Cerner reports mixed Q3 earnings amid 'eventful' quarter
Rebecca Pifer @RebeccaMPifer
Health IT giant Cerner chugged along in the third quarter, reporting mixed earnings aftermarket Thursday. Revenue of $1.43 billion, up almost 7% year over year, was in line with Wall Street expectations, although the Kansas City-based EHR company slightly missed earnings estimates.
Bookings in the quarter ticked up 4% year over year at $1.65 billion, the high end of the company's expectations. Backlog of $13 billion was down almost 9% year over year due to the termination of a long-term contract with Adventist Health which will reassume its own revenue cycle operations in November and cut Cerner's 2019 revenue by $170 million.
Cerner CEO Brent Shafer called the quarter "eventful" due to its acquisition of federal IT consultancy AbleVets, a partnership with Amazon's cloud computing business and a ten-year contract renewal with health system Geisinger.
Cerner rebounded somewhat from a disappointing second quarter despite pressures like the market dominance of privately held rival Epic Systems and heightening regulatory oversight in health IT.
The company reported operating cash flow of $351 million and profit of almost $82 million in the quarter, driven primarily by professional and managed services which accounted for 35% and 21% of Cerner's revenues, respectively.
The EHR vendor expanded its federal investments with the acqusition of a Washington, D.C.-area federal consultancy firm, AbleVets, earlier this month for $75 million in cash. Cerner expects the deal to close in the fourth quarter and contribute $90 million of revenue in 2020.
"We had a very busy quarter" in the federal business, John Peterzalek, Cerner's chief client officer, said on the call, calling the AbleVets acquisition a "natural next step." The health IT giant is still open to additional M&A in business targets to spur non-organic growth.
Cerner inked a no-bid $10 billion VA contract in the second quarter of 2018 and expects the initial sites from the beleaguered project to go live in spring 2020. A separate $5.5 billion federal contract with the Department of Defense saw four sites go live in September and should see the next wave of sites go live in the fall next year.
Cerner also announced a partnership with Seattle-based e-commerce giant Amazon in the quarter, naming its cloud services business AWS its preferred cloud provider. The two plan to work on interoperability and data portability and AWS could be a useful partner as Cerner pivots to more of a big data strategy for the second half of 2019 and beyond.
Beyond advancing user experience, increasing product speed to market and reducing Cerner's costs over time, the possibilities with the AWS partnership are "substantial given their vast consumer knowledge," Shafer said on the third quarter earnings call.
Shafer has continued structural and processes revamps following a shaky financial performance last year, shelling out $117 million on organizational restructuring in the third quarter. In the first half of 2019, the CEO has removed the role of president, eliminated redundant business units, expanded operating margin targets for 2019 and 2020, created a "transformation management office," focused on strengthening its software-as-a-service platform and curating healthcare data that pharmaceutical companies, payers and others can pay to access.
As part of the push, Cerner, which contracts with almost 28,000 healthcare companies worldwide, established the position of chief marketing officer in September, hiring ex-Medtronic exec Darrell Johnson for the inaugural post.
Cerner expects revenue in the fourth quarter to come in between $1.41 billion and $1.46 billion, adjusted earnings per share of between $0.73 and $1.65, and new business bookings of between $1.45 billion and $1.65 billion.
The stock remained largely stable following the earnings release.
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Filed Under: Health IT Finance