Yes, just quick clarification, Marc, on that last statement. Did you say you have not factored in a lot of stimulus?

We built our plan based on our 2009 activity levels, adjusted slightly for pipeline, So there is likely -- stimulus starts hitting this in the middle of the year, and in the years, we expect that there's potential for upside. We think Q1, as our guidance indicates, relative to Q4, is going to reflect some of the seasonality that we normally encountered. And obviously, after a monster Q4, down slightly for Q1 numbers would make sense from a bookings standpoint. But our plan, and that's what we base our guidance on going into the year, doesn't expect anything heroic from a stimulus perspective.

Okay, and -- thanks for the help there. When we look at the $15 million, $10 plus million dollar deals, how many of those would you characterize were from new footprints? And I'll stop there.

I would say, this is Mike. I would say about a third.

Okay.

And we're not, in our calculation, when we do the 30% plus from new business, we're not including Tenet in that, even though all those technically represent new footprint facilities, where that's excluded from our calculation.

Okay, great. And then final, on the pipeline, when you look out, can you characterize at all the stimulus related deal, and have you seen a tick up yet? Based on your initial comments Marc, I guess you're really not factoring much in until later in the year. But are there active -- an increase in active RFPs because of the stimulus?

Yes, this is Mike again. There absolutely is an increase in RFP traffic and an increase in activities in the marketplace. So we're, like we've said in the last three calls now, we're seeing different behavior in the marketplace that's driven by a desire to get meaningful use for our clients here in the US and the market in the US, and we expect that to continue through the year.

Okay, thank you.

You have a question from the line of Jamie Stockton of Morgan Keegan. Please proceed.

Hi guys. Thanks for taking my questions, and good quarter. Mike, really, I would say that both of them pertain to where the demand is coming from in the hospital space and then your opportunity in the community hospital space. And the first one is, would you say it's accurate that the larger the organization, the more likely it is they are moving now relative to the stimulus?

What I have said in the last couple calls is the market is broken down in about a third, a third, a third. A third are waiting see what meaningful use gets defined as, and if it becomes real, a third is staying of course on a journey they already started, and a third are either starting or accelerating. What I would say that we're seeing now is, unless you have some special extenuating circumstances, financial or otherwise, that bottom third that was waiting is at a minimum, getting a plan to get towards meaningful use. So I think every -- it's fair to say, unless you've got some extenuating circumstances, this is on your radar and you've got a plan or you're building a plan to action it. Now, where you are in that decision process is a different point, but I think it's very active around getting a journey started around meaningful use.

And then would the opportunity in the community hospital space, what sort of a time frame do you think is out there as far as those potential customers making a decision as to whether or not they are going to go with their existing vendor or if they're going to switch?

I would say that we expect the activity around the stimulus to play out over the course of the next three to five years, so that the acceleration to get there will happen then. For a community hospital, I would say they tend to make decisions in a time frame as low as 60 to 90 days. And as we saw in Q4, we actually see some of either our clients or some folks in the marketplace really making a gut check around, are the solutions or the technologies that they have selected, are they going to get them to meaningful use? And when they make a decision and it is no, we need a new strategy, they tend to act very quickly. So I think we'll see activity on that front in 2010 spike, so people will make the gut check, make a decision, and if the decision is a one that finds themself back in the marketplace, they tend to go very quickly. So I view it as this is our window of opportunity from a replacement or displacement standpoint, our best window of opportunity that's driven by stimulus is going to happen in 2010.

Okay, and my last question is on the physician side. You guys have hired a few more people from a sales standpoint, I think, in your physician business. You have the partnership with CDW. How have the conversations gone with the regional extension centers? Do you think that that is going to be another area where you can increase your distribution among physicians, especially smaller practices?

Absolutely. Our best means to reach high volume physician practices is through our client base, and our client base are the active participants in these regional extension centers. So I think when they announce the 60 or 70, we will absolutely go be a part of those functions, just as we've sold through our base and allowed them to essentially, already serve as regional extension centers themselves without having that formal designation.

Great. Thanks guys.

Your next question comes from the line of Corey Tobin of William Blair & Company.

Hi, congrats on a very nice quarter.

Thanks.

Three quick ones here. First, what would you estimate replacement deals, either departmental systems or core inpatient systems, represent as a percentage of your total opportunities today?

You're asking a Q4 composition question?

I'm more asking about when you look at the pipeline.

