塞納 (CERN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Cerner Corporation's first-quarter 2011 conference call. Today's date is April 28, 2011, 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, perspective, and prospects constitute forward-looking statements for the purpose of the Safe Harbor Provisions of the Security and Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading Risk Factors under item 1A in Cerner's form 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. Please proceed.

Thank you, Melanie. Good afternoon, everyone. Welcome to the call.

I will lead off today with the review of the numbers. Zane Burke, Executive Vice President of our client organization, will follow me with sales highlights and marketplace trends. Mike Nill, Executive Vice President and Chief Operating Officer, will discuss operations. 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 the Q&A portion of the call, and provide closing comments.

As we announced last week, Mike Valentine will be leaving Cerner effective May 13. We would like to thank Mike for his many contributions to Cerner and wish him well in the future. We're pleased to have Zane Burke and Mike Nill with us on the call today. Zane and Mike are both seasoned leaders who have contributed significantly to Cerner's success, and we look forward to having them share their insights on the call.

Now I will turn to results. All key measures in Q1 were at or above our expected levels. Bookings were very strong and exceeded the high end of our guidance range by nearly $60 million. Our income statement performance was very good, with revenue and adjusted EPS above our guidance and consensus, and continued strong margin expansion and earnings growth. We again had excellent cash flow performance with record levels of free cash flow reflective of strong earnings quality.

Moving to the details, our total bookings revenue in Q1 was $525 million, which is the best result for a first quarter in Company history. Bookings significantly exceeded the top end of our guidance range, and we're up 30% from Q1 of 2010. Bookings margin in Q1 was 443 or 84% of total bookings. Our total backlog increased 19% year-over-year to $5.3 billion.

Contract revenue backlog of $4.46 billion is 21% higher than a year ago. Support revenue backlog totaled $666 million, up 6% year-over-year. Revenue in the quarter was $491.7 million, up 14% over Q1 of 2010. The revenue composition was $140 million in system sales, $132 million in support and maintenance, $209 million in services and $10 million in reimbursed travel.

System sales revenue reflects 20% growth from Q1 of 2010 with double-digit growth in all areas, including software, hardware, device resale, sublicense software and subscriptions. Our device resale business continued to gain significant traction and had its best quarter in terms of revenue since we launched that business.

Services revenue was up 16% compared to Q1 of 2010 with strong growth in both Managed Services and Professional Services. Support and maintenance revenue increased 4% over Q1 of 2010. We expect growth in support to increase as we move through the year.

Looking at revenue by geographic segment, domestic revenue increased 18% year-over-year to $420 million. Global revenue of $71 million was down 7% against a tough Q1 comparable, but was up 4% sequentially, and we expect stronger growth for the remainder of the year based on strong Q1 global bookings and a strong pipeline.

Moving to gross margin, our gross margin for Q1 was 81.6% which is down 260 basis points year-over-year and up 60 basis points sequentially. Gross margin continues to be impacted by strength in device resale and increase in third-party services. As we indicated last quarter, we expect gross margin to remain in the low 80s, but we expect to continue expanding operating margins, which we did again this quarter, despite lower gross margins.

Looking at operating spending, our first quarter operating expenses were $299.9 million before share-based compensation expense of $7.4 million. Total operating expense was up 6% compared to Q1 of 2010. Sales in client services increased 7% compared to Q1 of 2010, driven primarily by growth in Managed Services and Professional Services. Our investment software development increased 6% compared to the year-ago quarter and G&A expense increased 3% year-over-year.

Moving to operating margins, our operating margin in Q1 was 20.6% before share-based compensation expense. This is up 180 basis points compared to Q1 of 2010 which is at the high-end of our 100 to 200 basis points target.

Moving to earnings and EPS, our GAAP net earnings in Q1 were $64.6 million or $0.75 per diluted share. GAAP net earnings include share-based compensation expense, which had a net impact on earnings of $4.6 million or $0.05 per share. Adjusted net earnings were $69.1 million and adjusted EPS was $0.80, which is up 27% compared to Q1 of 2010.

Our tax rate in Q1 was 32.9%, which benefited from lower foreign taxes in the first quarter. For the full year we expect our tax rate to be 34.5%. Note that applying this annual tax rate to normalized Q1 tax expense would have reduced earnings per share by $0.02.

Now moving to our balance sheet, we ended Q1 with $949 million of total cash and investments, which is up from $835 million in Q4. Total cash and investments include $611 million of cash and short-term investments and $338 million of highly rated corporate government bonds with maturities over one year. Our total debt is $101 million. Total accounts receivable ended the quarter at $469 million, which is -- down $8 million from Q4 due to strong cash collections.

Contracts receivable or the unbilled portion of receivables were $133 million and represent 28% of total receivables compared to 29% in Q4. Cash collections were $531 million, which is an all-time record. Third-party financings were $16 million, representing 3% of total cash collected. Our DSO in Q1 was 87 days, which is flat compared to Q4 and down from 89 days in Q1 of 2010.

Operating cash flow for the quarter was an all-time high at $126.5 million; Q1 capital expenditures were $21.4 million, and capitalized software was $20.5 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was an all-time record at $84.7 million. We do expect capital expenditures to increase as we move through the year, but we still expect to continue generating strong operating and free cash flow.

