J.P. Morgan Healthcare Conference

Transcription

1 J.P. Morgan Healthcare Conference Zane Burke President Marc Naughton Executive Vice President and Chief Financial Officer January 9, 2018

2 Cautionary Statement Regarding Forward-Looking Statements This presentation may contain 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 Cerner s solutions or services. These forward-looking statements are based on the current beliefs, expectations and assumptions of Cerner's management with respect to future events and are subject to a number of significant risks and uncertainties. Cerner s performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: (a) the possibility of significant costs and reputational harm related to product-related liabilities; (b) potential claims for system errors and warranties; (c) the possibility of interruption at our data centers or client support facilities; (d) the possibility of increased expenses, exposure to legal claims and regulatory actions and reputational harm associated with a cyberattack or other breach in our IT security; (e) our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others; (f) potential claims or other risks associated with relying on open source software in our proprietary software, solutions or services; (g) material adverse resolution of legal proceedings; (g) risks associated with our global operations; (h) risks associated with fluctuations in foreign currency exchange rates; (i) the potential for tax legislation initiatives that could adversely affect our tax position and/or challenges to our tax positions in the United States and non-u.s. countries; (j) the uncertainty surrounding the impact of the United Kingdom s vote to leave the European Union (commonly referred to as Brexit) on our global business; (k) risks associated with our recruitment and retention of key personnel; (l) risks related to our dependence on strategic partners and third party suppliers; (m) difficulties and operational and financial risks associated with successfully completing the integration of the Cerner Health Services (formerly Siemens Health Services) business into our business or the failure to realize the synergies and other benefits expected from the acquisition; (n) risks inherent with business acquisitions and combinations and the integration thereof; (o) the potential for losses resulting from asset impairment charges; (p) risks associated with volatility and disruption resulting from global economic or market conditions; (q) managing growth in the new markets in which we offer solutions, health care devices or services; (r) risks inherent in contracting with government clients; (s) risks associated with our outstanding and future indebtedness, such as compliance with restrictive covenants, which may limit our flexibility to operate our business; (t) changing political, economic, regulatory and judicial influences, which could impact the purchasing practices and operations of our clients and increase costs to deliver compliant solutions and services; (u) government regulation; (v) significant competition and our ability to quickly respond to market changes and changing technologies and to bring competitive new solutions, devices, features and services to market in a timely fashion; long sales cycles for our solutions and services; (w) variations in our quarterly operating results; (x) potential variations in our sales forecasts compared to actual sales; (y) volatility in the trading price of our common stock and the timing and volume of market activity; and (z) our directors authority to issue preferred stock and the anti-takeover provisions in our corporate governance documents. Additional discussion of these and other risks, uncertainties and factors affecting Cerner's business is contained in Cerner's filings with the Securities and Exchange Commission. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. Except as required by law, Cerner undertakes no obligation to update forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in our business, results of operations or financial condition over time. A reconciliation of non-gaap financial measures discussed in this presentation can be found in the Appendix to this presentation and Cerner s most recent earnings release that was furnished to the SEC and posted on the investor section of 2

3 Cerner at the Intersection of Health Care and IT Founded in Kansas City in 1979 Largest standalone health care IT company in world $5.6B cumulative R&D 5,000+ person IP org 2,000 clinicians 359 patents 26,000 associates worldwide 25,000 client facilities in over 30 countries 19 of 30 largest health systems have Cerner footprint Annual R&D investment ~$700M $4.8B 2016 revenue 13% 10-yr CAGR (mostly organic growth) 20% 10-yr Operating CAGR * Operating earnings reflects adjustments compared to results reported on a U.S. Generally Accepted Accounting Principles (GAAP) basis in our 2016 annual report on Form 10-K. Non-GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of financial performance. Please see the Appendix for a reconciliation of these items to GAAP results. 3

