Cerner Corporation (CERN-NASDAQ) Nicholas Jansen, (727) 567-2446, Nicholas.Jansen@RaymondJames.com Andrew Cooper, Res. Assoc., (727) 567-2295, Andrew.Cooper@RaymondJames.com Healthcare Information Technology 4Q Revenue In-Line but Bookings Miss (4Q, 1Q Guide) to Weigh on Stock Recommendation: We reiterate our Outperform rating on shares of CERN but lower our price target to $57 (vs. $47-48 after-hours, down ~14%) following another mixed quarter, with 4Q a bookings timing problem and not a revenue miss (as this matched expectations for the first time in 2015). The 4Q bookings softness and lighter 1Q guide (off a tough comp) will clearly weigh on the stock short-term (appears timing-related). That said, while it surely has been a frustrating ride, we still believe there are areas of optimism: (1) robust competitive positioning; (2) crossselling levers in ITWorks, RevWorks and Healtheintent; and (3) Siemens-related synergies. These all can support near-10% revenue and mid-teens EPS growth LT, with the after-hours valuation multiple (20x) likely to provide some support in context of this growth profile. As such, we prefer not to overreact on bookings timing (28% growth in 2015 overall) and believe the company s Analyst Day can be a potential catalyst in context of better understanding the key moving parts. Mixed 4Q. Cerner reported 4Q15 revenues of $1.175 billion vs. consensus of $1.174 billion. System sales outperformed, offset by a modest shortfall in services/support. Bookings grew 16% y/y to $1.348 billion (below guidance), though an ITWorks deal and large professional services contract that slipped to 2016 (likely 2Q) would have put bookings in the range. Adjusted EPS of $0.61 compared to the $0.57 consensus, but was a more modest beat at $0.58 normalized for the R&D tax credit impact. The beat was low quality (EBIT missed). 1Q guidance largely in-line, 2016 views virtually unchanged: Management issued initial 1Q revenue guidance of $1.15-1.20 billion versus current consensus of $1.178 billion. Adjusted EPS guidance of $0.52-0.54 compares to the $0.54 consensus. Bookings guidance calls for $1.15-1.25 billion, below the $1.33 billion Street estimate. This implies flat bookings y/y, a function of tough comps. Visibility calls for bookings growth in both 1H and all of 2016 despite the 28% growth comp for the full year, a function of competitive positioning and cross-selling opportunity. Management s tone remained positive on long-term bookings outlook despite the bad optics of 4Q miss/1q guide. EPS guidance remains at $2.30-$2.40 vs. the current Street estimate of $2.36. 