It's a tough question to answer, because almost every situation represents a displacement for one or multiple suppliers. So an easy answer is 90% of the transactions that we do are replacing someone, but a pure, a wholesale replacement has been fairly rare to date. Q4 was obviously a big spike for us relative to a single large transaction and a couple others that tagged along with it. So we haven't seen that as a huge opportunity for us, but as I mentioned in my comments earlier, I think our best window of opportunity to go accelerate and perform on that front is probably 2010.

Great. Switching to the margin side for a second, now that was a very nice quarter, and congrats on making the 20% goal. And assuming that comes through in 2010, internally, as you look out over the next three to five years, what's the next step with respect to margins or the next target with respect to margins that you would point us towards?

Yes, this is Marc. I'm kind of getting out of the setting the margin target business for at least one quarter, if I can. No, we think 20% is a great target since it was 9% when we first established it, but we don't think that's total reflective of all of the leverage that's in the business. So we will -- we're in a very unique situation here, so we're going to do a good job, we think, of balancing margin growth with investing as appropriate in the business. We've already made a lot of the investments, so those investments won't have a big impact on margins. But we would like to, in a steady state environment, continue to try to grow margins between 50 and 100 basis points annually. But we're at this point focusing on getting the 2010s to a full year at 20%, and then we'll go from there. We aren't done growing margins.

Great. And final one if I could, Marc you're dovetailing on your comments earlier with respect to top line guidance. Would you say at this point you're more comfortable with the guidance that was set up there for 2010 revenue than perhaps you were coming into 2009 and hitting the 2009 revenue target?

Every time we provide guidance, we are very comfortable with what we provide based on the facts that we know at the time, so I'd have to say that at least my comfort level, I have to be very comfortable every time we talk. I think that clearly the environment of January 2010 and February 2010 versus the same time a year ago feels much better from our standpoint, relative to what we think we can accomplish. I think I've indicated that our plan doesn't assume we're going to increase bookings over the prior year number. Stimulus will help us meet that target, so it's not completely excluded. But if we get some upside on the stimulus, which is more likely in 2010 certainly than it was in 2009, I think realistically, the guidance is our best view of the year at the time we provide it, so I'd have to say that every time I provide you guidance, I'm comfortable with it.

Excellent. Congrats again, thank you.

Thanks.

You have a question from the line of George Hill of Leerink Swann. Please proceed.

Hey guys, good afternoon, and thanks for taking the call. I have another couple questions. Marc, a real quick housekeeping question. Did you say tax rate of 35% for next year?

Correct.

Okay, Mike, I wanted to talk for a second about the UHS and Tenet wins, and I wanted to ask how we should think about those wins vis-a-vis, I think about old big contracts like Ascension Health, and I remember when you guys first signed Ascension, you guys had put a number around it that looked like about $100 million, and if I think about Ascension today, if I'm doing my math right, they've spent almost a $250 million with you guys. Should we think about the large contracts that you guys sign not as terminal value contracts, but these are really what it costs to bring the customers kind of up the initial curve and that there will be future spending after that?

That's absolutely the way we look at it. We talk about, in my comments earlier about the dollars that go back into R & D to create new innovations at the edge, and so we were talking a little bit about it around the white space and how it's a little bit of a moving target because if you look back a year from today, we really didn't have an IT works client. It was something that we were launching and now it represents a sizeable chunk of what happened to Q4. You look back two years from today and we were talking to you about the device connectivity and how meaningful that business is today, so you fast forward two years from today and I think there will be more good things going on in our install base that will go back into those large client transactions and we were due for a large transaction in the US. We skipped 2008, and so having the two happen in 2009 was a good catch up, and we expect that. We look for the larger opportunities, the larger transactions and we fully expect to continue to leverage our solutions into beyond that initial point-of-sale in each one of those opportunities, so the short answer is absolutely yes.

Okay, great color. Second of all, not everybody in the healthcare technology sector has reported results as good as your guys with an outlook as optimistic as your guys. In the most recent quarter, do you think it's fair to say we're starting to see the bifurcation of some of the winners and losers in the market?

Neal?

(laughter) Go ahead, Mike.

This is Marc. I think clearly, it's still a competitive environment out there. Right now, everybody can say that they're going to meet the meaningful use targets, and I think those that can prove it early are going to have an advantagee, and we fortunately happen to be in that camp, so we'll see. Clearly, our results do set us apart from the rest of the industry at this point.

Yes, and I'll say last question, Marc, I'll ask you to indulge me for just a few seconds. If I remember right, when you first started on the data center project four or five years ago, you invested about $100 million in the data center capacity that you have right now. Can you talk about what the managed services attach rate looks like, maybe give us color on where the hosted services revenue line ended the year and about what profitability level there looks like?

