塞納 (CERN) 2014 Q3 法說會逐字稿

Welcome to Cerner Corporation's third-quarter 2014 conference call. Today's date is October 23, 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, new markets or prospects for the Company's solutions and plans and expectations related to the acquisition of Siemens Health Services.

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 has been furnished to the SEC today and posted on the investor section of Cerner.com.

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

Thank you, Denise. Good afternoon, everyone, and welcome to the call. I will lead off today with a review the numbers. Zane Burke, our President, will follow me with the 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. Neal Patterson, our Chairman and CEO, will be available during Q&A.

Now I will turn to our results. Our total bookings revenue in Q3 was $1.1 billion, which is an all-time high for the third quarter and reflects 19% growth over our previous Q3 record results in Q3 of 2013. Bookings margin Q3 was $976 million, or 89% of total bookings. Our bookings performance drove a 21% increase in total backlog to $10.16 billion. Contract revenue backlog of $9.34 billion is 22% higher than a year ago. Support revenue backlog of $814 million is up 6%.

Revenue in the quarter was $840 million, which is up 15% over Q3 of 2013. The revenue composition for Q3 was $224 million in system sales, $177 million in support maintenance, $416 million in services, and $23 million in reimbursed travel. System sales revenue reflects an 11% increase over Q3 of 2013, with 18% growth in software offsetting the flat technology resale revenue. The sequential decline in system sales this quarter is a result of a decline in technology resale that was greater than the sequential increase in software. Q3 system sales margin dollars grew 15% over the year-ago period, driven by continued strong levels of software.

Moving to services, total services revenue was up 21% compared to Q3 of 2013, with strong growth in professional services, managed services, and ITWorks. Support and maintenance revenue increased 7% over Q3 of 2013.

Looking at revenue by geographic segment, domestic revenue increased 16% for the quarter and global revenue grew 14% over Q3 2013.

Moving to gross margin, our gross margin for Q3 was 83.3%, which is basically flat compared to 83.6% in Q3 of 2013. Looking at operating spending, our third-quarter operating expenses before share-based compensations and acquisition costs were up 14% to $487 million. Sales and client service expenses increased 14% compared to Q3 of 2013, driven primarily by continued increase in revenue-generating associates in our services businesses.

Our investment software development was up 17% compared to Q3 of 2013 and continues to be driven by investments in our growth initiatives. We also have $4 million less capitalized software and $1 million more amortization that contributed to the prior -- the year-over-year increase. G&A expense increased 14% compared to Q3 of 2013, driven mostly by growth in personnel.

Moving to operating margins, our operating margin before share-based compensation expense and acquisition costs was 25.4% in Q3. This is up 30 basis points compared to Q3 of 2013, which is slightly below our 50-plus basis point target for Q3 due to third-party services remaining slightly elevated. We expect over 50 basis points of margin expansion in Q4.

Looking forward to 2015, we expect the first year of incorporating our pending Siemens Health Services acquisition to result in our adjusted operating margins declining to the low 20% range, but we expect them to return to the mid-20s by 2017 based on ongoing leverage in our core business and the accretion from the Siemens Health Services acquisition ramps.

Moving to net earnings and EPS, our GAAP net earnings in Q3 were $129 million, or $0.37 per diluted share. GAAP net earnings include share-based compensation expense, which had a net impact on earnings of $10 million, or $0.03 per diluted share. GAAP net earnings also include costs related to our pending acquisition of Siemens Health Services, which had a net impact on earnings of $6 million, or $0.02 per diluted share. Adjusted net earnings were $145 million and adjusted EPS was $0.42, which is up 20% compared to Q3 of 2013. The Q3 tax rate for adjusted net earnings was 33%. For Q4, we expect our tax rate to be between 33% and 34%.

Now I will move to our balance sheet. We ended Q3 with $1.56 billion of total cash and investments, which is up $90 million compared to Q2. Our total debt, including capital lease obligations, is $147 million, down from $155 million in Q2. Total receivables ended the quarter at $617 million, which is flat compared to $615 million in Q2. Our DSO in Q3 was 67 days, which compares to DSO of 66 days in Q2 and 66 days in the year-ago quarter.

Operating cash flow for the quarter was $220 million. Q3 capital expenditures were $68 million and capitalized software was $44 million. Free cash flow defined as operating cash flow less capital expenditures, and capitalized software was $107 million for the quarter.

Moving to capitalized software, the $44 million of capitalized software in Q3 represents 38% of $116 million of total investment in development activities. Software amortization for the quarter was $25 million, resulting in a net capitalization of $19 million, or 16% 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 be approximately $175 million, which is flat compared to 2013.

Regarding our share buyback, in light of our Q3 announcement that we plan to purchase Siemens Health Services, we did not purchase any shares back during the quarter. So our year-to-date total remains at 4.1 million shares repurchased, or [$217 million]. We do still have $100 million of share repurchase authorization that was approved in May.

Now I would like to provide an update on our pending acquisition of Siemens Health Services. We received regulatory clearance from the US Federal Trade Commission and have continued our integration and transition preparation since we announced the deal on August 5. All of this work has supported our positive view of the Siemens Health Services business unit. At this point, we are targeting a close date of February 2, 2015.