2016 revenues are expected to be $4.9-5.1 billion compared to the preliminary over $5 billion forecast. Management does not view the revenue range as a change in thinking for 2016 outlook vs. last update. While more will be disclosed at Analyst Day, long-term views of +10% revenue growth remain unchanged. Estimates modestly lower: While guidance components are virtually unchanged, we lower 2016 and 2017 EPS to $2.35 (-$0.02) and $2.70 (-$0.05), respectively, to reflect a slightly lower revenue growth profile. We model 4% bookings growth in 2016 off a tough comp, with 2017 returning to double digits amidst cross-selling success. We assume minimal capital deployment and margin improvement at low-end of LT annual target in 2017. Valuation: Based on after-hours ($47-48), CERN trades at 20x 2016 EPS vs. 23-35x three-year range. Our new $57 price target uses a 21x multiple on CY17 EPS, reflective of the sustained midteens EPS growth profile and the company s strong competitive positioning in the HIT market. Non-GAAP Q1 Q2 Q3 Q4 Full GAAP EPS Revenues EPS Mar Jun Sep Dec Year Full Year (mil.) 2014A $0.37 $0.40 $0.42 $0.47 $1.65 $1.50 $3,403 Old2015E 0.45A 0.52A 0.54A 0.57 2.07 1.56 4,427 New2015A 0.45 0.52 0.54 0.61 2.11 1.54 4,425 Old2016E 0.56 0.58 0.60 0.63 2.37 2.20 5,005 New2016E 0.53 0.58 0.59 0.66 2.35 2.00 4,966 Old2017E 0.65 0.67 0.69 0.74 2.75 2.57 5,486 New2017E 0.60 0.67 0.67 0.75 2.70 2.36 5,485 Rows may not add due to rounding. Non-GAAP EPS excludes FAS123 and one-time charges. Published by Raymond James & Associates February 16, 2016 Company Comment Rating Outperform 2 Current and Target Price Current Price (Feb-16-16) $55.46 After-Hours Price (7:57 p.m.) $47.66 Target Price: Old: $69.00 New: $57.00 52-Week Range $75.72 - $52.91 Suitability High Risk/Growth Market Data Shares Out. (mil.) 347.9 Market Cap. (mil.) $19,295 Avg. Daily Vol. (10 day) 1,977,879 Dividend/Yield $0.00/0.0% Book Value (Jan-16) $11.12 ROE 14% LT Debt (mil.)/% Cap. $604/14% Earnings & Valuation Metrics 2014A 2015A 2016E 2017E P/E Ratios (Non-GAAP) 33.6x 26.3x 23.6x 20.5x Company Description Cerner Corporation, based in Kansas City, Missouri, is a leading supplier of clinical and management information systems to more than 10,000 healthcare organizations worldwide. The company develops, markets, and supports information systems and content solutions for health organizations, physician practices, consumers, pharmaceutical and medical device industries, and the healthcare industry as a whole. Cerner is focused on developing technology that reduces errors and waste in healthcare. The company integrates its solutions into the Cerner Millennium architecture, which combines clinical, financial, and management information systems. Please read domestic and foreign disclosure/risk information beginning on page 4 and Analyst Certification on page 4. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863
