塞納 (CERN) 2012 Q3 法說會逐字稿

Welcome to Cerner Corporation's third-quarter 2012 conference call. Today's date is October 25, 2012, and this call is being recorded.

The Company have asked me to remind you that various remarks made here today by Cerner's management about future expectations, plans, perspectives and prospects constitute forward-looking statements within the meaning of the federal securities laws. Information contained in words intended to identify such forward-looking statements and factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading, Risk Factors, in Cerner's Form 10-K, together with other reports that are furnished or filed with the SEC.

Please see the Company's earnings release that was furnished to the SEC today and posted on the Investors section of Cerner.com for a discussion of the risks associated with forward-looking statements as well as reconciliation of non-GAAP financial measures discussed in the earnings call.

The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

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

Thank you, Christy. 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 operations and provide an update on our corporate imperatives. Jeff Townsend, Executive Vice President and Chief of Staff will follow Mike and discuss strategic initiatives. Neal Patterson, our Chairman, CEO and President, will be available during Q&A.

Now we will turn to our results. We delivered excellent results in the quarter, and we continue that with a very positive outlook. Bookings, revenue and EPS exceeded our guidance range, and we again delivered very strong cash flow.

Moving to the details. Our total bookings revenue in Q3 was $770 million, which is a record for a third quarter. This reflects 18% growth over our very strong results in Q3 of 2011 when bookings grew 31%. Bookings margin in Q3 was $671 million or 87% of total bookings.

Our bookings performance drove a 20% increase in total backlog to $6.79 billion. Contract revenue backlog of $6.06 billion is 22% higher than a year ago. Support revenue backlog totaled $724 million, up 5% year-over-year. Revenue in the quarter was a record $676 million, which is up 18% over Q3 of 2011.

The revenue composition for Q3 was $230 million in system sales, $154 million in support and maintenance, $278 million in services, and $14 million in reimbursed travels. System Sales revenue reflects 22% growth from Q3 2011. This was driven by record Q3 license sales as well as continued strong growth in device resale, traditional hardware resale and subscriptions.

Moving to Services, total Services revenue was up 19% compared to Q3 2011 with strong growth in both managed services and professional services. Support and maintenance revenue increased 11% over Q3 of 2011.

Looking at revenue by geographic segment, both domestic and global revenue increased 18% year-over-year, with domestic growing to $591 million and global coming in at $85 million.

Moving to gross margin. Our gross margin for Q3 was 77.9%, which is up from 76.9% in Q2 and down slightly from 78.9% in Q3 of 2011. The sequential increase in gross margin was driven by stronger software, and a year-over-year decline was driven by slightly higher third-party maintenance costs.

Looking at operating spending, our third-party operating expenses were -- are third-quarter operating expenses, pardon me, were $369 million before share-based compensation expense of $10 million. This is a year-over-year increase of 14%, which is well below the growth of our revenue and gross margin and reflects ongoing operating leverage.

Sales and client services expenses increased 17% compared to Q3 2011, driven by an increase in revenue generating associates and our services businesses. Our investment in software development was up 7% compared to the year ago period. As we have discussed, we have been hiring in our R&D organization this year and expect our R&D investments to continue growing, but the growth will still be moderate compared to expected revenue growth.

G&A expense increased 8% compared to Q3 of 2011. Moving to operating margins, our operating margin in Q3 was 23.3% before share-based compensation expense, and was up 90 basis points compared to Q3 of 2011, which is just below our targeted range due to continued high levels of tech resale revenue and slightly higher spending in the quarter. However, we still generated earnings upside as this level of margin expansion, combined with our higher than expected revenue, still drove operating earnings growth of 23%.

Moving to net earnings and EPS. Our GAAP net earnings in Q3 were $99 million or $0.56 per diluted share. GAAP editors include share-based compensation expense, which had a net impact on earnings of $6 million or $0.04 per diluted share. Adjusted net earnings were $105 million and EPS was $0.60, which is up 25% compared to Q3 of 2011. The tax rate for adjusted net earnings was 34.8%, which is within our expected effective tax rate range of 34% to 35%.

Now I will move to our balance sheet. We ended Q3 with $1.5 billion of total cash and investments, up from $1.39 billion in Q2. Total cash and investments include $1.04 billion of cash and short-term investments and $463 million of highly rated corporate and government bonds with maturities over one year. Our total debt, including capital lease obligations, is $197 million. Total receivables ended the quarter at [$542 million], which is up $50 million from Q2. Contracts receivable for the unbilled portion of receivables were $86 million, and represent 16% of total receivables.

Cash collections were $662 million. Our DSO in Q3 was 73 days, which is down from 87 days in Q3 of 2011.

Operating cash flow for the quarter was $182 million. Q3 capital expenditures were $52 million, and capitalized software was $26 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was $105 million.

Going forward we expect quarterly capital expenditures to remain in the $45 million to $60 million range, driven by the ongoing construction at our new Kansas City, Kansas campus. As we demonstrated this quarter, we can still generate strong free cash flow even during this period of elevated capital spending.

Moving to capitalized software. The $26 million of capitalized software in Q3 represents 31% of the $83 million of total investment in development activities. Software amortization for the quarter was $21 million, resulting in net capitalization of $5 million or 6% of our total R&D investment.