4 Market Review Snapshot Cerner & Epic remain recognized U.S. market leaders Cerner also recognized as Non-U.S. market share leader Most IDN/multi-facility wins in 2016* (2017 results not available yet) Recognized as specialty and continuum leader* e.g. Behavioral health and post-acute markets Opportunities Over 2,000 sites on legacy platforms Many are smaller, but some larger systems remain State, Local, & Federal opportunities equivalent to dozens of IDNs Tech-enabled services capabilities differentiate Cerner ITWorks, RevWorks, Value Creation Office Industry consolidation Providers looking for scale and standardization Most recent announced transactions could create opportunity for Cerner Some mergers create HealtheIntent opportunity Supplier consolidation also creates opportunity *KLAS Research, 2016 Clinical Market Share Report 2017 KLAS Enterprises, LLC. All rights reserved. Non-U.S. Acute Market Share Leader 4

5 Revenue Cycle Organic revenue growth of 19% in year organic revenue CAGR of 21% Continued success in our base and new business About one third of Millennium base has purchased revenue cycle and growing quickly Part of almost all new EHR business Expanding services opportunities Targeted projects Transition services Business office management Full outsourcing 5

6 Population Health Market Inevitable shift from fee-for-service to value-based reimbursement Focus on tools that enable both FFS and value-based models Differentiated Approach Broad suite of solutions on common platform Unmatched data variety, scale, and intelligence Near real-time Actionable in the workflow Broad client base Leading health systems Cerner and non-cerner EHRs Health plans and ACOs Employers Government 6

7 Recent News Adventist Health Expansion of RevWorks and addition of initial ITWorks relationship Cerner assuming day-to-day management of Adventist Health s revenue cycle and clinical applications IT staffs Focused on creating seamless experience in a patient s entire health journey Positions us to innovate quickly and at scale Veterans Affairs Announced late 2017 they were doing interoperability validation, to be completed by end of January We are confident in our interoperability capabilities and view this as opportunity to demonstrate our leadership Indicated they expect to sign Cerner contract in early 2018 Recall that on our Q3 earnings call we indicated we did not factor in significant contributions from the VA in our Q4 guidance. 7

8 Financial Highlights

9 Financial Highlights Revenue ($ Millions) $ s in Millions Top Line Growth 2017 Q Q Q3 Q3 Growth 2017 YTD YTD Growth Bookings $ 5,446 0% $ 1,250 $ 1,636 $ 1,111-23% $ 3,996 0% Revenue $ 4,796 8% $ 1,260 $ 1,292 $ 1,276 8% $ 3,828 8% Revenue Backlog $ 15,927 12% $ 16,098 $ 16,648 $ 16,532 7% $ 16,532 7% Bottom Line Adjusted Operating * $ 1,133 5% $ 289 $ 298 $ 294 2% $ 880 5% Adjusted Operating Margin* 23.6% 22.9% 23.0% 23.1% 23.0% Adjusted Diluted EPS* $ % $ 0.59 $ 0.61 $ % $ % Balance Sheet & Cash Flow Cash and Investments $ % $ 609 $ 748 $ % $ % Cash used for Share Repurchases $ % $ 23 Days Sales Outstanding 69-14% Debt $ 564-7% $ 550 $ 543 $ 535-7% $ 543-7% Operating Cash Flow $ 1,246 31% $ 304 $ 292 $ % $ 959 6% Free Cash Flow* $ % $ 144 $ 119 $ % $ % $5,000 $4,000 $3,000 $2,000 $1,000 $0 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Revenue Adjusted EPS* Operating Cash Flow Free Cash Flow* $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 EPS Dollars in millions except for EPS FCF = Operating CF less Capital Expenditures and Capitalized Software * Adjusted operating earnings, adjusted operating margin, adjusted diluted earnings per share and free cash flow reflect adjustments compared to results reported on a U.S. Generally Accepted Accounting Principles (GAAP) basis in our 2016 annual report on Form 10-K and most recent Form 10-Q. Non-GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of financial performance. Please see the Appendix for a reconciliation of these items to GAAP results. 9

10 Sales Pipeline Bookings $5,446 Revenue Backlog $15,927 * Operating margin reflects adjustments compared to results reported on a GAAP basis in our 2016 Form 10-K. Non-GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of financial performance. Non-GAAP results are used by management along with GAAP results to analyze our business, make strategic decisions, assess long-term trends on a comparable basis, and for management compensation purposes. Cerner 2016 Business Model (Dollars in Millions) Contribution Revenue Margin % Contribution Margin $ Revenue Streams Licensed Software $549 91% $498 Technology Resale $274 20% $54 Subscriptions $442 62% $274 Professional Services $1,445 28% $404 Managed Services $981 37% $366 Support & Maintenance $1,016 75% $762 Reimbursed Travel $89 0% $0 Totals $4,796 49% $2,358 Indirect Expenses Research and Development Selling, General and Administrative -11% -14% ($535) ($690) Operating Margin* 24% $1,133 System Sales Support, Maintenance and Services 10