Call highlights. (1) The current backlog is expected to supply 79% of 2016 revenues, providing good visibility into the year, with management also noting that even if bookings were flat (they still expect growth) this would imply a 13% CAGR in 2015-16 and the average life of the remaining bookings is in the 3.5 year range post-2016 (suggesting still a healthy level of visibility into LT revenue growth); (2) new footprints added in 2015 were more than double the prior record, with only eight of the 238 sites from the DoD included in the year (in other words, competitive replacement momentum is strong); (3) over 40 Siemens clients migrated to Millennium in the year, a number management is pleased with, and a positive sign given a KLAS survey post-deal that saw a more modest amount of Siemens conversions to Cerner; (4) contracts over $5 million and over $10 million grew 37% and 62% respectively in 2015, but 4Q saw no ITWorks or RevWorks deals, lowering long-term contracts to 27% in 4Q vs. ~34% average in the first three quarters; it is important to note that the ITWorks miss in 4Q does not reflect a lost opportunity rather a delay in deal signing, which is expected in 2Q16; (5) revenue makeup is shifting towards subscription-based models, which saw 76% growth in 2015 to $388 million; (6) the R&D tax credit extension accounted for $0.04 in 4Q, making up for the full year all in 4Q, though would have been a penny per quarter, equating to the normalized adjusted EPS of $0.58 in 4Q; (7) Cerner repurchased 2.5 million shares at an average price of $58.40 in the quarter, and commentary suggested this avenue will be strongly considered for greater capital deployment in 2016; and (8) 85 customers have selected the HealtheIntent platform, and management sees more than 20 current opportunities outside the existing client base and primarily on competitor Epic s platforms; further, a state has selected HealtheIntent s enterprise data warehouse capabilities to gain insights on its Medicaid population, a new market entry point. December Quarter Financial Comparison In the following table, we compare Cerner s 4Q15 results against our estimates and last year s reported metrics. The comparisons are skewed by the 1Q15 acquisition of Siemens, which inflates revenue and expense growth metrics y/y. Income Statement 4Q15A 4Q15E 4Q14A Total revenue 1,175.3 1,177.4 926.0 Cos t of revenues 199.2 206.2 172.8 Gros s Profi t 976.1 971.2 753.2 Gross margin 83.0% 82.5% 81.3% Adjus ted S&M 463.0 450.9 366.3 % of revenue 39.4% 38.3% 39.6% Adjus ted R&D 137.5 129.7 103.2 % of revenue 11.7% 11.0% 11.1% Adjus ted G&A 85.0 86.9 55.0 % of revenue 7.2% 7.4% 5.9% Adjusted operating income $290.5 $303.8 $228.7 Tota l opera ti ng expens es 685.5 667.5 524.5 SFAS 123 expens e 17.8 21.0 17.0 One-ti me cha rges, expens es 45.6 12.5 6.4 Operating income 227.1 270.3 205.3 Other i ncome (expens e), net 0.8 (3.1) 3.2 Pre-ta x i ncome 227.9 267.2 208.5 Ta x provi s i on 61.8 90.8 60.6 Income tax rate 27.1% 34.0% 29.1% Net Income from Ops 166.1 176.3 147.9 Opti on expens e (SFAS 123R) a fter-ta x 13.0 13.9 11.0 Extra ordi na ry Cha rges 33.2 8.3 4.2 Adjusted Net Income $212.3 $198.4 $163.1 GAAP Di l uted EPS $0.48 $0.50 $0.42 Adjusted EPS excluding option expense and charges $0.61 $0.57 $0.47 Y/Y Growth 31% 22% 20% Di l uted Sha re Count 347.9 349.3 350.2 Other Key Metrics Booki ngs 1,347.5 1,522.2 1,159.5 Y/Y Growth 16.2% 31.3% 4.9% Margin Analysis Gros s Ma rgi n 83.0% 82.5% 81.3% Adj S&M 39.4% 38.3% 39.6% Adj R&D 11.7% 11.0% 11.1% Adj G&A 7.2% 7.4% 5.9% Adj. Opera ti ng Income 24.7% 25.8% 24.7% International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 2
