塞納 (CERN) 2010 Q3 法說會逐字稿

Welcome to Cerner Corporation's Third Quarter 2010 Conference Call. Today's date is October 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 provisions of the Securities 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 forward-looking statements may be found under the heading, Risk Factors, under item 1A in Cerner's Form 10-K, together with other reports that are on file with the SEC.

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

Thank you , Regina.

Good afternoon, everyone, 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. Mike will be followed by Jeff Townsend, Executive Vice President and Chief of Staff, who will discuss strategic initiatives. Neal Patterson, our Chairman, CEO, and President, will join us for Q&A.

Now, I'll turn to the results. All key measures in Q3 were at or above our expected levels. Bookings were strong and exceeded the high end of our guidance range. Our income statements performance was very good with revenue slightly above the midpoint of our guidance range and continued strong margin expansions and earnings growth. We, again, had great cash flow performance with record levels of free cash flow reflective of high earnings quality.

Moving to the details, our total bookings revenue in Q3 was $496 million, which is 17% higher than Q3 2009 bookings and above the top end of our guidance range. Bookings margin was $398 million or 80% of total bookings. Even though we had a strong year-over-year and sequential growth in software bookings, the bookings margin percent is down sequentially and year-over-year, due to lower margins on technology resale. Given the strength in software, the lower margin percent does not concern us.

Our total backlog increased 21% year-over-year to $4.66 billion. Contract revenue backlog of $4.02 billion is 24% higher than a year ago. Software revenue backlog totaled $642 million, up 6% year-over-year.

Our revenue in the quarter was $462.7 million, which is up 13% year-over-year. The revenue composition for Q3 was $133 million in system sales, $130 million in support and maintenance, $191 million in services, and $8 million in reimbursed travel. System sales revenue reflects growth of 13% compared to Q3 2009, with strong growth across software, sublicense software, and hardware revenue. Services revenue was up 18%, compared to Q3 2009, with strong growth in both managed services and professional services. Support and maintenance revenue increased 7% of the Q3 2009.

Looking at revenue by geographic segment, our domestic revenue increased 16% to $394 million. Global revenue was down $2 million or 3% to $69 million. While the weak global economy still impacting our global business, global revenue is still up 6% year-to-date and we expect improved growth in Q4 and in 2011.

Moving to gross margin. Our gross margin for Q3 was 82.9%, which is down 10 basis points year-over-year and up 10 basis points, sequentially. System sales margins decreased 250 basis points year-over-year, due to the lower margins on technology resale, which were driven by a combination of lower margins on hardware and device resale and lower margins on sublicense software. Similar to our bookings margin, the lower system sales margin is not a concern given the strong levels of software bookings and revenue. Further, as I'll discuss in a moment, we're still driving strong operating margin expansion even with lower system sales margin.

Looking at operating spending, our second-quarter(Sic-see press release) operating expenses were $283 million before share based compensation expense of $6.6 million. Total operating expense is up 7% compared to the year-ago quarter. Sales and client service expenses were 10% compared to Q3 2009, driven primarily by growth in managed services. Our investment in software development was flat compared to Q3 2009, reflecting continued leverage of our R&D spend, and G&A expense increased 5% percent year-over-year.

Moving to operating margins, our operating margin in Q3 was 21.7% before share-based compensation expense. This is up 330 basis points compared to last year and keeps us on track to exceed our full-year 2010 target of 20% operating margins. The margin expansion was driven by a combination of increased profitability in our professional services, managed services, and support business models along with ongoing leverage of investments in R&D and SG&A expense.

Moving to earnings and EPS, our GAAP net earnings in Q3 were $60.9 million or $0.71 per diluted share. GAAP net earnings include share-based compensation expense, which had a net impact on earnings of $4.1 million or $0.05 per share. Adjusted net earnings were $65 million, and adjusted EPS was $0.76, which is up 25%, compared to Q3 2009. Our tax rate was 35.4%, which is in line with the level we expected.

Now, I'll move to our balance sheet. We ended Q3 with $770 million of total cash and investments, which is up from $678 million in Q2. Total cash and investments include $565 million of cash and short-term investments and $205 million of highly-rated corporate and government bonds with maturities over one year. Our total debt is $119 million. Total accounts receivable ended the quarter at $463 million, which is up $22 million from Q2. Contracts receivable, or the unbilled portion of receivables, were $137 million and represent 30% of total receivables compared to 29% in Q2.

Cash collections were $472 million, which is a record for a third quarter. Third party financings were $21 million representing 4% of total cash collected. Our DSO in Q3 was 91 days, which is up from 88 days in Q2, and down from 105 days in Q3 2009. The year-over-year decline was primarily related to Q4 2009 reclass of the Fujitsu receivables to other assets, which we discussed on prior calls. Operating cash flow for the quarter was an all time high at $119 million.

Q3 capital expenditures were $19.3 million. Capitalized software was $20.5 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was also at an all time high at $79.1 million. Free cash flow for the quarter again represents well over 100% of net earnings and reflects continued strong earnings quality. Also, note that our year-to-date capital spending of $75 million remains below our planned level for this point in the year. We do expect capital spending to be higher in Q4, but we will be below our initial guidance of $130 million to $150 million.

