Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
On a corporation's third quarter 2019 conference call.
Today's date of October 24, 2019, and this call is being recorded.
The company has asked me to remind you that birthmarks made here today constitute forward looking statement.
Moving without limitation those regarding projections of future revenues or earnings operating margins operating and capital expenses bookings no solution services and offering development.
Capital allocation plans cost optimization and operation improvement initiative.
But your business outlook, including new markets, all prospects for the company solutions and services.
Perspective expected benefits of certain of our collaboration.
Actual results may differ materially from those indicated by the forward looking statement.
Additional information concerning factors that could cause actual results to differ materially from though in the forward looking statements may be found under item one a concern or school 10-K, together with the company other filings.
A reconciliation of non-GAAP financial measures discussed in this mornings call can be found in the Companys earnings release, which is furnished to the FCC today and posted on the Investor section of the of standard Dot com.
None are assumes no obligation to update any forward looking statements information, except as required by law.
At this time I'd like to turn the call over to Brent Shaffer, Chairman and CEO Cerner Corporation you may begin.
Thank you to Rhonda good afternoon, everyone and welcome to the call.
I'll spend the first few moments, providing my thoughts on the business last Garcia for Mark not to take you through the financial results. When Mark includes our Chief client officer juncture. So it will provide some marketplace commentary and it also has done trig argued VP of strategic growth to talk about schurz growth strategies.
It's been an eventful quarter, it's you're at the end of July we announced our collaboration agreement with E. W. S and the Amazon and the company's made good progress around our transformation efforts and we recently concluded our annual Healthcare Conference Center Health Care Conference and it was really another successful CHC, where we hosted over 11000.
Clients partners media and other health health care affiliates from around the world.
FEMA. This year's conference was now next during my keynote are you sure cerners improvements in addressing our clients' needs today, and our innovation plans for the future.
Now as we discussed last quarter, our strategic cream framework to deliver on this innovation and growth was focused on three key areas.
Software as a service.
Hope networks and data as a service.
Our recently announced relationship with eight of you asked an Amazon is foundational to these areas.
Our work with eight of U.S. is expected to enable delivery of scalable and secure solutions in a faster more agile way with the power of advanced artificial intelligence and machine learning tools embedded in the work flow.
Our claims can expect to see advancement in the overall user experience for consumers and care teams as well as their overall health system in financial operations.
We plan to modernize our platforms and software development approach increased the pace of innovation and speed to market and lower the operational burdens for our clients.
This also represents an opportunity to reduce turner's costs over time, and it's part of our focus on long term profitability improvements.
Further the possibilities with a cerner and Amazon collaboration are substantial given their vast consumer knowledge.
I'd also like to provide an update on on other activity. This part of sooner is broader transformation.
We spent most of this year focused on identifying and addressing inefficiency cost optimization opportunities.
Well. This work is ongoing we are now putting additional focus on other improvements to drive long term business transformation.
This includes work on capability building automation product management and go to market strategy.
To help us deliver on the market product management elements of our transformation. We recently created in filled the wrong.
[noise] September you know Daryl Johnson is joining us from Cerner following successful career at Medtronic and he has a very deep expertise in health care data ecosystems, and as a recognized leader in marketing innovations in global brand positioning for devices software services and data platforms.
I believe instituting this new CMO role in integrating strategic marketing into our organizational structure will strengthen cerners portfolio and product management processes and also improve our brand and go to market strategies.
As it relates to the financial results I'm pleased with this quarter's numbers against the backdrop of advancing our transformation the team executed and delivered against the expectations We said.
It was more work to do but I'm confident we have the right balance focus on executing the near term and Recalibrating. The company for the long term and that profitable growth ahead.
Oh, but to hand, the call over to Mark.
Thanks, Brent good afternoon, everyone I'm going to cover our Q3 results in future guidance last quarter, we delivered solid bookings revenue and earnings.
Start with bookings, which were 1.651 billion in Q3 of 4% over Q3 of 2018 at the high end of our guidance range.
We ended the quarter with a revenue backlog of 13.31 billion, which is down 9% from a year ago, primarily due to the termination of a large outsourcing contract that I will discuss in a minute.
Also recall that our backlog calculation under the new revenue standard excludes revenue from contracts with termination clauses, even though such clauses are rarely exercised we had a higher than usual amounted to these types of contracts in Q3.
