塞納 (CERN) 2010 Q1 法說會逐字稿

Welcome to the first quarter 2010 conference call. Today's date is April 28, 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, plans, perspectives, and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision of the Private Securities Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning the factors that could use actual results to differ materially from those in the forward-looking statements may be found under the heading risk factors under item 1-A and Cerner Form 10-K together with other reports that are filed with the SEC.

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

Thank you. Good afternoon and welcome to the 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 we will turn to our results.

Q1 represented a solid start to the year with all key measures at or above expected levels. Our bookings were at the high end of our guidance range and all-time high for a quarter. Our income statement performance was good with revenue at the high end of our guidance range and strong margin expansion driving earnings upside. Our cash flow performance was also strong with record levels of free cash flow.

Moving to the details, our total bookings revenue in Q1 was $405 million which is 22% higher than Q1 2009 bookings and all time high for first quarter. Booking margin was $340 million or 84% of total bookings revenue. The bookings margin percentage is lower than the 89% bookings margin percent in Q1 of 2009 despite very strong year-over-year growth in software bookings. This is due to lower margins on technology resale bookings and a lower percentage of total bookings coming from managed services which have 100% bookings margin. Our total backlog increased 21% year-over-year to $4.32 billion. Contract revenue backlog of $3.7 billion is 24% higher than a year ago. Support revenue backlog totaled $626 million, up 7% year-over-year.

Our revenue in the quarter was $431.3 million which is up 10% year-over-year and was at the high end of expected level's revenue composition for Q1 was $117 million in assistance sale, $127 million in support and maintenance, $180 million in services and $7 million in reimbursed travel. Systems sales revenue reflects growth of 17% compared to Q1 2009 with strong software growth offsetting a decline in hardware revenue. Within the hardware revenue we had our best quarter to date of device resale. The declines traditional hardware more than offset this. Traditional hardware revenue continues to be impacted by the this success of our managed services offering and lower prices of data center hardware. We are encouraged by the trend of device resale and believe it will continue to grow as contributor to top line, particularly given the CareFusion agreement Mike will discuss.

Services revenue, which includes managed services and professional services, was up 13% compared to Q1 2009. This growth reflects continued strong growth in managed services and a return to growth of professional services which was driven by increased implementation activity coming out of our strong Q4 bookings. Our support and maintenance revenue increased 2% over Q1 2009. As we discussed last year, support and maintenance growth has been impacted by the shifting of services revenue that previously treated support to professional services as part of our transition to working with BT instead of Fujitsu in the southern region of England.

Maintenance revenues 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 growth to improve by the second half of 2010 based on the improved software bookings the last two quarters and good outlook for software sales.

Looking at revenue by geographic segment. Our domestic revenue increased revenue by 10% to $355 million. Global revenue was $76 million which reflected a 10% increase and is a good start to the year after a tough 2009.

Moving to gross margin, our gross margin for Q1 was 84.2% which is up 90 basis points year-over-year and 120 basis points sequentially. Our systems sales margin was up 320 basis points year-over-year due to the improved software levels. System sales margins were down sequentially largely due to lower technology resale margins and expected decline in software from Q4 record levels to Q1.

Looking at operating spending, our Q1 operating expenses were $282.1 million before share base compensation expense of $5.5 million. This is up 8% compared to a year ago. Sales and client services expenses were up 8% compared to Q1 2009 driven primarily by growth in managed services and a higher level of bad debt expense. Software development expense was up 3% compared to Q1 2009 reflecting continued control of this expense line. G&A expense was up $6 million or 23% year-over-year. The increase is primarily related to the year-over-year difference in the impact of foreign currency as we had an FX gain in the year-ago quarter compared to a small FX loss this quarter.

Moving operating margins, our operating margin in 18.8% before share base compensation expense. This is up 200 basis points compared to last year and keeps us on track for our full year 2010 target of 20% operating margins.

Moving to earnings and EPS, our GAAP net earnings in Q1 were $50.2 million or $0.59 per diluted share. GAAP net earnings include share based compensation expense which had a net impact on earnings of $3.5 million or $0.04 per share. Adjusted net earnings were $53.7 million and adjusted EPS was $0.63 which is up 21% compared to Q1 2009 and above the high end of our guidance. Our tax rate was 35.1%, which is in line with our projected level.

Now I'll move to the balance sheet. We ended Q1 with $609 million of cash and short-term investments of $50 million from Q4 2009. Our total debt is $118 million. Total accounts receivable ended the quarter at $423 million which is down $38 million from Q4 2009 driven by record cash collections of $484 million. Contracts receivable, or the unbilled portion of receivables, were $125 million which is down $10 million from Q4 and represents 30% of total receivables compared to 29% in Q4 2009.

Third party financings were $19 million, representing 4% of the total cash collected. Our DSO in Q1 was 89 days which is down from 90 days in Q4 and 102 days in Q1 2009. Year-over-year decline was primarily related to the reclass of the Fujitsu receivable to other assets which we discussed last quarter.

Operating cash flow for the quarter was $106 million. Q1 capital expenditures were $32 million and capitalized software was $21 million. Free cash flow to defined as operating cash flow less capital expenditures and capitalized software was a record for a first quarter at $53 million. It is worth noting the free cash flow for the quarter represents more than 100% of net earnings or reflects continued strengthening of our earnings quality.