Moving to capitalized software, the $20.5 million of capitalized software in Q3 represents 29% of the $70 million of total spending on development activities. Software amortization for the quarter was $17.8 million, resulting in net capitalization of $2.8 million or 4% of the total. Based on our current release schedule, we expect amortization to increase to approximately $18.5 million in Q4.

Now, I'll go through the guidance. For Q4 revenue, we expect revenue in $490 million to $510 million range, reflecting growth of up to 9% over Q4 2009, which you will recall was a very strong quarter that reflected a $57 million sequential increase over Q3 2009. We expect Q4 adjusted EPS, before share-based compensation expense, to be $0.80 to $0.85 per share, with a midpoint reflecting double-digit growth over the very tough Q4 2009 comparable. Q4 guidance is based on total spending before stock compensation expense of approximately $290 to $295 million. Our estimate for stock compensation expense is approximately $0.05 for Q4.

Moving to bookings guidance, we expect bookings revenue in Q4 of $490 million to $530 million with a midpoint of this range reflecting strong sequential growth. As expected, the guidance range does not surpass the all-time record bookings in Q4 2009, which included the two largest contracts in our history as well as our second ITWorks contract. However, our year-to-date bookings combined with our Q4 guidance positions us to exceed our full year 2009 bookings by over $50 million, which is strong considering we entered the year indicating full-year bookings could be down due to the challenging comparable.

Now, I'd like to provide our initial thoughts on 2011. Based on the initial version of our 2011 plan, the 2011 consensus estimates for revenue and earnings both appear reasonable with top line growth of approximately 13% and bottom line growth of more than 20%. We believe the improving macro environment combined with the continued ramp-up with stimulus driven demand support this level of growth and perhaps some upside if stimulus demand accelerates. As always, we will continue to update our outlook on future earnings calls.

In closing, we are pleased with our results in Q3, with all key metrics at or above expected ranges. Specifically, we are pleased with our strong bookings and revenue growth, continued strong margin expansion and earnings growth, and record levels of free cash flow generation.

With that, I'll turn the call over to

Thank you, Marc.

Good afternoon, everyone. Today, I'm going to cover sales and operational results, marketplace trends, and highlights from our health conference. Starting with the results highlights, our bookings revenue in Q3 of $496 million included 22 contracts over $5 million, which is an all-time record. Twelve of these contracts were over $10 million, which is a level only surpassed in Q4 2009, when we had 15 contracts over $10 million. Looking at competitive wins, our bookings from new footprints were strong again, with 30% bookings coming from outside of our core Millennium install base.

As I discussed last quarter, we feel very good about Cerner's competitive position due to the depth and breath of our solutions, readiness to meet meaningful use, and proven services capabilities. With many competitors having solution gaps, multiple versions of solutions with unclear migration paths, scarce services resources, or the uncertainty related to going through a merger, this is a prime opportunity for us to gain additional share. The gaps of some of our competitors gets even larger when considering potential requirements beyond stage one of meaningful use and we are getting a lot of traction when we discuss our capabilities beyond stage one with prospective clients.

This quarter included strong levels of bookings in the licensed software, professional services, managed services, and technology resale business models. And, almost all of our business units had strong bookings with particularly strong performance in women's health, critical care, peri-operative, revenue cycle, medical devices, imaging, clinical process optimization, and community hospitals. Another area I would like to highlight is our physician practice business. Beyond the -- based on the extremely positive reaction from clients who saw our improved user interface workflow while at our recent health conference, it is clear that the investments in our physician practice solutions are paying off. This progress is also reflected in another solid quarter of physician practice sales, including establishing seven new alignment relationships in our health system client base that allow for rollout of our physician practice solutions to their affiliated physicians. We expect this trend to continue, as our ability to offer a fully integrated EMR across inpatient and outpatient venues, aligns well with the trend of more hospitals and health systems influencing physician practice decisions and/or employing a larger number of physicians. Having an integrated platform across all venues will only increase in importance in coming years, with the evolution of new care delivery and reimbursement model such as ACO's which will blur the boundaries between different venues of care.

I'd also like to provide an update on the substantial progress we've made in DeviceWorks, one of our newer business units. In addition to illustrating at our health conference the progress clients have made in redesigning the care environment with our smart room, we also demonstrated the next generation of smart room, with specific solution advancement such as nurse call integration and mobility. We expect these advancements to lead to significant changes in client strategies for the procurement of devices and technology that operate in the care environment. We continue to have success with our medical device resale business, with the third quarter including strong sales of pumps, beds, and vital sign monitors. We now have over 30 medical device manufacturers participating in the certification program for integrating medical devices.

The alignment we announced with CareFusion is beginning to yield results with a growing pipeline and expanded solution development. We expect to share more exciting news on this front by the end of this year. We are also gaining increased traction with medical device integration into the EHR as it is becoming a top priority for our clients. Building on the success of our initial iBus capabilities, we are seeing more adoption of solutions like Point of Care Vitals Collection and Supplementary Device Alarm Routing that extend connectivity to enhance workflow and increase patient safety.