Now I will go through Q4 and full-year guidance. For Q4 we expect revenue between $670 million and $700 million with the midpoint reflecting growth of 11% over Q4 of 2011. This equates to full-year revenue between $2.63 -- I am sorry, $2.63 billion and $2.66 billion, with the midpoint reflecting 20% growth. This is up from our previous range of $2.575 billion and $2.625 billion.

We expect Q4 adjusted EPS before share-based compensation expense to be $0.62 to $0.64 per share, with the midpoint reflecting 15% growth over Q4 of 2011. This equates to full-year adjusted EPS between $2.34 and $2.36, with the midpoint reflecting 26% growth. This is up from our previous range of $2.32 and $2.36.

Q4 guidance is based on total spending before share-based compensation expense of approximately $375 million to $385 million. Our estimate for the impact of share-based compensation expense is approximately $0.04 in Q4 and $0.13 to $0.14 for the full year.

Moving to bookings guidance, we expect to bookings revenue in Q4 of $925 million to $975 million, reflecting solid growth over our record Q4 2011 bookings of $899 million, which were up 44% over Q4 of 2010.

I would also like to provide our initial thoughts on 2013. The initial version of our 2013 plan supports the current 2013 consensus estimates for revenue and adjusted earnings per share. As always, we will continue to update our outlook on future earnings calls.

In closing, we are pleased with our strong results in Q3 with all key metrics above our expected ranges, including strong bookings, revenue, earnings and cash flow and strong margin expansion. With that I will turn the call over to Zane.

Thanks, Marc. Good afternoon everyone. Today I'm going to provide sales highlights and discuss marketplace trends. Starting with our results, our bookings revenue in Q3 of $770 million reflects 18% growth over last year's bookings and is an all-time high for a third quarter. Bookings included 21 contracts over $5 million, nine of which were over $10 million.

Noteworthy areas of strength included licensed software, professional services, managed services, device resell, Revenue Cycle, physician practices and community hospitals. In the hospital market we continue to see strong levels of purchasing in our installed base as our clients purchase additional solutions for Stages II and III of Meaningful Use, and to prepare for value-based purchasing ACOs and other shifts in the industry that will require additional IT investments.

We also continue to sell strong levels of services to our installed base, which was very evident this quarter in the ITWorks and RevWorks successes that Mike will discuss.

Outside of our installed base we continued to operate in an environment with multiple installed base actively considering alternatives, and we are in a strong competitive position in these opportunities. Evidence of our competitiveness is that 31% of our record Q3 bookings came from outside our core Millennium install base.

A highlight this quarter was a new relationship with a major investor-owned health system that will be implementing Cerner solutions in 19 of their hospitals, displacing two different competitors in the process. We are very excited about this new relationship which we believe could grow significantly in the coming years.

We also had a major Catholic health system choose to expand their use of Cerner to nine hospitals -- by nine hospitals, for which they had previously chosen another supplier.

As I indicated last quarter, our pipeline for additional new footprints is very strong as we see a growing number of hospitals reconsidering their supplier as they face the rising bar for Stage II and Stage III of Meaningful Use and additional requirements for value-based purchasing ACO and data analytics capabilities.

We believe the Cerner is the only company with a comprehensive and scalable platform that will position our clients for success as the industries transitions from a fee-for-service model revolving around treating people when they get set to a proactive model that keeps people well.

We believe our primary competitors' narrow focus on simply being an EHR product company will become a problem for both them and their clients as they realize their antiquated platform will not be sufficient in the evolving health care landscape.

In addition to our investments in areas we believe will be necessary to support the future health care environment, we've also continued to invest heavily in the areas that still drive many of today's decisions. As an example, we believe we are leapfrogging our competition with Millennium Plus and PowerChart Touch by providing a physician experience that is superior to any other system and also fits into our broader analytics and population health strategy.

These improvements are already contributing to an improved win rate in the hospital market. We also continue to have strong success in the ambulatory market, where we have benefiting from our improved solutions and the marketplace's desire to have an integrated inpatient and outpatient solution.

As I indicated, this desire for integration is not limited to hospital and physician office integration. With the reimbursement increasingly tied to quality and outcomes and more care shifting to different settings, the ability to coordinate care across multiple venues is becoming critical. Cerner's ability to provide solutions for physician offices, ambulatory surgery centers, behavioral health, urgent care, home health, occupational health, rehab hospitals, skilled nursing and long-term care facilities, as well as many other venues, is another competitive advantage in this environment.

One additional trend I would like to discuss is the consolidation that is occurring in the hospital market. Given our strong market share and strong relationship with IDNs that are frequently the acquirers, we believe this is a potential positive trend for Cerner. In the past 18 months Cerner clients have acquired more than 75 hospitals with the majority of these representing net new opportunities to extend our client base.

Outside of the US we had a very good quarter with solid results in most regions, and particularly strong results in Canada, Australia and the Middle East. In the Middle East we signed a contract to provide solutions and services to a 1,200 bed private hospital in Saudi, which we believe contributes to our strong position in the region and helps our chances to participate in a large opportunity for the country's public hospitals. We were also selected for new business in Australia, England and Ireland during the quarter.

Before handing the call over to Mike I would like to make a couple of comments about the 2012 Cerner health conference which was held in Kansas City earlier this month. This conference was a huge success, with more than 10,000 attendees, including global attendance that was up 34% from last year and included attendees from 21 countries.