When you combine the expected revenue from our backlog and the additional revenue expected from contracts not included in backlog our revenue visibility remains at approximately 85% over the next 12 months.
Revenue in the quarter was 1.4 to 9 billion up 7% over Q3 of 18 in inline with our expectations.
Well now go through the business model detail and year over year growth compared to Q3 of 18.
License software revenue Q3 was 155 million up 10% over Q3 of 18, driven primarily by our strong growth in our at says offerings technology resale of 70 million increased 60% compared to both Q3 of 18 and last quarter subscriptions revenue grew 16% to 92 million.
Professional services revenue grew 11% to 570 million, primarily driven by solid growth in implementation services.
Managed services was flat as 302 million.
A lack of growth primarily related to the phase out of revenue from health services clients that made the decision to leave in past years and are just now getting transitioned out of our data centers.
Nothing a retention rate for health services client to solve it is about 80%, but there's still some impact from those that have left.
Overall attrition remains very low and we expect managed services to return to modest growth in 2020.
[noise] support and maintenance was also flat at 277 million, which is in line with our expectations and also reflects the impact of attrition and finally reimbursed travel 26 million was up 6%.
Looking at revenue by geographic segment domestic revenue was up 6% from the year ago quarter of 1.265 billion in international revenue of 164 million was up 8% year over year.
The gross margin our gross margin for Q3 was 81.0% down from 81.2% in Q2 of 19, and 82.8% year over year, driven by higher third party services largely related to our federal business and a lower margin mix within technology resale.
Now I'll discuss spending operating margin than net earnings for these items, we provide both GAAP and adjusted or non-GAAP results. The adjusted results exclude share based compensation expense share based compensation from a tax items acquisition related adjustments organizational restructuring and other expenses.
And investment gains that are detailed and reconciled to GAAP in our earnings release.
[noise].
Included in the organizational restructuring line this quarter is $60 million charge related to the termination of a revenue cycle outsourcing contract with a dentist tell this was a joint decision based on what we agree was best for both parties and has also related to our previously communicated portfolio management process. This will result in revenue cycle operations.
I mean assumed by Ventas and Huron beginning in early November with nearly 1700 soon associates transitioning back to Adventist health and you're on at that time.
This will reduce annual revenue by approximately 170 million, but have little impact on earnings.
Note that Adventist health was re committed as we committed to all clinical and revenue cycle solutions and I T work services. This only pertains to the revenue cycle outsourcing service.
When I have other item of note that is included in GAAP results, but not or adjusted result is a 9 million dollar nonoperating unrealized gain on one of our equity investments.
Now I'll walk through our operating expenses, our third quarter GAAP operating expenses of 1.069 billion were up 18% compared to 903 million in a year ago period, largely driven by the restructuring charges.
Our adjusted operating expenses were up 6% compared to Q3 of 18 looking at the light ends for Q3 sales and client service expense increased 6% year over year, primarily driven by an increase in personnel expense related to the growth in professional services software development expense increased 10% over Q3 of 18 driven by.
7%, increasing gross R&D.
6% increase in amortization and flat capitalized software.
Your next best was down 8% driven by a decline in both personnel Nonpersonnel expenses.
Amortization of acquisition related intangibles decreased slightly year over year.
Moving to operating margins, our GAAP operating margin in Q3 was 6.2% compared to 15.5% in the year ago period.
Our adjusted operating margin for the quarter was 18.1% down from 19.2% in Q3 of 18, but up from 18% last quarter in line with our expectation.
The adjusted operating margin implied by our revenue earnings guidance that will discuss in a moment implies an expected adjusted operating margin slightly over our targeted 20% for Q4.
We also believe our ongoing business optimization efforts keep us on track for delivering our targeted Q4 20, adjusted operating margin of 22.5%.
As I mentioned last quarter, we believe our ongoing cost optimization in the business simplification efforts position us to continue improving our profitability beyond 2020 further we believe our prop platform modernization and moved to the cloud represents another driver of margin improvement longer term this will be a multiyear process, particularly for.
Sure Millennium and most near term benefit is largely also offset by modernization investments.
However, we expect to lower operating costs associated with this move along with efficiencies in improvements we are driving in our development process the meaningful meaningfully contribute toward profitability, while also helping us delivering differentiated solution to our clients at a lower total cost of ownership.
