塞納 (CERN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cerner Corporation's second-quarter 2014 conference call. Today’s date is July 24, 2014, and this call is being recorded.

The Company has asked me to remind you that various remarks made here today constitute forward-looking statements, including, without limitation, those regarding projections of future revenues or earnings, operating margins, operating expenses, product development and new markets or prospects for the Company’s solutions. 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 Item 1A in Cerner’s Form 10-K, together with the Company’s other filings. A reconciliation of non-GAAP financial measures discussed in this earnings call can be found in the Company’s earnings release, which was furnished to the SEC today and posted on the investor section of Cerner.com.

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, Glen. Good afternoon, everyone, and welcome to the call.

I will lead off today with a review of the numbers. Zane Burke, our President, will follow me with results, highlights and marketplace observations. Mike Nill, Executive Vice President and Chief Operating Officer, will discuss operations. Jeff Townsend, Executive Vice President and Chief of Staff, is with a client today. Neal Patterson, our Chairman and CEO, will be available during Q&A.

Now I will turn to our results. Our total bookings revenue in Q2 was $1.08 billion, which is an all-time high for a second quarter, and reflects 15% growth over our previous Q2 record results in Q2 of 2013. Bookings margin in Q2 was $980 million, or 91% of total bookings.

Our bookings performance drove a 21% increase in total backlog to $9.69 billion. Contract revenue backlog of $8.88 billion is 23% higher than a year ago. Support revenue backlog of $807 million is up 7%.

Revenue in the quarter was $852 million, which is up 20% over Q2 of 2013. The revenue composition for Q2 was $235 million in system sales, $175 million in support and maintenance, $413 million in services, and $29 million in reimbursed travel.

System sales revenue reflects a 17% increase over Q2 of 2013, driven by strong growth in software and technology resale. Q2 system sales margin dollars grew 19% over the year-ago period, driven by continued strong levels of software.

Moving to services, total services revenue was up 28%, compared to Q2 of 2013, with strong growth in managed services and professional services. Support and maintenance revenue increased 7% over Q2 of 2013.

Looking at revenue by geographic segment, domestic revenue increased 24% for the quarter. Global revenue was down 4% from Q2 of 2013, due mainly to the timing of a couple of global contracts. Zane will discuss our global outlook for the rest of the year, which looks solid.

Moving to gross margin. Our gross margin for Q2 was 80.9%, which is down from 82.2% in Q2 of 2013. The slightly lower gross margin is mainly due to an elevated level of third-party services being used in the quarter to support a significant number of systems go-live. The high level of go-lives also led to a large increase in reimbursed travel revenue, which is zero margin, and also impacts our margin percent, but not the absolute dollars of margin.

Looking at operating spending, our second-quarter operating expenses before share-based compensation expense were up 19% to $483 million. Sales and client service expenses increased 22%, compared to Q2 of 2013, driven primarily by a continued increase in revenue-generating associates in our services businesses.

Our investment in software development was up 18%, compared to Q2 of 2013, continues to be driven by investments in our growth initiatives. G&A expense increased 8%, compared to Q2 of 2013, driven mostly by growth in personnel.

Moving to operating margins. Our operating margin before share-based compensation expense was 24.3% in Q2. This is down 80 basis points, compared to Q2 of 2013, due to the higher level of third-party services and reimbursed travel revenue. Our forecast for the second half of the year reflects between 50 and 100-plus basis points of margin expansion, depending on mix.

While this will put us below our original target for margin expansion this year, our earnings guidance is still higher than when we began the year. As always, our focus is on delivering predictable levels of growth in gross margin and earnings dollars, which we have done this year, even without expected levels of margin expansion.

Moving to net earnings and EPS, our GAAP net earnings in Q2 were $129 million, or $0.37 per diluted share. GAAP net earnings included share-based compensation expense, which had a net impact on earnings of $10 million, or $0.03 per diluted share. Adjusted net earnings were $139 million, and adjusted EPS was $0.40, which is up 18% compared to Q2 of 2013.

The Q2 tax rate for adjusted net earnings was 33.7%, which is in line with our expected effective tax rate. For the second half of 2014, we expect our effective tax rate to remain within 50 to 100 basis points of 34%.

Now I’ll move to our balance sheet. We ended Q2 with $1.47 billion of total cash and investments, which is flat compared to Q1, as we used our free cash flow for share repurchases. Our total debt, including capital lease obligations, is $155 million. Total receivables ended the quarter at $615 million, which is up $51 million from Q1.

Our DSO in Q2 was 66 days, which is flat compared to the Q1 DSO, and down from 68 days in the year-ago quarter.

Operating cash flow for the quarter was $248 million. Q2 capital expenditures were $62 million. And capitalized software was $42 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was $144 million for the quarter.