Cerner Corporation Nicholas Jansen (727-567-2446) Income Statement Raymond James & Associates 2009 2010 2011 2012 2013 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16E 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E Total revenue 1,671.9 1,850.2 2,203.2 2,665.4 2,910.7 784.8 851.8 840.1 926.0 3,402.7 996.1 1,126.0 1,127.9 1,175.3 4,425.3 1,168.3 1,238.5 1,244.9 1,314.0 4,965.6 1,290.7 1,368.0 1,375.2 1,451.3 5,485.2 Cost of revenues 281.2 320.4 441.7 608.2 515.2 129.1 162.4 140.1 172.8 604.4 168.7 192.3 190.6 199.2 750.8 195.5 212.0 210.2 223.6 841.3 214.7 232.8 230.8 245.6 923.9 Gross Profit 1,390.7 1,529.9 1,761.5 2,057.2 2,395.5 655.7 689.4 700.1 753.2 2,798.3 827.4 933.7 937.3 976.1 3,674.5 972.7 1,026.5 1,034.7 1,090.4 4,124.3 1,076.0 1,135.2 1,144.4 1,205.7 4,561.3 Gross margin 83.2% 82.7% 80.0% 77.2% 82.3% 83.5% 80.9% 83.3% 81.3% 82.2% 83.1% 82.9% 83.1% 83.0% 83.0% 83.3% 82.9% 83.1% 83.0% 83.1% 83.4% 83.0% 83.2% 83.1% 83.2% Sales and client service 700.6 767.2 870.0 1,020.6 1,173.1 330.9 343.2 346.4 375.0 1,395.6 420.2 463.4 465.9 489.1 1,838.6 472.7 499.0 500.3 511.7 1,983.7 518.4 545.6 547.0 562.1 2,173.1 % of revenue 41.9% 41.5% 39.5% 38.3% 40.3% 42.2% 40.3% 41.2% 40.5% 41.0% 42.2% 41.2% 41.3% 41.6% 41.5% 40.5% 40.3% 40.2% 38.9% 39.9% 40.2% 39.9% 39.8% 38.7% 39.6% Y/Y Growth -1% 9% 13% 17% 15% 24% 22% 14% 17% 19% 27% 35% 34% 30% 32% 13% 8% 7% 5% 8% 10% 9% 9% 10% 10% Siemens deferred revenue add-back 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.5 8.7 9.1 17.8 48.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 SFAS 123 expense 7.6 11.1 13.3 17.3 24.1 7.2 7.1 8.3 8.7 31.3 8.5 9.7 9.6 8.3 36.2 10.1 11.1 11.1 9.7 42.0 11.1 12.0 12.0 10.6 45.8 Adjusted S&M 693.1 756.1 856.6 1,003.3 1,149.0 323.7 336.2 338.1 366.3 1,364.2 399.1 445.1 447.1 463.0 1,754.4 462.6 488.0 489.2 502.0 1,941.8 507.2 533.5 535.0 551.5 2,127.2 % of revenue 41.5% 40.9% 38.9% 37.6% 39.5% 41.2% 39.5% 40.2% 39.6% 40.1% 40.1% 39.5% 39.6% 39.4% 39.6% 39.6% 39.4% 39.3% 38.2% 39.1% 39.3% 39.0% 38.9% 38.0% 38.8% Software development costs 285.2 287.8 290.7 319.8 418.7 111.0 114.5 115.7 125.9 467.2 161.2 178.6 174.9 170.5 685.3 185.4 186.7 187.2 187.5 746.8 198.4 199.7 200.3 200.6 799.1 Y/Y Growth -2% 1% 1% 10% 31% 19% 12% 8% 9% 12% 45% 56% 51% 35% 47% 15% 5% 7% 10% 9% 7% 7% 7% 7% 7% Total Capitalized software 77.7 80.9 83.0 100.2 174.6 44.5 42.1 44.1 47.0 177.8 63.1 69.8 71.8 59.9 264.7 70.5 70.9 71.1 71.3 283.8 75.4 75.9 76.1 76.2 303.6 Cap Rate 27.3% 28.1% 28.5% 31.3% 41.7% 40.1% 36.8% 38.1% 37.0% 38.1% 39.1% 39.1% 41.1% 35.2% 38.6% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% Amortized Software Costs 63.6 69.0 79.1 81.8 94.7 25.1 