塞納 (CERN) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to Cerner Corporation's fourth quarter 2011 conference call. Today's date is February 7, 2012 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, prospects, constitute forward-looking statements for the purpose of the Safe Harbor provision of the Private Securities 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, including Company's earnings release.

A reconciliation of non-GAAP financial measures disclosed in this earnings call can be found in the Company's earnings release filed with the SEC and available at www.SEC.gov and posted on the Company's website at www.Cerner.com. Under the About Cerner section, click Investor Relations then Presentations and Webcasts.

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

Thank you, Derek. Good afternoon everyone and welcome to the call.

I will lead off today with a 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 our Works businesses and 2012 imperatives. 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, is traveling today. Now I will turn to our results.

Our strong fourth-quarter results capped off a record year across all key measures. Bookings were very strong and exceeded the high end of our guidance range. Our income statement performance was excellent, with revenue and adjusted EPS above expected levels and continued margin expansion and strong earnings growth, and we had very strong cash flow performance.

Moving to the details, our total bookings revenue during Q4 was a record $899 million. Bookings exceeded the high end of our guidance range by more than $200 million and were up 44% from Q4 of '10. Bookings margin in Q4 was $755 million or 84% of total bookings. For the full year, bookings revenue was $2.72 billion, up 37% from 2010.

As Zane will discuss, the strength of business in Q4 spanned across all business models and included two ITWorks contracts and one RevWorks contract. Our bookings performance drove a 24% increase in total backlog to $6.11 billion. Contract revenue backlog of $5.4 billion is 26% higher than a year ago. Support revenue backlog totaled $706 million, up 8% year-over-year.

Revenue in the quarter was $615.6 million, which is up 23% over Q4 of '10. The revenue composition for Q4 was $220 million in system sales, $142 million in support and maintenance, $242 million in services, $11 million in reimbursed travel. The upside relative to our guidance was largely driven by higher system sales and strong services. For the full year, revenue grew 19% to $2.2 billion.

System sales revenue reflects 34% growth from Q4 of '10. This was driven by strong growth in licensed software, subscriptions and device resale, with the growth in these items slightly offset by flat levels of traditional hardware and sublicense software. For the full year system sales revenue grew 28%.

Services revenue was up 24% compared to Q4 of '10 and 20% for the full year with strong growth in both managed services and professional services. Support and maintenance revenue increased 7% over Q4 of '10 and 6% for the full year.

Looking at revenue by geographic segment, domestic revenue increased 21% year over year to $524 million. Global revenue was $92 million and grew 35% compared to the year ago period. For the full year domestic revenue grew 21% to $1.89 billion, and global revenue grew 7% to $309 million.

As a preview to the annual update of our detailed business model that we'll provide at our investment community meeting on February 22, I would like to provide you with a total revenue growth by business model for the full year 2011. Licensed software grew 21% to $325 million. Technology resale was up 39% to $246 million, driven by growth in device resale.

Subscriptions and transactions increased 28% to $136 million. Professional services revenue grew 21% to $550 million. Managed services increased 20% to $351 million. Support and maintenance was up 6% to $551 million and reimbursed travel was $45 million, up 38%. We'll go into more business model detail at our investment community meeting.

Moving to gross margin, our gross margin for Q4 was 78.6%, which is basically flat compared to 78.9% in Q3 and down compared to 81% a year ago. The year-over-year decline in gross margin was driven by the strong levels of technology resale that I discussed, as well as an increase in third-party services. For the full-year gross margin was 80%.

As we have noted in the past, while revenue mix can impact gross margins in any given period, we continue to drive operating margin expansion as I will discuss in a moment.

Looking at operating spending, our fourth-quarter operating expenses were $337.8 million before share-based compensation expense of $8 million. Total operating expense was up 15% compared to Q4 of '10 with the majority of the growth driven by an increase in revenue-generating associates in our services business.

For the full year operating expenses were $1.27 billion, up 11% from 2010. This compares to revenue growth for the year of 19%, reflecting strong operating efficiencies.

Sales and client service expenses increased 19% compared to Q4 of '10 and 13% for the full year, driven primarily from growth in managed services and professional services.

Our investment in software development increased 4% compared to Q4 of '10 and 5% for the full year. We expect to continue growing our R&D investments in coming years to accelerate innovation in areas Mike and Jeff will discuss. We expect to be able to do this with R&D still growing slower than revenue, so we maintain the leverage we have achieved from our R&D investments.

G&A expense increased 10% compared to Q4 of '10 and 11% for the full year driven by personnel and other expenses related to an increase in hiring and training.

Moving to operating margins, our operating margin in Q4 was 23.7% before share-based compensation expense and was up 160 basis points compared to Q4 of '10. For the full year operating margins increased 140 basis points to 22.2%. Going forward, we believe we can continue to expand operating margins 100 to 200 basis points annually through efficiencies across our business models and expense leverage.

Moving to earnings and EPS, our GAAP net earnings in Q4 were $91.2 million or $0.52 per diluted share. GAAP net earnings included share-based compensation expense, which had a net impact on earnings of $5 million or $0.03 per share.

Adjusted net earnings were $96.2 million and adjusted EPS was $0.55, which is up 26% compared to Q4 of '10. For the year, adjusted net earnings were $324.9 million and adjusted EPS was $1.87, which is up 26% from 2010.

The tax rate for adjusted net earnings was 35%, which is in line to slightly below what we expected. For 2012 we expect our effective tax rate to be 35% to 36% with the rate in Q1 likely being lower due to a favorable tax settlement.

