塞納 (CERN) 2014 Q4 法說會逐字稿

Welcome to Cerner Corporation's fourth-quarter 2014 conference call. Today's date is February 10, 2015, 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 the actual results to differ materially from those in the forward-looking statements may be found under Item 1(a) 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 to 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, Alex. 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. Neal Patterson, our Chairman and CEO, is traveling. Jeff Townsend, Executive Vice President and Chief of Staff, will be at our investment community during HIMSS and looks forward to providing an update on our rollout of solutions at Intermountain Healthcare and our strategic alignment with them that we believe will broadly benefit Cerner, Intermountain Healthcare, and our client base.

Now we will turn to our results. Overall, we had a solid Q4, a very strong year, and we have a good outlook for 2015 and beyond. Our total bookings revenue in Q4 was $1.16 billion, which is an all-time high and reflects 5% growth over Q4 of 2013. Bookings margin in Q4 was $982 million, or 85% of total bookings. For the full year, our bookings revenue was $4.25 billion, up 13% over 2013.

Our bookings performance drove a 19% increase in total backlog to $10.62 billion. Contract revenue backlog of $9.79 billion is 20% higher than a year ago. Support revenue backlog of $826 million is up 5%.

Revenue in the quarter was $926 million, which is up 16% over Q4 of 2013. The revenue composition for Q4 was $280 million in system sales, $197 million in support and maintenance, $431 million in services, and $81 million in reimbursed travel. For the full year, revenue grew 17% over 2013 to $3.4 billion.

System sales revenue reflects a 14% increase over Q4 of 2013, with strong growth in technology resale and good growth in software revenue. For the full year, system sales revenue grew 12% over 2013, driven by software growth of 17% that was partially offset by lower full-year technology resale growth of 4%. Subscription revenue grew 12% for the year.

Q4 system sales margin dollars grew 11% over the year-ago period and full-year system sales margin dollars grew 16% over 2013, reflecting continued strong levels of higher-margin system sales components, like software and subscriptions.

Moving to services, total services revenue was up 19% compared to Q4 of 2013 and 23% for the full year, with strong growth and professional services, managed services, and ITWorks.

Support and maintenance revenue increased 16% over Q4 2013 and 9% for the full year. The higher growth rate in Q4 reflects the impact of the quarter having 14 weeks instead of our typical 13 weeks. Note that the revenue benefit of the extra week was minimal for professional services and system sales, as we had low professional services utilization during the extra week, due to the holiday, and system sales is mostly nonrecurring revenue.

Looking at revenue by geographic segment, domestic revenue increased 14% and global revenue grew 34% over Q4 of 2013. The higher rate of global growth in Q4 was driven by strong software and technology resale, as well as continued growth in global and managed services. For the full year, domestic revenue grew 18% and global grew 6%.

As a preview to the annual update of our detailed business model that we will provide at our investment community meeting on April 14 at HIMSS, I would like to provide you with the total revenue and growth by business model for the full year of 2014. Licensed software grew 17% to $453 million. Technology resale grew 4% to $273 million. Subscriptions and transactions increased 12% to $220 million. Professional services revenue grew 28% to $1.09 billion. Managed services increased 15% to $549 million. Support and maintenance was up 9% to $725 million and reimbursed travel was $90 million, which is up 28%.

Moving to gross margin, our gross margin for Q4 was 81.3%, which is down compared to 82.1% in Q4 of 2013, reflecting the higher level of tech resale and third-party services compared to the year-ago period. Full-year gross margin of 82.2% was basically flat to 2013.

Looking at operating spending, our fourth-quarter operating expenses before share-based compensation expense and acquisition-related adjustments were $524 million, which is up 17% compared to adjusted Q4 of 2013 operating expenses, which also excluded a settlement charge. For the full year, operating expenses before share-based compensation expense and acquisition-related adjustments were up 18% to $1.96 billion. Adjusting the growth rate for the extra week reduces the Q4 growth rate to approximately 10% and the full-year growth rate to about 16%.

Sales and client service expenses increased 17% compared to Q4 of 2013 and 19% for the full year, driven primarily by a continued increase in revenue-generating associates and our services businesses.

Our investment in software development was up 15% compared to Q4 of 2013 and up 16% for the full year and continues to be driven by investments in our growth initiatives. G&A expense increased 16% compared to Q4 of 2013 and 13% for the full year, driven mostly by increases in personnel expense related to our strong growth and higher amortization expense related to recent acquisitions and acquired intangibles.

Moving to operating margins, our operating margin before share-based compensation expense and acquisition-related adjustments was 24.7% in Q4. This is down 90 basis points compared to Q4 of 2013, due to higher tech resale and to third-party services. We were also impacted by the extra week, which ended up having a slightly bigger impact on expenses than it did on some revenue elements, such as professional services, where we incurred a full week of expenses, but had low utilization due to the holiday.

As we indicated last quarter, we expect the first year of incorporating Siemens Health Systems into our results to bring our adjusted operating margins down to the low 20% range. We expect operating margin to return to the mid-20%s by 2017, based on ongoing leverage in our core business and as the expected accretion ramps.