Moving to net earnings Vps, our GAAP net earnings in Q3 were 82 million or 26 cents per diluted share, which is down from 51 cents in Q3 of 18 adjusted net earnings in Q3 212 million and adjusted diluted EPS was 60 cents 66 cents compared to 63 cents in Q3 of 18.
Our GAAP and non-GAAP tax rates are both approximately 20% in Q3.
Moving to our balance sheet. We ended Q3 was 633 million of cash and short term investment, which is down from 954 million last quarter with our free cash flow being offset by 400 million of share repurchases for the year, we have repurchased 14.4 million shares for $1 billion, an average price of $69 and 53.
Yes, and currently have 483 million of remaining authorization under our repurchase program.
Moving to debt our total debt remained flat to last quarter at 1.039 billion.
Total receivables ended the quarter at 1.155 billion down from 1.229 billion in Q2 of 19, our Q3 Dsos were 74 days, which is down from 78 days in Q2 of 1982 days in the year period.
Operating cash flow for the quarter was 351 million Q3 capital expenditures were 111 million and capitalized software was 66 million.
Free cash flow defined as operating cash flow less capital purchases and capitalized software development costs was 174 million for the quarter.
We expect free cash flow to remained solid in Q4 and solid growth in free cash flow in 2020.
Moving to capital allocation.
As I indicated we repurchased 1 billion of stock in Q2 in Q3 483 million remaining on our current authorization, we still expect to execute the majority of the repurchase authorization by the end of Q1 of the next year subject to market conditions and other factors. We intend to continue funding. This was a combination of cash from operation.
His in depth with the amount of debt depending on the timing of our repurchases and whether we used cash for M&A and other purposes.
Regarding M&A, we did just announced a definitive agreement to acquire able that's the cash consideration for this acquisition is expected to total approximately $75 million, we expected to close in Q4 of this year.
We expect it to contribute approximately 90 million of revenue 20, Twond, John will discuss able vest as a great fit given their experience and the importance of our federal business.
Moving to our dividend program, we paid our first two quarterly dividends of 18 cents per share on July 26 and October nine.
Now I'll go through guidance.
We expect revenue in Q4 to be between 1.41 and 1.46 billion.
The midpoint of this range reflects growth of 5% over Q4, the team and would bring full year 2019 revenue to 5.685 billion, which reflects 6% growth over 2018 and is within our previously provided full year guidance range.
Note that guidance includes approximately 25 million of impact from the termination of our Dennis drug works agreement and our Q4 guided growth would be 7% without this change.
Also note that our guidance reflects minimal impact from able that's given it is not close.
We expect Q4 adjusted diluted EPS to be 73 to 75 cents per share the midpoint of this range is 17% higher you for the team would bring full year 2019, adjusted diluted EPS to $2.67, which reflects 9% growth over 2018.
Moving to bookings guidance, we expect bookings revenue in Q4, a 1.45 billion to 1.65 billion.
The midpoint of this range reflects a 21% decrease compared to the fourth quarter of 2018 and would bring full year 2019 bookings to 5.876 billion down 13% from 2018.
Year over year decrease in Q4 is primarily driven by a couple of factors.
Historically Q4 bookings have included large rather work extensions from Adventist health, there will no longer occur given the transition of those services back to Adventist.
Additionally, as we discussed this year, we're taking a more selective approach to low margin long term contracts and this has led to a decline in those types of bookings that is expected to continue.
We expect to provide our outlook for 2020 on our Q4 call.
In summary, we were pleased with our solid results in the third quarter. We've made good progress this year, but theres still lot of work to do we expect to continue executing against our plan as we finished 2019 and move into 2012 with that I'll turn the call John Thanks Mark.
Good afternoon, everyone. Today I will provide was all highlights in a quick update on our federal business I'll start with our bookings, which grew 4% over last year and we're at the high end of our guidance consistent with recent quarters, we had a lower level of long term bookings compared to last year with the percent of bookings coming from long term.
Next in the quarter at 29% compared to 34% in Q3 of last year. Excluding these long term bookings our bookings grew at a double digit rate in Q3.
We had solid contributions this quarter from all key areas, including revenue cycle federal and our strategic growth businesses, which include population health health networks employer consumer data as a service and other adjacent markets.