Moving to capitalized software, the $42 million of capitalized software in Q2 represents 37% of the $115 million of total investment in development activities. Software amortization for the quarter was $25 million, resulting in net capitalization of $17 million, or 15% of our total R&D investment.

Our outlook for capital expenditures and capitalized software remains the same as what we provided last quarter. We expect capital expenditures to be $260 million to $280 million for the year, which is down from $353 million in 2013. We expect capitalized software to remain in the mid $40 million range per quarter throughout the year, which will lead to it being flat or slightly higher than the $175 million capitalized in 2013.

Regarding our share buy-back, we purchased 2.8 million shares for approximately $142 million during the quarter, bringing our year-to-date total to 4.1 million shares repurchased for a total of $217 million. This concluded the original amount that was approved in December of 2013, but we still have the additional $100 million of authorization that was approved in May.

Now I’ll go through Q3 and full-year 2014 guidance. For Q3, we expect revenue between $840 million and $870 million, with the midpoint reflecting growth of 17% over Q3 of 2013. For the full year, we expect revenue between $3.3 billion and $3.4 billion, reflecting 15% growth at the midpoint. This is up from our prior range of $3.25 billion to $3.4 billion.

We expect Q3 adjusted EPS before share-based compensation expense to be $0.41 to $0.42 per share, with the midpoint reflecting 19% growth over Q3 of 2013 adjusted EPS. Q3 guidance is based on total spending before share-based compensation expense of approximately $485 million to $495 million.

For the full year, we expect adjusted EPS between $1.64 and $1.67, with the midpoint reflecting 17% growth. This is up slightly from our prior range of $1.63 to $1.67. Our estimate for the impact of share-based compensation expense is approximately $0.03 in Q3 and $0.11 to $0.12 for the full year.

Moving to bookings guidance, we expect bookings revenue in Q3 of $1 billion to $1.1 billion, with the midpoint reflecting 13% growth over Q3 of 2013.

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

Thanks, Marc. Good afternoon, everyone.

Today I will provide Q2 highlights and discuss marketplace trends.

Starting with our results, our bookings revenue in Q2 of $1.08 billion reflects 15% growth over Q2 2013, and is a record for a second quarter. For the quarter, we had 31 contracts over $5 million, including 19 over $10 million. The mix of long-term bookings was 33% in the quarter, which includes an ITWorks contract and strong managed services bookings.

Our competitiveness in the quarter was strong, with 32% of our bookings coming from outside of our core Millennium installed base. This reflects a continuation of the momentum that has been building in recent years, including a record level of new over-200-bed hospitals in 2013. We believe we have a multi-year window to continue expanding our footprint, as other suppliers continue to struggle to help their clients navigate the increasing regulatory requirements and changing healthcare economy. This opportunity is reflected in our pipeline, which is at an all-time high across all segments.

We are also gaining share through the ongoing consolidation in the industry that is being led by health systems that are Cerner clients. In fact, each of the last three quarters has included bookings contributions from clients buying Cerner solutions for hospitals they acquired.

Now I’ll discuss a few areas of our business that contributed to our strong results. I’ll start with population health. Our population health organization delivered strong results again in Q2, driven by sales of HIE, patient portal, enterprise data warehouse, clinical process optimization, and our new Healthe Registries solution.

Coming out of a significant number of meetings on population health, with both Cerner and non-Cerner clients in Q2, I am even more confident that our EMR-agnostic approach, which spans the continuum of care, is the right one. We continue to compete against many best-of-breed suppliers, but none are following our comprehensive platform approach, so they are only effective in certain areas.

In addition, most of them have not taken on the significant challenge of aggregating and standardizing clinical claims and financial data across multiple systems. As a result, competing offerings are using incomplete and latent data sets, which limits their value in our opinion.

Most importantly, we are achieving value with existing clients. \We are capturing measurable value statements across multiple areas of our population health portfolio. And these are strengthening our competitiveness with our prospects.

I'll move to the revenue cycle where we had another strong quarter, driven by sales of our broad suite of revenue cycle solutions and services. Our revenue cycle business has grown more than 40% year to date, which is impressive when you consider we are coming off 51% growth in 2013. This success is evidence that the significant investments we have made in our revenue cycle capabilities in recent years are paying off. We have now gone from simply trying to meet minimum expectations to having major differentiators in areas such as contract management and care management.

Operationally, we are establishing scale, and now have over 1,200 clients live on patient accounting, including approximately 200 hospitals and over 1,000 clinics. Importantly, we have been establishing proof points at much larger clients, and this success is leading to significant demand from other large health systems.

The momentum we are building through selling our solution portfolio is also helping build our pipeline for our full-service offerings. Today I’d like to highlight a subset of our RevWorks offering that have been growing in recent quarters. That offering is an Extended Business Office, or EBO, which is a service where we augment a client’s staff with our resources.