Moving to capitalized software. The $20.5 million of capitalized software in Q1 represents 29% of the $71.5 million of total spending on the development activities. Software amortization for the quarter was $15.8 million resulting in net capitalization of $4.7 million or 7% of the total. Previewed last quarter, amortization declined $2 million sequentially as the amortization of what was capitalized in 2004 completed. Amortization will ramp back up as we move through the year. Based on our current release schedule, we expect amortization to go up by about $1 million in Q2 and another $1 million in Q3 and Q4. That puts Q2 amortization in the $16.5 million to $17 million range ramping up to about $18.5 million to $19 million by Q4.

Now I'll go through the guidance. Looking at Q2 revenue, we expect revenue in the $440 million to $455 million range with the mid point of range representing 11% growth over Q2 2009. For the year we continue to expect revenue between $1.8 billion and $1.875 billion, reflecting 10% growth at mid point. We expect Q2 adjusted EPS before share base compensation expense to be $0.64 to $0.69 per share with mid point reflecting over 20% growth. For the year we expect adjusted EPS of $2.80 to $2.90 with the mid point reflecting 17% growth over 2009. Q2 guidance is based on total spending before stock compensation expense of approximately $280 million to $285 million. Our estimate for stock compensation expense is approximately $0.04 for Q2 and $0.16 to $0.18 for the year.

Moving to bookings guidance. We expect booking revenue in Q2 of $430 million to $460 million with mid point of this range reflecting 13% growth over last year.

In closing, we were pleased with our results in Q1 with all key metrics at or above our expected ranges. Specifically, we are pleased with our strong bookings growth and outlook, return to double digit revenue growth, continued strong margin expansion and earnings growth and continued strong free cash flow generation. With that, I will turn the call to Mike.

Thanks, Marc. Hello, everyone. Today I am going to talk about observations on the marketplace, operational updates and results highlights. Starting with the marketplace as reflected in our results, marketplace has improved from the conditions we saw for most of 2009. The impact on the economic downturn continues to be become less severe with access to capital suddenly improving. While some providers are still hesitating on stimulus purchases as they await time meaningful use definitions, most view the interim final definitions as enough to begin moving forward and are comfortable Cerner is a safe choice to deliver any version of the final meaningful use requirements.

Based on our strong pipeline and forecast we expect the volume of activity to build as we move through the year and the requirements become finalized. Relative to meaningful use, there has been a lot of discussion and input by various groups suggesting requirements should be softened or delayed. At this point, we don't foresee any changes that changes the opportunity for Cerner as we believe the end goal of driving tangible benefit through widespread and meaningful adoption of HIT will remain intact even if there are some tweaks to how the legislation is rolled out. One item worth noting is that legislation passed earlier this month changed the definition of hospital based eligible professionals to now include physicians that work in hospital-owned practices. This provides important benefit to our client base as it increases the amount of incentive dollars available to them.

Looking at Cerner's overall stimulus opportunity we continue to see a substantial opportunity in our install base and for gaining market share. The billions of stimulus dollars are install bases eligible to receive create a large opportunity for us to help clients get to meaningful use. For clients that are already at or near meaningful use, the stimulus dollars can provide capital to purchase solutions and services that will allow them to continue their journey beyond meaningful use. In addition, we estimate there is an $8 billion to $10 billion addressable market for new footprints in hospitals that either don't have an EMR today or those that will switch suppliers for a safer path towards meaningful use.

In summary, we continue to believe the next few years will be a major opportunity to grow revenue from existing clients and to expand market share. And we really like our position based on the readiness of our solutions relative to most of our competitors and our unmatched ability to deliver in predictable time frame and at a predictable cost.

Health reform has also been a major topic in our marketplace. While the ARRA legislation which passed over a year ago now will have a larger near-term impact on Cerner's core business, I'd like to comment on the recently passed health reform legislation and its potential impact on Cerner and our clients. A key element of the health reform legislation is that it addresses what is probably the biggest operating and financial risk that our clients face which is uncompensated care by driving insurance coverage for an estimated 32 million additional consumers. While on the surface this is a major positive, there will be many second order effects including potential for increased volumes that will create capacity constraints and challenges to profitably provide care at the rates reimbursed under the expanded coverage models. These are strong incentives for providers to maximum efficiency and represent another long-term positive for HIT. The legislation also creates more compliance and reporting challenges for our clients in the area of paper quality and waste fraud and abuse measures that we believe create the need to further leverage HIT investments.

Another element of the reform legislation is an attempt to evolve new reimbursement models and care delivery models to create better aligned incentives between the government pair and providers as well as create economic alignment between the physicians in the community and major acute care hospitals. One suggested model is accountable care organizations, or ACOs, which will be contracting entities representing the physician, hospital and possibly other entities across the continuum of care for major high cost or high prevalence medical conditions. We believe that the concept of a medical home will also evolve over this decade where individuals will have a defined relationship with an organization in a further attempt to coordinate care and improve health outcomes.

While these concepts are still evolving, they will likely create both challenges and opportunities for our clients and we believe they can play an important role in driving efficiencies and improving quality and health care. These new models will require technology systems to enable clinical and financial changes necessary to efficiently deliver care. As Jeff will discuss in a minute, these -- this direction is consistent with our vision of creating a new middle for health care and we feel we have working examples of the necessary building blocks towards this vision in production at client sites today.