Moving to net earnings and EPS, our GAAP net earnings in Q4 were $148 million or $0.42 per diluted share. GAAP net earnings include share-based compensation expense, which had a net impact on earnings of $11 million or $0.03 per diluted share. GAAP net earnings also include adjustments related to our acquisition of Siemens Health Services, which had a net impact on earnings of $4 million or $0.02 per diluted share.

Adjusted net earnings were $163 million and adjusted EPS was $0.47, which is up 20% compared to Q4 of 2013. For the year, adjusted net earnings were $576 million and adjusted EPS was $1.65, which is up 17% from 2013.

The Q4 tax rate for adjusted net earnings was 30%, which is lower than our normal tax rate, primarily due to the reinstatement of the R&D tax credit during the quarter. In total, the lower tax rate benefited Q4 adjusted EPS by $0.02, with about $0.01 tied to the prior-period portion of the credit.

For 2015, we expect our tax rate to be in the 33% to 35% range.

Now I will move to our balance sheet. We ended Q4 with $1.65 billion of total cash and investments, which is up $94 million compared to Q3. Our total debt, including capital lease obligations, is $130 million, down from $147 million in Q3. As previously announced, we added $500 million of debt early this year, which will increase our balance-sheet efficiency and provide ample financial flexibility at a low cost. The impact on earnings from the debt will be minimal and does not change our guidance.

Total receivables ended the quarter at $673 million, which is up $56 million from Q3, driven by strong sales in the quarter. Our DSO in Q4 was 66 days, which compares to DSO of 67 days in Q3 and 67 days in the year-ago quarter.

Operating cash flow for the quarter was $223 million. Q4 capital expenditures were $76 million and capitalized software was $47 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was $100 million for the quarter. For the full year, operating cash flow increased 22% to $847 million. Free cash flow for the year was $393 million, with capital expenditures of $276 million and capitalized software of $178 million.

Moving to capitalized software, the $47 million of capitalized software in Q4 represents 37% of the $126 million of total investment in development opportunities. Software amortization for the quarter was $28 million, resulting in net capitalization of $19 million or 15% of our total R&D investment.

For 2015, we expect to continue generating good free cash flow, with strong expected operating cash flow growth offsetting an expected increase in capital expenditures tied to beginning construction of a new campus and capital expenditures related to our Siemens Health Services acquisition.

Now I would like to provide an update on our acquisition of Siemens Health Services, which closed last week as scheduled. The purchase price was $1.37 billion, which includes the $1.3 billion agreed-upon price and $70 million in working capital adjustments.

We accomplished a significant amount of integration and transition preparation in the six months since we announced the acquisition. There is still a lot of work to do, but all of our work to date has supported our positive view of Health Services and we are very excited to move forward as a combined company.

Now I will go through Q1 and full-year 2015 guidance. For Q1, we expect revenue of between $1.05 billion and $1.1 billion, with the midpoint reflecting growth of 37% over Q1 of 2014. For the full year, we expect revenue between $4.8 billion and $5 billion, reflecting 44% growth at the midpoint. We expect Q1 adjusted EPS before share-based compensation and acquisition-related adjustments to be $0.44 to $0.45 per share, with the midpoint reflecting 20% growth over Q1 2014 adjusted EPS.

I would like to point out that the consensus for Q1 adjusted EPS increased from $0.44 to $0.46 in the last 30 days and appears to include some significant outliers. Our guidance is based on our outlook, not consensus, but I wanted to point this out because Q1 consensus seemed to shift a bit out of line with the rest of the year, especially when you consider Q1 will naturally include the least amount of accretion from Health Services.

For the full year, we continue to expect adjusted EPS before share-based compensation and acquisition-related adjustments to be $2.05 to $2.15, with the midpoint reflecting 27% growth. Our estimate for the impact of share-based compensation expense is approximately $0.03 to $0.04 in Q1 and $0.14 to $0.16 for the full year.

Moving to bookings guidance, we expect bookings revenue in Q1 of $1.05 billion to $1.15 billion, with the midpoint reflecting 21% growth over Q1 of 2014.

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

Thanks, Marc. Good afternoon, everyone. Today, I will provide color on our results and make some marketplace observations. I will start with our results.

Our bookings revenue in Q4 of $1.16 billion reflects 5% growth over Q4 2013, which was an all-time high. Full-year bookings of $4.25 billion represent 13% growth over 2013.

I view our bookings performance as very good, especially when you consider the mix of long-term bookings was lower than it has been in the past. In Q4, long-term bookings were 24% of total bookings. This is well below our typical 30% to 32% range. While we did have one ITWorks deal in the quarter, the overall lower mix of long-term contracts is the primary reason our bookings were at the lower end of our guidance range. For the year, 30% of our contracts were long term, compared to 32% last year. As Mike will discuss, our outlook for ITWorks is very good.

Looking at overall contract size, we had strong level of contracts over $5 million and $10 million, with 33 contracts over $5 million, including 16 over $10 million. For the year, we had record levels of contracts in both categories, with 112 contracts over $5 million and 63 over $10 million.