Now I will go through Q4 and the full-year 2014 -- or 2015 guidance. Sorry. For Q4, we expect revenue between $880 million and $915 million, with a midpoint reflected growth of 13% over Q4 2013. Our Q4 revenue guidance combined with year-to-date results put us at the high end of our previously provided full-year guidance of $3.3 million to $3.4 billion (sic - see press release, "$3.3 billion") and reflects 16% full-year growth.

We expected -- we expect for Q4 adjusted EPS before share-based compensation acquisition costs to be $0.46 to $0.47 per share, with the midpoint reflecting 19% growth over Q4 2013 adjusted EPS. Our Q4 adjusted EPS guidance combined with year-to-date results reflects 70% full-year growth. Q4 guidance is based on total spending before share-based compensation and acquisition costs of approximately $520 million to $535 million. Note that our Q4 ends on January 3 and includes 14 weeks instead of 13, which is why there is a higher than normal sequential increase in expense and revenues.

Our estimate for the impact of share-based compensation expense is approximately $0.03 in Q4, which would lead to $0.12 for the full year. And moving to bookings guidance, we expect bookings revenue in Q4 of $1.15 billion to $1.25 billion, with the midpoint reflecting 9% growth over Q4 2013 and 14% growth for the full year.

Looking at 2015, we are working on a combined plan that incorporates our pending acquisition of Siemens Health Services. Based on our preliminary view, we expect adjusted EPS to be in the range of $2.05 to $2.15 when you include estimated accretion from the acquisition. At the midpoint, this reflects growth of 27% over 2014. For revenue, we expect combined revenue of $4.8 billion to $5 billion in 2015. We view this guidance as preliminary until the acquisition is completed and we finalize our combined plan, but we wanted to give you our initial thoughts.

Finally, I would like to mention that our earnings release dates will be later than our normal schedule next year. This is due to the extra week in 2014 which leads to each quarter starting a little bit later next [week] year. And we also plan to add some time to accommodate bringing Siemens Health Services into our closing process. Per our normal approach, we will announce our earnings release date via press release a couple of weeks before each release, but I wanted to give you a heads up that they will be later next year.

And with that, I'll turn the call over to Zane.

Thanks, Marc. good afternoon, everyone. I will start with our results and some marketplace observations. Our bookings revenue in Q3 of $1.1 billion reflects 19% growth over Q3 2013 and is a record for the third quarter. We had 25 contracts over $5 million, and this includes 15 contracts over $10 million, 10 of which were more than $15 million.

The mix of long-term bookings was 35% in the quarter, which is slightly higher than recent levels in the low 30s due to large ITWorks contract and strong managed services bookings.

New business activity in the quarter was good, with 27% of our bookings coming from outside our core Millennium install base. Our pipeline for new footprints is strong, and we are well positioned to continue driving 25% or more of our bookings from outside of our installed base.

Overall, we remain pleased with our competitiveness. The significant investments we have been making in our solutions have led to a very strong offering for the present needs of healthcare providers while also widening our differentiation of Population Health and other capabilities that providers will need as healthcare shifts away from a fee-for-service model.

As we have discussed, interoperability will be critical for these future models of care to be effective. Without interoperability, the return on the billions of dollars being invested in digitizing healthcare will be limited. As a result, our commitment to interoperability and having the most open EMR is an important competitive differentiator that is gaining more attention in the marketplace.

Now I will discuss a few key areas of our business starting with Population Health. Our Population Health organization delivered strong results again in Q3, driven by sales of HIE, Patient Portal, Enterprise Data Warehouse, Clinical Process Optimization, and Healthe Registries. A noteworthy deal in Q3 was Cerner being selected by a large health system with no previous Cerner footprint for a broad suite of Population Health solutions, further validating that our approach expands our addressable market beyond our installed base. In this case, the client prioritized their Population Health procurement even though they intend to replace their EMR in the future. We expect to compete for their EMR business and believe we are well positioned. So this could become an example of our Population Health capabilities leading to a new EMR footprint.

Another observation I would like to make is that we continue to compete against numerous best-of-breed suppliers. Our comprehensive open-platform approach is gaining attention. We have been having conversations with an increasing number of clients who chose a best-of-breed registry solution as recently as 18 months ago and are already considering a change to our platform because they are not getting the value of their niche solution. The niche providers have not taken on the significant challenge of aggregating and normalizing clinical claims and financial data across multiple systems. As a result, these competing offerings are using incomplete and latent data sets, which limits their value.

I would also like to highlight an announcement that was made by a Cerner client, Sharp HealthCare, about how the Sharp HealthCare plan members are among the first consumers to take advantage of Apple HealthKit through the Healthy Now app from Cerner Wellness. Cerner's integration with Apple HealthKit means Healthy Now users and their health team can seamlessly track information from any number of health and wellness applications together, resulting in an up-to-date view of personal health habits and wellness goals.

Another highlight of the quarter was good results in our Revenue Cycle business. Last quarter, I highlighted the success of our extended business office, which is RevWorks service that includes augmenting a client staffed with our associates. These associates specialize in areas such as billing and collections, denials management, coding and backlog, and legacy follow-up, and support all venues of care from ambulatory to acute and to post-acute.