Our theme, Because it is Personal, struck a cord with attendees and included our clients and associates sharing stories of why health care is personal to them, but only in the job they do, but also as individuals who interact with the health care system.

I came away from the conference with increased conviction that we are focused on the right things for the right reasons. The conference also reinforced my view that we still have significant room for growth, both with our existing clients and through an increasing number of new client opportunities. With that I will turn the call over to Mike.

Thanks, Zane. Good afternoon everyone. Today I'm going to discuss ITWorks and Revenue Cycle and provide an update on our physician experience imperative.

I will start with ITWorks. In Q3 we signed our third-quarter -- our third client of the year, bringing the number of clients signed since launching ITWorks in late 2009 to 12. Our new ITWorks client has worked with Cerner since 1997, and believe that an ITWorks alignment would further align its strategic goals of transforming health information in its region, enhancing clinical processes and positioning the health system for future growth and advancement.

The broader point, which we have made before, is that ITWorks is much more than traditional outsourcing. Aligning IT resources and using our scale and expertise to improve and accelerate IT outcomes at our clients is important, but it is only part of how we align with them. The level at which we align is captured in the ways of the transformation model we recently created with the leadership of our ITWorks clients.

This model starts with technology as a foundation for greater levels of transformation in the areas including patient experience, physician experience, clinical and financial operations, quality, safety and ultimately population health management. These continuums represent major categories that impact the industry, and our clients are leveraging ITWorks as part of their strategy to be successful in this period of rapid industry change.

As I have discussed in the past, the tight alignment we have with our ITWorks clients often leads these clients to rapidly adopt additional Cerner solutions and services. A good example of this occurred in Q3 when one of one of our ITWorks clients also became a RevWorks client. The client established an ITWorks agreement in 2011, and their high satisfaction with that relationship contributed to the decision to align with Cerner to manage their day-to-day Revenue Cycle, operational and administrative functions.

Another important consideration in their decision is that they believe we helped position them to achieve their organizational mission of managing the health of their community. This marks the fifth RevWorks acute services client and our second combined ITWorks and RevWorks client.

In addition to another RevWorks client, we also had a strong Revenue Cycle sales quarter adding several new clients. Operationally we passed a milestone by bringing our 100th hospital live on patient accounting during the quarter. We also have more than 430 clinics live.

As I mentioned last quarter, we have been working closely with some of our largest clients to advance our solutions. This has resulted in functionality and clinical, financial integration that is unmatched in the industry.

With the rollout of our Revenue Cycle solutions progressing nicely at our larger clients we believe we are establishing proof points that will lead to an acceleration of Revenue Cycle adoption in our client base and strong differentiation when competing for new business.

It is becoming increasingly clear that our integrated approach is needed to succeed as the industry begins to shift to a value-based -- to a value- and quality-based model that will require tighter integration between clinical and Revenue Cycle systems.

Next I would like to provide an update on our physician experience imperative. As most of you know, we have had a big push this year toward enhancing the physician experience and we have made significant progress. We brought PowerChart Touch, our native iPad app, live at a client site for the first time in August, and we now have 13 early adopter clients.

The feedback has been great and the solution's ease-of-use and the amazing speed at which it runs has been substantial. The speed is enabled by our design approach and by Millennium Plus, the cloud platform on which we are deploying PowerChart Touch.

As we discussed, Millennium Plus is also an important component of our population health strategy as it enables broader interoperability across all EHRs and provides connectivity to our Healthe Intent population health management platform.

I am pleased that we have accomplished -- I am pleased with what we have accomplished with PowerChart Touch. In less than one year we went from a mere concept to a production application. While we view this as just the first milestone in a long journey for PowerChart Touch and other future mobile applications, it proves our ability to bring a concept to a reality that can radically alter and improve the user interactions with Millennium.

This project also demonstrates a new method for designing and building applications with the end in mind. All design, development, systems management and support teams were involved in the project at the outset to ensure that we not only created a great user interface, but one that performed well and delivered the levels of stability that our clients expect.

In short, I believe we are demonstrating the agility of a small entrepreneurial company we still are at our core, while leveraging the scale and resources of the large organization that we have become.

I would also like to point out that our focus on the physician experience goes well beyond the iPad. We continue to rollout improved workflows and a new look and feel across our solutions, and response has been extremely positive. We are also taking a comprehensive approach to maximizing physician productivity through optimal design, configuration, content and training across all venues.

We have rolled out best practice standards for our preferences and privileges that are derived from the accumulated experience of implementing our solutions and CPOE across our client base. In many cases this approach allows us to reduce what took hundreds of configuration decisions now down to about 10. This too is having a very positive impact on our physician experience.

In summary, I am very pleased with our progress we have made on improving physician experience, and I believe we are in a clear path to leapfrog the competition. With that, I will turn the call over to Jeff.

Thanks, Mike. Today I wanted to recap some innovations that were highlighted during the Cerner health conference, the evolution of our Healthe Intent platform and our population health initiatives. As both Zane and Mike highlighted, our health conference creates an opportunity for us to sync with our clients on both future and current state activities at a significant scale.