24.9 25.4 28.0 103.4 29.1 29.6 29.7 30.7 119.1 33.7 35.7 37.7 39.7 146.9 40.7 41.7 42.7 43.7 168.9 Software development 271.1 272.9 286.8 301.4 338.8 91.5 97.3 97.0 106.9 392.8 127.3 138.5 132.8 141.3 539.8 148.7 151.5 153.8 156.0 609.9 163.7 165.6 166.9 168.1 664.3 % of revenue 16.2% 14.7% 13.0% 11.3% 11.6% 11.7% 11.4% 11.5% 11.5% 11.5% 12.8% 12.3% 11.8% 12.0% 12.2% 12.7% 12.2% 12.4% 11.9% 12.3% 12.7% 12.1% 12.1% 11.6% 12.1% Y/Y Growth -1% 1% 5% 5% 12% 13% 18% 17% 16% 16% 39% 42% 37% 32% 37% 17% 9% 16% 10% 13% 10% 9% 9% 8% 9% SFAS 123 expense 4.4 6.9 8.4 9.2 11.1 3.1 3.6 3.4 3.7 13.8 3.0 5.0 4.6 3.8 16.3 3.5 5.7 5.2 4.4 18.8 3.9 6.2 5.7 4.8 20.6 Adjusted R&D 266.7 266.0 278.4 292.2 327.7 88.5 93.7 93.7 103.2 379.0 124.3 133.5 128.2 137.5 523.5 145.2 145.7 148.5 151.6 591.0 159.9 159.4 161.2 163.3 643.7 % of revenue 16.0% 14.4% 12.6% 11.0% 11.3% 11.3% 11.0% 11.1% 11.1% 11.1% 12.5% 11.9% 11.4% 11.7% 11.8% 12.4% 11.8% 11.9% 11.5% 11.9% 12.4% 11.6% 11.7% 11.3% 11.7% General & Admin. 127.0 130.5 144.9 163.6 202.0 55.2 57.2 68.5 66.0 246.9 113.1 160.1 123.3 118.6 515.0 93.7 95.1 96.2 96.9 381.9 99.6 101.0 102.1 102.9 405.6 % of revenue 7.6% 7.1% 6.6% 6.1% 6.9% 7.0% 6.7% 8.2% 7.1% 7.3% 11.4% 14.2% 10.9% 10.1% 11.6% 8.0% 7.7% 7.7% 7.4% 7.7% 7.7% 7.4% 7.4% 7.1% 7.4% Y/Y Growth 12% 3% 11% 13% 23% 15% 10% 33% 29% 22% 105% 180% 80% 80% 109% -17% -41% -22% -18% -26% 6% 6% 6% 6% 6% FX Gain/(loss) 4.0 (0.2) 0.0 0.0 0.0 0.0 0.0 9.4 6.4 15.8 40.5 71.6 31.4 27.8 171.3 24.0 24.0 24.0 24.0 96.0 20.0 20.0 20.0 20.0 80.0 SFAS 123 expense 4.9 7.0 7.8 11.6 13.8 4.5 4.5 4.3 4.6 17.8 5.0 5.8 6.0 5.8 22.5 5.9 6.7 6.9 6.7 26.1 6.5 7.2 7.5 7.4 28.5 Adjusted G&A 126.1 123.4 137.1 152.0 188.2 50.7 52.7 54.8 55.0 244.8 67.6 82.6 85.9 85.0 663.7 87.9 88.4 89.3 90.1 451.7 93.1 93.7 94.7 95.5 457.1 Y/Y Growth 6% -2% 11% 11% 24% 16% 8% 14% 16% 30% 33% 57% 57% 55% 171% 30% 7% 4% 6% -32% 6% 6% 6% 6% 1% % of revenue 7.5% 6.7% 6.2% 5.7% 6.5% 6.5% 6.2% 6.5% 5.9% 7.2% 6.8% 7.3% 7.6% 7.2% 15.0% 7.5% 7.1% 7.2% 6.9% 9.1% 7.2% 6.9% 6.9% 6.6% 8.3% Adjusted G&A excl. FX 122.1 123.6 137.1 152.0 188.2 50.7 52.7 54.8 55.0 213.2 67.6 82.6 85.9 85.0 321.1 87.9 88.4 89.3 90.1 355.7 93.1 93.7 94.7 95.5 377.1 % of revenue 7.3% 6.7% 6.2% 5.7% 6.5% 6.5% 6.2% 6.5% 5.9% 6.3% 6.8% 7.3% 7.6% 7.2% 7.3% 7.5% 7.1% 7.2% 6.9% 7.2% 7.2% 6.9% 6.9% 6.6% 6.9% Total operating expenses 1,081.8 1,145.6 1,272.2 1,447.5 1,664.9 462.9 482.6 486.6 524.5 1,956.5 591.0 661.2 661.3 685.5 2,599.0 695.7 722.1 727.1 743.7 2,888.5 760.2 786.6 790.8 810.4 3,148.0 SFAS 123 expense 16.8 24.9 29.5 38.1 49.0 14.8 15.2 16.0 17.0 63.0 16.5 20.4 20.2 17.8 74.9 19.5 23.4 23.2 20.8 86.9 21.5 25.4 25.2 22.8 94.9 One-time charges, expenses 0.0 0.0 0.0 0.0 106.2 0.0 0.0 9.4 6.4 15.8 53.0 80.3 40.5 45.6 219.4 24.0 24.0 24.0 24.0 96.0 20.0 20.0 20.0 20.0 80.0 Operating income 292.0 359.3 459.8 571.7 575.5 178.0 191.6 188.2 205.3 763.1 166.9 171.7 215.4 227.1 781.1 233.6 256.9 260.5 301.9 1,052.8 274.3 303.2 308.4 352.5 