EBO services offer greater flexibility, and can be deployed to target a specific client need, such as helping with legacy A/R, or coding backlog, or a long-term staff augmentation strategy. As a result of this flexibility and a faster sales cycle than full RevWorks deals, this business has scaled quickly. We currently have 250 associates in our EBO supporting over 100 acute and ambulatory clients.

In summary, our investments and execution in the revenue cycle space have led to much stronger competitiveness, contributed meaningfully to our growth, and created a substantial pipeline of opportunities going forward.

Moving to the ambulatory space, where we had a strong Q2, we added over 2,000 providers in the quarter, bringing our total to over 65,000, which is approximately double the number of providers we had just four years ago. We continue to routinely displace our key competitors as our large acute care clients favor a common platform for their affiliated and employed physicians. This competitiveness is the result of the significant investments we have made in our physician solutions, and we expect our success to continue.

We also had a very good quarter in the small hospital market, adding 8 new CommunityWorks clients, and bringing 17 clients live. We have signed 13 new clients year to date, and expect to easily exceed the 19 we signed in 2013.

Outside of the US, we had another strong quarter from a bookings standpoint, driven by contributions from the Middle East, Canada, and the UK. As Marc mentioned, revenue was down slightly due to the timing of a couple of contracts. In addition, some of the bookings strength came from remote hosting contracts, which don’t have material upfront revenue, but they contribute to a more visible revenue stream going forward. In fact, we already have more global hosting bookings in the first half of the year than we did in all of 2013, and we expect this trend to continue.

Looking at the rest of the year, we expect improved revenue growth outside of the US. We expect this growth to be driven by the strong bookings in Q1 and Q2 and a good bookings forecast for the remainder of the year.

Now I’ll cover a couple more marketplace observations. Overall, we believe marketplace dynamics continue to favor Cerner. There are pressures on health care providers to control costs and increase quality. And they continue to view IT as a key lever in helping them do this.

While the Meaningful Use continues to be tweaked, the proposed adjustments to Stage II of Meaningful Use really don’t change much. In the end, the bar remains high, which is an advantage for Cerner. In addition, Meaningful Use is just one area of focus, as providers are dealing with the impact of other measures in the mandates, such as healthcare reform, value-based purchasing, and ICD-10.

The final observation I would like to make is the importance of interoperability is increasing. As you know, Cerner is committed to interoperability and having the most open EMR. It is becoming clear that this is the right strategy.

Our healthcare system is being digitized. And the opportunity to improve it with this data will not be fully realized unless all stakeholders commit to interoperability. If not, the return on billions of dollars invested in systems will be limited, and the opportunity to have a major positive impact on the quality of healthcare system will be wasted.

We believe that operating as a closed system is borderline immoral. Yet there are still major players that continue to operate this way. We are pleased that members of Congress have recently been demanding that taxpayer dollars not line the pockets of vendors that have developed business models around intra-operability, when all suppliers should be focused on delivering the value of true interoperability.

We believe it is wrong for taxpayer dollars to subsidize closed platforms. Consumers have a right to their data. One of the primary reasons that Neal joined the ONC Policy is to ensure that they will have it.

With that, I’ll turn the call over to Mike.

Thanks, Zane. Good afternoon, everyone.

Today I am going to discuss ITWorks and provide some operational highlights.

I’ll start with ITWorks. This quarter we signed an ITWorks contract with a full-service community hospital that has 120 active staff physicians practicing in 37 different specialties. They are a long-term Cerner client, and are currently pursuing HIMSS Level 6 recognition.

Similar to most of our ITWorks clients, this client concluded that ITWorks was a good fit after completing an evaluation of the resources needed to continue meeting regulatory mandates, such as future phases of Meaningful Use and ICD-10. These pressures are common across our client base and are the reason our ITWorks pipeline remains strong.

As a mid-year update on ITWorks financial contribution and outlook, our ITWorks revenue is up over 50% year to date. And we expect it to also have full-year growth over 50%. This growth is driven by strong bookings last year, bookings and scope expansions this year, and a strong pipeline for the second half of this year.

Now I’d like to provide a couple of operational highlights and discuss some client achievements. I’d like to start by giving you a sense for the volume and diversity of work we are doing with our services business.

Our professional services organization is the largest healthcare-focused consulting business in the world. It has over 5,500 associates, and will contribute over $1 billion of revenue in 2014. In Q2 alone, we implemented 2,507 solutions at 197 sites, adding 174,000 new users.

Our services capabilities create a competitive advantage over competitors that rely almost solely on third-party services. Through our solution center implementation approach and best practice methodologies, we provide predictable results at a predictable cost to our clients.