Moving to our results, as Marc mentioned our booking revenue in Q1 of $405 million represents 22% year-over-year growth and a Q1 record. These bookings included 17 contracts over $5 million including eight over $10 million which is also a record for Q1. Our bookings from new footprints were solid with 20% of bookings coming from outside of our core millennium install base and our outlook for new footprints is also strong.

As I indicated we are seeing clients move forward with stimulus purchases and reflected in good contributions from core EMR sales this quarter. In addition, we continue to drive results from our agile business unit, or ABU structure, we created last year to align sales, services and development resources across vertical markets and make us a stronger more agile competitor in those markets. This approach contributed to good Q1 bookings in areas like device connectivity, device resale, RX station dispensing units, critical care, women's health, lab and imaging. All of these areas represent meaningful wide space opportunities with existing and future clients. Our ABU structure allows us to leverage the depth and breadth of our solutions and ongoing solutions to create a sustainable growth and we expect to remain the leader through demonstration of continued innovations that set the bar for what meaningful use standards should look like beyond 2015.

Our innovation is not limited to software solutions. We have substantial growth opportunities and new service offerings that capture a larger percent of our clients existing IT spending. Cerner IT Works is a good example of new service offering with great growth potential. Recall that IT Works is a suite of services where Cerner takes on a bigger role in a client's IT department to help them drive efficiency performance and quality while also creating a closer alignment between Cerner and our clients. We signed our first two clients in 2009 and have created good proof points very quickly. In fact, we signed another IT Works client in Q1. It is worth noting that this hospital based in Wisconsin did not have an existing relationship with Cerner and they were not initially considering IT Works. After witnessing first hand what we have established at one of our existing IT Works clients, they were convinced that this approach represented the kind of alignment they needed to accelerate their path to achieving meaningful use and ultimately to achieve their quality objectives.

Another new service was strong potential is Cerner RevWorks which includes solutions and services to help health care organizations with the revenue cycle functions. We continue to make great progress with our patient accounting solution, including improving the features and functionality. With Cerner RevWorks we are building on this progress to go beyond patient accounting. We were creating a clinically driven revenue cycle process that increases reimbursement. Lowers cost, ensures compliance and eliminates waste, delay and friction. Our well aligned with supporting the clinical reporting required in the pay for quality elements of health care reform as well as the new payment models that will be required to support the formation of ACOs.

In summary, Cerner IT Works and RevWorks represent vehicles to enhance our alignment about our clients. 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 client's 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 health care.

Another highlight of the quarter was strong performance in the physician practice market where we added nearly as many new providers as we did in all of 2009. This success was driven primarily through our large health care system client base relationships as they pushed our physician office solutions to affiliated physicians. While we also had good early results from our CDW channel relationship, which has contributed to a large increase in our pipeline. Our competitiveness continues to improve and the quarter included wins against all major physician practice suppliers.

Before turning to the call to Trace I wanted to discuss an announcement we made earlier today with CareFusion. As indicated in the release, Cerner and CareFusion will be offering enhanced medication management capabilities to existing and new clients above company. As part of the agreement we will serve as value added reseller of CareFusion Pyxis dispensing technologies into our strategic Cerner millennium client base. We will also work together to develop an adapter that supports integration at EHR systems and clinical information into the medication management pharmacy and perioperative processes. This agreement is the first step in a broader intent to integrate CareFusion devices. Note that we will continue to develop and market our own RX station solutions as part of our broad device work strategy. This agreement is strategically significant to Cerner and CareFusion as well as being a big positive for the health care delivery market.

For Cerner, it is significant because it extends our device works strategy to a leading global supplier of medical devices and validates Cerner's clinical work flow vision where the EHR serves as single source of truth. It also creates an opportunity to significantly increase adoption of our iBus device connectivity solutions which we formally referred to as MDBus both inside and outside of our install base with Cerner software becoming the end user interface for CareFusion's industry leading devices. For CareFusion, it means they can now offer a complete close loop medication system with fluent EHR integration. In addition, our iBus platform can be leveraged for integration of other care fusion devices such as Alaris and Viasys. CareFusion also gains a strong distribution channel for their suite of solutions.

For the broader health care delivery market, this partnership brings providers what they want, a solution for integrated and automated work flows that is prebuilt and simple to purchase and implement. More importantly, together we establish a single source of truth which helps optimize patient safety and caregiver work flow. From a financial standpoint, the impact will be immaterial for this year as there will be some transition period to set up the operational processes. We expect the impact to begin ramping up in 2011 to more than $50 million of revenue annually. Margins are expected to be similar to technology resale margins with the potential to be supplemented with higher iBus margins when expanded offering is included.

In summary, we were excited to be joining with CareFusion to positively impact patient safety and clinician workflow and I look forward to providing you more information as we move forward with this strategic relationship. With that, I turn the call over to Trace.

Thanks, Mike. Good afternoon, everyone. Today I would like to provide some comments on my transition to running our global business from London and then discuss some highlights from our Q1 global results. As I announced on our last call, I am in the process of relocating to London to spearhead an increased focus on global opportunities which show the long-term promise of even surpassing the current United States market potential. The visibility of health care reform in the US is not going unnoticed in countries around the world and as I have indicated previously, having Cerner's president on the ground in Europe sends a strong message about the importance of and our commitment to being a true multinational Company. I have been pleased with how well the move has been received by the many global clients and prospects have I met since announcing this transition a couple months ago. I am hopeful that this reception is an indication that this move will pay dividends as the need of health care technology continues to grow around the world.