1,238.4 Other income (expense), net 0.7 2.9 9.9 16.0 12.0 3.0 2.7 2.2 3.2 11.1 0.2 (1.1) 0.3 0.8 0.2 (2.7) (1.9) (1.4) (1.3) (7.3) 0.0 0.0 0.0 0.0 0.0 Pre-tax income 292.7 362.2 469.7 587.7 587.6 181.0 194.4 190.3 208.5 774.2 167.1 170.7 215.7 227.9 781.4 230.9 255.0 259.1 300.5 1,045.5 274.3 303.2 308.4 352.5 1,238.4 Tax provision 99.2 124.9 163.1 190.5 189.7 61.5 65.3 61.3 60.6 248.7 56.2 55.6 68.4 61.8 242.0 76.2 84.2 85.5 99.2 345.0 90.5 100.0 101.8 116.3 408.7 Income tax rate 34% 34% 35% 32% 32% 34% 34% 32% 29% 32% 34% 33% 32% 27% 31% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% Net Income from Ops 193.5 237.3 306.6 397.2 397.9 119.5 129.0 129.0 147.9 525.4 110.9 115.0 147.3 166.1 539.4 154.7 170.9 173.6 201.4 700.5 183.8 203.1 206.6 236.2 829.7 Option expense (SFAS 123R) after-tax 10.6 15.6 18.2 23.5 30.3 9.6 9.9 10.4 11.0 40.9 10.9 13.8 13.8 13.0 51.5 13.0 15.7 15.5 14.0 58.2 14.4 17.0 16.9 15.3 63.6 Extraordinary Charges 0.0 0.0 0.0 0.0 68.1 0.0 0.0 5.9 4.2 10.1 35.2 54.2 27.7 33.2 150.2 16.1 16.1 16.1 16.1 64.3 13.4 13.4 13.4 13.4 53.6 Adjusted Net Income $204.0 $252.8 $324.8 $420.8 $496.3 $129.1 $138.9 $145.3 $163.1 $576.4 $157.1 $183.0 $188.7 $212.3 $741.1 $183.8 $202.7 $205.2 $231.4 $823.1 $211.5 $233.6 $236.9 $264.9 $946.9 GAAP Diluted EPS $0.58 $0.69 $0.88 $1.13 $1.13 $0.34 $0.37 $0.37 $0.42 $1.50 $0.32 $0.33 $0.42 $0.48 $1.54 $0.44 $0.49 $0.50 $0.58 $2.00 $0.52 $0.58 $0.59 $0.67 $2.36 Adjusted EPS excluding option expense and acquisition related adjustments $0.61 $0.74 $0.93 $1.20 $1.41 $0.37 $0.40 $0.42 $0.47 $1.65 $0.45 $0.52 $0.54 $0.61 $2.11 $0.53 $0.58 $0.59 $0.66 $2.35 $0.60 $0.67 $0.67 $0.75 $2.70 Y/Y Growth 22% 26% 28% 18% 11% 17% 18% 20% 17% 22% 31% 29% 31% 28% 18% 12% 9% 8% 11% 15% 15% 15% 14% 15% Basic Share Count 323.9 329.8 337.3 341.9 343.6 343.7 341.8 341.2 341.9 342.1 343.2 344.4 344.0 340.9 343.1 341.9 342.3 342.7 343.1 342.5 343.5 343.9 344.3 344.7 344.1 Shares repurchased 0.0 3.2 0.0 3.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Option Creep 5.9 7.4 4.6 1.7 0.2 (1.9) (0.6) 0.7 (1.5) 1.4 1.2 (0.4) (3.2) 1.0 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Difference in Diluted and Basic 11.6 11.9 10.5 9.5 8.6 8.5 8.0 8.1 8.3 8.3 8.4 8.0 7.3 7.0 7.7 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 Diluted Share Count 335.5 341.7 347.7 351.4 352.2 352.2 349.8 349.3 350.2 350.4 351.7 352.5 351.4 347.9 350.8 348.9 349.3 349.7 350.1 349.5 350.5 350.9 351.3 351.7 351.1 Other Key Metrics Bookings 1,831.5 1,995.0 2,724.1 3,139.0 3,769.6 910.2 1,078.6 1,101.9 1,159.5 4,250.2 1,197.8 1,291.7 1,589.9 1,347.5 5,426.9 1,197.8 1,356.3 1,589.9 1,500.4 5,644.4 1,339.7 1,515.7 1,773.5 1,671.4 6,300.3 Y/Y Growth 19.0% 8.9% 36.5% 15.2% 20.1% 13.5% 15.4% 18.7% 4.9% 12.8% 31.6% 19.8% 44.3% 16.2% 27.7% 0.0% 5.0% 0.0% 11.4% 4.0% 11.9% 11.8% 11.6% 11.4% 11.6% Backlog 4,211.6 4,940.2 6,111.0 7,272.7 8,914.0 9,244.9 9,686.7 10,156.0 10,616.6 10,616.6 13,001.0 13,305.3 13,875.6 14,195.1 