In addition to the DeviceWorks success, a highlight for the quarter was signing our fourth ITWorks client. This contract is smaller than our previous contracts because they are not initially doing the full scope of what we have done with our other ITWorks clients. I'm excited to announce that we started off Q4 on a good note by signing our fifth ITWorks client who's also doing RevWorks, which I'll discuss a little bit later in the commentary. The momentum with our ITWorks offering is building, and the pipeline of prospects has increased significantly in the past quarter, largely because our clients are viewing ITWorks as a way to align strategically with Cerner during a very critical period of execution. Also, word is getting out about the success at our initial clients.

Operationally, we had a great quarter of execution in our professional services business. As Marc indicated, the top line performance of our professional services businesses has picked up this year and increased utilization has allowed this business model to contribute nicely to our margin expansion. This is evidence that the investments we have made in implementation tools and methodologies continue to pay off, and the predictability we create by automating much of the implementation process is a big differentiator in the marketplace. Our clients are very focused on locking in their services team for their meaningful use journey and we are seeing them add solutions and services beyond meaningful use to their road maps as well. We've also seen a pick up in demand for our Lighthouse services, as many clients create their Stage II plans. This activity helps with the visibility of our services revenue and, looking ahead, we still feel good about our ability to work through our existing backlog and meet expected demand through a combination of increasing utilization of existing resources and ongoing hiring.

Looking at contributions by region, the US was the primary driver of our bookings growth in Q3 as the weak global economy impacted our results in some non-US regions. However, we continued our steady progress in our larger global regions, including the UK, and we established new footprints at an academic hospital in Spain and a children's hospital in Australia during the third quarter. Looking ahead, our overall global outlook in coming quarters is strong.

Turning back to the US marketplace, we continue to see steady increases in stimulus-driven activity, both inside and outside our install base, as providers engage in a path to meaningful use and beyond. As reflected our strong outlook for the rest of the year, and our initial 2011 guidance, we expect this momentum to continue building.

Looking beyond 2011, we believe this will be a multi-year opportunity with each stage of the stimulus requirements building on the prior stage and the additional demand for solutions and services being driven by second order effects of stimulus and health reform. As we have discussed, health reform will change many things in the healthcare landscape and create new opportunities for Cerner. Creating coverage for the uninsured will create second order effects such as increased volumes that will create capacity constraints and changes to reimbursement models that may make it challenging to provide care profitability. The legislation also creates more compliance and reporting challenges for our clients in the areas of pay for quality and waste, fraud, and abuse measures. These challenges create strong incentives for providers to maximize efficiency and present another long term positive for HIT.

Another part of the changing landscape will be the evolution of reimbursement and care delivery models such as the accountable care organizations. or ACO's, that are designed to align incentives between the payer and providers and between the physicians in the community and at major acute care hospitals. These new models will likely create both challenges and opportunities for our clients while also creating opportunities for Cerner to play an expanded role in driving higher quality, better coordinated, and more efficient care. For those of you who attended the Cerner health conference earlier this month, you saw first hand how focused our client base is on preparing for the challenges driven by reform. While discussions around stimulus were prevalent, it is clear that our clients are also thinking beyond meaningful use and there were multiple client led sessions on the impact of reform and how providers are positioning themselves to take the lead in establishing new delivery models such as the ACO's. Even though the definition of an ACO remains vague, all signs point to a linkage between quality outcomes and reimbursement, which aligns very well with what Cerner has been investing in for quite some time now.

Leading provider organizations are planning ahead to make sure that they are ready to react quickly as details around reform become available. We believe ACO's, whatever form they may take, along with other changing regulatory requirements, like bundled payments, value-based purchasing, and even the move to ICD-10, creates a significant opportunity for Cerner to become more strategic to our clients as they look to navigate these fundamental changes. For example, the major impact these requirements will have on providers' revenue cycle creates a major opportunity for our improved and expanded revenue cycle solutions and services. Our conviction that this opportunity is significant was further strengthened at our health conference where there was an unprecedented amount of interest in our revenue cycle offerings.

Our health conference gave us the opportunity to highlight the progress we've made on our revenue cycle solutions, including substantial improvements in our patient accounting solution. This progress was also evidenced by the presence of several reference clients at our conference willing to share their revenue cycle success stories. Just to give you a numerical perspective on our progress on the patient accounting front, we entered the year with 61 sites live with our patient accounting solution. We now have 80 sites live, and counting only the clients we have currently contracted projects underway for, we will end next year with 115 live client sites, effectively doubling the size of our base in two years. The broader awareness around our capabilities in revenue cycle has allowed us to advance conversations with clients about our Cerner RevWorks offering, which goes beyond solutions and transactions and provides operational services to help healthcare organizations improve their end-to-end revenue cycle functions.

As I mentioned, we signed our second revenue RevWorks client in early Q4, and we look forward to sharing more information about that client on our next call. As part of our increased emphasis on revenue cycle solutions, we also announced three partnerships during our health conference that extend our revenue cycle platform by allowing us to embed industry leading content and solutions from Ingenix, MedAssets, and Search America. While we are continuing our aggressive expansion of Cerner-developed revenue cycle capabilities, these partnerships quickly enhance our revenue cycle offering and extend value to our clients by embedding content from industry leaders into our platform.