Moving to our results. As Marc mentioned, our global business had a nice rebound in Q1 with return to double digit top line growth. Coming off of what was a very difficult 2009 and frankly an enduring global next crisis, this is a good start to the year. While we still face challenges in 2010, I believe our broad market footprint and our solid Q1 positions us for continued momentum and a good year. One example of this execution is in England where we, along with our prime contractor British Telecom, had another very important goal as part of the NHS program in London.

St. George's Healthcare NHS Trust, a thousand bed trust with over 6,000 staff converted several millennium solutions across both inpatient and outpatient facilities in March. This is our third trust conversion since November and brings total live millennium sites in the UK to over 60 with more than 30,000 daily users. This past activity along with nine other concurrent system implementations demonstrates our unparalleled depth of clinical solution in the UK. Most importantly, there is no other supplier working in England with this level of success and market penetration running on a current scalable architecture positively impacting clinical process and patient care. These delivery successes and our longevity in the UK market have served us well as the national program continues its HIT journey.

As many of you may know, BT and the NHS restructured their contract for the London region which resulted in updated contract between BT and Cerner. This creates much needed clarity going forward and allows for a greater emphasis on Cerner's more flexible implementation approach that has contributed to the improved satisfaction with our recent go lives. Cerner will now assume a more strategic role for both implementations and training and will have a direct relation with the trust. This is important because it will allow for a more localized configuration and will enable us to leverage our proven implementation methodologies.

In the southern region we formalized our role as sub contractor to BT for an additional three trust which brings our total in the region to 11. This is a very important step forward in our efforts in the south of England with three prestigious health authorities moving ahead with the Cerner deployment. Overall, we were pleased with our continued progress in England. While speculation about the direction of the NHS program has picked up pace in anticipation of the election on May 6, we strongly believe that the need for information technology will continue to play a central role in modernizing NHS, and Cerner's proven delivery capabilities and commitment to the marketplace should position us to continue to expand our work across the national health service.

Moving to the Middle East where we also had noteworthy results, recall that last quarter I highlighted another successful go live at part of the SEHA HIT initiative in the emirate of Abu Dhabi. This success led to SEHA signing with Cerner in Q1 to significantly expand the scope of their project which puts them on a path to becoming one of the most advanced users of health care IT in the world. As reminder, SEHA is the company that oversees operations of all public hospitals in Abu Dhabi. SEHA owns and operates 12 hospital facilities, 2644 licensed beds and more than 40 ambulatory and primary health care clinics. SEHA is one of the largest employees in the Middle East with 15,500 doctors, nurses and other clinical staff and administration. This continued execution and success should positively impact our efforts in the Middle East as other countries in region face significant health care reform challenges.

In summary, I am pleased with our solid start to the year and look forward to building momentum as we move through the year. I look forward to keeping you updated on our progress. With that I will turn the call over to Jeff.

Thanks, Trace. Today I will expand on comments I made last quarter. When I introduced my focus on what we refer to as CERN, consumer, employer, research and network. These initiatives represent our efforts to capitalize on the second order of facts that will result as medical records become digitized and care delivery organizations get connected in the coming years. We believe this will create major new opportunities for Cerner.

Part of Cerner's vision for health care in this decade is placing the consumer at the center of the health system, with each person in control of his or her own smart secure contextually relevant and interactive personal health record. This record should be the private property of the person and should hold their complete medical history, quickly becoming the holistic platform for their current health status. Also, we believe that this record should give people ready access to information on both the price and quality of the care they receive and that it will be capable of personalizing medicine using a predictive model of future needs based on a person's family history, medical history, current problems and unique genetic code. Equipped with this information, consumers and their providers would have financial, emotional and pragmatic incentives to work together to achieve health objectives, strategically manage chronic conditions and intervene early in emerging future health issues. A new era of alignment and transparency will evolve creating new delivery models and transforming the concept of a patient's care team as well as disrupting the current arcane, inefficient reimbursement system with point of service payment.

We also continue to believe that the employer will be a much more active participant in health care solutions in the next decade due to the large percentage of health care costs funded by employers. The new US legislation further expands employer's responsibilities, in many cases mandating their participation. In 2009, we expanded our footprint and capabilities in the employer space with our acquisition of IMC Health Care which expands our employer clinic offering to include occupational health while increasing our list of employer clients, including some that are very large organizations. We have quickly integrated IMC in to Cerner and have already added two new employer clinic clients in Q1.

Our growing base of employer clients represent a great opportunity to sell other employer services such as on-sight pharmacies, condition of wellness management programs and new age benefit plan design services. Cerner has designed these to help large self-insured employer better control the cost associated with managing and improving the health of their employees while bringing new levels of service and quality to employees and their families. As I have mentioned, we have proven our ability to do this inside Cerner where we have saved money on health care costs over the past several years while improving the health of our associate base as measured by meaningful clinical indicators such as cholesterol levels, body mass index, blood pressure and glucose levels.

Moving to the R, or research in the CERN acronym, we also believe the managed transparency created by the EHR will transform how medical research is conducted in the US and abroad by academic institutions, pharmaceutical companies and others. Our EHR capabilities should enable new and completely different methods, processes and platforms for clinical trials and regulatory compliance, shortening the timeframe needed for research to enter practice and giving researchers broad new data sources for prospective and retrospective study. Additionally, our research platforms involve new and effective ways to incorporate the most recent clinical research contextually in care delivery.