Now I'll move to our balance sheet. We ended Q4 with $1.13 billion of total cash and investments, up from $1.09 billion in Q3. Total cash and investment include $775 million of cash in short-term investments, and $359 million of highly-rated corporate and government bonds with maturities over one year.

Our total debt, including capital lease obligations, is $127 million. Total receivables ended the quarter at $563 million, which is up $15 million from Q3. Contracts receivable, or the unbilled portion of receivables, were $91 million and represent 16% of total receivables compared to 19% in Q3.

Cash collections were a record at $638 million. Our DSO in Q4 was 83 days, which is down from 87 days in Q3 and Q4 of '10.

Operating cash flow for the quarter was a record at $168.5 million. Q4 capital expenditures were $29.2 million and capitalized software was $21.1 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was also a record $118.2 million.

For the full year, operating cash flow grew 20% to $546.3 million and free cash flow grew 31% to $358.6 million, with capital expenditures of $104.8 million and capitalized software of $82.9 million. Free cash flow represents more than 100% of net earnings for both Q4 and the full year, demonstrating strong earnings quality.

Looking into 2012, we expect an increase in capital expenditures compared to the low $100 million range we've seen in the last two years. Some of this will be driven by the construction of additional space at our new Kansas City, Kansas campus that is needed for our growing associate base. We do not expect this to have a material impact on our free cash flow as the construction will span multiple years, and we will also be receiving incentives that will offset a portion of the construction costs.

Moving to capitalized software, the $21.1 million of capitalized software in Q4 represents 28% of the $75.2 million of total spend on development activities. Software amortization for the quarter was $19.2 million, resulting in a net capitalization of $1.9 million or 2.5% of our total R&D investment.

Now I will go through the Q1 2012 guidance.

For Q1 revenue, we expect revenue between $565 million and $585 million, with the midpoint reflecting growth of 17% over Q1 '11. For the full year we expect revenue between $2.425 billion and $2.5 billion, with the midpoint reflecting growth of 12%.

We expect Q1 adjusted EPS before share-based compensation expense to be $0.48 to $0.50 per share, with the midpoint reflecting 23% growth over Q1 '11. For the full year we expect adjusted EPS between $2.20 and $2.30 per share with the midpoint reflecting growth of 20%. Q1 guidance is based on total spending before share-based compensation expense of approximately $335 million to $340 million.

Our estimate for the impact of share-based compensation expense is $0.03 in Q1 and $0.12 to $0.14 for the full year.

Moving to bookings guidance, we expect bookings revenue in Q1 of $560 million to $600 million. The midpoint of this range reflects 10% growth over Q1 of '11.

In closing, we are pleased with our strong results in Q4 and the full year, with all key metrics at or above our expected ranges including record bookings, revenue, earnings, and cash flow, and strong margin expansion. With that, I will turn the call over to Zane.

Thanks, Mark. Good afternoon everyone. Today I'm going to provide highlights of our sales results and cover marketplace trends.

Starting with our results, we had another quarter of record bookings driven by robust demand in our client base and strong competitiveness and new footprint opportunities. Our bookings revenue in Q4 of $899 million reflects 44% growth over last year and is at an all-time high. For the year, bookings revenue was up 37% to $2.7 billion.

As Marc mentioned, we signed two ITWorks contract and one RevWorks contract in the quarter. These contributed to the percent of our bookings from long-term contracts being 34%, which is slightly above historical levels. But recall that Q4 of last year also had two ITWorks contract and a RevWorks contract, so it had a similar mix.

These contracts were clearly not our only large contracts, as we had an all-time high level of 32 contracts over $5 million, including a record 19 over $10 million.

Another driver of the strength in bookings and revenue this quarter was strong results from our DeviceWorks organization. 2011 was a breakthrough year for DeviceWorks, as our clients' interest in using Cerner as a single source for connected devices increased, and more device manufacturers looked to us to be resellers because they recognize the value of our device connectivity platform and the strategic relationships we have with our clients.

We been saying for several years that DeviceWorks' can offset the flat to declining trend of traditional hardware sales, and we saw this play out this year as essentially all of the 39% growth in total technology sales in 2011 was driven by device resale. This strength came from broad sources including CareFusion Pyxis medication dispensing devices, RxStation, infusion pumps, beds and monitoring devices.

Another highlight for Q4 and the year was the traction we gained in the small hospital market with our CommunityWorks offering. Recall that community works is our SaaS offering for small and critical care hospitals where we leverage our hosting and service capabilities to provide a complete suite of clinical and financial solutions at a very competitive price. In 2011 we added over 20 new small hospital footprints and expect this to accelerate in 2012.

Moving to our physician solution, we had a strong Q4 that contributed to the best year in our history with ambulatory bookings growing 60% in 2011. I believe this strength is the result of enhancements we've made to our solutions over the past few years, coupled with the marketplace's desire to have an integrated solution across inpatient and outpatient venues.

Evidence of this trend is that we continue to partner with many of our clients in our installed base to extend our solutions to their employed and affiliated physicians. In 2011 alone, we've partnered with 42 of our large health system clients to offer physician solutions. In many cases our clients are displacing an existing ambulatory EHR supplier so they can move to our integrated offering. The recently announced expansion of our relationship with Adventist Health to include 130 outpatient clinics is a good example of this.