Before turning the call over to Jeff, I wanted to highlight another announcement we made at our health conference. During Neal's keynote, he indicated we will be offering our new semantic search solution for free. As Jeff will discuss, semantic search uses natural language processing to provide a contextual searching of structured and unstructured information across the medical record. We are providing this subscription to semantic search for free because we think it is important to drive rapid adoption and quickly prove the benefits of the solution, which we believe will change the way clinicians interact with the EMR while also helping to solve many of the inter-operability challenges the industry faces today. The early feedback I'm getting from our clients is that docs love this capability, which in turn, I believe, will lead to a much faster adoption rate than we originally expected. At the end of the day, I see these capabilities further differentiating Cerner and strengthening our competitiveness while, at the same time, setting the stage for additional solutions we will be offering in the cloud.

With that, I'll turn the call over to Jeff.

Thanks, Mike.

Today I'm going to talk about a couple of the themes coming out of our health conference and some launch announcements we made that will shape the next wave of innovation beyond the enterprise EMR stage. As Mike discussed, many of the discussions at our health conference revolve around actions our clients are taking to address challenges that will come with health reform, the change in reimbursement requirements, and proactively staying ahead of the meaningful use phases. It is clear that information technology is emerging as the centerpiece of strategic investment to deal with the changing landscape. As our clients are becoming more digital, it is also clear it has increased the appetite for innovation and accelerated the demand for the "next new".

For Cerner and our clients, the health conference has become an annual milestone event where clients shape their strategies and create their road maps for the future. Our collaborative user room platform, which was introduced at the conference a year ago, has created a medium for year-round innovation and sharing which moved the bar of the quality, depth, and breadth of the interactions this year, allowing groups to more effectively self-organize in the purpose-driven ecosystem. In total, there were over 250 client led presentations, 72% of which had continuing education credits, sharing their successes, lessons learned, and what we call innovation at the edge, where they are showcasing their own development gadgets.

As Mike mentioned, the first big launch of the client base was around our semantic search capabilities, which I discussed last quarter and was the first major solution within our cloud-based, Healthy Intent platform. To speed adoption and create a platform for the next wave of solution offerings, we announced this cloud-based service would be offered as a free subscription service. No license, no operating fees. The importance of solving the challenges of unstructured data and varying nomenclatures across an ever increasing store of clinical information risks stalling the momentum of the industry. Standards and inter-operability while progressing, will span this decade. We strongly believe there's an opportunity to leapfrog this cycle to more rapidly impact the continuity and coordination of care and intend to prove it over the next year across nearly one-third of the US market. Our challenge to the client base is to adopt this capability as quickly as we deployed Lights On with the goal being that the majority of our clients are in production one year from today. This value will be significant to both our clients and the potential innovations.

As you may recall, we utilize a sophisticated natural language processing engine to parse through clinical information and map to ontologies and nomenclatures. The semantic engine then creates indexes which map the source data to multiple clinical concepts and categories. During Neal's keynote, a physician from the University of Missouri demonstrated the abilities of this solution using a real patient, attempting to understand their prior medical history and what medications have been tried in the past. In this case, searching Ace Inhibitor not only retrieves the documents for this phrase, but, also, all medications within the drug class, bringing to the surface a document that was several years old, explaining the patient's side effects from one of these medications, which the patient didn't remember until reminded. Not only saving time and clicks, it impacted the quality of care, changing the course of treatment in seconds. As the name Healthy Intent suggests, we believe this platform continues to evolve in sophistication to the point that it can anticipate and determine the clinical intent based on the behavior of the specific user, the history of the patient, and the context of the prior actions. Rapidly deploying the base infrastructure across the scale of our client base will expedite the learning and discovery of use cases significantly.

Moving to the second part of the launch, we demonstrated a health agent operating system earlier in the year that applied sophisticated statistical algorithms against contextual clinical activity to recommend clinical action. Some of you may remember the demo from our investor day in March where we took a patient with multiple conditions, each with multiple stages of progression, and suggested medication orders which were derived from analysis of several thousand permutations. Using a similar approach to our efforts last year during the influenza concerns, we challenged our client base to sign up for our Sepsis surveillance algorithm, as our first national health agent. Within the Healthy Intent platform, this runs using an index that is created by search, removing the need to perform specific mapping or custom extracts from each enterprise.

In 2009, sepsis affected nearly 750,000 Americans annually, resulting in mortality rate of 28.6% and is expected to top the one million mark in 2010. Annually, more Americans die from sepsis than either heart attack or stroke. The algorithm that has been in place at a few Cerner clients for some time, embedded within the enterprise, showing remarkable results in mortality rates. By moving this capability to a health agent in the cloud, we want to prove the speed at which new capabilities and evidence can be deployed through interoperability.

To close, we also announced our new mission statement -- To contribute to the systemic improvement of health care delivery and health of communities. We think the two solutions I discussed show both our intent and capability to both disrupt and systemically accelerate the move towards a new middle, changing the paradigm for both interoperability and the adoption of new clinical evidence.

With that, I would like to open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Jamie Stockton with Morgan Keegan.

Thanks, guys, for taking my questions. The first one, Marc, would be with your bookings guidance for the December quarter. Last year in the December quarter, we had a couple of big lumps in there, three. This year, would you say it's going to be a much more normal quarter, from a booking standpoint, just no huge deals?