New business activity was good, with 28% of our bookings coming from outside of our core Millennium installed base for both the quarter and full year. This is a slightly lower percent than last year, which is more reflective of success in our base than lack of success outside of our base.

Looking ahead, our pipeline reflects more new business opportunities than we have ever had going into a year, with the notable step up from a number of opportunities we saw in 2014. I'm also pleased with how well positioned we are competitively in these opportunities. As a result, I expect 2015 to be a very good year for new business.

I believe we still have a multiyear period ahead of us where there will be opportunities to win new footprints where the core EHR isn't Cerner's. Overlapping this opportunity is growing demand for population health solutions, which continues to be fueled by a trend away from fee-for-service payment models.

A recent example of this trend is HHS' announcement last month that they intend to shift from fee for service to value-based reimbursement more rapidly than many people expected, with the goal of having 90% of Medicare payments tied to quality or value by 2018.

I believe these trends play to Cerner's strengths, as we improved our solutions that meet the present need of healthcare providers, while also widening our differentiation in population health, interoperability, and having the most open EHR.

Now I will discuss a few key areas of our business, starting with population health. Our population health organization had a strong 2014, with revenue increasing more than 20% to $450 million. This was driven by sales of enterprise data warehouse, analytics, clinical process optimization, HIE, patient portal, and Healthe Registries. 2014 was also a year in which we demonstrated that our Healthe Intent platform has great potential beyond our installed base, by establishing important new population health footprints outside our base.

We have many more prospects in 2015. As I mentioned last quarter, we believe we will have instances where our population health capabilities are sold first and then lead to new EHR footprints.

Another trend that emerged in 2014 is that we are already starting to see opportunities to displace niche providers of population health solutions that were purchased by our clients as recently as 18 to 24 months ago. One of our larger bookings in Q4 was for replacing several niche population health solutions at a large client. The niche providers have not taken on the significant challenge of aggregating and normalizing clinical claims and financial data across multiple systems. It is also difficult for them to match our ability to bring near real-time information into the clinicians' workflow.

As a result, we believe most competing offerings are using incomplete and latent data sets and they aren't part of the workflow, which makes them less attractive to providers.

Moving to our revenue cycle business, we had a very good year that included strong growth and good progress at bringing key clients live on our revenue cycle solutions. For the year, our revenue cycle business grew more than 30% to approximately $200 million. This is a fivefold increase since 2010, reflecting our strong progress and returns on the significant ongoing R&D investments we made -- have been making in this space.

A key for our revenue cycle business has been getting more large clients to roll out our revenue cycle solutions. 2014 was a big year in this regard as we brought sites live for some of our largest clients and they are now hosting reference sites for us. This success contributed to another one of our large IDN clients purchasing a broad suite of revenue cycle solutions in the fourth quarter to implement across their 12 acute facilities and 85 ambulatory clinics.

In addition to our strong current capabilities contributing to this selection, a key factor was our work on next-generation revenue cycle solutions designed to support emerging financial models that are more aligned with population health.

Looking ahead, we have a very strong pipeline for revenue cycle that includes several of our large IDN clients. We also believe the significant experience the health services associates bring will help continue our strong momentum.

Moving to the ambulatory space, where we had a strong Q4 and year that included the following highlights -- 16% revenue growth to $151 million; record bookings, including 30% growth in the business office services, where we continue to gain momentum; signed 11 signature displacements of our key competitors, including the three largest clients of one competitor; signed an alignment deal with an investor-owned post-acute care company to do outsourced billing for their providers in several markets; and we received best-in-class recognition in the 1 to 10 physician ambulatory EMR category.

We also had a great year in the small hospital market, adding more than 20 CommunityWorks clients during the year and growing bookings over 50%. We were also recognized again by KLAS as a category leader in the community hospital market.

Outside of the US, we had a very strong Q4 with revenue growth growing 34%, driven by strength in the UK, Middle East, and Australia. This growth, combined with the good growth in Q3, offsets decline in the first half of the year and led to 6% full-year growth.

We remain well positioned for a good 2015 based on the strong global pipeline, great 2014 bookings, and the complementary global business at Siemens Health Services.

I would like to highlight an announcement from early this year that we helped the UAE Ministry of Health become the first organization in the Middle East to roll out a member portal. The online portal is a bilingual website that allows residents of Dubai and Northern Emirates to communicate directly with the Ministry's healthcare providers. As we've discussed in the past, population health is very much a global opportunity and this is a nice milestone in an important region that could lead to broader population health opportunities.

One additional global highlight is that Cerner client Marina Salud became the first US -- I'm sorry, the first non-US hospital to earn the HIMSS Davies Enterprise Award. Davies Award recipients are HIMSS Stage 6 and 7 organizations that demonstrate significant sustainable improvement of patient outcomes through the utilization of EHRs and information technology, while achieving return on investment.