Finally, requirements related to stimulus and reform will require new networks to facilitate the interchange of secure medical information. The AARA defined requirements in funding and enabled creation of regional networks that will facilitate broader interoperability allowing personal health records, population health management and chronic disease management programs to exist. With our Cerner network offering we facilitate ARRA interoperability and patient communication requirements by providing a clinical data exchange that is interoperable with all major EHRs and portal for both providers and consumers. We are also well positioned to participate in the numerous state networks and health information exchanges, or HIEs, which are being driven by stimulus requirements. We have already proven strong capabilities and scale with our national influence initiative and other state and regional networks we have created.

Further, we believe our Tiger Institute Initiative with the University of Missouri will prove to be a model for how to work with a state to create a modal that facilitates broad interoperability and improve sufficiency and quality of care across the state. I believe our work with MU will play a role in the direction of new delivery and payment models such as ACOs. Every state is struggling with the reality of balancing their budgets and adapting to the new reform legislation. The need to innovate the care delivery models has never been greater.

In summary, we see the automation occurring in health care leading to a series of disruptive structural changes to health care ultimately creating new models for delivering care and radically altering the current middle layer that separates care organizations from the source of funds, and all of the Cerner initiatives are tied to a bigger vision of creating what we call a new middle for health care. The new middle is something we can see as a radically different transactional layer for health care, one that will work synergistically with a broader EHR adoption and interoperability capabilities that will unfold in this decade. Our vision for a new middle aligns well with directions being driven by stimulus and reform and involving payment and delivery models like ACOs. Over the next year we will invest in further defining the characteristics of the new middle. Our early discussions of this platform have already begun to influence our internal development activities. It is becoming the vision to guide a new era of long-term growth for Cerner. With that, I'd like to open the call for questions.

First question comes from the line of Charles Rhyee of Oppenheimer. You may proceed.

Thank for taking the questions, guys. Generally talk about the stimulus and what you expect here as we move to the back half of the year. Clearly it seems with the interim rule out a lot of people are weighing in. As we find the final rule, you mentioned briefly that it looks like people are starting to move ahead with their decision making. Do you think that once the final rule is published, the activity will then really accelerate or is it just that people are moving along with the process and that when people sign the bottom line on the contract that will still kind of take a little bit of time, or do you think there is this built up amount that will move people to just kind of sign and get going?

Charles, this is Mike. I will take that question. Our sense is that the folks that have made decisions and are on a trajectory will continue forward. So independent of the final definition of meaningful use, I don't think it is going to have a major -- we aren't planning for it to have a major positive impact and we aren't planning for it to have a major negative impact. Our sense is that folks that are on the decision making trajectory at this point are committed to the journey and they view that independent of this next decision they need to make the decision they are committing their organizations to it and they are heading down that path. So I actually don't view the final ruling to be substantial in terms of how we were projecting the remainder of the year financially.

Are there -- is that just as you look at your customer base or is that your just sense of the overall market itself?

I think that's our sense of the market in total inclusive of our client base. So I think they are going to continue on the path. As we have said before, there are a lot of new decisions that will be made over the next 18 to 24 months for what represents net new footprints to Cerner. And at the same time there are many clients in our base that are planning for journeys that will take them to stage one meaningful use and beyond. I think that they're taking the information that's out there today and they are making decisions and I really don't see the final ruling independent of how it gets tweaked of having a major impact for our financial view of the industry over the next three or four quarters.

Thanks. And then maybe just a follow-up right there. In terms of the tweaking of rules, I know some of the policy committee meetings have discussed allowing the providers to drop some of the meaningful use criteria and still qualify. When you look at the 25 sort of measures that are out there, obviously you can't drop CPOE, but looking at some of the other ones that looking at people could drop, do you have a sense in your discussion with clients which hospitals are looking to see if they can just avoid at least for now and they come back to it later?

I think what you said in your last sentence is exactly where their heads are which is they are not necessarily debating the definition of meaningful use. They are actually debating the timing for when it's enacted and for being a meaningful user and very specifically for them the current binary state of it kind of a pass/fail nature. And really I think what their argument is is not the level, it's when and do I get partial credit for being almost a complete meaningful user so all of which I think supports their decision to make -- to start and to finish some of these journeys that they have taken upon.

Great. Thanks a lot.

Our next question comes from the line of Michael Cherny of Deutsche Banc. You may proceed.

Hey, guys, I want to dig in a little bit more on the CareFusion announcement today. Obviously the MDBus, now iBus platform, has been kind of a big talking point for you over the last few years. You think out over the next three to five years how big of an opportunity to do you see this being? Are you planning on folks getting a larger scale partnerships, the CareFusion partnerships? Can you give us any kind of big picture thoughts where you see this going.