This year was highlighted by more than 500 client-lead interactions, as they shared and showcased their progress over the last 12 months. The solution gallery was our largest to date, providing an opportunity for more than 250 solutions and services to be showcased. As many of our client organizations have either completed Stage I of Meaningful Use or are approaching that milestone, they are now positioned for a wave of next new capabilities that position them to improve safety, reduce costs and improve outcomes.

As an example, Care Connect was introduced during the conference. Initially introduced on the iPhone, this is a comprehensive communication and care delivery solution that integrates voice, messaging and care delivery capabilities such as medical device association, clinical alerts and medication administration into a single application workflow.

For the first time clinical cooperation is possible through traditional communication technologies with the EMR and medical devices all synchronized into a single, embedded on the go total experience.

As Mike outlined, the Revenue Cycle suite is continuing to gain traction across our client base and was another heavy traffic area during the conference. Over the last 18 months an additional 24 solutions have become GA within the Revenue Cycle suite. The continued progression of Revenue Cycle upstream into the clinical workflow and physician documentation areas is creating greater opportunities within the existing clinical experiences, as well as driving more organizations to begin to roadmap a replacement for their existing platforms as they approach the ICD-10 transition in 2014.

As new models continue to emerge in both quality incentives and population management the ability to navigate the continuum of Revenue Cycle demand is becoming increasingly important to our clients. Our client base will have at risk more than $5 billion of annual revenue in the coming years tied to value-based purchasing, Medicare thirty-day readmission rules, quality reporting requirements alone.

As a result, Cerner's alignment with our clients to help them mitigate these risks and succeed in the evolving health care landscape will create a significant financial opportunity for Cerner.

Moving on to our Healthe Intent platform, search has now hit a tipping point across our talent client base and we expect accelerated adoptions as clients complete their checklists of mandates. Over 50% of our US client base is now utilizing the solution as we are approaching 1 petabyte of indexed clinical information.

Much like the speed of deployment around Millennium Plus and PowerChart Touch that Mike shared, we are seeing a similar pattern emerge through our Healthe Intent cloud-centric solutions. While Cerner has offered a sepsis learning package within our Lighthouse practice for several years, the adoption and use of our cloud-based algorithm is more than twice the adoption of the prior solution in half the time since general availability.

In addition, the ability for the platform to support an agent-based learning environment has allowed for the algorithm to revolve on a 30-day lifecycle followed by rapid adoption within days versus months. We are seeing the platform validation and distribution model change the paradigm for speed to value.

We have shared our population health relationship with Advocate in the past. Early progress from these efforts was another highlight of our health conference. Joint development of more sophisticated predictive models has been an initial focus of this partnership. While we are only a few months into the partnership, the combination of Advocate and Cerner Math teams has created an initial predictive agent for readmissions which was shared during the conference.

It has demonstrated a 20% to 30% improvement in predictive powers compared to the majority of existing evidence-based models in use today, and we are confident it can be improved.

We continue to see significant potential from working with one of the more advanced population health organizations in the country. More specific to population health, there is a pattern from a couple of decades back that is now repeating. There is a growing number of niche best-of-breed solutions emerging, much as they did in the '80s and '90s around clinical solutions.

In the end architecture and integration won out. We believe we are similarly positioned for success in population health as the rest of this decade plays out while others repeat history with the spare piece parts.

We have outlined the foundational elements of population health in the past at a more granular level, somewhat as clues to the larger strategy that is now playing out from data liquidity through the Cerner network, interoperability and HIE offerings to our Lighthouse enterprise data warehousing and quality solutions, as well as our patient portal platform and PHR solutions, which offers a range of device and provider connectivity offerings, as well as wellness options.

While we expect the foundational portfolio to continue to evolve, these have become real businesses with total revenue in excess of $150 million. Supporting these solutions is Healthe Intent, which is our cloud-based architectural platform for population health. At our health conference, Neal shared our vision for how we will continue to advance our capabilities in this area, providing a glimpse under the hood.

Fundamental to the design of this platform is an evolving operating system specifically designed to identify the person, predict where interventions will be affected, attribute the individual to accountable providers and guide them to take appropriate action.

During the keynote address we outlined the clinical programming language we called Synapse. This is a purpose built clinical programming language that creates agents within the Healthe Intent operating system to trigger and coordinate health care programs across the population.

Very much like the clinical definition, the language supports the recognition of signaling of an event, then coordinates that action across the platform based on localized requirements. We think this is a fundamental differentiator as the level of sophistication to manage the health of a population ultimately requires both personalization to the individual and localization to the provider network within a community.

This must be much more than a set of workflow applications with independent data sets and configuration options. The ability to create these sophisticated commands in a natural language familiar to clinicians will create an ecosystem of rapid discovery and innovation beyond the four walls of Cerner.

While this description oversimplifies the complexity of health care as it plays out at a ZIP code level, we believe we are the only company in position to comprehensively facilitate population health. Over the next year we will bring more Synapse agents to life, leveraging the platform we have evolved over the last three years.

With that, I will turn the call over to the operator for Q&A.

(Operator Instructions). Michael Cherny, ISI.

Congratulations on a great quarter. So just thinking ahead a little bit on the outlook, obviously with the 4Q bookings number, you know, a very impressive number, especially given the growth you put up last year. I want to get a sense, if you can, about the expectations for any of the larger deals, particularly the Works type steals in the fourth quarter.