11 Near-term Growth Dynamics Bookings Expect full-year 2017 growth Growth in SaaS and Works bookings Quarterly results have been lumpy, as we predicted Revenue Increased recurring revenue and reduced reliance on current-year bookings provides solid visibility to uppersingle-digit growth Margins Expect flat adjusted operating margins near term Over $70M increase in D&A expense reduces near-term leverage Expected acceleration in Works businesses Believe margin expansion is attainable longer-term Larger contributions from SaaS population health revenue Non-cash expense growth rate expected to slow * Adjusted operating margin reflects adjustments compared to results reported on a U.S. Generally Accepted Accounting Principles (GAAP) basis in our 2016 annual report on Form 10-K and most recent Form 10-Q. Non-GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of financial performance. Please see the Appendix for a reconciliation of these items to GAAP results. 11

12 Balance Sheet and Cash Flow Balance Sheet Used excess cash in 2016 for share repurchases $700M repurchased in 2016; $1.4B since 2013 Future uses of cash Investing in business R&D, technology infrastructure, facilities to support growth Increased significantly past 5 years, positioning us for long-term growth Expect overall capex to decline in 2017; could increase in future years depending on growth Repurchases Offset equity compensation dilution plus additional amounts as deemed appropriate Acquisitions Generally not acquisitive, but may be some opportunities given volume of change occurring in health care Cash Flow Outlook Growth in operating cash flow and reduced capital expenditures expected to drive over $150M increase in free cash flow in 2017 This would bring free cash flow to over 75% of GAAP Net Income Free Cash Flow % of Net Income will fluctuate based on capital needed for growth, but expected to remain above 75% after 2017 and trend to over 90% * Free cash flow is not a GAAP measure. Non-GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of financial performance. Please see the Appendix for a reconciliation of these items to GAAP results. 12

13 Long-term Growth Targeting 7-11% long-term growth $9B-$12B in 2025 Internal target remains double-digit Near-term growth from expected from EHR replacement, solution whitespace, RevWorks, and ITWorks Contributions from Population Health expected to ramp in Timing of large Works deals and Population Health ramp will impact growth rates 13

14 Key Assumptions $45B+ Non-U.S. Health Care IT spend (Gartner) EHR less penetrated than in U.S. Associates or offices in more than 25 countries; market leader in many Industry PMPM ranges from single digit to $65+ depending on solutions and services Our current target supported by PMPM below $5 Identifying more services opportunities with higher PMPM $45B+ addressable software and services market (MarketandMarkets Dec. 2016) Growth includes ongoing penetration of revenue cycle in client base and with new EHR footprints and increased RevWorks activity $8B+ annual revenue opportunity in installed base 2025 target assumes new clients by 2025 Over 400 prospects in client base Represents EHR replacement (primarily through ~2020), Federal Government, Device Resale, non-itworks Hosting and Support, Ambulatory, Post Acute, CareAware, Emergency, Lab, Interoperability, Critical Care, Pharmacy, Perioperative, Women s Health, Imaging, Behavioral Health, Oncology, Rehab, and related implementation and consulting services Current client has installed less than 20 of 70+ solutions Model assumes 3% growth through 2020, then 2% growth

