Cerner Corporation Disappoints in Q3 With Weak System Sales

By Markets Fool.com

Cerner Corporation (NASDAQ: CERN) announced its third-quarter results after the market closed on Tuesday. Investors expected the healthcare technology company to deliver strong year-over-year earnings growth, but Cerner failed to meet those expectations. Shares dropped over 5% in after-hours trading. Here are the highlights.

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Cerner results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Sales

$1.185 billion $1.128 billion 5%

Net income from continuing operations

$170.0 million $147.3 million

15.4%

Earnings per diluted share

$0.49 $0.42

16.7%

Data source: Cerner. YOY = year over year.

What happened with Cerner this quarter?

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Cerner's third-quarter revenue fell $15 million below the company's previous guidance. However, the company's profitability wasn't affected by the revenue shortfall. Earnings came in about where Cerner expected -- but a little lower than what many investors thought the company would report.

On an adjusted non-GAAP basis, Cerner posted earnings of$202.6 million, or$0.59 per diluted share. These adjusted numbers were more favorable than the GAAP numbers, primarily because of the exclusion of acquisition-related costs and share-based compensation expenses.

Bookings, a measure of the value of contracts signed but not yet recorded as revenue, totaled$1.434 billion in the third quarter. This figure was below Cerner's guidance and was down 10% from the prior-year period. However, bookings in the third quarter of 2015 were exceptionally strong and present a tough year-over-year comparison.

Other highlights from Cerner's third quarter included:

  • Operating cash flow of $240.3 million.
  • Free cash flow of $56.5 million.
  • Total backlog of $15.471 billion, an 11% year-over-year increase.

What management had to say

Zane Burke, Cerner's president, acknowledged the challenging quarter:

While Cerner's third-quarter results were slightly below our expectations, they were still solid and included the second highest level of bookings in our history. Our competitiveness remains strong and has been bolstered by over $2 billion of investments in research and development over the past four years. We believe these investments have strengthened our clinical, revenue cycle, and population health solutions and position us for strong growth going forward.

Looking forward

Cerner expects fourth-quarter revenuebetween $1.225 billion and $1.300 billion. The company also adjusted earnings per diluted share for the fourth quarter to come in between$0.60 and $0.62. Bothrevenue and earnings guidance for the quarter are less than what many investors anticipated.

For full-year 2017, Cerner projects revenue between $5.2 billion and $5.45 billion. The midpoint of that range reflects an 11% increase from 2016. Cerner also expects adjusted earnings of between $2.50 and $2.70 per diluted share. The midpoint represents a 13% year-over-year increase.

Despite a disappointing third quarter, Cerner shareholders can take solace in one important detail from the company's results. Recurring revenue from support, maintenance, and services comprised nearly 73% of Cerner's total revenue. Even if new sales aren't up to par from time to time, the company can count on a steady recurring revenue stream.

With no more federal incentives for healthcare providers to purchase new systems, Cerner and its peers face a more difficult path in the years ahead. However, there are still many providers on older systems that could be solid targets for Cerner. The sluggish growth in new sales from the third quarter could turn out to be just a bump in the road.

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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends 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.