We have more than doubled our extended business office this year and now have over 300 associates. A highlight in Q3 was signing several acute-care clients to assist them in their billing operations from our extended business office in Kansas City.

Moving to the ambulatory and small hospital market where we continue to do well, we had record ambulatory bookings and displaced several key ambulatory competitors as our large IDM clients continue to favor our integrated solution. We also established a key alignment deal with an investor-owned post-acute-care company to do outsourced billing for their providers in several markets.

In the small hospital market, we gained multiple new footprints with our cloud-based community works offering, winning against four different niche community hospital competitors and against our primary competitor's extension offering in these new footprints.

Outside of the US, we had another strong quarter from a booking standpoint, and revenue growth improved to 14% after a slow first half of the year. We had particularly strong performance in the UK, Middle East and Canada.

We have a strong global forecast for Q4, so I expect to finish the year on a positive note. Also the strength of global bookings in 2014, which has included a high level of hosting and professional services, should lead to more predictable global revenue growth in 2015. One additional highlight is the Cerner client Croydon Health Services NHS Trust, a 540-bed South London hospital, was recognized by HIMSS Europe as the first hospital in the UK to achieve Stage 6 certification.

Before turning the call over to Mike, I would like to make a few comments on our pending acquisition of Siemens Health Services. In the 2 1/2 months since we announced our intent to acquire them, we've had time to do additional analysis and get feedback from the marketplace. I am pleased with the results of both. Additionally, we continue to be impressed with the quality of the clients and the people at Siemens Health Services. They will both be big assets to Cerner.

Feedback from the marketplace has also been positive. Our existing clients see value in the increased R&D investment that will result from acquisition, and we have already seen instances where the pending acquisition has improved our position and potential new EMR footprint opportunities in the Siemens Health Services client base.

In summary, I'm very excited for the Siemens Health Services clients and associates to join Cerner. With that, I'll turn the call over to Mike.

Thanks, Zane. Good afternoon, everyone. Today, I am going to discuss ITWorks and provide client success highlights. I will start with ITWorks. As some of you may have seen when it was announced in August, we created a strategic partnership with Georgia Regents Medical Center that included our ITWorks offering. The agreement is designed to help them create a more efficient and cost-effective healthcare delivery model through technological innovation and advancement.

The new alignment, called Jaguar Collaborative, encompasses the health system, GR Health, as well as some information technology services for the University. It also provides for improved information technology performance, EHR usability, and client services. Cerner will provide remote hosting and add enhanced monitoring and system capabilities to provide increased security for the health system's electronic health data.

The third quarter also included our first non-US ITWorks deal. This is a partial ITWorks engagement that will have the initial focus on the Millennium upgrade, technology and support assessments, solution road maps, and physician experience enhancement. While this agreement is small compared to our other ITWorks contracts because it's just a limited engagement, it has the potential to grow to something much larger over time, and we expect it to become a great proof point for our ITWorks model outside the US.

In summary, some of these -- each of these agreements represents good examples where we have significant opportunities to expand relationships with long-term clients as they look to keep pace with changes in health care, manage costs, and position themselves as leading healthcare providers.

Similar to last quarter, I would like to briefly highlight a client accomplishment. Today, I would like to discuss Adventist Health, who is rolling out Cerner Revenue Cycle solutions to all of their hospitals and clinics and is also our largest RevWorks client. They're replacing 19 separate patient accounting systems with one standardized Revenue Cycle platform, which should eliminate duplicative processes and streamline workflows across this enterprise.

Adventist Health has already launched the Cerner Revenue Cycle suite of solutions at nine hospitals and related clinics. Their annual report noted a 39% decrease in accounts that were discharged without a final bill as well as a 40% decrease in accounts that were discharged without final coding. The more efficient billing process also led to a $61 million decrease in accounts receivable and has helped Adventist Health achieve 100% of their cash collections goal. The key to their success has been having registration scheduling and patient accounting workflows on a single platform, which enables more cost-effective and accurate billing and coding and is also more efficient for the users.

Adventist Health has also implemented Cerner PowerChart Ambulatory at [107] outpatient locations and has had a success rate grow to the 90% for provider Meaningful Use attestations.

The progress Adventist is making has not gone unrecognized. They were recently included, along with about 80 other Cerner clients, on a Hospitals & Health Networks Most Wired list.

As we have discussed in the past, the success Adventist Health and other large integrated delivery networks are having with our solutions has been a key factor to our strong competitiveness in the marketplace.

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

(Operator Instructions) Dave Francis, RBC Capital Markets.

Could you guys give us an update on some of the bigger new contracts that are out there in the marketplace? Whether it be the DOD, Mayo, and some of the foreign things that are out there on the horizon. Thanks.

Dave, this is Zane. Both of those opportunities are in different stages in terms of selection process. The DOD is just at the point where they -- the RFP responses are due this week after a couple of delays in the deadlines for submission of RFP. That is likely to be a selection in the first half of 2015, contract in the back half of 2015. So we feel we are well positioned and are excited about the opportunity there.

On the -- Mayo process is not something that is probably appropriate to comment since is not a public procurement, but it is actively ongoing. We feel well positioned there and competing well.

And are there any mileposts we ought to be looking for relative to the DOD contract, or is that something that's going to stay pretty much in house there? Thanks.