Yes, this is Mike. I will answer that. We have been on this journey for three or four years and there was a meeting probably 2-1/2 years ago where we had almost 60 medical device suppliers, manufacturers at our headquarters in Kansas City and we view that as kind of day one of changing the game for how devices would be, their relevancy in clinical care processes and the connection to electronic health records. That was day one. Since then, we literally have around 50 partnerships that are different degrees of partnerships that include certification and include some of them are reseller relationships, but all of them advance the connectivity of clinical devices to the medical record in the clinical processes. So we absolute -- we have been on this journey. CareFusion is very noteworthy because they represent a substantial percentage of the market place for three or four different verticals within the medical device supply and -- medical device manufacturing space. So I think it's a major partnership. We are very excited about it. At a technical level we will advance the cause relative to medication management and they will help us advance our solutions relative to connectivity to the supply chain. So I think it's very meaningful. As it relates to the economic impact, we spoke to the near-term view of just the peer reseller arrangement but we believe the real upside for both of us is in the new markets that it enables outside of just a core basic reseller arrangement. So we have very high expectations for what it could lead to, we just need to do the work now to enable those new markets.

Great. Then I get one question on kind of the cash flow. Marc, obviously very strong cash flow during the quarter. You guys have really started to see some nice trajectory there. Obviously getting a bit of a cash build on the balance sheet. As we move into the meaningful use final definition, are there any thoughts on cash deployment in terms of as you look at the meaningful use definition potentially any areas you can firm up in order to make sure you are hitting that by making a couple of tuck-in acquisitions?

This is Marc. I think from our standpoint we are very comfortable with our current ability to deliver 100% of meaningful use. That's not a question and our strategy clearly is to build within the millennium architecture. I don't see us needing or necessarily wanting to do an acquisition that would be related to meeting some requirement. We will deliver those through our internal capabilities. I think as we have spoken before, that this time in the market is going to be an interesting 18 to 24 months that will result in a bifurcation between companies that are delivering and companies that are having difficulty doing so and we think will bring about opportunities to do some acquisitions in this space and where the valuation differentials are pretty significant. We are actually quite happy with having significant amount of cash on our balance sheet at this point and at this point continuing to add to that cash. And we think that will well position us should any of those opportunities come up in that 18 to 24 months.

Great. Thanks.

Our next question comes from the line of Sean Wieland of Piper Jaffray. You may proceed.

HI. Thanks. Can you give us some sense -- I know you won't give me the exact number but on the direction of the software sales component of your bookings you highlighted that in past quarters as particularly strong.

This is Marc. I think the relative to Q4 of last year it was clearly a rebound, very strong quarter. Q1 of 2009 was a very weak quarter and I think we saw this quarter was more return to good solid software performance, stronger certainly relative to the year ago quarter but nothing overly unusual. So on a kind of element by element everything pretty much in consistent percentages. Most of the time we kind of really only referenced services being between 20% of bookings and that was pretty much in line with that this quarter. I think overall solid quarter, good continuation of software but nothing huge or out of the ordinary but just back to good solid performance across the board.

Okay. And then follow up question on CareFusion. It sounds like the initial effort will be around the Pyxis workstation but then you mentioned integration with Alaris pumps. What's the time line of that integration? When do you expect to have it deliverable in the market? And then what does this do for the competitive advantage of your own medication dispensing system?

The timing on the integration of the rest of the CareFusion devices is TBD. The intent of the relationship is to set up joint development capacity probably shared between our headquarters here in Kansas City and theirs in San Diego. We will be announcing more around that. We obviously support the connectivity of a multitude of pumps and other devices today and we are looking forward to wiring the full CareFusion suite into the future.

The second part of your question around Rx station, we will continue down the Rx station path. It's something that was talked about a lot in the CareFusion agreement discussions. Our focus has been improving out the connectivity between the management process and the dispensing devices themselves. We think there are lots of opportunities that will continue to innovate on that front. We view our relationship with CareFusion as probably an enabler towards that and we look forward to giving you more details on what those road maps may look like going forward. But we will stay the course with Rx station and we, in fact, plan to continue innovations in places that are largely complementary to what care fusion provides today and net new things for what's Cerner does today.

In the agreement with CareFusion, are there terms that say you can't go after CareFusion business with your Rx station?

This is Marc. We can't obviously discuss the terms of that agreement since it's not a public document, but I would suffice to say we are pleased with the agreement and look forward to our strategic partnership working with them. This basically means that the EMR won. This is a key statement for device connectivity and system running those off of the system that controls the patient record and improves patient safety.

Single source of truth.

Exactly. As we go forward more and more of the details will come out as we talk with you. I think at this point probably won't go in to details of the agreement other than to say we were pleased with it.

Okay. Got it. Thank you very much.

Our next question comes from the line of George Hill of Leerink Swann. You may proceed.

Thanks for taking the question, guys. Marc, housekeeping issue. Did I hear you right that the capitalized software in the quarter was $25 million and change and the amortized portion was about $15.8 million?

Tell you what, go to the next part of your question and I will look that up.

My next part of the question will be is there anything that you guys have developing or working on that you can talk about that led to the jump up in the capitalization rate or the absolute dollar level with respect to capitalized software?

The Q1 number that was capitalized at $20.5 million.

Okay.

And then amortization was $15.8 million.

I will say (inaudible) my first question because I wrote it down as 25.8 and not 20.5. And then I guess the second question I wanted to talk little bit more about Sean's question with respect to the bookings mix. Can you -- I guess give us any more color with respect to the composition of how much is coming from the managed services and the hosted services and the degree to which we were seeing a lengthening of the revenue recognition period with a lot of the bookings that you are adding to the backlog these days and how should we think about the average backlog burn period?