Well, the top line of managed services showed about $250 million for the year. It clearly is one of our fastest growing elements of the business, and the way we have set up our facilities is that we can incrementally add data center space in kind of digestible CapEx chunks. So when we talk about spending the $130 million to $150 million a year in CapEx, that covers building out that additional capacity as well as putting computers in and adding people. So it is a business we continue to expect to grow. Our ultimate goal is every client we have is a managed service client, and then that client steps up and becomes an IT Works client a little bit down the road. So --

And your attachment rate, so 100% of the people who made -- of the new clients that came to Cerner in Q4 that also made a technology decision went with our hosted managed services offering.

Okay, and I guess while I'm thinking about it, is that if you guys, let's say you put $150 million worth of capital into this business. It's now a $250 million-plus run rate business that's generating maybe EBIT margins approaching 20% from returns on capital perspective, that probably looks pretty good?

Absolutely. We're excited when that business basically turned to where it cash flows, it by itself covers its own capital investment on an annual basis, so.

All right, that covers my question. Thanks guys.

Thanks, George.

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

Hi, thanks, and my congrats on a great quarter too. A quick question related to prior comments you made. What's the margin profile of the IT Works business? Is it something that's highly intensive in terms of costs up front and then becomes profitable later, or should we be thinking of it somewhat differently?

Yes, the IT Works business is primarily designed for us to take over operating the clients' IT which includes running their data center, using their equipment. So we don't have very much CapEx up front, and the two deals we did are very illustrative of that. We didn't have a big CapEx hit in the front. We're not buying their assets. We're not doing the outsourcing view of the world where we do that.

We're taking over their people, but that's an expense that we need to go run their things and we're getting paid for that. So relative to a margin view, we look at these kind of as an overall transaction, so there's providing the -- operating their systems internally, there's a software component, there's often a managed service component for the Cerner elements of the deal, because most of them will already have a managed services component. So all in, Atif, that gets us to a margin rate that's pretty close to kind of our hurdle rate, which historically has been 20%. Clearly, the software component of that helps get there, but that's part of the overall design of this approach. And as we continue to be able to move them to Cerner Solutions off their existing solutions, all those support and maintenance they are paying on those other solutions flow to the Cerner coffer, so those are higher margin businesses as well. So those will actually start out pretty profitable, and they will get more profitable normally over time.

Got it, okay. And then on the Q4 bookings, Marc, you said even without the visible outlying this quarter, you would have been about $100 million over plan. Could you give us any idea of where that strength is coming from? Is it mainly in the community hospital market, or is it just existing customers? Any clarity on that?

Yes, this is Marc. It is all over. From the very biggest deals we sign to the small relatively small places that are less than 100 beds and are signed up for $10 million worth of hosting and software and services. So it's really fairly broad across our spectrum of potential clients.

And -- this is Mike. And it's also balanced across our business models. So services, software, so it was -- it didn't land in one area.

Okay, and then final question on the professional services side. That's lagged somewhat, and you indicating that's going to be up in 2010. Any plans to increase your billable headcount there, and how is that going to that affect the numbers?

I think relative to that, we discussed previously that we had a bit of a bench in anticipation of some activity. That activity hit in Q4 pretty well, so I think we're able to handle that business with existing headcount. We will -- we have a approach to that where we can hire well-seasoned, from an education standpoint, kids off campus, put them through a six week course where we basically make them capable of installing our systems in our solution center. So we will look at adding headcount as we go forward, but because of the short timeframe to get them up and billable, we won't have to do that significantly in front of seeing the demand. So we have worked very hard to establish this solution center approach, and now it will help us meet the demand on a relatively real time basis.

That's great. Thank you.

Your next question comes from the line of Steve Halper of Thomas Weisel Partners. Please proceed.

Hi, two questions. One, on the contracts that you're signing today, are you doing fixed fee projects for implementation services?

Yes, Steve, this is Mike. Yes, we are. 100% of the new business that took place in the US is going through the solution center, and that is from an implementation perspective ,and that's a fixed-fee model. There are some fee-for-service things that tend to get hung off of that core arrangement, but by and large, the implementation is a fixed-fee engagement.

And how do you price those out to insure that you're not going to get burned on your costs?

Steve, we've been kind of installing systems for a long time. The advantage of having a very solid platform with Millennium is we pretty much know what it takes to implement, and especially when they come to the solution center, we're doing a bigger percentage of the build relative to the client. We have more control over it. It's -- we've actually had a very good history of being able to estimate our costs on those implementations, certainly as compared to the field. So all in all, we would much rather run things through a solution center. And the reality is that because of the efficiencies of our people not traveling, even with lower billable rates, we actually can drive a higher margin with those people than we would in our field people.