It will pretty much stay in house there. So once the RFP responses are received -- which, again, the deadline was extended to I believe it's next week -- then they will ask for a clarification question as part of that. But I don't think there will be anything public that we will know about until the first half of 2015.

Richard Close, Avondale Partners.

I just have a really quick one. On the investor-owned, post-acute deal, could you go into a little bit more detail what the products were again? I think you said RCM. I'm not positive there. And then is this an existing customer or someone totally new to you guys?

This is a new client for us. It is actually our business office services for physicians, so we are providing the outsourced billing for those physicians. And this represents actually a pilot for them for about 50 to 100 physicians initially, and then they have about 1,600 physicians. So once we have success, we have the opportunity to roll out more broadly. But this is a great first footprint for us.

Okay. Thank you.

Garen Sarafian, Citigroup.

First, a clarification question. Going back to the preliminary guidance that you had given for next year of $2.05 to $2.15, if you back into that number from the consensus, if you look at the $0.15 accretive assumption that you guys have made previously, the legacy Cerner number, it looks like the Street was either too high in their $1.97 I see. Or is it that when you look at Siemens that some of the assumptions you've made are more back-end weighted? Just trying to understand was consensus for next year organic Cerner too high, or are you seeing something different as you dig into Siemens where the accretion is more back-end weighted?

Yes, as we look at the numbers there was no intent to indicate that our earlier view that we discussed with you on Siemens has changed in any way. I think if you look at what -- when we were putting our numbers together, we were looking at $1.95 kind of as consensus. When we come out of Q3, we don't have a final plan yet. So what we try to do is give you an idea of are we comfortable based on current status with what consensus looks like. We basically looked at that as being $1.95, added the $0.15 accretion from Siemens to come up with $2.10, which was the midpoint of our guidance. So there's no deeper meaning in this other than it's consistent with our normal practice of before we get our plan done, I can give you accurate guidance in detail. That's what we've done. So does not mean to imply that there's any difference in any of the numbers that we've talked about previously.

Got it. No, good -- important point of clarification. And then as a follow-up, just on a broader level, you obviously speak with a lot of hospitals, and at least a good portion of the nonprofits have fiscal year June or September end. So at this point in the year, what are you seeing in terms of their upcoming IT budgets? And maybe if we can split that into two. First, are overall budget is increasing or decreasing and by how much? And second, those that plan to spend the most, what shifts in spending patterns are you seeing so far?

This is Zane, Garen. Not a lot of 9/30 year ends in clients that I work with. Mostly 6/30 and calendar year end. So, many of my clients are in the middle of budget process -- as the ones on the calendar year-end elements. And they are looking at continued investment in IT as a lever to -- as ways to improve quality and lower costs, and we are seeing pretty consistent mechanisms on the IT spend in those spaces. That's not a scientific study, but that's merely the dialogues that I'm having on an anecdotal basis.

And any shifts in spend other than clients being at different points in the IT cycle?

It is where they are on their journey. So those that are further along on the journey are looking -- they are turning their attention to thinking about more pop health elements, and they are prioritizing that at the top of the list. Those that do not have strong foundational clinical systems are out to thinking about the strong clinical foundational systems. And so it is reflective of our pipeline, which is at an all-time high.

Great. Thank you very much.

Lisa Gill, JPMorgan.

Zane, you had mentioned that you won a large client for your Population Health service. First, can you talk about what specific products it's for? And then second, I think you also noted that this health system is planning on changing its core EMR. Can you point to any specific reason for that potential switch?

Well, the first part is there -- the solutions they are looking at from us, or actually they acquired from us for the Healthe Registry solution and Enterprise Data Warehouse, and then they are very interested in some of the things that we're doing in the future. It was really they -- this is what I call a 2.0 buyer. This was a client that has been taking risk in their marketplace and had some niche solutions out there, but those niche solutions were not meeting the needs as they tried to go take risk and have had to actually think about all the things that go into making up that risk. And as they looked at our platform, they found it to be the most comprehensive out there. And so it's really a -- they are going to be on the journey with us, so they are acquiring the things that we have in our toolkit today, but they are incredibly interested in what we're doing in the future, and the vision piece of that is very important to them.

The second part of that was your EMR question. And they view that their foundational EHR is not what they need on a go-forward basis. So they have, in this case, 43 different ambulatory EMRs, and they've got a variety of things on the acute side. And that they need to shore up their foundational solution, and the selection -- I will say absolutely that the selection on the Population Health side is helping us from a competitive perspective in this EMR battle.

So on the EMR side, will they move everything to your product? Will it be a stepped approach? How do we think about that opportunity?

Well, it's a step approach. They're going to do the Population Health pieces first because they have needs today around managing risk. So they are accepting risk today, and they don't have the tools they need so it's a burning business need. The second piece will be the EMR selection that will occur, and anticipate that to happen over the next six months.

Okay, great. Thank you.

Steve Valiquette, UBS.

You know, I guess first of all to follow up on Garen's question earlier, I think I'm the one who is guilty of moving from the Street from $1.95 to $1.97 because I already put the Siemens deal in my projections. So I guess I apologize for being early on that.