Moving to capitalized software, the $20.5 million of capitalized software in Q1 represents 28% of the $72.6 million in total spending on development activities. Software amortization for the quarter was $19.1 million, resulting in net capitalization of $1.4 million or 1% of our total R&D investment. For the rest of the year, we expect capitalized software to be between $20 million and $22 million per quarter and amortization of $19 million to $20 million.

Now let me go through the guidance. For Q2 revenue we expect revenue between $505 million and $520 million, with a midpoint reflecting growth of 12% over Q2 of 2010. For the full year, we expect revenue between $2.07 billion and $2.12 billion, up from our previous range of $2.05 billion to $2.1 billion.

We expect Q2 adjusted EPS before share-based compensation expense to be $0.83 to $0.87 per share with a midpoint reflecting 23% growth. For the full year, we expect adjusted EPS between $3.55 and $3.62 with midpoint reflecting 21% growth. This up from our previous range of $3.50 to $3.60.

Q2 guidance is based on total spending before share-based compensation expense of approximately $303 million to $308 million. Our estimate for the impact of share-based compensation expense is $0.05 to $0.06 for Q2 and $0.21 to $0.23 for the full year.

Moving to bookings guidance, we expect booking revenue in Q2 of $540 million to $570 million, with a midpoint of this range reflecting 19% growth. In closing, we are pleased with our results in Q1 with all key metrics at or above our expected ranges. Specifically, we are pleased with our strong levels of bookings and revenue, continued margin expansion and earnings growth, and record levels of operating and free cash flow generation

With that, I will turn the call over to Zane.

Thanks, Marc. Good afternoon, everyone.

As a brief introduction for those of you I haven't had the opportunity to meet, I have been at Cerner since 1996, starting out as an executive in the finance organization, where I worked for Marc as corporate controller and business development leader. Since 2002, I have held several roles in our client organization. Most recently being focused on driving new footprints as leader of our client development organization and owning Cerner's relationship with investor-owned hospitals. Additionally I have had responsibility for our employer network service offerings.

With that, I will move to discussion of our sales results and marketplace trends. I will start first with the results. We had a very strong quarter, including excellent progress at expanding our relationships with existing clients, while also demonstrating our competitiveness by gaining several new clients.

Our bookings revenue in Q1 at $525 million reflects 30% growth over last year, and an all-time high for first quarter. Bookings this quarter included 16 contracts over $5 million, 11 of which were over $10 million. This is also a record for first quarter. Our competitiveness was strong, with 26% of bookings coming from outside our core Millennium install base.

Overall the market is very active, and I believe Cerner is extremely well-positioned with our broad and deep solution portfolio, our readiness to meet meaningful use and improve our service capabilities. This is in contrast to many of our competitors that still have solution gaps, constrained service capabilities and other types of uncertainties surrounding them. As a result, I expect Cerner to have a record year of gaining new footprints in 2011.

The breadth of our solutions and services is also reflected in our bookings this quarter. We had good contributions from all business models with particular strength in license software and professional services. Additionally, our agile business units continue to drive contribution across a wide range of solutions and services. With noteworthy strength in our Lighthouse clinical optimization, laboratory, oncology, physician practice, healthy network and hub, revenue cycle, medical devices, and community hospitals.

In the physician practice base we had a very strong result in Q1. The improvements we have made to the physician user interface and work flow have begun to be recognized by the industry, and I believe our Q1 results reflect building momentum for our physician solutions. Our competitiveness has dramatically improved, and we now have wins in each quarter against all competitors in the physician office market.

While much of our success in the physician practice solution is driven by selling through our large install base, it is important to note that many of our new hospital footprints included the selection of ambulatory solutions in their core solutions. This is evidence that our ability to offer a fully integrated EMR that is very competitive across inpatient and outpatient venues is a highly valued capability.

In addition to our strong integrated inpatient and outpatient offering, we differentiate from others in the industry with our ability and willingness to inter-operate with other systems. By providing an option that doesn't require changing out all systems when the client doesn't want to lose the value of the investments they have made, we are an attractive option compared to other suppliers that force the reinvestment because of their inability or unwillingness to connect to other systems.

Moving to other highlights for the quarter, our DeviceWorks organization had another strong quarter, including two new RxStation agreements; good contributions from our CareFusion relationship, putting us on path to have over $40 million of revenue contribution this year; strong device resale, with contributions from the resale of pumps, beds, monitoring and communication devices, as well as good iBus device connectivity, including seven new footprints.

The progress we made in the device space with our clients and partners is being well recognized by the industry. Today's announcement that WellSpan, Cerner and Hospira were honored with the 2011 Way-Paver Award for excellence in barcode-enabled patient safety is a good example.

A final highlight for the quarter that is we signed our third RevWorks client and have a strong pipeline for the balance of the year. With ICD-10 looming and the likely new payment structures associated with accountable care organizations, we expect a wave of revenue cycle activity in the coming years and believe we are well-positioned.

Let's move to the geographic mix of our results. As Mark mentioned, our global revenue is down year-over-year, but we did have a strong global bookings quarter, particularly in Canada, where we signed a large managed services contract and in England, where we added two NHS trusts. We expect a strong start to the year from a bookings standpoint along with a strong global pipeline to translate to stronger contributions in our income statement by our global business as the year progresses.