Before turning the call over to Mike, I would like to make a few comments on our recently closed acquisition of Siemens Health Services. We are very pleased to welcome the Health Services associates and clients to Cerner. Thanks to a significant amount of pre-close efforts on both sides, we have hit the ground running. We just had our first joint forecast meetings this past week, just two days after the official close of the acquisition. These meetings reinforced my positive view about the opportunities we have as a combined organization.

We have a good initial view of cross-sell opportunities and we are already in discussions with many of our new clients about providing additional Cerner solutions to meet their needs, ranging from replacing their EHR to adding population health or device connectivity capabilities. We look forward to providing you updates as we progress through the year.

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

Thanks, Zane. Good afternoon, everyone. Today, I am going to discuss ITWorks, professional services, and provide a client success highlight.

I will start with ITWorks, which had a great year, including a new contract in the fourth quarter. Our new ITWorks client is Genesis Health System, based in Davenport, Iowa. Like most organizations, they have been on a journey to increase quality, while reducing costs. They viewed an ITWorks alignment as a good match and can improve service and allow for predictable IT spend.

The new relationship also calls for the establishment of a value alignment office, which is aimed at helping Genesis innovate and optimize care processes, ensure patients receive the best possible care, and increase return on technology investments. The agreement also includes new services, such as help desk operations, application services, and optimization of IT service delivery across the health system.

Financial results for ITWorks were excellent in 2014, with revenue growing over 60% to more than $300 million. We believe our offering is very compelling because we help clients control spending, while getting more done and achieving a higher level of value.

Our ITWorks products are all referenceable, 100% have attested for meaningful use, and 74% are at HIMSS EMR adoption level 6 or 7, which is more than 3 times the 22% industry attainment level. Overall, ITWorks clients are typically model clients that stay on our latest code, embrace new solutions and services, and are strong Cerner advocates. We believe that as provider organizations face ongoing pressures, our ITWorks value proposition will continue to resonate very well. This is reflected in a very strong pipeline and we expect 2015 to be a record year.

Now I would like to provide some highlights on -- from a strong year from our professional services organization that they delivered. In 2014, our professional services revenue grew more than 25% and eclipsed the $1 billion mark, with strong growth in traditional implementation revenue, as well as operational management, performance improvement, and other non-implementation revenue that is creating diversity in our services business.

With approximately 6,000 associates, our professional services organization is the largest healthcare IT focused consulting business in the world. I believe our services capabilities create a competitive advantage over competitors that rely almost entirely on third-party services, because of our ability to deliver a predictable outcome at a predictable cost.

In 2014, we continued to advance our implementation methodologies, including our model system approach that starts with a fully built best practices system that allows for fine tuning as users get hands-on experience and training. This approach has the potential to significantly reduce implementation duration and effort, which should benefit new clients transitioning to a Cerner platform.

In 2015, we are focused on, first, facilitating seamless migrations for clients of health services that choose to move to Cerner. Second, continuing to grow non-implementation components of our business, such as process optimization, enterprise resource planning, and performance improvements. And third, staffing the expected increase in new footprints that Zane discussed earlier.

Now I would like to briefly highlight a client accomplishment involving success with our revenue cycle solutions. Recently, Cerner client Lafayette General Hospital received a MAP award from the Healthcare Financial Management Association. MAP stands for measure, apply, and perform, and Lafayette General is one of only three organizations in the country recognized by HFMA for performance improvement in revenue cycle.

The key achievement of Lafayette was decreasing net AR days from 75 days to 44 days. They were also able to reduce their levels of discharge not final billed from nearly $20 million down to approximately $6 million. A key to their success has been their ability to leverage Cerner's clinically driven revenue cycle to enable staff to capture accurate and complete information at the front end, provide financial [clearance] capabilities, and enable client data to drive coding, billing, and cash collection operations.

With that, I will turn the call over for questions.

(Operator Instructions). Michael Cherny, Evercore ISI.

Congrats on a nice end to the year. You obviously had a very strong year going into your base in terms of increments of new bookings, as evidenced by the results you have generated. As you think about 2015, think about priorities for pursuing new business, obviously, Zane, I heard you guys talk about incredibly strong pipeline. How much do you think about that and segment the opportunities in the pipeline, at least qualitatively, in terms of going into the existing base of your own customers, first going to the existing base now of the Siemens customers that you have on where I would assume there is a pretty nice, very hopefully early to achieve incremental upsell opportunity versus the replacement market, which seems to continue to be shaping at least in a nice way in your direction?

This is Marc. I think the overall market as we look for 2015, you can't -- I think you segmented it pretty well, Michael, our base, the HS base, and then the new opportunities. Zane has spent a lot of time working on our new opportunities. Zane, you want to --

The new business space, particularly the large regional player, is very active in the marketplace and I think you would see we provide -- we do some segmentation to match up with the buyers.

You think about our CommunityWorks offering on the smaller end, the regional community hospital marketplace, the IDN segment, and then the investor-owned segment, and so there is further segmentation around that, and then there is also our outside-the-US organizations, which each country reflects a different marketplace as we look at those. And so, we look at -- we attack those in different ways and with -- and frankly, across the board, we see good opportunities across all segments of both new business, as well as our installed base. That's across the US and outside the US.