In addition to this example where we are replacing the ambulatory solutions of our primary inpatient competitor, we also displaced all the major best-of-breed ambulatory competitors at least once in 2011. We believe this trend will continue, as we have several large clients that chose best-of-breed ambulatory providers in the last three to five years that are now coming back to the market for an integrated solution.

Additionally, significant greenfields still exist in the market and we're well-positioned for this opportunity as well. Our competitive position in both replacement and greenfield opportunities will be further strengthened by our current focus on enhancing our solutions to improve the physician experience and productivity with PowerChart Touch and our Project Go initiative, which Mike will discuss in more detail.

Moving to our global results, as Marc mentioned, we had a strong quarter outside of the US as well with 35% revenue growth in Q4. After a slow start to the year, these strong results bring the full-year growth to 7%. Overall we continue to see gradual improvements in most global markets and we had strong years in Canada, Australia and the Middle East.

The strength in the Middle East included an agreement with Hamad Medical Corporation to digitize the entire public health system of Qatar. This agreement significantly expands our leadership position in the region and strengthens our position for other large opportunities.

In England, despite continued coverage of changes to the national program, we're continuing to execute. In Q4 our Choose and Book contract was extended and we expanded our relationship with two trusts. Going forward we believe we're well-positioned for growth in the UK as we expect more opportunities to sell directly in all regions.

Moving to the overall marketplace and our competitiveness, we gained share again in Q4 with 35% of bookings coming from outside of our core millennium install base. For the year, 32% of our bookings were from outside our base, which is up from 28% last year. We continue to see significant new footprint opportunities.

While many hospitals use their existing supplier to get to stage one of meaningful use, we expect many of them to switch suppliers as they face the rising bars for stage 2, stage 3 and additional requirements for a value-based purchasing, ACOs, and data analytics capabilities.

With two major installed bases largely up for grabs due to challenges with transitioning to new platforms, and uncertainty around their ability to keep up with future requirements, we believe we're still in the early stages of a multiyear market share shift. Since only one competitor presents a consistent challenge, we have a great opportunity to gain a significant share of those vulnerable installed bases in the coming years.

I'm also pleased that we had our best win rate against our single toughest competitor in 2011, and I believe this will continue to improve for two reasons. First, we have already enhanced and are making significant incremental improvements in the one area that has historically led to their success -- the physician experience. We now offer a very competitive experience physician experience and believe our efforts this year with Project Go and PowerChart Touch will change the game in our favor.

Second, we strongly believe we're the smart choice for anyone looking beyond the early stages of meaningful use. Our investments in interoperability, data analytics and our Healthe Intent platform provide a meaningful differentiator against a company that has a platform that makes interoperability and data analytics very challenging.

From a macro view, while we recognize healthcare is likely to be targeted as part of the solution to the US deficit, we believe the stimulus plan will remain intact and other programs, such as value-based purchasing, will drive ongoing IT adoption. While some level of cuts to our clients' funding are likely, we expect any future adjustments to be tied to quality and outcomes which will make IT adoption essential for organizations looking to remain competitive.

In summary, I am very pleased with our record results in 2011 and I think we're well-positioned for strong a 2012 and beyond. With that, I will turn the call over to Mike.

Thanks, Zane. Good afternoon everyone. Today I'm going to discuss ITWorks, RevWorks and Cerner's areas of focus for 2012.

Let's start with ITWorks, which had a great Q4 that included two new ITWorks clients, bringing our total to nine. One of them is a long-term client that chose to expand the relationship with Cerner by adding CernerWorks hosting and ITWorks.

The second client is brand-new to Cerner and chose Cerner to displace their existing EMR provider and to provide hosting and ITWorks services. This is a second example of ITWorks being part of a new client win, and demonstrates that ITWorks is not just something we sell into our base. But it's also part of our competitive differentiation.

The success of our existing ITWorks clients is a key factor in the decision-making process for potential clients. Future clients can directly observe the speed of progress against clinical roadmaps and they can easily conclude that ITWorks alignment with Cerner is very powerful. It is the best way to accelerate their path to meaningful use and to ensure compliance with future regulatory requirements.

Another noteworthy observation about ITWorks is that almost all of our ITWorks clients have executed some form of scope expansion since their initial contract. In total we had over $50 million worth of scope expansion contracts in 2011. This activity proves the benefit of the tighter alignment that is created with ITWorks and is evidence that there's still room to grow after the initial ITWorks relationship is established.

Moving to RevWorks, we also signed a RevWorks client in Q4. This marks our fourth RevWorks client and is our first critical access hospital that chose RevWorks. The signing was an existing ComunityWorks client that is already aligned with a suite of clinical and revenue cycle solutions. The RevWorks relationship allowed them to advance their current system and deploy new capabilities to optimize revenue and generate cost savings.

In addition to adding a RevWorks client, we also had a great deal of success in 2011 with clients increasing adoption of our revenue cycle solutions and services that can become the foundation for a broader RevWorks relationship.

In total, our revenue cycle bookings more than doubled over 2010 levels with the strength driven by patient accounting, access management, care management and health information management. We also continue to execute operationally, and in 2011 we brought Patient Accounting live at 31 hospitals and 95 clinics. We now have a total of 76 hospitals and 365 clinics live.

Looking ahead we remain confident that Revenue Cycle will be a big contributor to a longtime growth long-term growth. We're building a good foundation in our installed base and are increasing penetration of core Revenue Cycle solutions and establishing strong examples with our initial RevWorks clients.