At the macro level, the fundamental problem of healthcare costs growing faster than the overall economy exists in almost all countries, and IT continues to be viewed as the way to break this trend. We believe Cerner is the best-positioned global HIT company, and we remain bullish about the potential of the global HIT market.

Turning back to the US, I want to provide some marketplace observations. Overall, we are seeing an unprecedented level activity both inside our client base and in new footprint opportunities.

In our client base, we continue to see strong demand as our clients move forward with their meaningful use road maps. We already had 12 hospitals in our client base receive Medicaid incentive dollars for stage 1 meaningful use and several others in the process of filing for Medicare incentives. As this activity ramps up, we expect to lead the industry in clients achieving meaningful use.

Importantly, we are seeing strong demand for solutions and services beyond meaningful use as our clients prepare for other regulatory requirements and industry shifts. This includes clients looking for the revenue cycle capabilities to prepare for ICD-10 requirements, reviewing their clinical processes, quality levels and reporting capabilities to be ready for value-priced purchases, and evaluating various ACO strategies, which is will require additional IT investments to support capabilities such as evidence-based practices, predictive modeling, remote monitoring across all transitions of care.

All of these factors are also a major focus for our prospective clients. As a result, our readiness for meaningful use is just a way where I believe we will continue to do very well in new footprint opportunities. Our ability to demonstrate capabilities that enable prospective clients to navigate through meaningful use while preparing them to address the changing world beyond meaningful use makes us a very attractive choice compared to many competitors who are focused only on achieving the meaningful use hurdle.

A final comment I would like to make on the marketplace is that I believe all the factors I have discussed will drive a multi-year period of strong demand that aligns very well with our core solutions and services. This is not just a 12- to 18-month wave that some people expect. Because of the multiple steps related to meaningful use and the different levels of existing adoption across the industry, all of the purchasing related to stimulus will not occur at once.

Further, all the other industry dynamics such as health reform, value-based purchase willing, ICD-10 and HIPAA 5010 will extend the wave of demand. I believe our capabilities are further even differentiated when you look beyond stage 1 meaningful use and at the IT needs driven by reform and value-based purchasing. As a result, I expect our ability to gain share to extend through a multi-year period. In summary, I am very pleased with our strong results in Q1, and I think we're well-positioned for an outstanding year.

With that I will turn the call over to Mike.

Thanks, Zane. Good afternoon, everyone.

For those of you I haven't met at one of our analyst days or meetings at our headquarters, I have been with Cerner since 1996. For the last several years I've had responsibility for IP development, CernerWorks, ITWorks, and support organizations. In my new role as COO, I have added responsibilities for elements of the client organization activities including sales and professional services. Today I am going to focus my comments on Professional Services, CernerWorks and ITWorks.

I will start with the Professional Services business, which had a great start to the year with record-level bookings for the first quarter. The organization continues to contribute nicely to our income statement, representing a visible element of both revenue and earnings growth. Our execution on projects has been strong, and we remain ahead of schedule on most projects. We also remain on track with our hiring, which has allowed us to ensure our projects are fully staffed on the planned start dates.

We now have over 2,500 associates in our Professional Services organization, which is the largest IT consulting organization in the world. We are also the most experienced, with an average of more than 5 years of experience across our organization, even when you include the recent increase in new hires which often come directly from college campuses. Our size, scale, experience, and ability to deliver predictable outcomes at a predictable cost are major differentiators in the marketplace.

Another element of our differentiating services capabilities is CernerWorks Managed Services, which provides unmatched scale and service levels. As an example, we support approximately 130,000 peak users through our data centers in Q1 and had up-time approaching four nines or 99.99% system availability.

In addition to our unrivaled scale and service levels, we continue to bring down the cost of ownership, which makes the offering even more attractive to our clients. As a result, almost all new clients select our Managed Services offering, and our existing US client base is steadily migrating.

More recently, the demand for these capabilities is picking up outside the US as well. A good example is a large Canadian client that engaged us to provide our Managed Services offering in Q1. There are several additional global Managed Services opportunities in our pipeline, so we expect global to become a meaningful contributor to this business in future quarters. We also continue to leverage our infrastructure and skill sets to add to our portfolio of Managed Services via the cloud delivery model.

A recent example of this is Skybox storage, which is a secure enterprise cloud-storage service that allows clients to expand storage capacity in a way that is seamlessly integrated with existing data solutions. It allows for consolidation of storage for PACS, radiology, lab, and other clinical systems. Our ability to offer this on-demand service in a secure and easily accessible manner is generating a lot of interest among our existing clients, and is something that can also be offered outside of our existing client base. We also have other Skybox cloud services for areas such as security, back up and desktop, where we offer high quality service with low up-front and ongoing costs compared to traditional models.

Moving on to Cerner ITWorks, while we did not sign an ITWorks client in Q1, we did have a scope expansion at an existing client, and we have a very strong pipeline of new clients. The demand is largely being driven by increased awareness of the success that we have had at our first 6 clients. Many other clients are attracted to ITWorks because they realize they don't have enough internal capabilities to navigate beyond stage 1 of meaningful use or address upcoming challenges related to health reform, value-based purchasing and ICD-10.