Let me see if I can cover most of that in one answer. I think managed services I made the comment that it was in line with kind of the historical view of it being 20% of our bookings. So I think that's pretty consistent. As you know, those are longer term agreements so they will extend the life of our backlog. As we do IT Works that will also extend the life of our backlog as well. So I think those are two items that will make roll out a backlog and extend the days needed to fully get backlog into the revenue but nothing out of the ordinary relative to that.

I think really if you look across the board almost everything had a good uptick relative to the prior quarter. Software had a little higher uptick relative to the prior quarter but we also had good services bookings and, as I indicated, services on the higher number was near our normal 20%. The mix of bookings wasn't anything too surprising and, therefore, it shouldn't have fluxed the backlog rollout in any significant way. Clearly, some of the deals we did relative to Q4, some of those large deals that had a hosting element that had a longer term project element will also extend the time that those things remain in backlog until they roll out. When you get to a backlog that is as big as ours, it takes a lot to really change the days it takes to roll out very much.

And quick one for Mike. As you look across the thousand plus millennium footprints that you guys have out there, if you were estimate the average I guess the kind of average Cerner customer penetration or how close those thousand sites are to achieving meaningful use whether you want to use the EMRAM model or what percentage of the proposed meaningful use stage 1 they have achieved, how close would you say a lot of those customers are?

That is a good question. Let me break it down a little bit. I will talk about what I would describe as our top 275 clients and that doesn't back into your facility count very well, but you can think of it as decision making bodies. And for each one of those we have literally built out a road map and mapped out what needs to happen between now and the strike points of both carrots and sticks associated with meaningful use and so we know where they stand and I would say that three-fourths of them now have a defined road map towards getting some level of stimulus payment, and define road map means they know what it takes to get there and they have organized around it. It doesn't necessarily mean that they contracted for it, both services, software and the piece parts that will make up their journey. That number is up quite a bit from where we started obviously a year and a half ago. So I think two-thirds of that population, three-fourths of that population is known and on a track and the other quarter I expect will have that shored up by the middle of this year.

Okay. I guess then if I ask about the two-thirds let's say I'm in Boston and you're in Kansas City, are they in Connecticut or Topeka?

I think -- I think that they -- we have a high level of confidence they will achieve stimulus funds from meaningful use. So what I would say that two-thirds is in good position to go get the fees, the benefits, the carrots associated with meaningful use.

Thank you.

The other rest of the base is really made up of our vertical marketplace and folks that don't have a full EMR today from Cerner. So it's a much more difficult question to answer, but we are -- we have a lot of activities largely driven by the ABUs, agile business units we talked about earlier, in playing a part in that road mapping as well.

Okay. Thanks for the color.

Our next question comes from the line of Richard Close of Jefferies & Company. You may proceed.

You said something about the physician growth being I guess in the first quarter larger than all of last year. Can you guys quantify that little bit more? I think you said you had 20% growth in the fourth quarter.

We haven't given specific numbers around physician practice counts. What we did say in the earlier text was we had nearly as much growth in Q1, nearly as much volume in Q1 as we had in all of 2009. And that was largely driven by around 10 major decisions and contracts for our larger IDN clients connecting their affiliated physicians.

Okay. And then with respect to I guess the opportunity on a go-forward basis there, how many of your hospital clients would you say that you penetrated from the physician EMR standpoint?

This is Marc. I think we were still fairly early in that. We had a lot of discussions but I think as far as agreements with those existing clients, it's still pretty early. Many of them are still looking at what they wanted to do for their physician strategy, especially in a context of HIEs and the variety of other things that are in play. I think people are taking a lot of time to think about it before they go and initiate a strategy. That's a little bit why it is significant that we have that much growth in the physician space because we have been seeing people sit on the side lines wait as they try to come up with the strategies to go forward.

So the other part of the answer is we have 30 or 40 large systems health systems that have endorsed our power works model as their vehicle for connecting both owned and affiliated physicians. So just out of that 275 entities that I talked about previously, you can do the math on who had declared that. That doesn't necessarily mean Cerner is the only option. It's endorsed as an option for and a vehicle for their owned and affiliated physicians.

Okay. And final question, for first quarter solid on the bookings and the size of the contracts. When you look at the pipeline, do you see these call it $5 million contracts or steadily expanding as we progress through the year, any sort of feedback on maybe the size of -- the average size of the potential contracts in the pipeline?

I think we will see more productivity out of in the new business, net new footprints to Cerner in Q2 and then in the back half of the year. So I think that will drive the volume of transactions above $5 million as they make their first initial big purchase with Cerner and generally contracting for a path toward meaningful use.

Okay. Thank you.

Our next question comes from the line of Atif Rahim of JPMorgan. You may proceed.

Hi. Just on the prior question, is there any way you guys can break out the percentage of bookings coming out from the physician business and has your -- has the model changed or is it is subscription model charges about $600 a month?

This is Marc. As we indicated previously, we don't -- we do not provide a lot of detail on the bookings from that granular level. The majority of the business we are looking at right now is the ASP business relative to new opportunities, the one we talked about as being $600 per provider per month.

Okay. Got it. And then just elaborate on the RevWorks business you talked about, I think Mike mentioned it. How this is different from your ProFit solution? Are you building capability where you have people actively going back and checking claims and essentially outsourcing the whole thing or is it just software that you're selling?