We also believe that as the industry shifts from the current volume-based reimbursement model to a value-based quality model, providers will increasingly look to clinical solution providers that can offer integrated Revenue Cycle solutions versus relying on standalone solutions.

In summary, we remain bullish about the outlook for all of our Works offerings. We believe strongly that if we provide high-quality services that deliver superior value to our clients, these offerings will create an outstanding value proposition and client adoption will accelerate. The key element that makes these offers compelling is that they do not require incremental spending by our clients. They are just shifting existing spending to Cerner and getting better performance for the same dollars.

We have proven this model with CernerWorks over the last decade and now our new Works offerings are following the same pattern. Before handing the call over to Jeff, I want to discuss our 2012 imperatives that I recently shared with our clients, as I think they are relevant to everyone on the call as well. The imperatives are -- drive meaningful use adoption, dramatically improve physician experience with our solutions, and powering population health management.

First, meaningful use continued to be a very powerful driver across our client base in 2011 and will continue to be the focus of significant activity in 2012 and beyond. By the end of 2012, the majority of our clients will have attested for stage 1. The meaningful use wave activity, combined with ICD-10, will require our entire client base to migrate to our current version of software, which is a big undertaking, but also very positive from an ongoing support standpoint.

In the process we will significantly impact workflows and activities of our clients' physicians, and it is imperative that we make this a smooth process and provide the best experience possible. This leads me to our second imperative; dramatically improve physician experience with our solutions.

Meaningful use is driven and will continue to drive physician adoption at unprecedented levels. We believe we have the best underlying technology to support meaningful use, and with the acceleration of physician adoption we continue to increase our focus on physician productivity and physician experience.

During the health conference in 2011, Neil launched Project Go and PowerChart Touch. The core message and driving principles behind these efforts are to make the solutions fast, smart and easy. We're focused on speeding up workflows, reducing clicks and ensuring our solutions provide each user with the information they need at the right point in the workflow in the context of the person, condition and venue.

We're building applications that require limited training, and support the natural movement of the user throughout the day and across the tablet, desktop and phone. In short, we're focused on enabling healthcare delivery anytime and anywhere.

Meaningful use is just but one set of requirements in a growing wave of measures and mandates that will continue to impact our clients in the future. Cerner's focus is to future-proof our clients' organizations by providing the technology to withstand changes to reimbursement models and the associated quality and regulatory reporting requirements.

This brings me to our third imperative for 2012, powering population health management. The current narrative uses terms like medical home and accountable care organization. Our population health management solutions will help our clients exchange and aggregate clinical data to support the advanced analytics required to predict and prescribe the patterns of care that deliver the highest quality outcomes at the lowest cost. This is where our competitive differentiation begins to widen.

In summary, we executed very well in 2011 and we're set up for 2012 to be a year that includes significant growth in our client adoption and substantial advancements in Cerner's capabilities and competitiveness. With that, I will turn the call over to Jeff.

Thanks, Mike. Today my comments are going to pick up where Mike left off and expand on how we're getting ready for the second order effects that are emerging as health care is digitized. In 2011 we made good progress on this front and our focus in 2012 on future-proofing our clients' readiness for measures and mandates, as well as facilitating population health management, is a continuation of the progress.

As we have discussed, we are building a metadata layer agnostic to the source EMR to better position our clients for the increasing use of quality standards, performance measures, and managing the health of populations. We call this layer Healthe Intent and 2011 was a foundational year for this platform.

In just over a year our chart search efforts went from a nascent offering to having 115 clients engaged. We are currently adding about 6 million documents and 150 million results on a daily basis, quickly building foundational data for the Healthe Intent platform.

There are several differentiators when comparing the Healthe Intent platform to other attempts to aggregate and analyze data. Interoperability is a key one. By being EMR agnostic, we can operate in the reality that not all information will come out of a Cerner source system.

We have already proven leadership in the area of interoperability with our Cerner Network and Health Information Exchange offerings, which create better clinical integration and coordination of care by facilitating secure electronic flow of data between hospitals, physician practices and other stakeholders regardless of the EHR system being used.

We exited 2011 with approximately 100 million clinical and financial transactions being sent across this network each month. This is double the level of transactions from a year ago.

Another differentiator of Healthe Intent is we were able to capture research, evidence and claims data that, when combined with real-time clinical data from the EHR, significantly enhances the power of the platform. We can be predictive and help identify risks as they occur so care plans can be changed, versus just reporting on them after it's too late.

A key element of our ability to be predictive is the deployment of agents across the Healthe Intent platform. Concurrent with the rapid growth in data being captured on our platform, we're deploying sophisticated machine learning algorithms to support mapping of clinical concepts and clinical decisions to support agents such as sepsis.

And to advance this progress we recently launched CernerMath, which is an initiative aimed at accelerating our ability to discover and develop clinical agents using a hybrid of published evidence and our Health Facts research platform. These tools will be critical to our clients as the healthcare landscape evolves to having payments tied to quality, outcomes, and the ability to manage the health of populations.

The dynamic nature of these changes to reimbursement structures will require the ability to quickly adapt to new requirements. As a result, we believe our cloud deployment model is important because we can help our clients be ready for the next requirement without major upgrades or implementation projects.

In closing I would remind you of the Wednesday investment community event at HIMSS. As Zane, Mike and I have outlined there is a lot of innovation coming to the surface, not only in the EMR and physician space, but also in interoperability, population management, and new care delivery models beyond the enterprise.