14,195.1 14,635.3 15,135.1 15,499.6 15,499.6 15,499.6 16,020.6 16,590.6 17,008.2 17,008.2 17,008.2 Margin Analysis Gross Margin 83.2% 82.7% 80.0% 77.2% 82.3% 83.5% 80.9% 83.3% 81.3% 82.2% 83.1% 82.9% 83.1% 83.0% 83.0% 83.3% 82.9% 83.1% 83.0% 83.1% 83.4% 83.0% 83.2% 83.1% 83.2% Adj S&M 41.5% 40.9% 38.9% 37.6% 39.5% 41.2% 39.5% 40.2% 39.6% 40.1% 40.1% 39.5% 39.6% 39.4% 39.6% 39.6% 39.4% 39.3% 38.2% 39.1% 39.3% 39.0% 38.9% 38.0% 38.8% Adj R&D 16.0% 14.4% 12.6% 11.0% 11.3% 11.3% 11.0% 11.1% 11.1% 11.1% 12.5% 11.9% 11.4% 11.7% 11.8% 12.4% 11.8% 11.9% 11.5% 11.9% 12.4% 11.6% 11.7% 11.3% 11.7% Adj G&A 7.3% 6.7% 6.2% 5.7% 6.5% 6.5% 6.2% 6.5% 5.9% 6.3% 6.8% 7.3% 7.6% 7.2% 7.3% 7.5% 7.1% 7.2% 6.9% 7.2% 7.2% 6.9% 6.9% 6.6% 6.9% Adj. Operating Income 18.5% 20.8% 22.2% 22.9% 25.1% 24.6% 24.3% 25.4% 24.7% 24.7% 23.7% 24.2% 24.5% 24.7% 24.3% 23.7% 24.6% 24.7% 26.4% 24.9% 24.5% 25.5% 25.7% 27.2% 25.8% Adjusted EBITDA Reported D&A 189.6 193.6 212.6 222.6 263.5 70.1 71.7 75.4 85.1 302.4 85.3 91.7 94.1 102.0 373.2 107.1 112.1 116.5 121.5 457.2 125.5 129.5 132.8 136.8 524.5 Amortization of intangibles 20.5 9.9 8.0 8.0 8.0 2.0 2.0 2.0 2.0 8.0 2.0 2.0 2.0 2.0 8.0 2.0 2.0 2.0 2.0 8.0 2.0 2.0 2.0 2.0 8.0 Amortization of software 63.6 69.0 79.1 81.8 94.7 25.1 24.9 25.4 28.0 103.4 29.1 29.6 29.7 30.7 119.1 33.7 35.7 37.7 39.7 146.9 40.7 41.7 42.7 43.7 168.9 Depreciation 100.1 93.5 86.9 80.3 73.8 16.8 17.1 15.7 17.6 67.2 54.2 60.1 62.4 69.3 246.0 71.4 74.4 76.7 79.7 302.3 82.7 85.7 88.1 91.1 347.6 Adjusted EBITDA 498.5 577.8 701.8 832.4 994.2 262.9 278.5 288.9 313.8 1,144.2 321.7 364.2 370.2 392.6 1,448.7 384.2 416.5 424.1 468.2 1,692.9 441.2 478.1 486.4 532.2 1,937.8 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 3
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Ratings and Definitions Raymond James & Associates (U.S.) definitions Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 4
Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Argentina S.A. rating definitions Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Europe (Raymond James Euro Equities SAS & Raymond James Financial International Limited) rating definitions Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments. Rating Distributions Coverage Universe Rating Distribution* Investment Banking Distribution RJA RJL RJ Arg RJEE/RJFI RJA RJL RJ Arg RJEE/RJFI Strong Buy and Outperform (Buy) 56% 67% 59% 48% 21% 39% 0% 0% Market Perform (Hold) 38% 33% 41% 37% 6% 15% 0% 0% Underperform (Sell) 6% 1% 0% 15% 9% 0% 0% 0% * Columns may not add to 100% due to rounding. Suitability Ratings (SR) Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital. Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program. High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 5
