Controlling Costs Helps Cerner Corporation in Q2

By Markets Fool.com

IMAGE SOURCE: GETTY IMAGES.

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In the first quarter, Cerner Corporation (NASDAQ: CERN) disappointed investors with lower-than-expected revenue. The company attributed the shortfall to lower resales of low-margin technology. Was Cerner able to show improvement in the second quarter? The giant healthcare technology company announced its second-quarter results after the markets closed on Tuesday. Here are the highlights.

Cerner results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Sales

$1.216 billion

$1.126 billion

8%

Net income

$166.5 million

$115.0 million

44.8%

Earnings per diluted share from continuing operations

$0.48

$0.33

45.5%

YOY: YEAR OVER YEAR. DATA SOURCE: CERNER.

What happened with Cerner this quarter

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How did Cerner achieve year-over-year growth for its bottom line that far exceeded its sales growth? By holding the line on expenses. The company posted decreases in three of four operating expense categories, most notably cutting general and administrative costs by one-third compared with the prior-year period.

On a non-GAAP basis, Cerner's earnings growth wasn't quite as impressive. The company reported adjusted net income for the second quarter of $199.2 million, or $0.58 per diluted share, up from $183 million, or $0.52 per diluted share, in the same quarter of 2015. However, Cerner enjoyed additional tax benefits in the year ago quarter that it didn't have this year.

Cerner announced that bookings,whichreflect the value of new business won that hasn't yet been recognized as revenue, hit $1.40 billion in the second quarter. That's a 9% year-over-year jump -- and much better than first-quarter bookings, which were flat compared with the prior-year period.

Other highlights from the second quarter included:

  • Operating cash flow of $254.9 million.
  • Free cash flow of $56.9 million.
  • Days sales outstanding of 74 days, compared with 81 days in the second quarter of 2015.
  • Total backlog of $15 billion, a 13% year-over-year increase.

What management had to say

Cerner PresidentZane Burke pointed out several positives from his company's second-quarter performance:

Cerner's strong second-quarter results reflect good execution and competitiveness in the U.S. and abroad.We continued to gain share in what remains an active electronic health record replacement market, while also having strong sales of revenue cycle and population health solutions that help our clients navigate the rapidly evolving reimbursement landscape.

Looking forward

Cerner's stock was up a little in early after-hours trading after topping investors' earnings expectations. That's a positive short-term reaction, but it's more important to focus on the company's long-term prospects.

There are still plenty of opportunities for Cerner in its core business of providing healthcare software to providers. The company estimates that over 3,000 sites are on what it terms "vulnerable platforms" that might be ripe for the picking. Of course, Cerner's rivals are eyeing those same prospective customers.

Privately held Epic Systems continues to be the main threat for Cerner. However, the company also must watch out for up-and-comers such as athenahealth (NASDAQ: ATHN). That company counts only around 80 hospitals as customers right now, but CEO Jonathan Bush seems to view his organization as David against Cerner's Goliath.

Last year, Bush stated that he expected both Cerner and Epic to "collapse like big black swans." Based on Cerner's latest results, don't expect Bush's prophecy to come true anytime soon. Nevertheless, Cerner shouldn't be overly dismissive of athenahealth's efforts to gain market share.

Even larger opportunities lie with expansion into population health, global markets, and revenue-cycle management. Cerner is already making progress on all three fronts, as Zane Burke mentioned in his comments. Revenue cycle management could present the biggest market -- and a very profitable one. Cerner estimates that profit margins for revenue cycle management will be over 35%.

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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends athenahealth and Cerner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.