Zane, this is Marc. How about the Siemens clients you have had a chance to --

[In fact], I have spent a fair amount of time on the number -- with a number of clients, and clients are very receptive and excited that Cerner has stepped in to acquire Health Services, and I think there is many that will -- that are looking for a strong path moving forward with Cerner, and whether that's on Soarian platform or whether that perhaps on a Millennium platform, each client's journey is different, but I've been very pleased with how the clients have responded to date.

Thanks, and just one clarification. I heard the one ITWorks deal in the quarter. I assume there were no RevWorks since they weren't mentioned. Any other kind of really, really sizable deals that were into that bookings number?

This is Zane. Not -- there were no large RevWorks deals of any kind. We did have a number of business -- small business office services deals and some smaller RevWorks operatings, but no full-scale revenue cycle management and no other significant large long-term bookings.

Michael, this is Marc. That's one of the reasons the bookings are at the lower end of the guidance range. I think as we look for 2015, we do see some of the -- particularly the ITWorks side of the business looking that it could get on the 1.25 type of a run rate for the year that we've been talking about, so we do see some -- a little bit of an uptick in that as we look at our pipeline.

Perfect. Thanks, guys.

George Hill, Deutsche Bank.

Thanks for taking the question. Zane, I guess, Zane or Marc, first I would start with you guys. If I look at the composition of the bookings in the quarter, the very strong booking guidance for Q1, and the rev pullthrough, I guess, Zane, can you provide any color around did any kind of long-term deals, long-term bookings, slip from Q4 to Q1 that you have visibility to in Q1? And if not, I guess can you just talk about what was generally happening with the longer-term bookings environment in the quarter?

I would just look at it and say there is a lot more opportunity in 2015 than what we saw in 2014 in total, particularly on the new business side.

But we see a number of opportunities that Mike pointed out in his comments around the ITWorks side. We will continue to be judicious about how we engage in the rev cycle space, and so I think you're going to see a little -- it's not unnatural to see some lumpiness in terms of how those longer-term bookings will pull through and have an impact on those numbers.

So I don't think there is any trend, per se, in that space, other than we feel very good about the ITWorks activity in the pipeline and how that may be impacting the bookings outlook as we move forward.

Okay, and then, Marc, maybe a quick follow-up just with respect to the Q1 bookings and the Q1 revenue guidance. Is there any chance you'll give us some color on how -- which portion of that we should think of as legacy Cerner and which portion we should think of as the SMS contribution?

Really as we -- given the fact that Q1 is going to have maybe a partial impact of Cerner health services, that, and after going through a forecast meeting there, which actually I have to throw a little bit of color, that was really impressive that both their teams and our teams were able to have a pretty decent forecast format and a dive onto their opportunities. They are not going to have much contribution to bookings in the first quarter. They're waiting for the close. Clients are certainly looking to see what the next step is and those conversations are ongoing, but most of the activity you are going to see driven by -- in Q1 from a bookings perspective will be coming almost entirely from Cerner.

I think as you look at the revenue side, topline side, you can look at health services providing us between $95 million and $100 million a month on the revenue topline, so I think that's a pretty good estimate. That's the number we have talked about and that's the one that our most recent work would continue to confirm.

So I think from that perspective, you will get a good view of the Company. For those of you that are looking to kind of get a little bit of a historical view, at least a prior year of under Siemens, their 9/30 financial statements under GAAP will be issued sometime in the next 60 days as one of our filings and it will break out health services. So you will get a little bit of a view.

I would just indicate that when you look at those numbers, topline will look about right. I think on the earnings line, they had some one-time things as they put together their GAAP statements and operations that moved up their earnings a little bit more than you'd expect. Basically, you exclude those and their earnings would have been breakeven, which is what we talked about.

That's a little -- the color I can provide right now as far as what their impact on Q1 is going to be, and obviously, once we get them in our income statement format and have a little bit better view, we will certainly, I think, probably be looking to update our trend file and do different things in that space. As we combine the companies, there is things like backlog that we just have different approaches on certain elements, and trying to parse them out between contract and support may not make sense going forward. We may have to go to a single backlog number, but our goal always is to be transparent and provide you guys what you need to make your decisions.

The color was very helpful. Thanks, Marc.

Steve Halper, FBR.

Hi, just going back to the cash flow comments that you forecasted or made, could you provide a little bit more color, Marc, just because we're not really familiar with the levels of capital requirements at Siemens or what you are planning on doing on a R&D basis? Are you looking at flat free cash flow in 2015?

This is Marc. When you're looking at 2015, right now my best estimate is that we would expect it to be right around $400 million, so basically flat to this year.

The primary driver of that is going to be more CapEx. The CapEx required for health services isn't significant. There are some things we want to invest in, clearly just their offices and making sure that they've got what they need, a little bit relative to their data center, getting that up to speed relative to our standards and being able to utilize some of that space.

But I think overall even with those additions and even with spending more money on our campus than we certainly did last year, we should still be able to fund all of that and still drive out right around $400 million of free cash flow.