With our existing ITWorks clients, we have quickly proven this is not just another IT outsourcing service. ITWorks offers strategic alignment with our clients that goes beyond traditional outsourcing. While part of this service does lead to the expected benefits of leveraging our scale to improve their basic IT operations, we have seen the most significant progress at accelerating clinical adoption and innovation at the edges of healthcare.

A great example of this is our first ITWorks client, University of Missouri, who went from stage 2 on the EMR Adoption Model to stage 6 in just 1 year. The University of Missouri has also been a major contributor to our medical home, condition management, and population health initiatives. Other ITWorks clients have proven to be cutting edge by being early adopters of new offerings, such as smart rooms, chart search, physician iPad apps, and RevWorks.

Another noteworthy observation is that, similar to CernerWorks, we're starting to see demand outside the US for the ITWorks offering. This new demand for services clearly enhances our growth opportunity in coming years and aligns Cerner with a larger portion of the healthcare spending, not just in the US, but around the world.

With that I will turn the call over to Jeff.

Thanks, Mike.

Similar to past calls, I am going to talk about some of our new initiatives in Cerner's evolution from a focus on helping clients automate the care process to a focus on both health and care, as well as the role of our Healthe Intent Platform in accelerating the impact of a digitized care-delivery system. As Zane and Mike have discussed, Cerner is well positioned for strong growth in coming years. Most of this growth will be tied to digitizing the core of healthcare. We believe this digitization sets the stage for another significant wave of growth.

Much of this will come from our focus on the health part of healthcare, because when the core is digitized, a new level of consumer health awareness is possible. While the majority of the dialog today is around cost, we see an entire landscape as more of an iceberg with the cost of care being above the surface, the much larger population and future costs associated with the health and well-being of that population lurking below the surface.

As we demonstrated during our Investor Day, the majority of the highlighted solutions were running in the cloud as part of our Healthe Intent platform. This allows us both to advance innovations more quickly based on the nature of that platform, but also introduces a new layer of capabilities above the individual enterprise, addressing the range of offerings from coordination of care, quality monitoring, and consumer engagement.

As many of you know, Cerner spent the last 5 years trying to crack the code on making good health pay. We have made changes to our health plan, fired our third-party administrator, launched a new age onsite clinic and pharmacy, incorporated biometric measurements for our population, realigned the economic incentive for associates in our health plan, and rolled out a data-driven wellness management program. We have also revamped our on-campus cafeterias to encourage healthier meals and encourage fresh thinking about work environments, incorporating options such as standing workstations.

This past Fall, our executive cabinet engaged our associates in a weight-loss competition that today resulted in about 10 tons of weight loss across our associate base. These changes allowed us to do what all employers want to do, bend the healthcare cost curve significantly, but more importantly, improve the health status of our associates and their families. In addition, these health initiatives have shaped our employer services offerings and provided insights to create solutions for our provider clients who will soon be incented to drive healthier outcomes through new reimbursement models such as accountable care organizations.

I wanted to share some foundational statistics on a set of our early inner initiatives around this platform as we introduced both search and sepsis last fall and have also discussed our progress on the Cerner network from time to time. A core concept to fuel our cloud initiatives is data liquidity from the enterprise sources within healthcare. Recently the Office of the National Coordinator for Health Information Technology announced that Project DIRECT had reached a major milestone.

This was a collaborative nationwide effort with over 200 participants across more than 50 organizations to define and create a simple inter-op solution for healthcare, making that available as open source. As part of that effort, Cerner became the primary source code contributor to the DIRECT project's Java reference implementation. It shows both our commitment to interoperability across the industry and our fundamental understanding of the potential ahead for our health economy if data liquidity becomes a reality more quickly. The ability to contextually share information is a growing reality, driven by the meaningful use criteria, healthcare reform, increasing quality metrics, and new coordination of care delivery models.

Through our Cerner network offerings we have now achieved interoperability with over 46 different EMR platforms across 40 health systems, 166 hospitals, and more than 65,000 physicians. Just last month we surpassed the 70 million transaction mark for the month. These are transactions that are specifically targeted to share information across providers, payers, and patients. This represents more than a 50% growth in the last 6 months, and more importantly, we have seen a 5X growth in clinical volumes over the last 12 months.

We expect that clinical volumes will exceed financial by the end of this year and is driven by both the increase of EMR deployments and the early realization of what's possible when both ends of the communication are digitized. Most important, these are providing real efficiency and workflow savings within the care delivery process and will continue to yield new business model opportunities.

After completing our pilot validation with the Healthe Intent chart search late last year, we are now approaching 15% of our clients actively engaged in deployment and/or use of this solution. While meaningful use has the day-to-day attention of our clients, because this is a cloud service, we have been able to activate this offering without disruption to the meaningful use journeys, and on average it's taking about 4 to 6 weeks to implement and backload history.

It only represents a fraction of the eventual volumes, but today we have more than 40 terabytes of data growing at a rate of 230 gigabytes a day, processing and indexing between 250 million and 350 million records daily. The learning and advancement of the algorithms continue to grow as our volume and diversity of information grows with them.