The expectation coming out of our forecast, Jamie, is much more of normalized quarter without any big deals skewing the numbers. So, that's why we think it's comparable to looking at Q4 year ago, ex- those large deals.

Okay. And, my other question, Mike, you have been controlling your sales and client service expense fairly well, that makes me wonder, heading into 2011 on the implementation front -- implementation capacity --what your thoughts are?

Are you guys going to be hiring as we go into 2011 to try to increase capacity there, or do you feel like some of the steps that you've taken to try to automate more of the implementations are going to allow you continue to leverage that line?

Yes. I would say both. We are hiring. We've increased capacity in the US by around 100 the first three-fourths of this year and going forward we expect to continue to hire through the middle of next year -- is what our pipeline is showing us.

At the same time, we're showing efficiencies in the implementation process, effectively driving down the total work effort on both sides of the equation, ours and our clients, systematically, year-over-year. So we're going to continue initiatives on that front while at the same time, ramp up our work force. We've actually transitioned some capacity out of non-US markets and into US markets at the same time, so we're going to continue to manage the levers to address the growth in pipeline.

Okay.

My last question along those same lines -- new hospital signs up today, when can they start their implementation?

We try to start them right away. A lot of the time we're dependent on their timeframe as well, so we want to get them started. Most of them have their eyes set on some level of achievement in meaningful use stage one, and so we're trying not to delay.

There are some things that we will do back here in Kansas City to engage in the project and start the build, build out their computing environment. Again nine out of ten clients tend to come into our data center and are hosted. We will start all of that work right away and get them going.

Thanks guys.

Your next question comes from the line of Greg Bolan with Wells Fargo.

Thanks for taking the questions.

With regards to the Cerner network, can you quantify the number of clients that are now installed on the network?

And thinking about the ultimate goal for interoperability among providers, does the network have the bandwidth to handle an exponential increase in transactions and how should we think about the financial meaningfulness of this network to Cerner?

This is Marc, Greg.

I think it is still an early effort for us at this time. We are creating the infrastructure for that network that we will basically manage and own ourselves. So, as far as people linked to that, it's a very small number, mainly just trials at this point. The size of the network and the capabilities of the network from its initial size to exponentially growing as you indicate, that's the design. It is designed to carry a lot of commerce and transactions and information across that network.

And the only thing I'd add is with a high percentage of our own clients being inside of the data center, a lot of that traffic doesn't leave the building, so there isn't a typical bandwidth concern you might be thinking about; most of that data is housed in the same floor space.

Very helpful, thanks.

Your next question comes from the line of Michael Cherny with Deutsche Bank.

Hey, guys. Obviously, you are starting to see some nice traction with ITWorks clients. Can you give us a little sense about when you sign those up, the different margin profiles in terms of what takes to getting ITWorks client up and running and what that contract would look like versus a typical contract?

Yes. This is Marc.

For an ITWorks deal, the initial deal normally has, obviously, a services component where we're taking over the operation of their systems and there is a margin related to that. That's not 20%; it's less than 20%, but there's also usually part of that deal includes software and other elements that are a higher profit margin that brings the blended rate in and for that deal over time to be accretive to our 20% goals, so those coming over time, but basically that spreads, if you look at the math, that spreads over the life of the ITWorks client for the most part.

Great.

Obviously, with the announcement of the partnerships at the leadership meeting a couple of weeks ago, how quickly will it take to get those guys up and running and really having the full sales force engaged to be able sell a comprehensive suite of solutions?

This is Mike.

I think we're ready now. We demonstrated the capabilities of the embedded technologies at the Cerner health conference. We are -- we actually had our sales meetings for the leadership and launched the capabilities and launched some programs to help accelerate the adoption of some of the capabilities, so we're ready now.

Cool. Thanks. That's helpful.

Thanks, Mike.

Your next question comes from the line of Steve Halper with Stifel Nicolaus.

Yes, hi. Regarding CapEx, you indicated that you were going to come in below your expected range. Can you just give us some commentary about next year and are there any major projects on the docket?

This is Marc.

Clearly, where we are today we have gained some efficiency relative to data center purchases and being able to use Linux and things like that, so my guess is that we end of this year someplace, in the $110 million, $120 million range, that feels about right.

We don't foresee any major projects. There's our normal data center buildout that we have to do, so I think relative to next year, for 2011, for the most part, we go in looking at somewhere around $150 million as a target. This year we have some efficiencies, no big projects. Even if we roll in a couple of larger projects next year, we shouldn't be higher than that, but I wouldn't model less than the $130 million to the $150 million range, going forward.

And just one separate follow-up -- any increased activity in the small hospital arena for the Company?

Yes. This is Mike

I think we're seeing more activity on that front and we had a good quarter in Q3 and we have aspirations for Q4, so we're -- while they were getting better at executing on that front, and we're seeing more activity on that front.

Great, thanks.

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

Hi. Thanks.

I have a question on the bookings. Last quarter after you signed up your RevWorks clients, you said you hadn't included any of the contributions from there into bookings. Did anything go in into 3Q? And how should we think about that going forward, especially around bookings margin? I realize this quarter, the bookings margin came in a little lighter for other reasons, but as RevWorks and ITWorks grow, should we expect margins there to -- the bookings margin -- to come in a little bit?