In recent projects, we have incorporated what we refer to as our Model Systems approach. That approach jumpstarts the project by starting with a fully-built best-practices system, which is then fine-tuned as users get hands-on experience and training. This approach has the potential to significantly reduce implementation duration and effort, and could materially benefit new clients transitioning to a Cerner platform, as well as reducing the cost of transition.

Of course, we offer much more than just implementation and training services. In total, we offer more than 20 different lines of service, including operational management, performance improvement, healthcare intelligence and analytics, strategy consulting, and regulatory, to name a few. This growing diversity of services and consulting offerings positions our services business for ongoing growth.

Finally, I’d like to highlight a recent client accomplishment at HealthSouth. During the second quarter, HealthSouth brought five additional rehabilitation hospitals live with their suite of Millennium solutions, bringing their Cerner footprint to a total of 46 of their 103 hospitals. Since the summer of 2012, HealthSouth has launched Cerner solutions into roughly five facilities per quarter, with each facility taking on a full suite of more than 15 solutions.

HealthSouth has 31 facilities at HIMSS Level 6, and anticipates that each newly added Millennium site will also qualify for this same recognition. Going forward, there are 10 additional hospitals scheduled for conversion later this year and 25 facilities scheduled for conversion in 2015.

In summary, we are making significant accomplishments with our clients, as we help them maximize their business in the present, while also preparing them for the future.

With that, I’ll turn the call over to questions.

(Operator Instructions)

Jamie Stockton, Wells Fargo.

Good evening and thanks for taking my questions. Maybe the first one, Zane, the Stage 2 numbers have continued to be pretty weak for everybody. Just big picture, it seems like hospitals, as they've stayed in the Meaningful Use program, have felt like they are on a treadmill. They have to keep qualifying with their current vendor.

If we see a lot of hospitals shake out for Stage 2, is that the big catalyst that you guys are looking for that is going to drive market share your way? Or do you think that there will ultimately be a lot of hospitals that ultimately qualify for Stage 2?

Thanks, Jamie. I'll start with our clients. We have the most Stage 2 hospitals that have attested to date of any other supplier out there. While not the large-size numbers, the most that are out there. And we expect our clients to do incredibly well on the Stage 2 attestation as things move forward here.

And I think it's a little early to determine what the market impact is going to be, given those low numbers for everybody. But I can look forward at our own numbers and know that our clients are in very good shape to attest moving forward.

I do think there are some clients with vendors that will struggle to get through that hurdle. But I think it is a little early to determine what that means in terms of the pipeline for us.

Have you seen an acceleration of hospitals coming to you saying -- we thought we were going to be able to handle Stage 2 with whoever, but now it's apparent that we can't, and therefore we are getting off of this treadmill and open to moving to other solutions?

Those have really occurred prior to this time period. The buying today is being driven primarily by people that are looking to create platforms that are beyond Meaningful Use. We're entering, really, the era of -- what's the foundational plumbing that I need to be more nimble and contemplate the future of healthcare decisions beyond just Meaningful Use. So, I would say to date not a lot of that in the current model, but something worth watching.

Okay. And then my other question just is on the population health. You highlighted that you were talking to both core clients and non-core clients. Can you give us some sense for the deals that you've signed so far, some rough portion of that that has been non-core clients, essentially everything you'd throw into the population health bucket?

I'd say it's a handful of clients to date. But we're seeing a lot of activity picking up in the pipeline. And, frankly, quite a bit of activity in our own base, which probably exceeding our early expectations for the year. So, the trends are very good in terms of both what we've delivered and then the pipeline activity in our current client base, as well as some of those other clients. So I would anticipate you will see signings in the upcoming quarters in both our core client base, as well as non-Cerner core EHR organization.

Okay. That's great. Thank you.

Michael Cherny, ISI Group.

Good afternoon and congratulations on a nice quarter. I just wanted to dig into a little bit of color on the trend file, which Allan was obviously nice enough to send out, as he always does. Looking at the deals for the quarter, it looked like there were fewer deals, so the average deal size, by my calc, is pretty big. I know you mentioned about 19 deals larger than $10 million.

As you think about that and think about the large deals that you're going after, how many opportunities are you seeing that are more near term and very urgent replacement in nature versus how many of those where there actually still might be some greenfield for these particularly larger deals the to could potentially go after?

Michael, this is Zane. I would say that if you looked at the total deals, which I do pretty closely, the activity was actually quite normal for all transactions. There was what I would call that mid-sized transaction anomaly where we didn't have as many mid-sized transactions in the quarter.

I think that's reflective of a lot of the activity that is going on where people are, the large buyers are making decisions either from the acquisition activity, so you see some things in some of the large-size of that, or ITWorks are hosting opportunity. People that are filling out the rest of their portfolios and the rest of the EMR on some of the larger side.