As a by-product of these efforts, we have also seen an increase in complementary solution demand, which also leverages the data liquidity wave. Both HealthSentry, a public health submissions solution, and Health Facts, a multi-year blinded research and benchmarking repository, have seen progress from these efforts. Today Health Facts contains more than 29 million unique individuals and is a sampling of clinical breadth more than 1.7 billion lab results. We are on course to double the contribution volume to this platform by the end of the year.

As we have previously mentioned, the St. John's sepsis agent, which targets the 750,000 Americans who are affected by sepsis each year, is refined and improved using this very large contextually structured clinical repository, creating a closed loop for not only discovery but continuous and contextual improvement in clinical decision support.

Last, I want to mention a recent announcement from earlier in the week. Cerner was selected by the Missouri Health Connection to enter negotiations to be the technical service provider for the State of Missouri's health information exchange. This, too, is a part of our Healthe Intent cloud-based services platform. The potential reach of this joint effort will cover over 750 provider organizations, 20,000 physicians, and nearly 6 million Missourians, positioning Missouri to become one of the first clipboard-free states in the Union.

As we demonstrated during Analyst Day in March, there is a greater potential for the new middle to change the current state of healthcare and create a more significant opportunity around health than care. I wanted to take the time to step back and help frame some of the emerging building blocks that are fueling the information and content that will make this possible.

With that I will turn the call over for questions.

Thank you , sir. (Operator Instructions) Our first question is from the line of Ryan Daniels with William Blair & Company.

Good afternoon. This is Jeremy for Ryan. Thanks for taking my question. Just wanted to key in on the commentary around the wins you have had that have included both inpatient and outpatient, and I am curious. What is the average increase in deal size when you are selected for both relative to the same client if they just went with an inpatient system?

This is Marc. It is hard to generalize exactly what the difference is when you do both inpatient and outpatient. Clearly it grows the size of the deal. For the most part, it is the extension of the inpatient EMR licenses out to the outpatient clinic, so while the overall dollars are not significant for adding the ambulatory, they certainly increase the number of users, which is the metric by which we get paid, so it is not going to be 50/50, but it could add 25% to a deal, depending on how the deal is structured, and certainly strategically winning the ambulatory side is key for us.

How many would you say have either -- have you implemented, and I am looking for order of magnitude, not maybe a real precise number, but in terms of those that you have already that are either referenceable or in the process of implementing or have ordered at this point?

To the ambulatory?

Both the inpatient and outpatient, what does the footprint look like at this point that either are using that already or are intending to use both together?

This is Zane, Ryan. I would say we're in excess of 50 clients that are in that realm of having both inpatient and outpatient in their large systems.

Okay. Great. Then the last question is a little bit more strategic in nature, but you quickly are amassing quite the war chest of cash, and I am curious what your strategy is for capital deployment as that cash balance continues to grow. Thank you.

This is Marc. As we continue to approach $1 billion dollars of cash on the balance sheet, our strategy right now is to look for opportunities in the marketplace where we could expand our footprint through some type of an acquisition. And we'll continue looking at that strategy. That strategy has a time limit on it, because we think it will only be effective probably in sometime around the next 12, maybe 24 months. At that point, if nothing is coming to fruition we'll look to return the cash to the shareholders in the most effective way possible.

Thank you.

Our next question comes from the line of Newton Juhng with FBR. Go ahead.

Thank you very much. I had a question about the small hospital market. I was just curious how much of an advantage do you have when a nearby large hospital system is running something with Cerner? Do you find that the smaller 75-bed or less type hospitals tend to be more receptive to the solutions you have as a result of just being kind of geographically placed in an area where there may be a particular system that's kind of the big fish in the sea?

This is Zane. What I would tell you in many cases it is very helpful to have that local larger organization that has some sort of affinity that's related to that other organization, and often times those clients are advocates of ours. And we have proven our value, and we're able to use that as a broad reference site. So yes, it does have an advantage for us.

And then in terms of your, I guess the broader addressable market there, is there any way to kind of quantify what has that versus what doesn't in terms of demarcating the market for the ones that have that opportunity?

Is your question, Newton, how many communities do we have a major footprint in that we can leverage relative to new opportunities?

Yes where you feel like you have that decided advantage, I guess.

That would be most of the US and many of the countries we are in, because we are obviously a large marketshare holder and we're broad. So it is very easy for us, and having rolled out Millennium for a period of time, we have a lot of effective satisfied users that will look very similar to the person looking to make a buying decision. So we are not lacking at all for referenceable sites that are geographically near to potential new clients.

Got you. Thanks for the clarification.

Our next question comes from the line of Donald Hooker with Morgan Stanley. Go ahead.

Thanks for taking my question. The free cash flow looked pretty strong in the quarter. What are you thinking for the year, any kind of guidance around that?

Well, I think that - Don, this is Marc - clearly Q1 was very strong. We had probably a little less CapEx than we would have normally planned. As you know, we have talked about CapEx for the year being in the 130 to 150 range. Starting off at the low end relative to that range, we would expect to probably end up somewhere in the low end. We would think CapEx will probably go up a little bit in the last half of the year relative to our planned investments in our hosting business and our Managed Services businesses, but overall for the year, we will be probably at or below the 130 that we had previously used as our base, so I think if you just use the growth in net income with 130 CapEx I think you will be pretty close to where we should end up for free cash flow for the year.