Yes, Atif, this is Marc.

The bookings margin for most of those deals when we do book them will vary, but those are services businesses, so normally a services contract is 100% bookings margins, so relative to those, they'd actually be accretive to your overall gross margins, relative to bookings margin. It's not going to drag it down.

Relative to the first part of your question on the RevWorks client, we still haven't taken any bookings on that client. It's an initial client and we're going to be very conservative as to how we recognize any of that in either our bookings or once it gets into bookings, pulls through into our income statement. So, at this point, most of the revenue bookings Mike talked about and other revenue bookings, RevWorks client being booked this quarter and once again that won't contribute to the bookings either.

The one thing I would add is that when your -- both RevWorks and ITWorks represent further alignment with our clients, so -- and they are generally longer-term arrangements, longer term contract. When you're doing that, we tend to also do our traditional business contracts at the same time. So, we are adding in software to the journey; we're adding in professional services. We're adding in third-party content including some of the partnerships that we just announced. They'll have, depending on the composition and what the client decides to layer into that aligned relationship, you'll get different margins as Marc described.

Okay. Got it.

And then, second question on the [Fujitsu] issue, we're coming up to a full year with the receivables. Do you have any insight on that whether you're going to move those receivables back to short-term? Any indication on the collections procedure there, and then secondly, just an update on the UK in general. How are things progressing there?

This is Marc.

Relative to the Fujitsu receivable, that process is ongoing and currently there is no facts that we would base a move to a short-term characterization; it will remain in long-term. We're still remain very confident will collect that receivable, but the process has to be completed and that process is ongoing. So, my expectation is in the foreseeable future, no change in the characterization and classification of assets until we see some substantive change in the process.

And regarding how we're doing over there, I think things are going well. As you know, we signed CCN3, which locked us into a contractual arrangement. We've been executing against that. We had some pretty important go-lives and/or upgrades in the quarter that represent good execution progress. We mentioned the Cerner health conference. We had nearly 100 clients and/or prospects from the UK attend our health conference this year, so we literally had a breakout session to address some of their unique needs.

As we described on the last call, we're positioning to not only execute on the existing contracts that we have in place, but also address the independent trust buying behavior that we are going to experience going forward. We have momentum on that front. We have a lot of activity in our vision center that we have built out in the London office. And then, finally, we mentioned Matthew Swindells as another leader that we're adding to the mix in Europe and he is on board now, so we feel good about the trajectory that we're on.

Great, thank you.

Your next question comes from the line of Brett Jones with Brean Murray.

Thank you for taking the question.

Marc, I was just wondering if we could circle back on the sales in client services line for a second. I know it was asked a little bit earlier, but I think we all expect to see some leverage, but I was surprised to see the actual dollar amount decline. Is there -- were there any one-time items on that line?

There's nothing unique in that. If you look at the year-over-year, it's up 10%, so you have seen growth from the year-ago quarter. I think Mike laid out pretty well that what you've seen from our stand point is you've got UK and some of the global markets, us being able to reduce our costs relative to sales and client service in those markets relative to job demand.

To some extent we're moving some of those people over to these other jobs in the US. To some extent, those people are leaving for other opportunities, but then we're growing in the US. The fact that it's relatively flattish makes sense. We have not added a whole lot of people this year and the 10% year-over-year increase covers that headcount increase.

All right. Thank you.

And then, just one more, if I could. Could you give us a sense for where the ambulatory EHR -- or how big your ambulatory EHR footprint -- is now? You talked about seven new alignment deals and I was just wondering, are those for the hospitals actually purchasing alignments or offering them for their affiliate positions?

I'll answer the latter part of your question. I'll let Marc take the first.

They are doing both. The agreements that we talked about were actual purchases, so they are purchasing for both owned and affiliated physicians and then sponsoring them in some form or fashion. In the ones that I spoke of on this call, they're all hosted out of our environment, so they're the PowerWorks solution model. And that's, we're seeing a mixed bag. I would say it's 70% to 30% relative to whether we do the PowerWorks hosting solution, the software as a service model, or a client attempts to host it themselves.

And we don't have -- we haven't disclose any specific numbers relative to physicians on the PowerWorks solution at this point. We probably will begin doing that in the future at some point, but don't have any numbers for you here.

Great. Thank you.

Your next question comes from the line of Richard Close with Jefferies & Co.

Yes. Thank you.

With respect operating margins, Marc, obviously, doing very well there and exceeding your target of 20%. Any update on where you think that can go, with all these other automation and efficiency things that you're driving -- where the operating margin tops out over the next three years?

I think that, obviously, 21.7% percent, we're very pleased with, and as a diligent analyst you want it to be higher than that. We've indicated that there's not a -- 20% was not our ultimate goal; we think we can grow more than that and obviously, we're proving that this year.

One of the keys is not only watching our expenses we have on the R&D and SG&A side, but services business. The more efficiencies -- as that business grows, as the stimulus projects come in, keep in mind that that level of revenue per quarter, if we can get 3% improvement on the contribution margin from that business, that drops 100 basis points toward our total margins. So in that business has historically been in the upper 20%'s -- I think as we get higher utilization rates and utilize more automation that you'll see us be able to grow that up into the low 30%'s and get the commensurate increase down on the operating margin line.