We will be using this year's event to formally launch several of these new solutions. We made great progress in 2011 at building a foundation that will help future-proof our clients while also positioning Cerner for the next wave. Now, I would like to open up the call for questions.

(Operator instructions) Jamie Stockton, Morgan Keegan.

Yes, thanks for taking my questions. I guess maybe the first one, Zane, as far as stage 2 is concerned, do you guys have any expectation for when the rules are going to come out or be proposed, and then maybe when demand related to that is really going to kick off?

Sure, Jamie. We anticipate the final ruling coming out here by the end of February. And obviously we've been working based on the drafts as they exist today. We expect a final ruling here in February.

We're seeing demand based on stage 2 today mostly in the new business area where you're seeing clients that are thinking about making changes after they get to stage 1 on either an ED system or a competitor's element, but don't feel good about where they are headed for the future.

The other piece of that is you will see significant opportunity for us in our existing client base around a couple of particular areas that will drive both the quality reporting analytics, and then there's some areas around physician documentation and medicine administration that will provide opportunities in our core client base as well. So we would anticipate, once those are finalized, that will help drive additional demand.

Okay. And then I guess maybe Marc, it looks like the service expense base grew a fair amount sequentially during the quarter. Obviously you guys are signing more outsourcing deals, but are you hiring a fair amount there ahead of some of these deals? If you could give us any color on that that would be great.

Yes, it is twofold. We do have -- obviously when we have ITWorks deals get signed, we pull those people into our services organization and that is a quick bump of a number of people that hits that line right away. We've also been hiring aggressively during 2011 based on our backlog and pipeline of work that we see for primarily implementation services.

So, we've been adding costs, when we get to our analyst day and investor meeting at HIMS, we'll talk a little bit about the contribution margins you're seeing from that business. And one of the things that we're proud of is the level we're driving from that business in a year where we actually incurred a bunch of expense bringing people on, getting them trained. But now all those people that we brought on are ready to go for 2012.

We don't expect to hire as many people for '12. It will be dependent on what the activity is. If the activity continues to increase we'll certainly hire a certain level. But I think we're really well positioned to get those people billable and out on jobs.

So that's the expense increase you saw, both from the ITWorks and from bringing on people that we're getting trained and ready to go out in the field.

Thank you.

George Hill, Citigroup.

Hey, good afternoon guys and thanks for taking the question. Marc, I want to follow up on one of Jamie's points. Did I hear you right that gross margin in the quarter deteriorated a bit on an increasing mix of services?

And then I thought I understood your comment in the last question to be that you've brought on a bunch more people in anticipation of new services business coming online, plus other associates that get put into the field. Should we then think of gross margins as having the ability to expand again in 2012 as opposed to the deterioration we saw in the last two quarters?

Well, the key for the gross margin level, there is two components. The key component clearly is our DeviceWorks and the resale of those devices. The higher component of that and the higher costs and the lower margins is clearly the primary driver.

The statement relative to services is basically for RevWorks and people that we bring in. And so the RevWorks deals, we didn't hire the people directly. We actually -- they remain employed by the health system, but we are basically hiring them as consultants outside of Cerner. So those costs go into our cost of goods sold to get to our gross margin. So it's those two elements.

And clearly we had a great year, so there's going to be an element of higher commissions that will go into that cost line that gives gets us to gross margin. So kind of in a decreasing order those are the three elements that impact that. We actually continue to see those things to be going forward, so we think that the level that you've seen in the last couple of quarters is an appropriate level.

And obviously I would point out that relative to our operating margins, we were still successful in growing our operating margins even with some of the lower gross margins. We expect to continue to be able, at these kind of level of gross margins we expect to see going forward, as in Q3 and Q4, to continue doing 100 to 200 basis points growth at the operating margin level.

So, we're very comfortable with that. We think gross margins are kind of at a fairly consistent level for a period here. And that is all right with us.

I appreciate that color. And then maybe a quick follow up for Mike. Mike, it sounded like with respect to ICD-10 and the rollout of new financial software packages, there doesn't seem to be a new license opportunity for people who were on service and maintenance. But it sounds like you might be able to take a service and maintenance increase on that. Did I hear that right?

Yes, that is correct. We expect there's going to be a significant services opportunity for us as our clients move through ICD-10 and try to control their revenue and maximize the potential there. So we see an opportunity for us in the future.

I appreciate the color. I will hop back in the queue.

Glen Santangelo, Credit Suisse.

Thanks a lot. I was wondering if I could just ask a quick question on Health Information Exchange marketplace. You've clearly discussed this in some detail in the past. And I know you have had some success on the private side of things, but maybe could you give us an update in terms of the public side of things?

I know you mentioned obviously some of your competitors maybe have issues with interoperability. Doesn't seem like that is an issue for Cerner, but could you maybe give your assessment of that marketplace and how we maybe evolve from here?

Yes. I guess it's a wide variety of options out there. Starting back at the stimulus level, every state has to stand up or come up with an exchange alternative. And so if you start at that level, you will see a variety of states trying to actually invest in technology and have their own offering for the broader public, to states that are just certifying or coming up with a short list of named, existing, what you would call private networks that they're going to sponsor or certify.

So, at the macro level every state has an objective to go complete and stand that up to get the dollars associated with it. At the federal level, the ONC is also driving a fair amount of activity trying to push what they call the Direct Project, which initially is messaging. And that is something Cerner's been very heavily involved in and contributed well over half of the open source to that effort.