Right, and would you expect that number to -- your level of CapEx, does that stay elevated for a number of years or is 2015 a little bit of an increase because of the campus buildout?

The campus buildout is going to be the key for 2015 and 2016. That will impact those years. Once we get the first phase of that campus done, we will likely be able to take a little bit of a pause, once again depending on our growth, because the key for us is we have got a -- we are a growth company and we have got to have places to go put our people and make them productive.

But I think right now, that's looking like a 2015 and 2016 impact, with 2017 probably being relief from some of that spend.

Great, thanks.

Bob Jones, Goldman Sachs.

Thanks for the questions. Marc, I actually wanted to ask one on operating margins. I know the target coming into 4Q, I think, was for more than 50 basis points of expansion. You obviously didn't see that. Margins were actually down, and then also for the year, I think you came in below the annual target as well. I understand you guys are talking about the holiday week being unproductive, but I would imagine some of that is more of an annual issue.

So I guess as you think about the margin progression you saw in 2014, could you maybe just -- and in the quarter, for that matter, could you maybe just talk a little bit about what went off target as far as the things you thought you had control of?

I think the key talking about the holiday week is not so much that it's a holiday because, yes, Christmas comes every year, at least my kids think it does, and so the fact that we had -- we do a 52/53 week year, so this year was a 14-week quarter, which included that extra week, which had the normal spend, all the spend, but didn't have as much topline impact.

I think when you look -- we have always looked at the Company as we should have a goal of driving down 100 bps per year growth in our margins, in our operating margins. I think if -- and that growth is going to go up and down on an annual basis, but if you look back to 2010 and the last four years, we probably averaged right at 100 basis points a year of growth. I think the key really for operating margins at this point is looking at 2015 because when we add in the health services revenues and their much lower margins from those revenues, you're going to see a significant impact on our operating margins.

I said in my comments we would expect those to be down in the low 20%s from current 25%, potentially plus, levels. The good news is as the accretion starts driving out as we go into the out years, that quickly gets back to current levels and begins to be able to go up at our 100 basis point a year expected growth rate.

The 2014 strong, in Q4 particularly, really the margin impact was as much driven by a strong hardware quarter and device resale quarter as anything, but I think it doesn't change our view of the business and the opportunities we have to get more efficiencies out, and clearly as we add health services, a bigger company, we should have more opportunities for those efficiencies.

That makes sense. Then, I guess, maybe Zane, just one on the new business side. Nice win with Meridian Health, particularly given that it is outside of your EMR base. Any sense you can give us on what the bookings or annual revenue contribution is for a strategic deal like this? And maybe more broadly, anything on the pipeline around similar deals that are focused around HealtheIntent?

As we mentioned, the population health is about $450 million in revenue, and we had the good growth and we are anticipating continued good growth in that space, so I think you can use that as a marker for how you can anticipate our population health business to grow in some of those kind of [thematics], but I can't speak about the individual deal economics.

Fair enough. Thanks.

David Windley, Jefferies.

As you think about the Siemens side of your bookings for the full year, I know, Marc, you already said first quarter won't be much of a contribution. As you think about the full year, can you help us to understand maybe which of the major buckets you expect to see the most traction in the early going? Is it selling Millennium into the base? Is it population health leading? Zane, as you talked about going to market population health first and following with EHR, or is it even managed services? Can you help us to understand where that traction will come early?

I think -- this is Zane. I think you'll see the traction. I think managed services will continue to be a strong element for -- that's an existing business for them and one that will continue. We offer some additional services in that space.

So it's really -- remember, our first objective is to make sure that we keep that client base satisfied and moving forward. I think you will see a number of clients that may think about moving to a Millennium platform, and so there may be some benefits in that and so that will be reflective in our guidance as well.

But it's a blend of the managed services, which is what they've continued to do, some add-on solutions. We will continue to sell Soarian financial patient accounting on a standalone basis. There is a marketplace for standalone patient accounting, particularly given one of our competitors has announced the sunsetting of some of their applications in the larger space.

So I think you'll see a number of different buckets that falls in. Those are all reflected in the bookings guidance that we provided.

Okay, and then, Marc, to your point on margin going down first and then working its way back up over time, are there significant buckets of expense that you could identify to us that will be -- that will come out of the Siemens side that will be the contributors to that synergy and margin accretion over the next couple of years? And are those things tied to the pace at which, say, old Siemens base converts over to new Cerner -- Cerner footprint base?

Yes, relative to -- the synergies are not -- synergies are certainly important. I think efficiencies come from just the combination of our two organizations.

I don't know -- I mean, we like the health services associates. We think they are talented. They're experienced. They are valuable assets, so we are pleased to keep -- to work with them and to build their momentum certainly within that client base and our shared client base.

So I think a lot of the synergies are just -- they're efficiencies relative to being a organization under a large corporate parent that has a certain method of operating that is somewhat more bureaucratic than perhaps Cerner Corporation is. There are things that we just see from how you operate and certainly there are elements of staffing that we can repurpose people to be focused on revenue-producing activities, rather than administrative-type activities.