So is this turning -- is the fixed fee, is that turning out to be a competitive advantage for you?

Yes.

Yes, I think the predictability in general is a competitive advantage for Cerner and the solution center and managed services, and the fact that the software, the solutions are up and running in a lot of places very effectively, those three are what set us apart.

And one quick housekeeping. The number of financing deals or the value of the financing deals were pretty small this quarter. Any color on that?

Yes, we ran out of room in our bank account for cash, so we had to -- no, it kind of indicates -- it's a little bit reflective of the health of the healthcare entities that we were dealing with this quarter that more of them were looking to push cash forward and did not need to access the financing capability we offer. So a little bit of a statement of the health of those clients.

And your financing partners are still in place, improving, willing to lend more?

Yes,given the increase in health, financial health, they're begging for more business. So obviously, if there's interest on the client side, we have people ready to take that.

Great. Thanks.

Why don't we take one more question.

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

Hi, thanks. So given the comments around the stimulus and the guidance, you're saying there's no impact from the stimulus baked into the guidance.

Yes, Sean. Let me just clarify that. There is -- clearly, we are doing our normal, we're not assuming any increase in bookings from '09 to 2010. There probably -- some of those bookings would have some stimulus element to them in just a normal course. But what I'm really saying is theres nothing extraordinary.

We're not including any of these deals that Mike talked about where people come up on the radar and do a transaction in a fairly short period of time. We've looked at our pipeline. There are elements in our pipeline that have some stimulus impact, but it's -- we aren't betting ahead of seeing that business coming to our pipeline, so I just want to clarify that to make sure I'm not saying we assume no stimulus. The normal amount of activity that doesn't exceed '09 bookings may have a stimulus component, but we think there's an opportunity to increase that in 2010.

Okay, so with that color, what do you need to see in terms of the macro landscape to start baking in an inflection point if one is out there?

Well we've always indicated Sean, that kind of mid 2010 is when we start thinking that the stimulus impact is really going to -- we're really going to see it. We had a little preview of it in Q4. Our Q1 guidance is a little bit normal seasonality, so I think as we come out of Q1 and have a 90 day better view from our forecasting process for the rest of the year, we'll provide -- you'll be able to see it as in our bookings guidance.

Give us our best view.

Sean, from a market perspective the normal decision process historically has taken between 12 and 18 months for an HIT selection, and so given -- if you just back that up, stimulus basically became real in February. A lot of new buyers came to market. or at least were thinking about coming to market in the middle part of last year. and so they're getting much more mature, processes are emerging from that so a little bit of our reluctance to put a giant pipeline out there into our -- baked into our numbers is seeing that come to fruition, so that's point number one. Point number two is, I think once our install base, our client base gets the final edict of what meaningful use is and the timing, so stage one, stage two, stage three, I think that will have an impact on how rigid or how secure their timelines are to move forward. So until those things happen and we get further down the path here, we have been hesitant to put any big markers out there.

Okay, great. Thanks.

Okay, at this time I'll turn the call over to Neal for closing comments.

Okay, great. It's always a good call when I only talk at the very end. So I think, just to recap, I'll recap frankly what we've all said here. First of all, the intersection of IT and healthcare is a very good place to be. I think everybody on the call, both sides of the call pretty much inferring that, and it is a very good place to be.

I think Marc said we had a very good quarter, which made a fair year out of it, but he remains cautious. And he knows Q1 is going to be seasonally, as always, a little bit harder. And then on the margin question he wouldn't change his position, but he's very pleased to have hit the 20% for the fourth quarter and we expect to be able to persist out , and he thinks there's more leverage in our model. Mike basically said the US ship -- the fourth quarter was a very good quarter, and he saw real improvements in the US. Trace said that even though it was not on a comparable basis and there was some tough things on the overall global marketplace, he's very optimistic there, to the point he is moving. You heard from Jeff. He basically said we really see healthcare as a broad system, a very big system.

The provision of healthcare is it comes together as kind of the Nexus of healthcare delivery, but you have to get beyond just the delivery side. So we see the system in a much broader sense, and we believe our size, our scale and frankly, our fundamental skills, we believe we can innovate significantly there over this next decade, and so that's basically what you heard from the team here. Appreciate the call. I don't know if you look out your window, but I look out this window and it's snowing. So I hope you all are in some sunny and warm place. So have a good afternoon. Thanks for your

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