I would tell you, the community hospital marketplace where we highlighted the CommunityWorks, which was one of our strongest quarters ever. And, so, I see a whole lot of strength in the small community hospitals. And, in fact, I see that as a big growth marketplace for us as we move forward.

So, I'm not sure there is a trend there in that mid-range piece, but I did note that myself as we were going through the numbers, as well. I think it's more just a reflection of the deal mix for the quarter.

Thanks, that's helpful. And then, Marc, a question for you, and one I've asked in previous calls, so I apologize for repeating myself. As the cash balance continues to build and build, and you generate strong cash flow, have you rethought the strategic priorities relative to capital deployment? I know you did a lot of buyback in the quarter. But as you think also about the new normal for what your product offering is going to be over the next 5 to 10 years, how much does M&A, which has never been something that Cerner has been particularly active in, play a factor into that?

Michael, this is Marc. I think the uses of cash that we've always talked about are pretty the same as we've been talking about. We're going to invest in our business. And you are seeing us do that through the R&D, through CapEx relative to our growth infrastructure. So, that is the same.

We are committing more funds to stock buybacks. As you saw, we did $217 million this year to date, and basically spent all of our free cash flow for this quarter on our stock buyback, and have some or to go do. I think we've always talked about that there's some element of strategic acquisition potential in our approach to use of cash.

The key for us is we don't really have any gaps that we need to go fill. So, we will be continuing to look at things that are interesting, that complement Millennium, that have good price to value ratio. But there's really pretty consistent, I think, in our approach to cash, as we talked about before.

Perfect. Thanks.

Steve Halper, FBR.

Hi. We'd like a quick update on Intermountain activities, as well as Advocate as you approach the end of that development cycle.

Hi, Steve, it's Zane. Just a quick update around Intermountain. We continue to engage in the build process and the project process. It's going incredibly well. They are a great client. It's been very collaborative. They engage with us in a number of ways. And we're really excited for them to continue to move forward with the project, which remains on track and going well.

Around Advocate, we went to live with the Healthe Registries, and they are seeing significant benefit from that. And we continue -- we've actually had our second go-live in Healthe Registries in our client base today, as well. It's not just an Advocate story any longer, which is good. But Advocate continues to be a leader in this space and is a great proof point of what we can do.

Are you seeing increased activity in the pipeline regarding Healthe Registries?

Absolutely. In fact, as I mentioned earlier, it's exceeding some of our early expectations around what that pipeline looks like, both in our core client base as well as our external client base. And I would also say beyond the Registries themselves.

So, as we roll other capabilities, the demand for some of the upcoming capabilities is very much in the thoughts of our prospects and existing clients today. I feel very bullish about the path that we're on, and that it is going to have a meaningful impact to Cerner as we move forward over the years.

Great. Thanks.

Lisa Gill, JPMorgan.

Hi. It's actually Gavin Weiss in for Lisa. I might have missed this in the prepared comments, but at investor day you showed a slide that outlined the potential wins for Cerner based on hospital M&A activity in 2013. Can you talk about where you are in terms of converting those potential wins? And how is 2014 M&A activity looking for you?

Good question. I did have some very brief prepared comments. But the M&A activities picked up in 2014 pretty significantly. 2013 was a little bit lighter than some of the previous years.

In the first half of the year there has been about 70 hospitals that have changed hands. Cerner hospitals continue to acquire at a greater rate than any of our competitors. And it was very consistent with the previous three-year trend of Cerner clients buying at around 45% to 50% rate of all acquisitions.

Again last quarter we converted some of those acquired bases into Cerner clients. We've had that happen in each of the last three quarters where we are converting that element. But we have not yet disclosed some of that conversion rate. We're still evaluating how fast those convert and how that works through the pipe. It continues to be a huge opportunity for us as we move forward.

Okay. And then just in terms of the competitive environment, it's been publicly reported that one of the hospital IT players has put their business up for sale. How does that affect those customers? Have you seen them come to market maybe with new RFPs or is it still too early?

It's early, but obviously that can cause some folks that are on those bases to consider what their long-term strategies are. So, I think that could provide some impetus for us and a little bit of tailwind for us. We have seen some early conversations in that dialogue.

Okay. Thank you very much.

David Larsen, Leerink.

Hello. Congratulations on a good quarter. There's been some recent news articles about interoperability between vendors such as Athena, Cerner, and Quality Systems and Cerner. Can you just talk about that? In Ascension Health, do you have any ability engagements going on with Athena? Thanks.

This is Zane. As it relates to Ascension and Athena specifically, there's not a program there. What we've done is have our industry group, which is called CommonWell -- which Athena is one of those partners -- that group has grown from the original five partners, which you may remember is McKesson, Cerner, Greenway, Athena, and AllScripts. And has grown to I think about 12 members to date, including CVS and other HIT suppliers.