But really my question was really along similar lines just on the revenue front around the deal. So you guys talked about $1.2 billion of revs previously. And if we add that in for 11 months, that's $1.1 billion. So you subtract that out, that's $3.7 billion to $3.9 billion for legacy Cerner, and that seems to be in line with the Street consensus. So I just wanted to confirm that first of all, if that's the right way to think about that.

That would be correct.

Okay. And then I forgot if you are able to disclose whether or not you have any synergies in there for 2015, either top-line or cost synergies in terms of how you're going to your bottom-line number for next year.

Yes, as we talked about on the call when we announced, we look at 2015 and look at approximately $0.15 of synergies, primarily cost driven, that we expect to see going to the P&L in 2015. That equates to roughly $80 million of pretax OE. So, yes, we continue to see those synergies being things that we can drive and gain the benefit in our P&L next year.

Okay, so nothing has changed in those quantifications. Okay. All right, that was it. Thanks.

Donald Hooker, KeyBanc.

My question was more around some of the gross margins in the quarter. So if I'm calculating this right, it looks like the support and maintenance services -- that bucket of revenues, some of the margins there were a little bit lower I think than last year, and they seemed to be trending down. Can you just maybe elaborate on that line item, on the gross margin there?

You're looking at the support and maintenance line?

Support maintenance and services and that drop through to gross profit. It looked -- I have it at 91.3. And it looks like it was --

You will see the impact on some third-party consultants that will come through on the gross margin lines -- some of the projects that we talked about a little bit relative to our discussions in the script. So that could impact the gross margin that you are seeing coming out of the services line.

Okay. And then maybe my --

It would hit us in Q2 and Q3.

Okay, got you. Is that so -- that maybe comes back up a little bit in Q4?

Yes, it should be that those resources are -- we are less reliant on those going forward.

Got you. And then maybe just one other question. You talked about DOD and Mayo, and I guess there is the -- you have some interesting business in the Middle East as well, I guess, with Saudi Arabia. Maybe can you elaborate on that a little bit? Because I think that's another large opportunity for you.

Donald, this is Zane. There is a great opportunity in the Middle East, but there's been some changes in the Ministry of Health. And so we continue to do well and had some good business in the Middle East. But with some of those changes, the timeline -- the timing is little bit questionable about exactly when those will come into the numbers. We do -- we have seen a ton of great activity in the UK, and our performance in the UK has been strong as well. So we have seen that be very strong, and we think that is going to have a very positive impact in 2015, as well as we think the Middle East will be strong. But the timing of that broader administrative health opportunity is a little bit in question right now.

Thank you.

Eric Percher, Barclays.

I will continue on the international front. So looking at the growth in the back half, do you feel like you're seeing a growth rate that you can sustain longer term, or is this just the high side of the variance? And then as you look at what your business will become internationally with the addition of Siemens, I am interested in the fact that you are very complementary in your geographic reach. And has that been because there have been markets that weren't attractive to you previously, or is it just a matter of you haven't been active in those markets as of yet?

So I'll take the first part of that, Eric, which is around the sustainability of the growth. And we are feeling really strong about the growth prospects globally and sustaining that global presence. In fact, our pipeline for global is also at an all-time high. And in going through the details of that, I am feeling very bullish about where we are on the global side of this, and so our opportunity there remains strong.

As it relates to the Siemens global element, there are some markets where they played at a little bit of a lower end in terms of scalability of the solution. And so from a scalability perspective, they have some offerings that scale to a different part of the marketplace that we haven't been in. And it is very nice and complementary and will give us good entree into those countries. And they're -- but those -- many of those places are natural places that we would have looked to have gone over time and as we've looked at the portfolio.

Yes, this is Marc. I think Zane comments are right on. The interesting thing to me on the Siemens side is certainly Germany is our biggest market. They have a couple of offerings there, at least three actually, that cover various levels of cost and what is provided based on those costs. What we're hearing as we have initial contact with those clients is they are very interested in something that goes beyond the relatively low-end solutions they currently have, especially academic centers, some of the large hospitals.

We also believe, and have seen it be at very start of in Germany, a push for paying for quality. Germany right now is basically -- that doesn't enter into the compensation program. Their Minister of Health is certainly focused on trying to move to a pay-for-quality environment, and existing systems aren't going to be able to be effective if that actually becomes part of the reimbursement strategy. So it actually feels that there's a lot of opportunity not only to sell the existing solutions into the country but to bring in Millennium on top of that for those organizations that are really looking to bring in a top-line EMR.

That's really helpful. And just a quick follow-up is as you look at those markets, is there an element of services, either from your side or the associates on Siemens' side, that is also in play in those markets?

I think is probably not -- they are much more limited on their service offering. So today, it's much more implementation focused. So certainly we would -- as we continue to expand our other service offerings, including the Works businesses that Mike talked about earlier from a global perspective, we think those are going to be attractive to the client base, especially if they look to enhance their technology infrastructures.

Thank you.

Steve Halper, FBR.

As you think about the acquisition of Siemens, and we appreciate the insight into 2015, what sort of incremental capital expenditures and capitalized R&D costs are you looking at for 2015?

Yes, Steve, this is Marc. Right now, anything I talk about would really not include Siemens because I don't have a really good view of what their capital requirements are going to be. So I think that I don't expect them to be significant as we acquire these assets. There will be some costs as part of acquisition to get those settled and get them in places they need to be longer term.