At the individual Cerner existing client level, really anybody that has more than one facility or more than one care delivery venue is creating their own private network as well. So I think if you look at other industries, whether you're wanting to look at telco, cable, all of these kind of follow a similar pattern of -- there will be a lot of these networks to begin with. And then there is likely to either be consolidation or the standards will take over to where it is more plug-and-play.

But right now, it is a relatively chaotic environment driven by meaningful uses requiring you to be able to share. And so it is almost a ZIP code by ZIP code thing to answer that question.

Okay, well thanks for the comments. Maybe if I could just ask one quick follow-up question on stage 2. I know we're sitting here waiting for the criteria to be announced. And obviously maybe we'll see a pickup in demand after that criteria comes out.

But my question is more around the delay of it. Are you seeing any changes in your customer's behavior, like a willingness to maybe the switch vendors or pursue a different strategy kind of given the delays in getting to the stage 2?

This is Zane. I think it's been nothing but beneficial to us in terms of the delay of the stage 2 enforcement elements of it. It's allowing some of the market places, some of the platforms, as we discussed that have either been sunsetted or are struggling, some of our competitors' platforms that are struggling. It's allowing our clients the opportunity -- and prospects the opportunity to go back and take another look at what their strategy should look like.

I appreciate that, and this is my last question and I will jump off.

Hey Marc, the Company is sitting with over $1.1 billion in cash now. I know in the past we've talked about potential acquisitions or small ones, and potentially trying to gain access to their installed base. But the Company seems to be doing a good job of winning market share in its own right. So what would you foresee the uses of those cash a couple of years down the road?

Well, I think the opportunity to do acquisitions is, regardless of whether it is market share or interesting technology that we could bundle with (technical difficulty) Millennium is going to increase. I think in an environment where increasingly the enterprise delivery systems, from a technology standpoint, are going to be the winners, there's going to be a lot of interesting niche technology whose owners as a company are not going to really have a long-term future ahead of them. So we think there is a lot of opportunity to go be acquisitive in an appropriate way.

I agree with your comment that market share purchases, we talked about that having a useful life. There could still be something there that would be interesting. But we are being very successful into other bases. So we're going to continue to hold the cash, focus on ways that we can invest it.

I think there is going to be a lot more opportunities than we've talked about publicly that can come up. And as a cash buyer in this market, given the private equities having difficulty getting access to capital, I think we're in a really good position to take advantage of what we think would be a buyer's market coming up.

So we're going to keep the cash. We're going to keep looking for opportunities and ways to invest it. And certainly over the long-term, if we don't find a better way to use that money to drive benefit to our shareholders, we would look at returning it to the shareholders in some form or fashion. But I think certainly over the next year or two there are going to be opportunities that I want to continue to hold that cash balance.

Okay, thank you.

Sebastian Paquette, Goldman Sachs.

Thanks for taking the question. So my first question is on the performance analytics market. And while you're giving chart search away for free right now, I'm wondering when you're expecting to GA your excess re-admissions product. And any initial thoughts on pricing and maybe what proportion of your clients you might expect to purchase the software? Thanks.

This is Marc. I think it's probably a little bit early to go into a lot of detail. Obviously our focus right now is getting search out there, getting the infrastructure and the delivery system created. Getting our clients used to accessing the cloud for data, which is a little bit different from what they've done historically.

I think certainly we'll start talking about that at the appropriate time. But to try and go into pricing and those types of things at this point is a little premature. I don't know that we've really nailed that down.

And certainly our expectation is to have a portfolio of those solutions available. And obviously that will impact the pricing as to how we bundle those. So, a good question; it's just probably a little early for us to be able to provide a really definitive answer yet.

The only thing I would add is that you will see us demonstrate and show some of the other things in that portfolio at HIMS. So you'll get a better feel for what the next set of solutions that aren't free look like.

Okay. If you take a look at the latest CMS data, about half of the eligible hospitals in the US have not yet registered for the stimulus program. I'm wondering, assuming that not all of these unregistered hospitals have fully implemented HCIT, I'm just wondering from your vantage point what you would attribute this lag to, compared to earlier adopters. And then how would to see this later adopter market segment start to show up in your bookings? Thanks.

This is Zane. I think there's a couple of things. I think first off there's the part where the change in some of the incentives in terms of there not being an incentive to go early created an environment where some of the hospitals waited for a year to actually attest. So we anticipate in our own client base, a very significant portion of our own client base will attest in 2012.

The other piece of that is this later adopter element where I think there was some feeling of whether the government would continue to fund it. As checks have gotten written, then I believe those clients are coming into the marketplace and saying they want their share as well. So what they are avoiding was the concern over Cash for Clunkers and clearly that did not come about. We are seeing our clients receive their checks, and we are well into the hundreds of millions of dollars.

This is Marc. One other thing that is kind of interesting is, we discussed the strategy of healthcare to get to stage 1 of meaningful use with an existing supplier. So you're going to see that list probably, at the top of it, Meditech and some other companies that we talked about that might be challenged, having gotten their clients to stage 1. We think those are additional opportunities.

So, just because someone is on that list doesn't mean that they aren't a future client for Cerner Corporation. So I think it's -- you've got to look at that as it is interesting data, but it doesn't mean those people have made a final decision.