I wouldn't put out another marker. We got out of that business a little bit relative to what we think they can get to, but I think we're fairly comfortable in that we can continue to increase operating margins and so, we'll see where we end up of this year. We'll be over 20% and then we can give you an estimate as we go forward.

Mike, I was wondering if you talk a little bit about the pipeline and the potential clients that you're seeing in the pipeline? Are they -- is it skewed towards more people starting at ground zero or do they have something and they're just looking for patches, you guys to come in and offer patches? Just trying to get a feel of really what the opportunity is on a go-forward basis, here.

The bulk of the opportunity in the US is associated with people committing to a meaningful use journey. And we are hopeful that we're the primary EMR provider in that, but there are cases where we are plugging the gaps for other suppliers. I would say the bulk of what we are up to is like our mix, 70% of our business comes from our base and finishing their journey, and this quarter literally 30% came from people starting a meaningful use journey. So, I think that's what we expect to see.

At the health conference, we announced many solutions that are really extensions, that don't necessarily tie directly to meaningful use and enable a new world once you have the core digitized. I would expect that 30% will change a little bit over time to be not just net new EMR footprints, but also expansion capabilities.

The final thing that would add is that just looking for a forward pipeline, we are seeing a higher, or an increased percentage of that pipeline made up of what I would describe as rebounds, so people who have started the journey with someone else, and have given up on it and they're back in the marketplace. We didn't have that as a substantial percentage of our pipeline, I would say, a year ago and looking a year forward, it's showing up substantially, so we're excited about that opportunity as well.

Final question would be, I know you guys have done pilots for certain customers in the past. I was wondering if you could just remind us, in terms of how those have worked out, in terms of pilots. Have they expanded into substantial business with those particular clients in the past? Any type of track record along those lines?

Our normal business model doesn't have us doing a whole lot of what I describe as pilots, but it's not uncommon for people that are making substantial decisions to get some proof points under the belt prior to moving forward, so we're accustomed to that model. We don't necessarily describe them as pilots because we view it as the beginning of a journey, but we're -- like any case our job is to execute very well, to deliver predictably, and to make sure that the solutions that we're putting forth are the best solutions. And we have a track record that when we do that good things happen downstream.

Okay. Thank you.

Our next question comes from line of Sean Wieland with Piper Jaffray.

Hi, thanks.

On your 2011 outlook, you said some upside of stimulus accelerates. I'd like to know what are your assumptions on acceleration? What are the leading indicators that we should be looking at? What are the leading indicators that you're looking at that gets you to your guidance?

Well, to our guidance, once again, the acceleration I talked about was driving results in excess of where the street is now, which is, our guidance was we're comfortable with where the street is. We have been pretty consistent, Sean, in our process. We base -- in our forecast process that goes out four quarters, and we look at a preliminary view of the 2011 plan and that plan process and approach has been consistent for quite some time relative to being we think, respectfully conservative.

Based on all that data we pulled together, we are comfortable with where the street is, relative to the potential to exceed that and the acceleration. You all will be able to see in our bookings number, given we're one of the few companies that provides the bookings data and guidance. You should be able to see when we start exceeding -- having larger bookings numbers than we've guided or at the very top end of our range, but that's going to be a precursor to us being able to deliver above that amount.

Relative to a trigger and I'll do the non-financial trigger, one of the things that may happen -- and I was at a client site that I saw a little bit of this starting to take shape -- is now that the infrastructure is being laid, meaningful use stage one for some folks is literally just finishing off the edges, so it's smoothing off the rough edges to get to a point where they could submit appropriate measurements and literally achieve meaningful use.

At the same time, there is a pent up demand to go do the higher order clinical work that's represented in some of our Lighthouse initiatives and really that start to bleed into what is stage two. And I think the clinicians are not going to -- they're not aligning their demands towards meaningful use. They're aligning their demands towards what they need to effectively perform their roles. So, there may be a trigger that the clinical need drives forward faster than the policy around stage two meaningful use.

Okay. Thanks.

And just a quick follow-up on the incremental operating margins. Obviously, your operating margins were at an all-time high; your incremental operating margins were north of 40%. As I think about you growing your business into 2011, would there be anything that you're doing that would be dilutive to those incremental margins?

Well, I think the key driver of that was primarily the services business and enhanced margins there, so as long as those continue to strengthen, there's nothing specifically that we have to invest relative to delivery on stimulus that would be a negative to the margins. I don't other there's anything that I see on the horizon that would impact that negatively but once again, it all still ties back -- a great component ties back to the services.

Great. Thanks a lot.

The next question comes from the line of Eric Coldwell with Robert W. Baird.

Thanks. Good evening.

Question -- gets back to the strength that you're seeing in the physician practice business and it may be a level of detail that's too granular for the call, here, but I'm curious whether any of these were replacement sales where you were knocking out an incumbent or series of incumbents and if there's any common theme, any commonality, in terms of what the affiliated physicians were using prior to Cerner getting the engagement?

This is Mike, Eric.

Probably the common theme is the systematic approach by a sponsoring health system into a region of physicians. So, the common thread is not people are leaving a specific ambulatory EMR, or practice management solution platform and coming to Cerner; it's more of a systematic alignment to an affiliated health system that is driving the change.