As you get more comfortable with these deals, as you get greater clarity about what it takes to get clients signed up for them, is it giving you a higher degree of visibility in terms of being able to guide to these deals? And is there any kind of clarity you can give around any potential contribution in the fourth quarter of any deals you could be expecting?

This is Marc. I think we have been indicating that clearly so far for this year we have been consistent with having an ITWorks deal every quarter. I think we are able to predict those at least relative to our normal forecast process where we review all the deals, layout where we think they are going to happen. So it varies between -- if there is one that we think is on track for Q4 it would be part of our guidance. If there isn't one that is on track for Q4 it wouldn't be part of our guidance.

I think you have seen us be fairly consistent with those long-term bookings to be around the 30% level -- a little over, maybe a little bit under. So I think it is pretty fair to say that feels like that is going to be fairly consistent number, that you're going to see us in the upper 20s to low 30s of that number relative to the total bookings.

And I think we are getting a little bit of an ability to forecast those at a higher degree of certainty and a little bit less risk in our forecast process. So each quarter is going to be a little bit different, the types of deals. But I think overall with our mix of long-term opportunities in any one quarter you can still see us generating that type of percentage on a quarterly basis.

Great, and then just quickly on the large for-profit public company you guys referenced, obviously, it seems like that customer had a fairly recent go live with one of the solutions you displaced. Could you talk a little bit about, if you can, any clarity as to how you guys were able to wedge your way in there and what that means going forward? I know you had talked about a few other systems that are looking now for replacement. How quickly do you expect this replacement market to develop with Stage II on the horizon about 15 months from now?

This is Zane. As it relates to this particular investor-owned organization, we have been working at for about the past two years and having dialogue. And they had an awareness of maybe some of the shortcomings that were in some of our competitors' solutions, and then some of the success that we have had in the investor-owned segment.

And so really the combination of our success in the investor-owned marketplace and impact delivering on predictable timelines on predictable budgets and creating a framework by which you can use your scale in a different way, which is the premise behind these large-scale organizations, really drove home what they needed to do there.

So my expectation is we will continue to see opportunities both in the investor-owned segments as well as other segments as people look at our competitors and where they are relative to being able to meet the mandates that are coming up.

Great, thanks for the color.

George Hill, Citigroup.

Thanks for taking the question. Marc, I guess, just a question on the bookings guidance, following up on Michael's question is -- I guess, do we know what the composition of the Q4 bookings will look like, or I guess can you give us directionally? Because I would have expected the revenue guidance to be a little higher given the booking strength in the quarter.

So is there anything that is changing in the composition of the booking mix or is there anything you know now about the bookings mix that is putting the revenue guidance where it is?

No, there is nothing particular in the bookings guidance. I think for this quarter, obviously, we had a strong software quarter, so it drove out a higher level of revenue relative to the bookings performance. But I think Q4 felt pretty normal, once again still looking for a percent, somewhere around 30% of the bookings to be in long term in nature. And they're still going to be a chunk of that that is going to be hardware related, but that has now equalized on a quarter-over-quarter basis.

So I don't think there is anything unique that I would point to relative to the -- to looking at the revenue that is coming out of that. Keep in mind, you're getting a lot of revenue -- a lot of our revenue is coming from the backlog and a lot of the bookings is driving into some of the backlog. Even the stuff that isn't, the 30% long-term, can still have a three- or four-year element of some of the service components.

So I think there is not going to be necessarily a complete direct correlation between the bookings number and the revenue number, but there is nothing unique about it.

All right, I appreciate that color. And also a question for the Mikes. On the displacement opportunity, I guess, just how quickly are we starting to see the market turn? I feel like historically, whether it has been Meaningful Use or CPOE or care-based Rev Cycle, or whatever the industry trend was, market churn never really ticked up much above 5%. Do we feel like we are seeing an acceleration? And I guess how do we expect that to play out into 2012 through 2013 and maybe first part of 2014?

This is Zane. I would say that we are seeing a bit of an acceleration in that displacement market. And I think that is evidenced by some of our -- the things I discussed in my script. And I think that is indicative -- that those comments are indicative of what is going on broadly.

And I actually believe, again, that this is a long-term view. That this is a five- to seven-year marketplace as you look at it. I think that many organizations will look at who they -- the horse that they bet on and make a decision to go a different direction. And I think it will occur over that five- to seven-year time period. I don't think -- I think we will actually -- you will see some -- there is obviously natural curve to some of those things, but I think were on the very beginning of that curve.

Okay, I appreciate the color. Thanks, guys.

Steven Halper, Lazard Capital Markets.

Just looking at the operating margin before stock comp, it was up 90 basis points. And it touched below that target, understanding the high level of tech resale that has been happening in the quarter. But when you look at the consensus numbers for 2013, and you support those numbers, is it safe to assume that you will get back to that goal of 100 to 150 basis points, or is the composition of the model changing such that that goal might be too high now even though the absolute operating profit might be where you want it to be?

I think when we have looked at operating margin percentage, we have always provided, obviously, all the way from about 9% on up trying to provide a path, let people know what we are going to grow there. That has always been conditioned a little bit on what we saw the topline growth. And I think this year certainly we are seeing topline growing at a rate that is faster than we envisioned when we first -- when we started the year, which is a good thing, because we have a tendency to be able to capture that growth and then grow margins on that higher revenue number.