So we think there are opportunities to go drive that out, and given the targets we've set, getting to $175 million of OE coming from these assets by 2017, we think those are eminently attainable, and if we just keep executing, keep driving our business, and getting with their client base and driving them forward that we should be able to deliver that without a great deal of effort.

Okay, thank you for that, and good luck.

Lisa Gill, JPMorgan.

This is actually Gavin Weiss in for Lisa. Zane, I wanted to touch on your comments on the ambulatory space. I think you said you had 11 displacements, including three from -- three of the largest clients from one competitor. I just wanted to get some more color on the drivers of those displacements. Is it dissatisfaction with the products or are the providers now affiliated with a core Cerner institution?

These are long-standing clients of Cerner's from an acute perspective that have -- and I would say it's kind of a combination of factors. One, our ambulatory solution is incredibly good and we have -- the investments that we have made in the R&D and the improvements that have been made on the inventory side, our clients have seen, and as they move towards further clinical integration and wanting to create more system-ness, if you will, they are looking to have an integrated -- they are looking for an integrated acute and ambulatory solution as they move forward.

I think you will also look at that organization and say that competitor was also not providing the kind of value that those clients were looking for. So it's a combination of factors that comes together, but incredibly good wins for us this year and representative of a trend that we think we will continue to see.

Okay, that's helpful. And then, Marc, I think I heard you that you said the addition of the new debt will not impact earnings, so can you just give us more color about how should we think about the interest expense, interest income for 2015?

No, it will impact earnings, but as you have likely noted, our guidance has basically remained the same since we talked about it at the end of Q3.

Okay.

We will just cover that interest expense within our existing guidance.

Okay, that's helpful. Thank you.

Dave Larsen, Leerink.

Congratulations on a good quarter. Zane, you made an interesting comment about 2015. I think you indicated that the pipeline and the activity for 2015 was actually greater than 2014. Can you just give any more color around that? Are you talking about hospitals, large hospitals, community hospitals? Just any more color would be great. Thanks a lot.

I am speaking about hospitals primarily, so in the hospital marketplace, and it's across many segments. It's -- as we have talked about for a while, this is a replacement market, not a meaningfully -- a replacement market that is preparing for changes in their business models, that's preparing for changes in being a true systems, and just not seeing the value from their existing suppliers that they need on a going-forward basis. It's much stronger than it was in 2014 and we see the level of activity significantly up.

Okay, and then, would you say a good portion of that is coming from Siemens? And then, would there be maybe one or two other vendors, like maybe, I don't know, Horizon or MEDITECH that you would highlight, or is it really maybe 10% Siemens? Just any more details would be great.

Sure, so obviously one of those you mentioned has announced some sunsetting of solutions and that is creating part of that, which actually, I would say, is additive to even the level of activity that we have seen. The Siemens activity is actually additive to the volume that we were seeing early on, so we're already seeing increased levels of activity for 2015, and some of these other events, including some that we've created through our own acquisition, is driving even more demand for our solutions.

It is all those factors out there, but the activity level is just -- is higher than it was in 2014 by orders of magnitude.

Okay, great, thanks a lot.

Sean Wieland, Piper Jaffray.

If you could break down for us, if I am a Millennium customer, what is on my shopping list that I really have to buy to be ready for Medicare's shift to fee for value? Put another way, what are some of the specific capabilities that you are bringing to the table there that you think are unique to you?

Sure, this is Zane. Sean, there is a couple things which you would first think about. We have what we call our Lighthouse offerings, which are truly around how do you provide the best quality care at a lower cost. We are able to actually put content and process through our software and solutions to help drive better outcomes, both from a patient perspective and a financial perspective.

The first thing you want to do is go future-proof yourself around some of those quality metrics and prepare for that. As you take more risk, our population health offerings will be the next set of things that you will want to have and you have to have in this marketplace, so the registries, you will need access to data, so you're going to have to be able to think about your data in different ways and he has the data wins in the future game, and following that data is going to be really incredibly important, so having an open and interoperable solution is a very important element.

So you're going to need an EMR that is capable of actually accepting different solutions, getting it back into the clinicians' workflow. Actually, you're going to need all of Cerner to be successful moving forward. The things that we have built and the things that we will build will continue to add value. So it is a very exciting time.

More risk that is borne, obviously, has impact on the -- our clients, but we view that as very positive from an IT perspective and the need for -- to understand the data, know the data, and to impact it at the point of care is going to be more important, so you really think about all those components as part of that future proof.

How about specifically some of the stuff you are doing with iCentra and Intermountain Healthcare, or should I wait for HIMSS for that?

We will give you guys an update around HIMSS for that, but we are very pleased with the progress that's been made at Intermountain. We anticipate going live here in the first quarter, and so I think you will get an opportunity to speak with both our client and Jeff as it relates to what's happening at Intermountain. And we believe that represents another turn of the crank on an EHR that will be ready for the future and that's -- so there are a number of things that we're pretty excited about.

Okay, thanks very much.

Mohan Naidu, Stephens.

My questions, Marc, maybe on the bookings, so you noted about the long-term contracts. What do you construe as long-term contracts? I am presuming ITWorks, RevWorks. What else?