High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal. High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal. Raymond James Relationship Disclosures Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months. Company Name Cerner Corporation Disclosure Raymond James & Associates makes a market in shares of CERN. Stock Charts, Target Prices, and Valuation Methodologies Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies. Target Prices: The information below indicates our target price and rating changes for CERN stock over the past three years. Valuation Methodology: We use forward EBITDA and EPS multiples when valuing Cerner. Risk Factors General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 6
Specific Investment Risks Related to the Industry or Issuer Healthcare Information Technology Industry Risks HITECH Act Failure for the HITECH Act to materially drive electronic health record adoption rates higher within inpatient and ambulatory healthcare provider communities could adversely impact the anticipated growth and demand trajectories of HIT solution providers. Credit Risk A tightened credit environment has the potential to slow ambulatory HIT spending, as we believe that physician offices will react to broader economic changes similarly to small businesses. Company-Specific Risks for Cerner Corporation Some of the risks to investing in CERN shares include the following: percentage of completion accounting results in disconnects between cash flows and earnings; Cerner's large hospital orientation results in long sales cycles, which are less predictable; revenue recognition at the time of contract signings creates greater dependence on closing deals by quarter's end; and the company's significant unbilled receivables are of lower quality than billed receivables and drive days sales outstanding well above the industry average. Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/disclosures/index. Copies of research or Raymond James summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see raymondjames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6 th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716. For clients in the United Kingdom: For clients of Raymond James & Associates (London Branch) and Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and is not intended for use by clients. For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJA, RJFI, and Raymond James Investment Services, Ltd. are authorised and regulated by the Financial Conduct Authority in the United Kingdom. For clients in France: This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in Code Monétaire et Financier and Règlement Général de l Autorité des Marchés Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers. For institutional clients in the European Economic Area (EEA) outside of the United Kingdom: This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted. For Canadian clients: This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements. Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows: International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 7
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