So based on the current consensus estimates, clearly they are looking to have some place between 100 and 200 increase in operating margins. Unless there is a significant adjustment in what our current plan is that would be our continued expectation.

I think we're looking to continue to see opportunities to grow software sales. These deals that are longer term that have a negative or certainly a breakeven impact in the early part of those deals are now getting some time on them that increases naturally the profitability of those deals as we move forward. So I think those are all good points.

We are also planning on investing heavily in R&D. And as we did that this year, we increased our R&D spend significantly. We are going to continue to do that in 2013, because the amount of things we have in front of us as opportunities that we can deliver by developing and innovating is as great as I think we have ever seen. I think we're going to continue to make those investments as we appropriately can.

But I think today there is -- I would not say there is anything that is going to be different from what you guys have in your models, which is going to be over 100 basis points to 200 basis point increase in margin.

Obviously, we are going to land our 13 plan as we finish out the year and get all of our initiatives lined up and we will provide true guidance on our Q4 call, but until that time we are comfortable with what consensus is.

Right. And then just one other quick question on 2013, if I may. In terms of free cash flow on the margin do you expect free cash flow to be -- to grow in 2013 versus 2012?

Our expectation would be to see it grow. Obviously in 2013 we will have a full year of investing in our new Kansas campus. I think you are aware and investors are aware, we are building one tower. We are going to start building the second tower immediately. So we're going to continue to have that capital outflow, but I think our cash flow performance certainly to date would indicate that we would be able to grow year-over-year free cash flow.

Great, thank you.

Ricky Goldwasser, Morgan Stanley.

Congratulations for a very good quarter. I had a question on the value of the contracts. Just looking at some of the data points, it seems that the total number of contracts year-to-date is about in line with last year, maybe even been a tad lower, but the dollar value associated with it, obviously, is greater.

So can you just give us a little more color on the scope of the contracts that you are seeing and your expectation for that trend to continue or not?

This is Marc. I think every quarter, obviously, is a little bit of a unique microcosm of the deals that are available. If you look back in Q3 of 2011 I think we probably had 25 contracts that were over $5 million and 16 that were over $10 million. This quarter we are 21 million -- or 21 contracts over $5 million and 9 million (sic - see press release) over $10 million. So, clearly, with the enhanced bookings that would imply that the ones that were over $10 million were stronger over $10 million then the 16 in the other.

I think you have got -- certainly this quarter we had three large deals that were over $60 million. And that would include the RevWorks, the ITWorks and another large client deal. So I think the mix is going to change relative to forecasting forward. I think we are going to continue to see a mix of RevWorks and ITWorks deals coming in that will have the over $10 million number a little bit higher, but it will depend a lot on the quarter.

We are selling a lot of things to a lot of people. And I think that broad support in the marketplace is allowing us -- the growth of bookings isn't just the bigger contracts getting bigger, it is a broad support across a variety of contracts that is allowing us to deliver these enhanced bookings.

Just kind of quarter-over-quarter I will provide little bit of view into that, but it will vary each quarter. And we continue to look at our client base and new opportunities as providing leverage on a quarterly basis.

Okay, and, obviously, the trend of cross-selling opportunities between hospital and ambulatory is an important one. I know you talked about strong growth on the ambulatory side. Can you quantify it for us, how fast is ambulatory growing in the quarter?

For us ambulatory is still a fairly small part of our overall business. The percentage trends for a lot of that business is growing 50% year-over-year. I think it is continuing to grow. It is not quite growing at that level, but it continues to grow.

And a lot of that growth is driving because of the desire of clients and physicians to be on the same system. And so a lot of our clients are looking to standardize on a single platform. That is where we are getting -- our footprint inside the acute care facility -- acute care health system is what is driving a lot of our ambulatory business. And I think it is important to see that as a differentiation from others in the industry who don't have that footprint inside the acute care industry and who are trying to either get it in there or are just trying to sell on the ambulatory side.

We are continually seeing a standard, centralized platform for both ambulatory and inpatient being what is driving the market, and that is what is driving our success. Obviously, as we continue to get bigger the growth rates don't continue to grow as much, but we are very happy with where that businesses, keeping in mind it is still today a small, small part of our total revenue.

Okay, thank you.

Charles Rhyee, Cowen and Company.

Maybe a question for Jeff here. You were talking about the Healthe Intent platform, and then obviously it is a big focus at the user meeting a few weeks back here. And you talked about what you're doing with Advocate. Can you talk about where we are in the cycle to market? Definitely a lot of small players coming up with technology solutions, but it seems that is the way you guys are approaching it is not only from technology but really also engaging employers as well as -- and patients as well as the members.

Can you talk about how that all needs to come together to really drive, I guess, true population health, and where we at in this adoption curve and how long do you think it takes for it to really take off here?

And then, lastly, if there is a change in the administration with the elections and you start potentially seeing some type of rollback with health reform, how do you think that either stalls or maybe changes the pace of some of this? Thanks.

Help me if I forget one of those A,B, C and Ds. But at the macro level, and I think some of you have visited and seen it, we have been running our own health plan since the middle of [the decade], and have not only ran our own plan, but put up clinics and used our population as something to experiment with. And that has been a big driver for us as we have stepped back and said holistically what does a platform really have to do to manage the health of a population.