Usually anything that's got a duration that is going to be five-plus years, so ITWorks tend to be seven to 10 years, RevWorks are similar to that, so that's how we would manage services or hosting agreements, all of those. And keep in mind, any -- when we sign a brand-new client, they buy software and services and implementation, many of those also buy managed services or hosting services. That contract component of it will be a long-term booking and the others will -- the rest of it will be just normal.

Okay, and one follow-up question on the Siemens contribution. You noted $95 million to $100 million per month. Is it fair to say that the majority of that is going to be support and maintenance revenue?

The majority of it will be in backlog for health services that will come into the income statement. The classification of it will vary, but it is flowing from long-term contracts that will have a variety of components to the revenue, but it's basically a single bucket of dollars that will be parsed out in different places, but it's coming out of primarily the backlog.

Okay, thank you very much.

Steven Valiquette, UBS.

One of your smaller hospital EHR competitors reported some soft earnings about a week or two ago, and it talked about this meaningful-use attestation period for FY15 being increased from 90 days to 365 days starting back in October of last year, how that may have caught some hospitals unprepared to start a year-long attestation and may have led to push out of some purchase related to stage 2.

So I guess I am just curious if you think that this CMS timing situation maybe had any impact on your bookings in the just-reported 4Q 2014. And also, could that impact the current 1Q 2015 as well? Thanks.

Steve, this is Zane. I don't see -- we have been talking about this for a while, but meaningful use has not been part of our bookings elements and our clients have been past that dialogue for quite some time as it relates to impact on our bookings or revenues. We have been in a different marketplace around the replacement side of that, so I don't anticipate that that had any future impact and I don't think it had any impact on the previous quarter, either.

Yes, this is Marc. Most of even the new business opportunities outside our client base are people that probably cobbled together something to meet stage 2, so --

I will say -- actually say substantially all of them have strategies for meaningful use. They are making -- they are looking at the increased level of activity is not a meaningful-use conversation. It is about how do I create a platform for the future by which I can think about either remaining a viable standalone organization or creating scale to be a bigger, larger organization, or preparing for changes in payment models, aligning across the continuum of care, all of which plays into Cerner's strengths.

Okay, so were you surprised to hear this peer talk about this, or is this peer just so small in the grand scheme of things it wasn't really something that you guys were really focused on one way or the other?

This is Marc. Their view differs from ours.

Okay, I'll leave it at that. Okay, thanks.

Jamie Stockton, Wells Fargo.

Thanks for taking my questions. Just a couple of quick ones. Marc, on the Siemens business, can you give us some feel for what bookings were in 2014 or what the book to bill was, or anything that we can go by as we think about how 2015 is likely to play out?

Yes, Jamie, I don't know that really, historically, it's going to have a lot of value. Some of their activity has been extending contracts, so adding years to existing relationships, which is great when we come in because there is a lot of long-term agreements that are in place.

If you looked at any particular period where they had a bunch of those, you would come up with a big bookings number, and so that would be -- I don't know that's going to be that helpful.

I think as you look going forward, are they going to have the same book-to-bill level we will? No, I don't expect that. At this point, I don't know that I can -- given that in Q1, which is the bookings number we can really talk about, it is going to be so low that it's not really worth doing the math to figure out their book to bill, we should be able to give you a more -- a better sense of what their bookings level is going to be as we go forward and get a better sense of what we think on a quarterly basis they will be able to do, but is it 1 to 1? Is it 0.5 to 1? Is it -- I can't tell you today what that is, but I can tell you it is going to be lower than ours.

Okay, that's great. Then, Zane, maybe real quick, you mentioned that there were some nichey pop health guys that were already at risk of being replaced in, I assume, some of your core clients. Can you talk about in the pop health space how important is it for a vendor to be able to provide both the technologies that health needs and maybe also services around that technology, care management or whatever? Is that something that is differentiating some companies from others in the pop health space and how do you think that will play out? I will stop there. Thank you.

It's a good question, Jamie. I will speak first to what I think has happened in their replacement activity. I think their replacement activity has been driven by people that -- early on, they had something that sounded like it was pop health related and our clients and their industry was needing anything and grasping at some of those niche providers that had something of some value, but at the end of the day is not a comprehensive platform for managing population health.

I think what the future is is a true platform-based population health strategy, and I've talked before about 1.0 buyers in the space versus 2.0 buyers, and what I mean by that, people that have actually been taking risk see the need for a system-based approach that's an enterprisewide-based approach that thinks across the continuum side of this.

As it relates to integrated services, I think there are some compelling offerings. I think there will be some -- I think you'll see additional solutions and services for companies that do provide both technology and service moving forward, and I think you will continue to see business models evolve as we get further into the population health role, and the more risk that our clients take on, I do think there was some opportunity for that side.

This is Marc. We are over our limits on time, so I just want to thank everybody for being on the call. We are very pleased with the strong 2014 that we had, and we really like the outlook for 2015 and really look forward to welcoming our health services brethren and going to do great things together. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.