Got you. And one last question here, going back to the additional hirings in 2011. Am I in the ballpark assuming that there were roughly 1000 additional associates hired on just over 8000 total base as of the last 10-K filing? And I am wondering, do you expect to continue that pace of hiring in 2012? Or should you start to see that hiring pace decline? Thanks.

Yes, I think relative to headcount. I think when we file our next 10-K you will note that we hired almost 2000 people net in 2011. So I think that was a huge year for hiring. In 2012 the opportunity and we'll continue to hire.

Will we add 2000 people? I don't know if that's going to be the case. But we are fortunate to be in a position and have a training program set up where we can bring new people in on a very just-in-time type of basis, where we're not having to put them on the bench for a period of time. We can sign a contract, know we're going to need resources in 90 to 180 days and then bring those people on board, get them trained so that they are available to do that.

And, clearly, as we do more of the ITWorks businesses we re-badge those people to Cerner, so in that case there will be a chunk of associates that join Cerner kind of en masse. So a part of that hiring that is going to approach 2000 for 2011 relates to the ITWorks transaction that we did during that year. So, there's two elements that are really driving that as I talked earlier -- services business and IT works. But I think certainly if that is something that you're interested in doing as a profession, our resume factory is open.

Thanks.

Donald Hooker, Morgan Stanley.

Great, thank you. Good afternoon. So I was intrigued by the momentum you guys have picked up in the ambulatory side. I know that is a small part of your business.

I was wondering if you could provide a little bit -- just curious in terms of -- to what extent of that growth is replacing other vendors. You commented there was some rip and replaces as you create more integrated healthcare IT systems. Is a large percent of that growth rip and replace or is a lot of it greenfield?

This is Zane. On the large systems, those are typically a replacement marketplace. So you see that where you have our integrated delivery networks. They typically have some sort of selection. Those are typically a rip and replace.

There is a large amount of greenfield opportunity in the smaller physician practices out there as well. So there is -- it's divergent based on where you are in the demand curve.

But you are basically marketing those ambulatory products almost exclusively through your inpatient customers?

Actually, we're not. We're in both spaces; very active in both.

Okay. And I will just ask one more. I was also intrigued by the pickup in the international revenues. I guess for the past couple of years international has been -- or global has been somewhat dilutive to your topline growth rate.

As you look into next year, and you gave some guidance there, is the international growth going to kind of catch up to the overall consolidated growth? I saw you had a big deal in Qatar, and it seems like you have some momentum there. Can you talk about the geographic mix for 2012?

This is Marc. I think it should be probably similar to what we saw in 2011. Certainly it's based on the economies of the countries. We certainly see -- saw in Europe in that area they're not rolling out a lot of RFPs for new projects because of the lack of funding. The UK we're doing okay in, but there's not a lot of new projects coming online. We're well-positioned when they do come online.

But when you look at the Middle East, you look at Australia, you look at Canada, those economies are doing well and they certainly are helping contribute to getting some growth. In our global business on a year-over-year, basis I think probably the slight growth that we see in 2011 over 2010 is more -- as much a factor relative to an easy comparable as it is to really great performance. But I think we've gone in saying we hope to see some -- a little bit of growth in that business.

I think when you look across some of those regions there are potential for some significant procurements. Obviously Qatar is a good example of getting countrywide support from a health system perspective. There are larger countries, certainly, in that region that would look to do something similar.

So I think it's going to -- global, I don't think it's certainly going to reach our overall revenue growth level that we saw as a Company, but I don't think it's going to be a significant drag. If we can continue moving that forward into mid to upper single digits, we would be okay with that for next year.

Okay, thank you.

Atif Rahim, JPMorgan.

Hi, thanks. If I could just follow up a little bit on that prior question about the ambulatory market, you've talked about it for a couple of quarters now. But any way you can provide us some tangible metrics on how large your footprint is there, what percentage of bookings it might be contributing, how you're actively going after the small market since I think you mentioned that?

Yes, this is Marc. Relative to what it contributes, as we've indicated it is a very small component of our total revenue profile. I think if you try to go say what kind of market share we have relative to all of our health system docs and all the independent docs that we pull up, it's going to be in the single digits as a percent.

So I think that overall it is a good market, going to need IT. We don't have a big footprint in it. We have a nice footprint. We're pleased with where we're at.

But the growth of that business on a percentage basis, while not being a huge mover of the meter on the topline overall for the company, has got a great future potential. So I think -- I'm not sure if I'm giving you that good of data. But fairly small market share here, expect to continue to grow, and we're going to be pushing both on the health system side and going basically door to door, if you will, and fighting for the individual providers who to date are still really in our mind a greenfield opportunity.

Got it. So probably view it as a tailwind but not necessarily moving the needle at this point. Separate question, I guess staying on that footprint, what is your footprint like on ITWorks or RevWorks just in terms of total hospitals at this point?

Really small in total. We have 11 ITWorks clients at this point - actually nine ITWorks clients at this point. So relative to the opportunity just in our base, we think that that has the opportunity to expand -- I don't know that it's exponentially. But we would expect by the end of the decade to have 50 to 70 of those clients up from the nine we have today, and that would not be getting all of our client base.

The interesting thing that we did not expect to see in the ITWorks business is not that only are we selling to existing clients to kind of be there at that next step to getting really going fast to getting an all-Cerner shop, we're seeing a lot of new clients wanting to go directly into an ITWorks relationship because they go visit clients that are existing clients that have it. They see the benefits of us managing all of their technology from the outset and fixing some of their problems that they're dealing with at this point.

