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Cerner Corporation Unimpressive in 3rd Quarter, but Expects Better Days Ahead

Cerner Corporation (NASDAQ: CERN) started off 2017 with a bang, posting strong revenue and earnings growth in the first quarter. Things slowed down a bit in the second quarter, with the healthcare technology company meeting its internal expectations on both the top and bottom lines.

Headed into the third quarter, Cerner expected to make revenue somewhere between $1.265 billion and $1.325 billion, with adjusted diluted earnings per share of $0.61 to $0.63. The company announced its third-quarter results after the market closed on Thursday -- and hit its estimates, but just barely on the bottom line.

Image source: Getty Images.

Cerner results: The raw numbers

Metric 

Q3 2017 

Q3 2016 

Year-Over-Year Change

Sales

 $1.3 billion  $1.2 billion

7.8%

Net income from continuing operations

 $177.4 million  $170 million

4.4%

Diluted earnings per share (EPS)

 $0.61  $0.59

3.4%

Data source: Cerner.

What happened with Cerner this quarter?

Nearly three-fourths of Cerner's third-quarter revenue came from support, maintenance, and services. This revenue increased almost 8% year over year to $927.8 million. System sales generated another $324 million in revenue during the quarter, also up close to 8% from the prior-year period. In addition, Cerner posted revenue from reimbursed travel of $24.1 million.

While the company reduced general and administrative expenses somewhat, spending increased for sales and client service and for software development. These higher expenses caused Cerner's total operating costs to rise nearly 9%.

Cerner reported operating cash flow of $362.9 million in the third quarter. It also generated free cash flow of $222.9 million during the period.

Perhaps the biggest disappointment for Cerner in the third quarter was that bookings didn't meet expectations. The company reported bookings of $1.11 billion, down from the prior-year period level of $1.43 billion and well below the record-high bookings from the previous sequential quarter of $1.64 billion. Cerner attributed this lower-than-expected figure to several large contracts projected to close in the third quarter that were delayed. The company anticipates that most of these contracts will go through in the fourth quarter.

What management had to say

Cerner president Zane Burke said:

Our third quarter was solid from a revenue and earnings standpoint and included record cash flow, but we are disappointed with missing our targeted level of bookings due to large contracts pushing. We remain well positioned for a good year based on our strong bookings guidance for the fourth quarter and expected solid full-year revenue and earnings growth. More importantly, we believe Cerner remains extremely well positioned for good long-term growth as we continue to gain share in the Electronic Health Record replacement market and still have meaningful growth opportunities in revenue cycle and population health, where our solutions and services help our clients navigate the shift from fee-for-service reimbursement to reimbursement based on value and quality.

Looking forward

Financial results for Cerner in the fourth quarter could be a little stronger. The company expects fourth-quarter revenue between $1.3 billion and $1.35 billion. Cerner also anticipates adjusted diluted earnings per share in the next quarter of $0.60 to $0.62. 

The delay of several large contracts in the third quarter should translate to Cerner setting a new record for bookings next quarter. Cerner projects fourth-quarter bookings between $1.75 billion and $2 billion.

Although it's still too early for financial guidance for next year, Cerner did provide a sneak peek at what it expects for 2018. The company thinks revenue will be between $5.5 billion and $5.7 billion. Assuming Cerner hits the midpoint of this range, it would be a 9% jump over what it expects for 2017. Cerner also anticipates adjusted diluted earnings per share in 2018 of $2.52 to $2.68. The midpoint of that range would reflect a 7% increase over 2017 expected results.

Overall, Cerner's business model appears to be solid. While the electronic health record market has matured, there remain significant opportunities for Cerner to increase market share by displacing smaller, less robust systems. 

 

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Cerner. The Motley Fool has a disclosure policy.