So what impact does it have on Revenue Cycle, on new reimbursement models, and then more broadly how integrated does all that have to be? So that has been a big guide for us as we have designed the systems.

At the adoption curve level, and we have mentioned Advocate a few times, they are on the front end of the market as far as taking risk and seeing significant shifts in their business model of how they are being reimbursed. I think the rest of the market still either has experimentation or is beginning to stick their toe in the water in these spaces.

So what you're seeing play out, and you mentioned it, is a lot of niche players to do one very small piece for one very specific scenario, whether that is quality reporting or it is maybe a pilot ACO with a small number of lives.

So we think that trend is going to continue, but in pretty short order here -- and I would say somewhat as we lead into the 2014 window with the uncertainty of whether the current health plan model proceeds or not, you are going to continue to see it at a CMS level independent of Obamacare and who is in place, there is a demand to drive costs down. And pretty much the consensus thinking is you have to move from a care model to a health model. And at the end of the day you have got to drive demand down and drive down the cost per unit of what it takes to deliver those demands.

So we don't see anything on the horizon that is going to slow the economic trends all the way from the pressure on deficits to the total cost of health care. All of these things are set up independent of whatever the next thing it is that gets passed who is elected here in two weeks.

But I think on the short-term if you are looking at where is the fuse going to get lit, I think you're going to continue to see a lot of niche experimentation out there. And we frequently will hear from our clients as, I just need this as a placeholder to get me through this next short window in time. I know there is a bigger, broader strategy that I need to develop.

So my long answer to it, I would say in the next 12 to 24 months you're going to see more and more movement from a small percent of the marketplace experimenting with population health to the majority of the marketplace having some level of risk inside their revenue mix.

Great, thanks.

Glen Santangelo, Credit Suisse.

I just had two quick questions if I could. I wanted to follow up, Zane, on an earlier question regarding the shift in market share. I think in your prepared remarks you talked about a number of potential customers are reconsidering their supplier. And it seems like the Company has put a significant amount of focus on data analytics and population health. And I am curious as what is sort of driving the market share shift?

Do you think it is really some greater transparency around Stage II guidelines or do you think it is clients are really starting to look down that five- to seven-year road that you discussed, and we are at that tipping point where they are really going to have to decide to make a dramatic shift if that is the case? What do you think is creating an acceleration potentially in that market share shift?

I think it is actually both. Some of that is they get to Stage II and looking at Stage III. But ultimately, if you're going to make it that kind of selection I think it is really about the additional mandates that are coming at our client base over time.

And so things like the value-based payments, the 30-day readmission elements, none of our competitors are ready to handle that today. And so we are uniquely in that situation. And there just becomes more and more mandates that are coming at our clients and are going to continue to come at them over time.

So it is really a combination of those things. And I think we're going to see that continue -- I think we are very much on the front side of that trend.

And just to think about the longer opportunity here for a second, we really didn't talk a lot about HIEs here. How do you think about the information exchange marketplace, and how do you view that opportunity for Cerner, particularly relative to some of your competitors that maybe could have issues as far as that's concerned?

We probably have two sets of bets playing out simultaneously here. On the HIE side we are a big interoperability advocate. And around some of the things that being driven out of DC like the Direct project, Cerner contributed the majority of the open source code for that project. So inside of our core business offering we are proponents of getting -- we call it liquefying the data. So getting the data moving is key to the next stage of improvement around population health.

Our other bet in parallel, and we have signaled some of this with technologies like search and then some of the things we have done around sepsis, is we have invested in technologies that we think can accelerate beyond the standard so we don't have to wait.

So being able to take things like textual documentation, parse that, find the clinical meaning and then put it into a structured form will get us past or through some of those delay as you see, I will call them orphan systems out there, that aren't going to be able to keep up with Meaningful Use Stage II and Stage III. We don't think that data needs to stay as an island.

But I think you will continue to see -- at the pure HIE level, you'll continue to see a fair amount of experimentation and probably multiple networks in some of the communities or states as they -- some will find that they didn't discover a business model to drive it and others you will find multiple private networks in a given community.

Okay, thank you.

Greg Bolan, Sterne Agee.

Thanks and also congrats on the great progress, guys. Can you maybe talk about actually progress with IDN clients that are consolidating solely with Cerner products and services across the organization?

Sure, this is Zane. So what we are seeing is obviously our clients are well positioned to be the acquirers. In fact, our -- in the last 18 months our clients have acquired more share than any other clients -- any competitor have acquired in that space. So nearly half of the hospitals were acquired by Cerner clients.

Now that being said, not all -- that doesn't mean they simultaneously move to a Cerner platform. It really does provide a good opportunity for us to come back in and use that as a selling opportunity to -- as they look to leverage their scale, to drive down costs within their organizations and create better efficiencies across the IDNs.

And so we work with our clients in that way. And we have the proof in the large systems of how to run these very large programs in a way which you can predict the cost, get the outcomes that we are looking for, and really set them up to become systems of the future. And that is what we are doing with these large IDN clients.

Great, thanks. And then just last one, if you could maybe characterize the audition process for the investor-owned hospital you had mentioned earlier? And maybe your thoughts around the ability to penetrate more of these hospitals, because it looks like you at around 15% penetration now for this system.