But I think what you'll see from our perspective is the drivers for our capital spend will be -- at least from a building perspective, we are going to be developing the next phase of new space we need for our growth. That will be out of what we call our Trails campus, near our Innovation campus that some of you may have visited.

So this year, we have spent some on building CapEx. Next year, we think we will spend more, but then we will have our normal infrastructure capital spend. And then capital software will be relatively similar, maybe slightly lower, that is capitalized in 2015. So if you are looking at 2014 and trying to extrapolate to 2015, I think the building CapEx could cost us $75 million to $100 million more in CapEx. So I think at a high level, just looking at Cerner, not looking at Siemens, the cash flow for this year -- free cash flow, which probably is around $400 million, let's just estimate, that will increment up from there. But there will be some -- in total because of our increased profits, but the total spend will be higher because of that development for the buildings.

Just one follow-up. Was the historical Siemens CapEx as a -- relative to Cerner's, was it considerably lower?

Yes.

Okay. And what did they do from a capitalized R&D perspective?

They capitalized R&D. They clearly did not have the level of investment on new projects that we have had recently, so they have a CapEx component. I don't know that it would be lower than our percentage, but I don't know that I can give you an exact number because there will be some expectation that as we look at that R&D spend and some of their projects become Cerner projects as they -- we move some of that work force over and focusing on what we want to co-develop. It will be harder to say which is in what bucket.

Right, fair enough. Great.

Jamie Stockton, Wells Fargo.

Zane, I guess, when you think about the Siemens base -- and you have had a number of conversations with those clients at this point, I'm sure -- do you have a good feel for when you might be able to start to convert some of that base? I mean, should we be thinking about a one- to two-year time frame to start to see some material conversion, or is this more of a three- to five-year time frame before you start to see a number of those clients convert?

The first thing is we are going to go -- we are going to support Soarian for the next 10 years. So those clients that are on Soarian, we absolutely are committed to their success and making them as happy as possible. So I'll start with that. Those that are on some of the older legacy solutions, we do think that that will play out over -- I do think it is a three- to five-year horizon as we move forward. The most important thing is that we earn the trust of those clients, that we treat them very well in the service aspects, and give them a road map for success in the future. And that's what we're beginning to do working with our -- the Siemens Health Services folks.

Okay, that's great. And then Marc, maybe one. This ITWorks deal in Georgia, they threw out a pretty big number as far as the value of the contract. Can you give us a ballpark for what actually flowed through your bookings during the quarter?

Yes, I mean, when we look -- if you look at our numbers, basically I would characterize it as a contract that is over $200 million, not the number that you have seen out there.

Okay, that's great. Thank you.

Michael Cherny, ISI Group.

I'm sorry again, as well. I think I had an early pro forma number out there, but I was trying to model effectively. I want to dig in a little bit to the bookings number a little more if you don't mind, and I want to look at it a little different way. If I do the back-of-envelope math, I see roughly you had about $300 million of bookings give or take from outside the base.

I know you talked about a couple of big contracts. But as you think about that number and that total dollar number, which obviously is a massive magnitude relative to the rest of the market, how do you think about the strategic rationale behind some of those deals? And how do you think a little bit more about what is driving such a massive dollar growth number? Is it the services that you are now providing, education you are doing in the markets to show how effective you are, unhappiness with the customers? If you can kind of bucket into the moving pieces that is allowing you to drive such strong outside your core bookings numbers.

Well, the first piece does start in our core marketplace, which is the core EMR space. So those that had made selections probably in the 10 to 15 years ago, and those organizations did not end up with a strong foundational EMR, those organizations are finding it necessary to make new decisions or to enter processes to make new decisions. And I view that as a five- to seven-year time horizon that the 60% of the marketplace that hasn't made a new contemporary solution decision will make those decisions over this time frame.

Michael, this is Marc. I think the other element is that when you have to bring a new client into Cerner, they buy a lot. They buy a lot of services. A lot of them -- we're seeing actually people looking at Works deals as a (inaudible) or back-office deals which might not rise to the level of Works deals. So they tend to be the bigger deal to come in during the quarter.

I think Marc is on a great point, which is the size of those deals typically reflect our managed services offerings that we're hosting, sometimes application management. So the size of opportunities are there. But the activity is, frankly, at an all-time high on the new business side. And we are seeing that across the community hospital marketplace, the critical access, our CommunityWorks marketplace, our physician office. And so it's really -- it's a number of different segments that are driving it, but it's principally there.

Then the other -- so those are kind of the new -- the replacement market for EHRs from a foundational perspective. Then you have a broad set of people that are like the pop health pieces, so we are starting to see an uptick of new business that is purely in the Population Health space. And so having some of those types of elements -- and it's kind of the breadth and depth of what we do across the entire continuum of care allows us to compete in multiple marketplaces. And we actually create new marketplaces like Behavioral Health, where we are being very successful in a number of behavioral health opportunities and using Millennium platform to scale into other areas. And so those marketplaces also have been successful for us.

So it's literally that breadth and depth of what we do. And so it's a combination of replacement market and new markets that need automation in those new market areas. Does that make sense?