Got you. And in the international, the global segment, you reported, I guess revenues down year-over-year. When you look over the next four to eight quarters, can you give us any kind of suggestion, what markets would you suggest we focus on as potentially a turn around, Middle East, Southeast Asia, Europe, where do you sense that there might be a bounce back?

I think - this is Marc again - that broadly for the globe we're seeing activity. Certainly Europe is still coming from behind, but in the UK we saw some very good footprint signings, two footprints. This quarter we see more in the pipeline there, so that's expanding. We think the Middle East and the Far East both have potential to bounce back as well this year. I think this year the revenue being down year-over-year is a little bit the reflection of the strong year-ago quarter globally relative to this quarter, and I think as we indicated, we would expect our global revenues to grow as compared to the prior years as we go through this year. We think there is a very good chance to have a strong global year in a variety of areas, which are really at this point too broad to go into all of them.

If I can sneak one last quick one in. I think last quarter you talked about a 30% year-over-year growth in your PowerWorks ambulatory offering. Is that kind of a continuing trend into the first quarter of 2011?

This is Zane. I would say it is very similar if not a little bit of increase to that.

Thank you.

Our next question comes from the line of George Hill with Citigroup. Go ahead.

Hey, guys, good afternoon.

Hey, George.

Marc, quick question with respect to bookings, two questions actually. Number one is bookings duration. Are we starting to see -- are we continuing to see the bookings duration go from the four to five year range to maybe a period of slightly longer than five years?

No.

Okay. And then --

I can provide a little color there, George. If you really look at our bookings and kind of look at the Managed Services, which are the longer term five to seven year type of booking that we have seen, we've really had those in our bookings at this point so long that it is really no longer a differentiation when you go look at the comparable prior periods. So for this quarter we had approximately 25% to 30% range coming from the seven year type bookings, and that's probably actually a little bit lower than we have seen in the last probably four to eight quarters. So I think bookings still is a very good measure of our future short-term as well as longer term opportunities, but this quarter there was no -- the over-attainment on our bookings guidance was really broad. It was across a spectrum in every area from services to software and Managed Services was right in its normal percent range of a bigger number, so it also contributed somewhat, but it wasn't any unique longer term type of duration.

That's great color. Thanks. Maybe just one quick follow-up there. If a smaller company in the space actually indicated that they had started to see deals slip from the current period probably to the back end of the year or maybe even next year as hospitals thought about driving forward to hit meaningful use either with best of breed solutions or earlier or just pushing off until 2012 to give them a longer lead time to hit stage 2 with respect to meaningful use, even though the bookings performance was great, do you guys feel like you might have seen any slippage?

This is Zane, George, and I would tell you that we continue to see a lot of opportunity here and did not see that slippage.

And then, Zane, I actually had one last one for you. The new UI that you guys are talking about putting out into the field that customers are satisfied with, that the iView product that I keep reading about people rolling out?

No, in this particular case it would be more of the mPage view, which you may have heard us talk about.

That's all I have. Thank you.

Our next question comes from the line of Michael Cherny with Deutsche Bank. Please go ahead.

Good afternoon, guys.

Hey.

Hello.

I just want to dig into the bookings number a little bit. Obviously it has been the focus of the quarter, and you guys put up stellar bookings well above your expectations. Can you give us a little more breakdown, especially given the amount of clients -- it looks like you signed about 375 new contracts, if I am reading this file correctly. Kind of where the upside bookings strength came from, maybe some of the clients you didn't necessarily expect to win during the quarter that you did? Any more color around the outsized performance of bookings would be great.

Mike, this is Marc. It is really reflective of a very active market in an active and deep pipeline that we have been building. People, and I think Zane made the point effectively, that people, especially as they're looking at putting solutions in are already getting past what do I need for stage 1, because I think a lot of people have kind of their path to stage 1 figured, whether it is their existing supplier or they're doing something new. But I think the stage 2 and beyond and all of the other initiatives are really driving people to get decisions made, so from our standpoint there wasn't any as I indicated, it was broad across all of our businesses relative to the bookings success. There wasn't any one area that drove that success. All that was -- everything was above plan and doing well, and as we look at our pipeline and finished our forecasting work for the upcoming quarter, we see that strength certainly continuing.

Great. And then just quickly on the UK commentary and the new two NHS trusts, were these trusts you had previously been affiliated with in any way or were these competitive wins going forward? I know you talked about improved international markets. How do you think about the UK in particular, given it has obviously been a little bit of a noisy situation?

We have had -- we have relationships with a lot of UK trusts. These were two of them that we dealt with to some extent in the past. As the volume becomes more focused at the trust level, and they start going out and making their decisions, we expect all of the work we have done over the last two and three years by our UK team, which has done a great job of bringing people into our London office, visioning them as to what can be accomplished. Now that they start having the ability to go make their own choices, that is -- we expect that to actually kind of be the beginning of a period of time when we start seeing individual trusts come into our bookings with some frequency. So the two we signed this quarter, yes, we had a relationship with them, but we actually kind of already, because of the program, have a lot of relationships and geographies with almost every major trust in them.