Obviously, there is the opportunity to do -- if we could do good work it tends to get other work. And that has been our experience in the investor-owned is those organizations tend to be a prove it model, so they don't go all in upfront. But they look for a pilot phase, and with success it will get other success.

Fair enough, thanks.

Jamie Stockton, Wells Fargo.

Congrats on a strong quarter. I guess maybe, Zane, just following up on one of Greg's questions, is there a number you can put around the facilities that are maybe within existing client footprints that are not Cerner shops today? And I don't really mean the Kaisers of the world, but more like Catholic Health West, where there are facilities that are maybe with another vendor and you have a decent shot of getting those?

We do actually quantify that data.

We can put a number to that, yes. Is that your question?

Yes, can you give it to us?

Can I share you that number? No. Sorry.

Okay. Well, all right. Maybe then, Mike, just touching on RevWorks, you had another deal there are this quarter. I think maybe that is the second deal in the last six quarters. Could you give us some color on what the environment for deals in that space seems like today? Has it slowed down and that is why we saw a window where there weren't a whole lot of RevWorks deals, and is it starting to reaccelerate now?

This is Zane. I will take that one. I think it is pretty -- it is natural that there is an ebb and flow in that side of the market. And that as we get more and more proof points I think you'll see more predictability. It was very similar to where we were in ITWorks last cycle. So is it a little bit behind -- RevWorks is just -- in terms of when we launched it is just a little behind that ITWorks lifecycle.

And I think it is quickly going to go down a similar path, where it will become a more predictable part of what -- our business. Because our clients are seeing success from our RevWorks offerings, and that -- again, that success begets other success. And that is what occurred on the ITWorks side in that we had some early initial wins, had some variability and the windows would come through the pipeline, but as we gained success and the success becomes known within our client base, it becomes a much more repeatable thing.

And I think that is what we're beginning to see on the RevWorks side as well. And, in fact, this particular client was an ITWorks client where we have had success on the ITWorks side, and they have seen the success that we've had around ITWorks and they extended into the RevWorks space as well. So I think that is a natural extension on top of what we do around ITWorks, and I think you can look at that as a great extension of our business.

Okay, and then maybe just my last question along the lines of what is going on in Revenue Cycle. I think two or three years ago at the analyst day you guys threw out this chart where you showed the map of Revenue Cycle solutions and then you showed a future state of Revenue Cycle.

Could you give us a feel for where are you in the progression of the portion of the Revenue Cycle platform that you want to fill out? I think Jeff said the unit had 24 solutions go GA in the last 18 months. Are you where you want to be or is there incremental development that needs to occur?

This is Jeff. I think we are within I would say 6 to 12 months of where we want to be from a completeness. At the same time, as I mentioned, that depth and breadth of solutions going out, there has been two trends inside our portfolio. One is bringing more of the capabilities inside of a native Cerner platform versus using third parties. That is both at a solution level as well as at a connectivity level.

So things like EDI connectivity is an example. So we are seeing more be pulled back in. The other is someone, as Zane pointed out -- the mandates, the measures, how you get paid is a moving target that is going to require more and more investment by our client organizations in some of these areas to adapt to a modern platform. It isn't as simple as taking a charge and drop it on a claim.

So if you were to look at our roadmap today as compared to the one you saw several years ago, you would see probably about 75% to 80% of that filled out in a GA form. And you would see that -- at the same time, though, we have a list of features, not quite as large, but that we anticipate a need to be built out to deal with the future state.

Okay, thank you.

Why don't we take one more question?

Richard Close, Avondale Partners.

Thank you for squeezing me in. I was just curious with respect to 2013, is there any reason we should not expect bookings at least flat to the 2012 levels?

There is no reason that you shouldn't expect us to grow bookings in 2013.

Okay, thank you very much. Congratulations.

Neal, why don't I turn it over to you?

Okay, great. So I thought I would make a few comments here. I tell these guys, if you guys -- if you all ask questions they can't answer I will step in, but as you can tell it is a very good -- it is a very strong team. Very good job.

We basically wake up every morning at the intersection of health care and IT. It is a very good place to be. It generates enormous opportunities for us. There are clearly challenges to being here, but I can't imagine a better place to start the day.

So we have -- basically as a Company we have kind of reinstated a boldness around here. The opportunities are just too significant not to be driving hard forward. We are clearly an innovator and probably one of the most significant innovators in health care, because we think this intersection of health care and IT is really going to create the foundation of the future health care -- how health care is delivered and managed, both at the delivery side and inside populations.

So the environment of health care is always going to have a political aspect to it, but the fundamentals don't change based on the elections. The fundamentals are -- the cost of health care have been rising for the last 60 years faster than the growth of our economies. And because of that there is fundamental pressure to find a -- to drive improvements in the current health care systems that create and deliver greater value. We think information technology is going to be the core way of doing that.

So our goal is to be the trusted partner of our clients in this industry, and drive innovation with them in creating platform for them to both deliver medicine and in the future manage populations.

So with that I will sign off. We're about ready to commence here in the room a surprise party for Jeff Townsend, who is now celebrating his 25th anniversary, so I thought I would share that with you guys and let you be part of the small celebration here. So have a great day. Thanks for being on the call.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect. Take care.