Come out of our Health conference earlier. This month I had several positive takeaways first our clients are cremating, creating tremendous value with our solutions clients led over 200 presentations education sessions and demonstrations, where these accomplishments were shared with over 11000 attendees.
They are committed to getting current and staying current which is an important foundation for our longer term shift to a single instance, cloud platform. They are excited and enthusiastic about our collaboration with a ws an Amazon our commitment to innovation and the vast opportunities that are carbonated platform.
Warm Springs finally, we're positive feedback on our revenue cycle progress and this sentiment is also reflected in our pipeline, which includes some large clients initiating the move to Cerners revenue cycle.
I also wanted to share a noteworthy success story the demonstrates the benefits of changes we've made over the past 18 months to become more client centric.
This client is an academic system good at low satisfaction with our Cerner solutions, just a couple of years ago.
So turning our focus to get into more getting them current our latest software release and a strong alignment with our model experience. They have become a top reference site with strong system performance and improved clinician productivity.
We're also in the process of converting 125 of their clinics from our primary competitors system to Cerner.
This demonstrates the value of our client centric operating model with a focus on getting clients current aligned with standards in which we help them make them successful that can drive broad levels of satisfaction and opportunities to expand our relationship.
Now I'll provide an update on our federal business, where we had a very busy quarter.
We brought a wave of four sites like for DMD in September and expect the next wave of sites to go line in the fall of 2020, we're also kicking off the coast Guard project this quarter.
For BA we expect the initial operating capability go live in the kickoff for additional waves to occur in the spring of 2020.
Before I close I'd like to provide a little more color on the able that's acquisition that Mark mentioned, we believe bringing the able best team on board will provide cerner additional capacity and technical expertise that will be very valuable in the federal space as a trusted partner in our future modernization program with the VA there.
Highly specialized in cyber security agile engineering analytics technology enablement with deep extra experience and delivering delivering value to federal health clients.
As we prepare for the upcoming key milestones on our federal projects integrating the able vantiv in our business is a natural next step as we expect their expertise will accelerate cerner success in providing integrated seamless care for veterans service members and their families with that I'll turn it over to Don Thanks.
Good afternoon, everyone.
We believe our vision to create a health network architecture for providers of care and every community will be realized in the coming back at.
The addressable market is far larger than the integrated DMR category that Cerner helped create progress was made in the third quarter to lead it.
One of the strongest provider brands and healthcare as Pennsylvania, based Geismar and share our vision to architect they system of health and care in Q3 guiding are designated are earmarked gnostic healtheintent as their preferred health network platform for a 10 year term. They also we will continue to leverage our well being application for member engagement.
Within their health plan.
Market reaction has been quite favorable.
Health systems are seeking solutions to help them scale growing health networks with high levels of technology, heterogeneity, and a shifting mix of employed and affiliated physicians.
Cerner is well positioned to meet that market need.
The on Geismar emerging market reach of Healtheintent can be seen in the recently released CMS data on Medicare shared savings PCL performance CMS announced over 700 million in 2018, MSP savings after accounting for shared savings and losses.
Cerner clients generated nearly 200 more than 200 million of those savings. The other MSP Asias advocates physician partners are ATP Hackensack Alliance Memorial Hermann were among the top performers.
As long term and post acute care become an increasingly meaningful part of the health network. We also took steps in Q3 to strengthen our continuum of care strategy.
We announced Resmed adds Brightree home health product will be our go forward market solution.
Resmed than Cerner also we use healtheintent as a health network platform for post acute care assets. This strategy, coupled with condition and therapeutics specific analytic opportunity is in areas like sleep give resmed and cerner the potential to build a category leading presence and a post acute market that we believe has significant.
Mental.
And the state government space, we extended the meaningful relationship in the third quarter with the Texas Department of aging and disability to bring a holistic care offering to Texas seniors and disabled population. This a solid use case for how cerner is extended care and behavioral health assets are managed services are proven history of innovation and.
Our solid delivery record created a compelling when strategy.
We also announced an investment in partnership in the third quarter with two I'd systems, I too I commend, 25% market share within the federally qualified health Center segment covers nearly a third of all Medicaid patient data and has a strong payer business with 13 managed care clients. The relationship already has delivered our first material when the an epic.