No, that does. That's very helpful. And just one quick clarification on the Population Health contract. I'm just trying to make sure I'm keeping an appropriate count. Is this -- this is the second one that you have announced, with Advocate being the first. Are there any others that we have missed that you want to highlight?

From a Population Health perspective, we actually have about 38 clients that have -- are on the journey with us. This is, I believe, the second or third new -- totally new footprint that was a Population Health first footprint. So that's the highlight behind that.

We won't be highlighting every Population Health deal we do because they are actually becoming part of our normal expectation at this point.

No, that's a very helpful clarification. Thanks, guys.

Sean Wieland, Piper Jaffray.

One more on Siemens. Do you have any thoughts on opportunities for bookings synergies? I understand you're committed to the Siemens product line, but there's a lot of other non-Cerner, non-Siemens stuff in that base that offers some interesting cross-sell opportunities. Any thoughts there?

Yes, this is Marc. When we -- when you look at a -- certainly a Soarian client, their clinical solutions were not very broad. They were focused on EMR or in a very core set of solutions. All of those clients are paying a third party, in many places a niche supplier, a fair amount of money for their ancillary solutions. So, yes, one of the key rationales for this business obviously, and the reason we want to retain that client base, is, like for like, exchanging Millennium for the Soarian, we have a lot of additional solutions that we can sell on to that base. And that's one of our expectations.

I think at the end of the day is that Cerner bookings or Soarian bookings, it will be -- we're not going to spend a whole lot of time worrying about who gets credit internally because obviously our comp plans will handle that. But I think the -- there isn't a lot of ability for us to sell back into that base once we get that base over to Cerner. And it will be likely to be -- potentially when they replace Soarian, but could actually be ahead of the when they replace Soarian.

I would say remember the biggest opportunity is in the non-Soarian client base. So the biggest opportunity is in that MedSeries4 and Invision solutions that have been out there for quite some time. But Marc appropriately indicates that there are some opportunities for cross-sell. And just again, the breadth and depth of what we do versus the breadth and depth of the Siemens Health Services solution set does offer some great cross-selling opportunities, and we will work at ways to create the best integration that we can.

Okay. And so to be clear, those kinds of synergies are not part of your -- the accretion that you gave us for 2015?

That would be correct. The focus primarily in 2015 from our perspective is some revenue synergies but primarily the spending side.

Okay. And then just one more. What are you hitting with regard to cultural challenges with the integration?

Interestingly enough -- I will let Zane talk here as well. But there's a lot of Shared Med people that are still in certainly the US side of this business, and they had a very similar culture to ours. A very similar let's get things done, let's not have a lot of bureaucracy, and let's be successful and let's be the winner in our segment.

Siemens certainly was focused on doing the right thing, but they are big company and big companies by their nature have to have a level of bureaucracy that a Company like us and a company like Shared Medical didn't have. So almost -- we are -- at least from my perspective, people are very excited about the chance to come to work for Cerner. Given the legacy of those people, lots of experience, they are coming with an excitement to be able to react quickly, make decisions quickly, and get to the market with the best solution. So I think it's actually better than I would have imagined it would be.

Super. Thanks.

George Hill, Deutsche Bank.

First one is for Zane or Marc. One of your competitors on a quarterly basis tends to break out the amount of bookings revenue that comes from Population Health targeted solutions. I was wondering if you guys would tell us either -- with the big deal that you guys announced this quarter, either what percent of bookings were Population Health related in this quarter, or how that is growing and maybe how we should expect the mix to change and how we should think about that.

This is Marc. When you have a lot of bookings, when you have 1 billion plus of bookings, breaking out something like pop health as a small percent of that isn't all that relevant to us. It might be relevant to a competitor because that's all they're selling. But for us, it really isn't that relevant. We try to certainly provide some anecdotal information relative to successes that we're having in different areas.

But this is something that was just in our portfolio. It's early, a lot of these things are pilots. So from a dollar standpoint, it's still not something that I would say is significantly moving the meter in many cases. But as it gets to be a bigger part of our business, we certainly can look at providing some -- a little bit more detail between those two. But at this point, I don't think it would be helpful in your analysis.

Okay. And then maybe just a quick follow-up just to make sure -- I don't know if I heard you correctly, but as we start to see the results come in for 2015, are you guys going to break out what was the growth of the legacy Siemens business versus the legacy Cerner business, or we just going to get it all together? Because I thought that you had said in prior calls that for at least a year you were going to give us transparency into the two business segments.

Yes, I think the goal would be to create the ability certainly on the top line to do some type of same-store view of the businesses. I think from an earnings standpoint as we go forward, that may be more and more challenged. But first report we filed, the 10-K from the first year, will break out Siemens on a separate basis to extent. So you will get that information from a GAAP and of that view perspective. And I think on a revenue side where based on getting a sense of same-store sales, I think that's relevant.

From an expense side, it would be harder just because there will be synergies that we get that will come to the P&L. There will be synergies that we get by being able to move people from Siemens over to our teams doing Cerner work. But right now it's a little bit early. I don't know exactly what data I'm going to have and what's going to be helpful to you all. But certainly as we talked about being able to break out elements of Cerner's and Siemens', my focus was on the top line.

Okay, that's helpful. Thank you.

Robert Jones, Goldman Sachs.