So we've got four proof points today in the marketplace on putting together that patient identifier, managing the consent. And that's gone incredibly well up-front. We are absolutely 100% committed to seeing that through and think that it's a super strategic and a valuable thing, and an important thing in our industry for us to do, and for us all to collaborate on. And when I mean all of us, it means all suppliers in our industry need to get onboard and be part of solving interoperability challenges.

Athena is obviously part of that CommonWell initiative. So, we have had success with them. And they are part of those pilot projects.

Okay, great. And then when you say -- part of those pilot projects -- does that mean field-to-field bidirectional data interchange?

This is solving a piece of interoperability. So, this piece of interoperability is actually the lack of national patient identifier in this country, which has not happened for mainly political purposes, and really could and should be solved by industry at this point. So, what we're doing is actually making it where we can share data based on that national patient identifier, that patient identification.

So, that's how the data sharing is occurring. And the consumer themselves will have the right to determine who gets that information and where that information -- whether they want to consent to that. So, that's the level of interoperability that we are at.

Great. It sounds like you guys are taking a great leadership role in that. Thanks a lot.

Robert Jones, Goldman Sachs.

Thanks for the questions. Marc, it sounds like the bolus of the go-live implements, and the related expenses, are what you are pointing to for the shortfall in operating margins versus the original goal for the year. I'm just curious, was there anything specific about these go-lives or the associated cost that was outside of your initial annual plan? And then just on the back of that, anything we should be thinking about as we look forward as far as risks associated with additional go-lives?

This is Marc.

Q2 was expected to be a very big quarter for doing go-lives, so it wasn't anything that was really outside our expectations. I think for the upside in revenue over our guidance range was driven half by additional third-party consultants, and half by the increased travel that we saw quarter over quarter. So, nothing that was beyond our expectations or that makes us concerned about our expense model.

I think clearly the higher revenue impacts operating margin percent. It certainly didn't impact our operating margin dollars, which is our key focus. We really want to drive out the operating margin dollars. We're actually fine if the revenue grows a little faster than we would have projected because we do have a pretty good history of being able to bring and expand our operating margin percentages as we go forward.

So, nothing that I saw in this quarter that would concern me. It was pretty much a volume-related item and a project-specific relative to the use on certain projects as from third parties that the clients would have requested, given, as we've talked about, the size of our consulting organization of 5,500 people. We, for the most part, do all of our own implementation work.

So it's a little bit of an at-the-edge element, but doesn't significantly change my view.

So, no reason to think differently about the margin opportunity expansion going beyond this year?

Correct.

And just to change gears, a follow-up question on outside the US just thinking about the UK dynamics. Any sense you can give us on the competitive dynamics there? Anything, updates as far as opportunities or market developments?

This is Zane. We had a great Q2, as we mentioned in my prepared comments. We have seen a lot of activity with those coming out of the trust, which is principally complete at this point. So, those coming out of the trust program are principally complete.

But there is a ton of activity in new business and within those clients that have come out and gone Cerner's direction and joined with Cerner directly. We see the UK as a fantastic growth opportunity. I'm very bullish on our growth in the UK.

Great. Thanks so much.

George Hill, Deutsche Bank.

Hey, good afternoon, guys, and thanks for taking the questions. I think, Zane or Mike, this is one for either of you guys to field. As you are talking to your clients about population health, and as they build the functionality stack, what components of functionality do they feel like they need to start with or buy first? And how do they move down the line?

So, are they starting with data warehousing or are they starting with data analytics and then moving down the end towards patient engagement or risk stratification? I'm trying to figure out where are we in the build of the functionality stack? Where do you guys index against where we are in the build from a product offering, and how far up the adoption curve do you think we are?

This is Zane.

I would say there's some core foundational elements which many folks have in just the HIE and portal space, which has broadly put in that. But as you referred to, George, it's really the next phase of that. So, registries and data warehouse and analytics are the pieces where clients are in their lifecycle buying thoughts.

Bigger contract management and the patient engagement sides of that actually have full CRM for healthcare, are really the future. The demands and the needs are there for this road map to lay out over the next several years, and we're developing work on that today. We are early in the delivery side of this, and we're very pleased with this.

But the thing that we've done different than anybody else is create a platform by which all of this is on one single platform and is not isolated in a single niche supplier. So, we're coming at it from a broad platform perspective, which we've now built that broad platform. And then we can build on the pieces of functionality for each one of the areas to satisfy the needs going forward.

We are incredibly well positioned on the broad platform perspective, whereas competitors in this space have come from a niche perspective and now have to try to figure out how to make that into a broader platform. And that's a lot harder way to run the railroad.