So I think that gives you a little bit of a view. I think clearly when we have our investor day we're going to give you a view of ITWorks and the future view that we did last time. We've refined that a little bit, so we can give you a 2020 outlook of what some of those businesses look like. But today that's very good progress to date on something that is very new for us, but we think that has a lot of opportunity for growth.

One interesting comment around the new client ITWorks that we added this quarter is that that was actually a selection that was made by -- a competitor's selection about 15 months ago and they failed at moving forward. And basically our ITWorks model being so prescriptive and having such a high level of both delivery of results and client satisfaction drove the new business and to make a change in a platform within 15 months. So it's proof of our theory and what we're seeing in terms of -- we think the market place is subject to change and up for grabs.

That's very interesting color, helpful. Thanks. One last clarifying question, if I could. Did I hear you say the bookings mix from the long dated contracts was about the same at a 34% on a year-over-year basis?

Yes. You've probably seen us around 29% on average if you go across. In this quarter we were at 34%. So slightly over that but it's kind of than that (multiple speakers)

The answer on Q4 is yes.

All right, thanks very much.

Ryan Daniels, William Blair.

Good evening guys. Thanks for squeezing me in. Maybe for Zane and Marc, a lot of discussion on the call tonight about the move towards more shared savings models and increasing technology demands with stage 2, stage 3 meaningful use and how that will create opportunities.

I'm curious, number one, are you seeing that as the stimulus checks are cut and some of the hospitals get those stage 1 meaningful use dollars, is that when they're coming back to the market in the pipeline? And if so, is that a trend that you think will accelerate in 2012 as more of the dollars start to flow to that client base?

We are seeing where clients are interestingly using those dollars to actually procure things that even aren't related to stage 1, stage 2 or stage 3. In fact Lab had one of our best years as a lab company. And Lab is not specifically in the stage 1, stage 2, stage 3 elements.

But what we've seen is clients come and use those meaningful use dollars to come back and round out their solution sets in other ways. So, yes, clearly it's adding capital into the system as they have seen those dollars.

What about as you look at the new footprints? I mean if you look at the potential of disruption or turmoil in the market place and getting net new wins in the acute market, are you seeing a direct correlation to some of these clients getting meaningful use dollars and then making the switch to Cerner? Is it not that directly correlated?

They are directly correlated. So that's why you're seeing the stage 1 attestations coming forward, and they're using those dollars to go out and make selections which will carry them for the long haul past stage 1.

Okay, that's helpful. Another follow-up there, just a lot of talk again about the ACOs and population health management. Obviously a big piece of that will be the care delivered outside of the ambulatory and acute markets, so post-acute care, LTACs, etc.

Are you seeing a pickup in demand there? I know you had a nice contract with HealthSouth. But are you seeing more activity in the non-acute market as well, given all the things that are taking place on the reimbursement front?

Yes. Actually I have been engaged in a fair amount of activity and we are the best positioned of any of the major players in this space, and particularly our single primary competitor in both the homecare, hospice and long-term care space.

Okay, great. Thanks for the color guys.

Derek, why don't we take one more question?

Sean Weiland, Piper Jaffray.

Thanks for squeezing me in. I want to go back to RevWorks. Did I catch you right? And did you say that you took 31 hospitals live on Patient Accounting in the quarter, or was that the year?

Yes. That's correct.

That's correct (multiple speakers)

The quarter and (multiple speakers)

For the year.

For the year, for the year.

That was for the year, okay. All right; that makes sense. Can you talk about what that competitive landscape looks like when you are competing for the Patient Accounting deals? And within your base of customer, who holds the largest footprint of Patient Accounting systems within the Cerner client base?

What we see is many of our new clients are selecting Cerner Revenue Cycle as part of their selection process up front. Many if not most of our new footprints include Revenue Cycle as part of that up front. And so you are competing at the broad-based enterprise level, clinical and financial systems. In our existing installed base, probably Siemens and McKesson would be the largest other financial systems providers, current state.

Okay. And do you see -- would you say that there is an upper grade cycle, overall industry-wide upgrade cycle underway there? How do you think about that market?

We feel really good about that market, that there's going to be a good opportunity there. There will be some elements around ICD-10 which may cause that marketplace to not accelerate as quickly as we would like to see it, and think that may happen around some of the accountable care type elements which will drive a lot of revenue cycle selections in our minds. But ICD-10 has to be factored into the overall timeline there.

Sean this is Marc. I think certainly with ICD-10, with pay for performance, all of those elements over time, people are going to want a clinically driven revenue cycle. And so we would expect our client base to over time evolve to a Cerner Patient Accounting system, Cerner Revenue Cycle.

A lot of our clients today our existing clients might not have us in all their facilities. But it's certainly interesting that all the new clients, a lot of them are purchasing to have a single platform to run both their financials and their clinicals. We think that is probably the trend going forward.

Okay, thank you. And just unrelated question, Marc, any thoughts on the outlook for bookings growth in 2012?

Yes, I think certainly in Q1 we're looking at double digit growth relative to bookings. I think it's important from a bookings perspective to realize we just grew bookings 44% last quarter, $200 million over our guidance range. Q1 is always a seasonally lower quarter, so double digit growth in a quarter that the prior year had a 30% growth is, we think, pretty good guidance. It is absolutely our expectation to grow bookings in 2012 over our 2011 levels.

Okay, thank you very much.

Thank you all for your attention. I appreciate it. Have a good evening.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.