Okay.

And just a quick follow-up. You talk about a number of areas of strength during the prepared remarks, everything from device connectivity to even revenue cycle, which seems to be bucking the trend of little bit this quarter. Simple question here, laundry list of things that are working -- outside of the little bit of sluggishness on the global side, which you think you will recover next year, is there anything right now that you're surprised isn't working and if so, why? Where there would be demand today and if so why?

Eric, as I actually look through the lines of business and the data, they are all performing well. It's a self-serving comment, it feels like, but there really isn't any single area where we're not doing as well as we thought. Probably the only thing I would look at would be hardware margins -- tend to always be under pressure and therefore you saw that impact in some of our gross margins and bookings margin being lower because of the pressure we're seeing on hardware margins, but that's something that's just part of being in that business. If you sell a lot of hardware, it's going to have -- their margins are just naturally lower.

I actually wouldn't highlight anything that's not coming up to the expectations that we've laid out in our plan and in our forecast.

That's great. Congrats on a good quarter. I'll drop off with that.

Hey, let's take one more call and then we'll have closing comments.

Your final question today comes from the line of Anthony Vendetti with Maxim Group.

Thanks.

Just a quick question and then a clarification on the deals. Over $5 million, would you say, 22? And how many over $10 million?

Let me get my notes here. 22 over $5 million and 12 over $10 million.

Over 10 million. And the 12 over $10 million, is that the most?

That was actually the second highest watermark, the first being Q4 '09.

Okay.

And just one follow-up on the ambulatory products and PowerWorks and so forth. Could just give us an update on how that's going?

Well, as I mentioned in the comments, the progress that we've made on the solution front is -- we're very, very pleased with. It was one of the buzz items at our health conference; we've gotten a lot of external validation both by our clients and by analysts that we're making a tremendous amount of progress just on the solutions front. So, we're very pleased with that trajectory and in reviewing where we're going, I think we're headed down a great path, and it's making a big difference in the marketplace.

And then our ability to go provide that is either a solution that is offered by our clients in their domain, so in their technology framework, or, offered through our data center and as software as a service model, I think, is just a differentiator that helps our clients basically do more at the same time. It just gives them the ability to have concurrent threads if they need to or leverage their platform if they need to, so that ability to go both directions into the marketplace is making a difference. I like the trajectory we are on; we're off to a good start in Q4 on that business, and we're staying the course.

Okay, and what's your installed base there, right now, number of physicians?

I think Marc said earlier in the call, we're not providing that information,

But, we will let you know when we are.

Okay, great. Thanks, guys.

I'd like to turn it over to Neal for closing comments, now.

Okay.

Yes. This is Neal. I just want you to know, I'm actually here. There is very little -- these guys have done a great job. I outlined -- I was sitting here summarizing, how do you summarize this call. I think from our side, the message we have been sending is we're definitely in a good place at a very good time. So, healthcare IT worldwide is -- I don't think you want to trade it with any other healthcare company. Our broad message to you is we're using our scale to increase our productivity. We are executing very well on most all of the cylinders, but we continue to innovate, frankly, fairly aggressively. I did get from the call here -- possibly my favorite all-time question I've heard from these calls over several decades, and it was Eric's, the call for last, here. Basically, asked is anything not working? There's always things that we can find that we can make work better, but it does summarize that we are at a good place at a good time and we're executing well.

If you look forward, which most of you that have listened to me over time, you know that that's an important context that I will typically bring to a conversation, because that forward-looking always gets here. But, frankly, looking forward in healthcare mid-decade in the US, we have a completely digitized -- we, collectively, in this country have completely digitized the content of a major industry, that's healthcare. And the records of healthcare of us as individuals in our society in our communities will be digitized by the mid-part of the decade; and fundamentally no industry that goes through a complete digital --digitization of the content of an industry, no industry hasn't had fundamental major change to it. Subsequent to that, what we are threading into the conversation through the innovation, through our continued investment in IP, is our version of what that's going to look like at the end of the decade. We think it's a big environment. It's a big opportunity for Cerner throughout this decade.

The other thing I would say is -- I was at one of largest health systems in the country yesterday, and all of the industry is saying, "well, healthcare tends to do this every decade." It seems like there is a major theme that everybody says will fundamentally change how healthcare works and will change the cost curve. And every decade that theme comes and goes. So everybody's a little tense as to, "will all of this path we're on now -- are we on fundamentally a different path or is this going to be a lot of work and then just nothing will change?" Fundamentally, when you go -- and the conversation yesterday and it recurs in most every conversation I have -- the big difference now, versus in the '90s and the '80s and the last decade, the big difference is IT.

These major health systems fundamentally have, since they have a different lever, to make huge changes to it and everybody knows there's huge changes that have to come to healthcare. So I think the environment --from my point of view, the environment -- I've never seen a better environment to be in what we're doing in over the last 30 years. So this should be a really big decade for Cerner, but with that I'll let you back to your day jobs. Thank you for your attention and I look forward to seeing you in the future. Good night.

Ladies and gentlemen, thank you so much for your participation in today's conference.

This concludes the presentation. You may now disconnect. Have a wonderful day.