Okay. That leads me to my follow-up. And if I think about Cerner's evolution on the clinical side or the financial side, I would ask, if you look at your client's pop health wallet, how much leakage do you guys think you have right now? Or how much share of wallet are these niche competitors taking that you might have to go recapture in the future the way you went -- later in the adoption cycle, and capture things like ED and surgical, and cardiology, and radiology, and packs? I'm trying to think about how much of the wallet is being committed now that you are not capturing, that you come back and catch in rounds two and round three -- or inning two, inning three, and inning four.

I think it is an interesting element. And I think it's an astute observation in what's occurred because those that were early and had something that sounded like population health on the first round of that, in many cases. And, so, oftentimes we are back in those niches, you are already in inning two, if you will.

What I found profound about this space is the competitor of the day, it really is a competitor of the day dynamic. Who was the big competitor 12 months ago is not the competitor of the day. So, I've never seen some of this move so quickly. I think it depends a lot on where the client is in their evolution, as well.

Where you're in inning one or inning two depends on the client's evolution. So, if they were part of the Medicare Advantage programs, or they're doing one of the Pioneer grants, they have likely made some sort of purchase along the way, and are much further along in their thinking of operationalizing population health.

Those that haven't done that probably actually haven't made many, if any, purchases in that space. So, you have to bifurcate the marketplace and say where is that organization in their lifecycle of going at risk and of thinking at-risk elements. It's a bit bifurcated in that space, if that makes sense.

Yes. So, if I think about that analogy, and I'm sorry, I'm going into Subsection C, if we think about later parts of the pop health technology structure, like what I would call provider network management and provider evaluation management, we might be in the first inning there. But if I look at HIE, I feel like we might already be in the fourth inning because I've already seen a handful of HIE companies come and go.

I think you have it exactly right, George. HIE is obviously the most mature, if you will, in that side. And there has been evolution in that side.

I don't know that that is where the buying is going. So, the buying is really moving towards some of those other areas that we talked about -- the patient registry, the data warehouse elements, and some of the analytics and reporting capabilities. That's where the principal buying is -- referral management -- that's where things are going.

All right. I'll hop off. I appreciate the color. Thanks.

Steven Valiquette, UBS.

Thanks, good afternoon. If we think big picture about some of your biggest potential drivers of bookings and contract wins over the next two years or so, which may include EHR replacement and also RCM sales into the installed base, but maybe not PHM in big size just yet, I'm just curious, is there a general expectation from your end on percent of contract dollars from new clients? Would that potentially move higher over the next few years versus the current 30% trend? Or could that move lower given the sighted mix? Or is it just too hard to predict that metric at this time?

I think our expectation is for it to remain similar. But, again, given that the numbers continue to grow, the dollars on new business continues to grow significantly. So, I think that's one of those elements. But I think we are anticipating it will be fairly similar at this point.

Okay. And then just quickly, last quarter it may been a little bit too soon to get a read on implications for market demand trends following the ICD-10 delay. But now that another three months have passed, just curious if there's any new or additional observations you may have regarding any market shifts just following that delay?

We saw very good performance in our revenue cycle solutions. As I mentioned in our comments, we're at 41% growth over 2013, which is coming off of 51% growth over 2012. So, I think we are feeling very good about where we are in revenue cycle and where our clients are, how the clients are feeling about our solution. And they're able to navigate the ICD-10 elements. They can plan on either side of that deadline to date and we are able to accommodate that.

But I don't see that as a driver of additional elements. I would say some of the EBO that I highlighted earlier, some of those types of stock fragmentation, some of that type of work, I think, does have some plainer ICD-10 elements to it that we're hoping augments some staff and do some things like that.

Okay. Got it. Thanks.

Dave Windley, Jefferies.

Hi. Thanks for taking the question. Zane, your chief competitor seems relatively uninterested or unmotivated in pursuing pop health, based on some of the chatter in the marketplace. And given the size of their client base and the size of the client in that client base, it would seem like they would be logical earlier buyers of some of those capabilities.

And that would make them a very opportune and rich target base for you to go after. I'm wondering in that context if there are particular initiatives that you might call out to drive your pop health platform into the belly of the beast, for lack of a better phrase.

I think you make a very good assessment of the marketplace. I think that's probably as much as I want to comment on that dialogue. We have solutions that the industry needs, and our solution is EHR-agnostic and so it will work regardless of who the competitor is. And it makes sense that we are in talking with some of those clients that may have made another selection on the EHR side. And I think you will definitely see some fruit as we look forward here, moving forward. We absolutely see it the same way you see it.

Okay. Totally separate topic -- on the EBO type opportunities mentioned in the prepared remarks, I wanted to understand that a little better. I'm not sure exactly how far along you are on those, but have you seen any instances where a client starts with what sounds like a fraction of a RevWorks deal and moves into a full RevWorks deal? And if not, can you talk to us about how you might see that evolve?