Marc, I actually just wanted to go back to the original accretion outlook from Siemens and the more than $0.15 in 2015. I was just hoping maybe you could talk a little about what could potentially drive that more than $0.15 part of that outlook. Now that you guys have provided a more formal outlook for 2015, could you maybe just touch on where you are seeing the potential upside opportunities to that number?

Yes. I don't know that what we're providing today is a more formal outlook. Clearly we have continued to do work. We continue to look at the numbers we originally looked at and have confidence in them. So it's -- I am not really here to go try to guesstimate what could happen in the future relative to them. I think in our view, as we said on the call surrounding the Siemens deal, we feel $0.15 is a good number that we should be looking for and that investors should have confidence of us -- of our ability to deliver that. A variety of things could happen to provide upside to that, but I think we're going to be consistent with our early view that has been supported by additional work that for now $0.15 is the number.

Fair enough. And then I just wanted to switch gears over to Meaningful Use. It seems like you and your major competitor constitute about 3/4 of the early Stage 2 attestation so far while other vendors, at least early on here, seem to be struggling a bit. I'm just curious if maybe you talk a little bit about Meaningful Use as a driver for either replacements, or are we at a point where the CMS needs to act in order to keep this program moving forward?

This is Zane. I don't see meaningful use driving any buying behavior today. So I think the thing it does -- I mean, on a individual stage level. What I think it does is people are seeing how much harder it is if you are not on a contemporary solution to comply with those different Meaningful Use elements. So I think you'll see compliance with those Meaningful Use stages by other suppliers, but I think the difficulty by which those suppliers have to cobble things together and focus their resources on those -- almost exclusively on Meaningful Use elements and not moving forward with the solutions is being noted in the client bases. And that's part of why the foundational solutions are -- the replacement market is very active.

So I think that is really where that continues to play out. So the bar continuing to raise is a good thing for Cerner.

Makes sense. Thanks.

Why don't we have one more question?

Charles Rhyee, Cowen.

Just two quick questions here. Zane, obviously you've talked a lot about -- in the past and a little bit here today all the things you are doing outside of, call it, core EHR. When you think about this market, can you help us -- and you might have done this in past calls, and I apologize if I don't remember. But can you help us size what you think the opportunity outside the core EHR market -- because as we move away from discussions just around Meaningful Use, do you envision that this market -- the future markets will be larger than the core stuff you've been selling and how big you think that can be?

Charles, we provided -- in our analyst meetings, we provided some views of what we think the future can look like in a number of those different lines of business, in particular, the Population Health perspective. But there's a number of different lines by which we see that opportunity growing. And so I would refer you back to those investor slides.

Yes, I think Charles -- this is Marc. We look at -- the pop health is the one that's hardest to quantify. We've seen various quantifications of $30 billion, of $15 billion, whatever. There's lots of external views of that. I think the more we work with clients, especially those taking risk, and see how that is -- they have to focus on how am I going to manage the population, improve the quality of what I provide, and reduce my cost of providing that high-quality care. I think Population Health is a no-brainer in the future world. So given the limited number of sizable players playing in that market, we think that's a big opportunity, and I think the market -- I think the potential market is as big as what we've seen in just doing the EMR. Zane would tell us it's bigger than that, so (multiple speakers).

I think that's what I was really focused on, the Population Health side. So while it's probably a little nebulous today, it's fair to think that this could easily be as big if not bigger than the (multiple speakers).

Certainly our view is this could be as big if not much bigger than core EHR market.

Great. And then just a follow-up on the DOD. When we looked at the RFPs as they were being formalized and in the final RFP, obviously the DOD made a lot of references to open-system architecture and interoperability. It's not as clear to see, just reading the RFP language itself, how important those factors are to DOD. But as you sat in the user group meetings -- sort of the vendor meetings heading into the RFP, can you give us more qualitative sense on what aspects are more important to them?

I absolutely do believe that the open interoperable is a key driver on what they are thinking about along with the capabilities to deliver to our service men and women across the world and support them in the different theaters of war -- venue that they are going to be in. So I think it's going to be a combination of that open interoperable. It's the capabilities across all elements. It's the capabilities of the partners that are driving, so it's not just an EHR discussion. And we really like our team a lot in terms of what we're doing in the partner side of that. So we think we have the best team on that side, and I think that's going to be incredibly important as you move from the current systems to what the new standards will be.

Great. If I could just add one more. It's not in the RFP itself, but is there -- has there already been preliminary discussions or at least anecdotally about a view in the future to also connect that to VA? Because I thought that was the initial reason that DOD was trying to do something with VA in the past.

There hasn't been a lot of dialogue of that as late, and that's why the DOD went out for a separate -- initially, you are correct, Charles, there was going to be a -- was a VA and DOD, and then the DOD specifically went separate from the VA. And that's what is driving, and that's part of this decision. Supposing what may happen in the future, I can't really look at that. But the current course of speed is DOD on a stand-alone basis.

Okay, great. Thanks a lot.

I want to thank everybody for attending today and appreciate the time. We were very excited about our results this quarter and continue to look forward to bringing Siemens Health Services into the fold in Q1 of next year. So with that, I look forward to talking to you soon.

This concludes today's conference. You may now disconnect. Have a great day, everyone.