15 Health care is too important to stay the same.tm

16 Appendix Reconciliation of GAAP to non-gaap financial measures We report our financial results in accordance with accounting principles generally accepted in the United States of America ("GAAP"). However, we supplement our GAAP results with certain non- GAAP financial measures, which we believe enable investors to better understand and evaluate our ongoing operating results and allows for greater transparency in the review and understanding of our overall financial, operational and economic performance. These non-gaap financial measures are not meant to be considered in isolation, as a substitute for, or superior to GAAP results and investors should be aware that non-gaap measures have inherent limitations and should be read only in conjunction with Cerner's consolidated financial statements prepared in accordance with GAAP. These non-gaap measures may also be different from similar non- GAAP financial measures used by other companies and may not be comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculations. We provide the measures of adjusted operating earnings, adjusted net earnings and adjusted diluted earnings per share as such measures are used by management, along with GAAP results, to analyze Cerner's business, make strategic decisions, assess long-term trends on a comparable basis, and for management compensation purposes. We provide the measure of free cash flow as such measure takes into account certain capital expenditures necessary to operate our business. Free cash flow is used by management, along with GAAP results, to analyze our earnings quality and overall cash generation of the business. Any future period guidance in this presentation includes adjustments for items not indicative of our core operations, which may include without limitation share-based compensation expense and acquisition-related expenses, such as integration expenses, and may be affected by changes in ongoing assumptions and judgments relating to our acquired businesses, and may also be affected by nonrecurring, unusual or unanticipated charges, expenses or gains, all of which are excluded in the calculation of non-gaap adjusted operating earnings, adjusted net earnings and adjusted diluted earnings per share. The exact amount of these adjustments are not currently determinable, but may be significant. It is therefore not practicable to reconcile this non-gaap guidance to the most comparable GAAP measures. Please see the accompanying table for a reconciliation of GAAP results to non-gaap financial measures. Adjusted Operating ($ in millions) Operating Operating Margin % Operating Operating Margin % Operating Operating Margin % Operating Operating Margin % Operating earnings (GAAP) $ % $ % $ % $ % Share-based compensation expense Health Services acquisition-related amortization Acquisition-related deferred revenue adjustment Other acquisition-related adjustments Voluntary separation plan expense Adjusted Operating (non-gaap) $ 1, % $ % $ % $ % Adjusted Net and Adjusted Diluted Per Share 2016 Q Q Diluted Diluted Diluted ($ in millions, except per share data) Net Per Share Net Per Share Net Per Share Net Diluted Per Share Net earnings (GAAP) $ 636 $ 1.85 $ 173 $ 0.52 $ 180 $ 0.53 $ 177 $ 0.52 Pre-tax adjustments for Adjusted Net : Share-based compensation expense 81 $ 19 $ 23 $ 21 Health Services acquisition-related amortization 81 $ 21 $ 21 $ 21 Acquisition-related deferred revenue adjustment 20 $ 4 $ 4 $ 4 Other acquisition-related adjustments 4 $ 0 $ - $ - Voluntary separation plan expense 36 $ - $ - $ - After-tax adjustments for Adjusted Net : Income tax effect of pre-tax adjustments (68) $ (13) $ (14) $ (13) Share-based compensation permanent tax items - $ (7) $ (9) $ (4) Adjusted Net (non-gaap) $ 790 $ 2.30 $ 198 $ 0.59 $ 206 $ 0.61 $ 206 $ 0.61 Free Cash Flow ($ in millions) Reconciliation of GAAP Results to Non-GAAP Results* Q ** Q Q Q Q Q Cash flows from operating activities (GAAP) $ 1,246 $ 304 $ 292 $ 363 Capital purchases (459) (88) (101) (73) Capitalized software development costs (294) (71) (72) (67) Free Cash Flow (non-gaap) $ 493 $ 144 $ 119 $ 223 Cash flows from investing activities (GAAP) $ (790) $ (104) $ (238) $ (252) Cash flows from financing activities (GAAP) $ (677) $ 4 $ 23 $ (0) *More detail on these adjustments and management's use of non-gaap results is in our most recent Form 10-K and our current reports on Form 8-K Q **The 2016 free cash flow presentation has been recast to reflect a new accounting standard (related to share-based compensation) adopted by the Company in Q

17 Recurring & Visible Revenue 86% of 2016 Revenue recurring or highly visible Up from 83% in 2015 Grew 13% in 2016 (19% excluding support) SaaS now about third of total software and trend expected to continue Works component of services expected to grow as well Type of Revenue Includes Non-Recurring Traditional Software, Tech Resale 14% 17% Recurring Support, Managed Services, Subsriptions, Works, SaaS 60% 58% Highly Visible Professional Services 26% 25% 17