Perfect. Thanks, Marc.

Our next question comes from the line of Atif Rahim with JP Morgan. Please go ahead.

Thanks. If, Marc, I could just ask that previous question a different way, were those two trusts in the south and southeast London region, or were they in one of the other regions in the UK?

They were in London.

Okay. Got it. And plans to expand outside of that? When do you think you could start signing up trusts outside of those two regions?

At this point we're working our pipeline, and will be able to announce things as they happen, but we really can't talk about that to a great extent on the call today.

Got it. Okay. On the DeviceWorks business, the gross margin effect is having, can you talk about how the gross margins are specifically just on that business and how the DeviceWorks business flows through bookings in terms of the magnitude, and how you fast recognize the revenue?

Yes. DeviceWorks basically is very similar to our tech resale business. Selling the actual -- or reselling the actual equipment or, in this case, for example, medicine dispensing cabinet, resulted in us recognizing revenue and recognizing cost of goods sold. The net margins on those as we talked are in the single-digit range, so that is going to impact our gross margins. The key for us, though, is usually those sales will come with it, bring with it an iBus transaction, which is basically 100% or -- it's software, so it brings with it a significant component of that. Relative to bookings, it will depend. Each item is a little bit different, relative to the resale, but for the most part on the resale of cabinets, that is going to be recognized as revenue when the install happens, so there will be a booking that comes into our bookings, and then within a twelve month period, the install or revenue recognition and cost recognition will occur down the road. The norm for sales, as you know, is ship in the quarter, revenues in the quarter and usually happens very short term. You will see some of these devices that are based on install showing up in our backlog and then rolling out of our backlog, but it will number in the six to nine month timeframe.

Got it. What's the size of the iBus software deal in this case?

I don't have that detail in front of me, but normally you probably would see it to be 10% of the total revenue of the deal.

Got it. One last question and I will jump off. On the Revenue Works side, any new update, any new contracts signed this quarter?

This is Zane. We did, in the call, in my comments, mention that there was one new Revenue Works client this quarter.

Got it. Thanks very much.

Our next question comes from the line of Jamie Stockton with Morgan Keegan. Go ahead.

Thanks, guys, for taking my questions. I guess real quick on that RevWorks deal, and Mike or Zane or whoever wants to take this, was that a hospital using your patient accounting system?

Yes, it was.

And do you feel like roughly that's a prerequisite for a hospital to look at RevWorks as a platform?

I don't think it is a prerequisite for our business model. In fact, it is actually -- I would view RevWorks as an opportunity for us to utilize some of our software solutions in that space and use -- bring in our patient accounting and that space as well, so it is not exclusive.

We wouldn't expect to just sell only to existing patient accounting clients. We will sell it as part of the RevWorks service offering, but that could get us into new places that don't currently have our patient accounting.

Okay. Zane, you mentioned the number of facilities that received their Medicaid EHR checks. I know those aren't the majority of the stimulus dollars that hospitals are getting, but do you think that for hospitals that maybe don't have their act together at this point as far as the stimulus is concerned, that that has gotten their attention? Have you seen any change in sentiment for some of the hospitals that are a little further behind as a result of those Medicaid checks?

Great question, Jamie. I think we're beginning to see that, so there are about 11 states that have confirmed plans for Medicaid space, and we're helping to educate the marketplace in that space. I would say there is not as much understanding of what's going on, but that's actually helping to drive some decisions as well.

Okay. And last question, Marc, on the bookings guidance. Is there anything lumpy in there that we should be expecting when you guys report next quarter?

No. I think that guidance reflects our view of the forecast and contribution across the board, and if there was something lumpy I'd expect that to be upside.

Thank you.

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

Thanks. Can you tell us what percentage of your customers have purchased everything that they need to hit stage 1 of meaningful use?

I doubt if we can tell you that.

Sean, that's actually pretty hard, because a lot of there are many of them that are going to hit stage 1 that may not have bought everything from us they plan to buy. And they're going to get there with non-Cerner reps in certain places.

What I would say, we're doing analysis with each one of our clients on meaningful use and helping them determine what they need to hit stage 1 and stage 2 as we believe it to exist today. So I can't give you the exact percentages. I can tell you we're in the middle of that process. The Medicaid element of this has accelerated some of that need to do that now, so we probably will be able to look at that on a going forward mode to give some additional insight, but we're going through that process right now with each one of our clients.

So if you can't ballpark it for us today, maybe we can get that from you next quarter? A ballpark?

I think the majority of our clients are looking at Q4 of 2011 as being their target for doing stage 1, getting into the next fiscal year of the federal government, and that the vast majority of our clients are comfortable they're going to get to that stage 1 level if they have been a client for any period of time. And the new ones we're working to get them there as well.

Okay. And second question, are you guys following what's going on, the Supreme Court reviewing the Vermont prescription data case, and in your view of that decision, I know there is no decision, that's been made, but are there any far-reaching implications for your strategy and how you -- in your business?

Yes, Sean, this is Marc. I would admit that I have not been keeping up with that case. Since there has been no decision, we wouldn't really have any comments until that time, so I can't really comment on it right now.