We haven't seen that happen to date. But we do see that as an opportunity and a very likely outcome of get started, do good work, and then get hired to do more work. That's pretty much a fundamental way that we try to operate at Cerner, is prove the value and move forward.

To date, as I mentioned, about 100 clients are utilizing those services to date, doing a number of different things. And we continue to grow our portfolio services that we'll do on a standalone basis. And I do believe that will drive additional growth on the full revenue cycle outsourcing.

Great. Thanks. And last question, conceptually, with a number of cross-selling opportunities that Cerner has, be it pop health or the works deals, things like that, beyond basic Millennium solutions, I'm interested in, in the context of capital deployment and M&A, and so forth, how the Company looks at the long-term value of adding a member to your footprint, be it by organic win or acquisition. And how you weigh the balance between getting that a substantial addition to your footprint quickly versus winning them by the ones?

This is Marc. I think the value of a member of a client in our footprint -- I don't know that the source of that value and where that client came from is critical. The key for us in our strategy is how can we continue to add more value to that client by more solutions, more services, more opportunities, to help them improve and to reduce their cost work, because that's the two key things they're looking to do.

For us, it really doesn't matter where they come from. It's really us going and executing our strategy. Zane, have you got a comment?

We do track the value of a new footprint. So, I can always say that new footprints are the lifeblood of the Company because we're a growth organization. And that we do a lot of things across the entire healthcare spectrum, can serve us in a number of ways. And, so, tracking that value of the footprint is something that, on an internal basis, we do. So, adding new footprints is incredibly important and that's why we have a big focus on it, and it serves us very well.

Very good. Thank you. I appreciate it.

Ricky Goldwasser, Morgan Stanley.

Hi, good afternoon. A couple of follow-up questions here. Obviously interoperability is big for clients and the big trend going forward. From the conversations you are having with those hospitals that are not current Cerner clients, and when you think about the pipeline, do you think that replacement opportunity from potential customers who currently are with players who don't necessarily have that ability, do you think that that's something that you could see, and see in the near term, next 12 months? Or do you think that these potential customers will first wait to attest from Meaningful Use 2 before they make the potential transition?

I view that as a very long-cycle thing. So, I think it's past that 12-month cycle. And as we have said previously, I think this is a five- to seven-year trend of replacement EHRs. And I think we are early in that five to seven years in that cycle.

I do think that ultimately that will be important, is your ability to be interoperable and to play a role. I don't think that Meaningful Use 2 is having a significant impact on a lot of the buying right now.

Okay. And, then, can you just share with us your thoughts on just Apple's announcement that it will collaborate with the player in the space that is not part of the CommonWell?

I don't know that we have any real comment on what other players do. We see CommonWell as the key structure through which we will achieve patient identification information in the future. And I think that people are certainly welcome to join that organization regardless of what other organizations that they are members of. It's not exclusive. It's all welcoming of all players.

You're going to see lots of different announcements. I think the key for us is we're going to spend the effort and work on the technology to make it happen. We're going to make it available to our clients. And we're hoping, as we increase membership, it will become the de facto standard.

Sean Wieland, Piper.

Hey, thanks a lot. I want to go back to Intermountain. Can you talk about the work you're doing with Intermountain is going to translate into your competitive advantage in the marketplace? And when do you think the market, or has the market started to realize what you are doing with Intermountain?

I think there's a couple of things there. Intermountain is one of the leaders in being the lowest-cost provider, highest quality. And the work that they've done around creating the care process modeling and their level of diligence around becoming the best provider at the lowest cost are things -- and the innovation that they've done on a number of different areas -- we're incorporating some of those things as we go.

So, we have in agile cycle that we're able to actually bring some of those things to bear early in our process. Our clients are becoming aware of what we're doing there. But I think there will be more to come. And certainly much of our client base, and prospective client base, are very interested in the outcomes that we bring at Intermountain, and bring to bear. And the objective is to bring that to our client base and to the entire healthcare industry, some of the successes that they've had, and make that part of the solutions that we deliver.

So, I would say there is a high awareness, obviously, of the project overall from our client base and from our prospects. They're already beginning to see some of the benefits of that. They'll see much more of that as you get to the end of the year and into the next couple of years, and our ability to go harvest some of that information together with Intermountain.

Sean, this is Marc. Obviously Jeff is on some of the calls, not on some of the calls. Our expectation is for the next quarter we will have him be able to speak and present. We'll obviously use that opportunity to go deeper into Intermountain and what's going on there, the benefits we expect to drive from that relationship. So, more information to stay tuned to, just to give a preview.

Super. Thanks a lot.

I want to thank everybody for being on the call today. We're very pleased with our results for Q2. And we look forward to talking to you all soon. Thanks very much. Goodbye.

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