Yes, this is Mike. The strategy behind RevWorks is to essentially own the back office processing. So it's more of an outsourced-like arrangement around the revenue cycle functions inclusive of the many aspects of our software that make up those functions. So it is comparable to the strategy that we have around the broader IT Works strategy.

Okay. And how many clients do you have on that today?

We have no clients that are official rev works outsourcing clients but we expect to deliver some in 2010.

Got it. Thank you.

Our next question comes from the line of Greg Bolan of Wells Fargo. You may proceed.

Thanks for taking the question. Now that you have been in the community hospital market for the past several quarters, can you talk about the pricing environment? And also, can you remind me if you are reaching deep enough in the stream to touch critical access hospitals with your ASP offering?

Yes. As far as pricing in the community hospital market space, we feel comfortable that our community works offering is price competitive in all the way down to critical access hospitals. I think what we are seeing relative to pricing is if we can get a bundled solution and we can get support for the kind of solution that we offer, we are getting a lot of traction. From a clinical perspective, we differentiate ourselves substantially. We are also nearly the only one that offers up a hosted solution, so it's kind of an all-in ASP hosted solution. And the other aspect we've seen traction on is allowing our larger clients to offer up their solution to smaller community hospitals and/or critical access hospitals in kind of a franchise model. So those three approaches are working well for us. We feel good about our price competitiveness.

We did add a few more clients to our mix in Q1. It wasn't as many as we hoped for. Our pipeline looks very good. We were unable to get some contracts over the line for a variety of reasons but we feel like Q2 will be a good quarter for us on this front and we have high expectations relatively speaking for that business model in 2010. So it feels good as a business to us and we feel good about our ability to deliver a solution that resonates with that target audience.

That's helpful. Thank you.

Why don't we take one more question?

Your next question comes from the line of Corey Tobin of William Blair. You may proceed.

Hi, guys. Thanks for taking the question and congrats on a nice quarter. Two very quick ones here. With respect to new footprint bookings the percentage of bookings from new footprints came down and kind of reversed trend we were seeing in the last couple quarters. Any color on why the reversal there and what level would you expect that to be at as you sort of round off the full year?

Yes, we -- I would say that we had a solid quarter of bookings all the way around to get to the number that we attained. We did not get the volume of new footprints across the line in time for the quarter. The good news in that is we are off to a good start in Q2 thus far already in the month of April. So I expect it to continue to be in the 20% to 35% range through the rest of the year. The pipeline certainly supports that and that's where our expectations are.

So there's no change with respect to the mix of deals from existing versus new clients in the pipeline?

This is Marc. A lot of those -- obviously they are new clients. They are just a little less predictable as to when they are going to land relative to a signing because they are doing brand new contracts. There wasn't anything other than just the series of people you are working with and the timing that they ultimately will land. The rest of the year looks pretty solid from a new footprint perspective.

Good. Last one if I could. Marc, I think previously you said the budget or the guidance for this year was based on less than flat bookings, if memory serves as the terminology used. I guess just based on what we saw in Q1 and the strength projected in Q2, what sort of expectations do you have baked into guidance right now with respect to bookings?

I think the concept of what we start the year and what we do our full year plan initially at, it kind of is where the concept of less than flat booking depending on what we see. But when we give you guidance for a quarter, which is kind of the mode we are in now that we are starting the year, that guidance is not based on some assumption. That guidance is based on a detailed forecast process that we go into and look at every deal and look at timing and we go out four quarters. Really, the guidance that you are being provided right now is a very timely up-to-date version of what we expect the business to do. So our current guidance as we are in the year is definitely based on that and really is not -- is much less related to any assumption that we would have had in our initial plan.

Great. Thanks.

With that I think I will close. This is Neal. Appreciate all your time on the call here. As I was sitting here and kind of listening through our part of the presentation or the script here, there are several things of noteworthiness. One is that you can see the landscape of health care changing and it changed a lot this last decade but we are entering this decade with really -- it's really at a high rate of velocity here. Most of the questions you were asking this quarter you didn't know about a year ago because a lot of them are stimulus driven. I found it strange there was no reform or other piece of legislation that is going to change landscape too and that is around reform and I think this time next year you will be -- there will be a lot of discussion about the impact of that legislation on the behavior and the landscape of health care and the role of IT in that. So health care is being digitized around the world from the inside out and we are a key piece of -- we are, for the most part, the infrastructure that is doing that for our clients.

Another significant thing that happened here is the relationship with CareFusion, two leading companies coming together around the fact that health care is digitizing and everything about health care needs to get smarter. And you can't get smarter if you are disconnected no matter how fancy you make the individual. That connection, that will be a theme throughout this next decade as fundamental platforms are formed to delivery care. And then none of you asked questions to Jeff or Trace over there, but the stuff that Trace made the very clear statement that this is a worldwide, most major countries are doing major work here in building this infrastructure and digitizing health care. And then Jeff took you through some of the kind of second order impacts of that and we think they are material. So everything ends -- we are getting better at what we are doing and we started off being reasonably good. So things are -- this is kind of a very fun place to be. It's going to be a very exciting decade. The topics are going to change quite a bit through that, part of that is going to come, as I said earlier, legislatively but there is a whole lot of second order impacts around digitizing health care. It's a fun place to be, we like where we are at. We are impatient to get to where we are going though. Thank you for your time and have a good day.

Thank you for your participation in today's conference. This concludes the presentation and have a great day.