Okay. Thanks a lot.

Sure.

Our next question comes from the line of Stephen Shankman with UBS. Go ahead.

Great. Thanks for taking the questions. I guess in Q1 about 20% -- 26% of new bookings were from outside the core volume, and I think it was a similar number from this quarter. Wondering if you're seeing any changes there in terms of the mix over the past few quarters, larger hospitals versus smaller ones and specifically as it relates to the new footprint.

Yes, I think relative to the mix of size of clients that are kind of coming to market these days, it is pretty broad, I think.

This is Zane. We actually just came through our review of our business, and there is demand across all elements of the business, both in the small market, as we talked about, in that community market, and actually we're seeing the return of some larger IDNs into the marketplace who have made some decisions previously and are now getting uncomfortable with the technology provider they put in place, and that's a trend that we anticipate to continue is actually some of the larger organizations coming back into the market place and looking for somebody they believe can take them to stage 2, stage 3 and well beyond.

So are they coming back into the marketplace in calendar 2011 or would that be maybe next year?

I think that's actually part of my commentary is, I think this is a much broader marketplace than some had expected, that it would be a rush for meaningful use, and this will play out over the next several years.

We're starting to see them show up in our pipeline, and when they show up in our pipeline that usually means twelve months or so timeframe for them to make a decision and sign a contract, so I think we will probably look to see more of those beginning in 2012 but as Zane indicates, we think that actually can fuel activity after 2012 through 2013 and 2014.

Great. That's helpful. Switching gears, just in terms of the, I guess, SG&A and also R&D lines, should we expect a similar kind of step down as we go through the year like we saw in 2010?

Step down being relative to --

As a percent of revenue?

Percent of revenue? We're continuing to look for efficiencies. Certainly R&D is a very key element to our success, and continuing to invest in new things, but as we continue revenue, especially the levels we're growing at now, it is logical that the R&D as a percent declines a little bit over time, because we just want to make sure we're investing fully in all the opportunities we have. We think we can do that while still getting efficiencies on the G&A and R&D line.

Okay. That's helpful. Thanks very much.

Our next question comes from the line of Steve Halper with Stifel Nicolaus. Go ahead.

Yes, hi. Earlier in the call you talked about 50 clients, presumably IDN clients, that are using inpatient and outpatient. Are those customers using PowerChart Office, or are you including PowerWorks in that number as well?

Steve, this is Zane. They would be doing a combination of the two, depending on their strategy for their physicians.

Right. So there would be some element of PowerChart Office and PowerWorks depending on the size of the physician group.

Well, remember, Steve, starting with -- that's the same solution set regardless of whether it is PowerWorks or PowerChart Office. That's the same code but, yes, you could have -- they could run both. They could run one or the other depending on their strategies with their physicians.

Okay. That's helpful. And what about ambulatory on a stand-alone basis? What is going on in that market? Where does Cerner sort of slot in? Are you going for transactions outside of your inpatient base?

Yes, very much so. In fact the solution is competitiveness is very strong, and on a stand-alone basis, we're going after both larger practices as well as singular practices.

What have been some of the changes in terms of code development that have led to some of the success there, because PowerChart Office has been around for a while but was not really that successful at first.

We have -- this is Mike Nill. We have continued to make investments in our ambulatory physician application, and in fact over the last year there was significant investment made to improve the usability and workflow, and as a result, our competitiveness has dramatically improved in that space. I think many of the companies that survey our clients are showing statistically that it is improving as well, so we think we're making good progress there.

Great. Thanks.

Melanie, this is Marc. I think given the time we're going to cut off the questions, and I would ask Neil to see if he has any closing comments for us.

Great. Thanks, Marc. This is Neal. My job is pretty easy when you guys all just grill Naughton here on our business models and see if you can find the hole. I am going to give Marc a passing grade here. He did a great job.

So in summary, I think my view is probably going to be similar to yours. We're in a good strong marketplace. We're getting good activity, and we actually see the activity will extend from our install base, from our current clients, and we're highly competitive in the new clients that are entering the marketplace for acquisitions. Part of that new buying which just got discussed here a second ago is some of our dear competitors' client base because there is a window here where it is going to force a lot of decisions and there is probably not too many bases in great shape. We are in great shape,. We're not the only one, but there is a lot of people that put together not real strong companies over the last 20 years and there's kind of a strength test being applied here. Then you all got it, frankly globally because we have always focused on the clinical side, there is a strong marketplace outside the US, and you can kind of throw a dart at it and we can tell you the story what's happening in those countries, and for the most part it is good story.

We built this company through innovation. We have been working for -- I have been -- I'm the oldest one in the room here -- spent most of my adult life working on digitizing the core of healthcare. We are clearly articulating to you all of this activity in the first half of the decade. It is creating -- it's basically digitizing the content of healthcare, and we think there will be big fundamental changes outside of that. We have several ways of narrating that, those kinds of changes, and the concept of a new middle is one of those. I think we're demonstrating to you today here, too, that there is a great team, and there is -- this company has a lot of talent, and the talent is broad and deep. So we have a lot of -- a combination of experience, and we also have a passion to innovate. Those would be kind of my closing observations and comments, and with that I will wish you good evening. Thank you for your time.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.