QHC community Health network based in North Carolina Server technology will help provide Medicaid recipients with care coordination and management across the state level network looking to tackle rising Medicaid costs.
Well, there financing model as Medicaid Medicare advantage for commercial insurance, we see the person at the center of any true Health network architecture. During Q3, we delivered a new version of our well being application. We also launched a consumer framework that delivers a one seamless consumer experience for both our application as well as.
Client developed and third party applications and as part of that overall strategy, we added consumer self pay capabilities from Palo Alto based simply and we also augmented our patient access and online scheduling capabilities through a partnership with Boston based Kairos.
So it's helped network architecture vision has four core pillars automate the care process connect the person structure store in study the data and then close the loop by pushing those analytic insights back into the care process.
I believe our health network architecture vision is more relevant today than it was when it was first sketched for an MBJ class and the 19 nineties, our strategic urgency to advances has never been greater in the quarter just concluded plus foundational for doing so with that let me turn the call back to Brent. Thanks, a lot done and thank you all for being on the call.
As you heard from the team were continued to execute against our targets and advance our strategies and just to summarize our transformation work remains on track and is advancing beyond cost of optimization to include broader structure in process changes in automation.
We're executing against opportunities in our core while also building pipeline capabilities in our strategic growth areas and.
We are actively executing our portfolio management strategy, demonstrating increased willingness to partner when it accelerates opportunities and strengthens our capabilities.
In summary, I believe this represents solid progress on our pursuit of sustainable and profitable growth, which I believe can be achieved while playing a key role in driving meaningful improvements in health care quality and efficiency.
Now I'll turn the call over to the operator for questions.
Thank you, ladies and gentlemen to ask the question I need to press Star then one on your telephone.
To withdraw your question please press the pound.
Again, that's all I wanted to ask the question.
Please standby, while we compile the Q.
First question comes from a lot of Steve well equipped with Barclays. Your line is open.
Hi, This is John Janowski I just had a question on the events transition I'm just curious if it has had any impact on future revenue opportunity for I guess.
Hi, good feedback that you're exiting.
Sharon relationships and I guess to that extent because it hurt future relationship opportunities where apply may want say, one stop shop type of vendor.
This is this is John Peters selling I don't think it hurts.
Neither our position or where we're trying to go because what we do as we try to align with the needs of our clients and as those needs change. It made it may result in something like we did with the Dennis So as long as we have a good solid reason explanation and and.
And the reason that that happened it hasn't been impacts we haven't got a tremendous amount of questions about it and as this is one of the areas were being more selective about I think it's understood by our clients.
In terms of what we're doing so in the short term it hasn't had any negative impact.
Yes. This is mark we we talked about being selective so that doesn't mean, we're not going to do certain elements of that business, but we aren't going to the full outsourcing and we're going to handle all the bodies. We can still do tactical assistance to our clients help them, where they need help but at margins that are attractive to us. So I think we stay.
We'll add that benefit to that client base without without them, saying.
Similar can offer everything I need so I think and we're seeing that in the marketplace.
Okay that makes sense and then I guess as we kind of think about that topline revenue algorithm moving forward. How do you expect these exited businesses and future exits to change the topline dynamics will you guys and up leaning a bit more on acquisitions moving forward with respect to the 6% to 9% long term revenue outlook.
Yes. This is mark I think the clearly we're as we're going through these optimization and restructuring efforts.
There'll be some level of reset to the topline as certainly we exit certain businesses and.
Certain approaches to the to driving revenue.
But I think if you look at the and M&A, absolutely will be a component.
How we look to grow the businesses I think don's comments really.
Indicate that we have a lot of internal growth opportunities some organic growth opportunities, but leveraging those with some M&A to make them go quicker and grow them more more quickly I think is clearly one of our strategy. So it's not going to be us just going out in acquiring revenue is going to be us investing in the business and in.
I am case that investment will be M&A in a business that can help us grow at identified opportunity faster than if we do it organically.
Great. Thanks.
Thank you.
Next question comes from the line of David Windley with Jefferies. Your line is open.
Secondly, if your phone is.
Thanks, sorry about that thanks for taking my question.
I wanted to follow up on the portfolio review would it be possible to I guess going a little bit more specific as you.
As you transition out of the Ventas relationship and.
In revenue cycle, you have I think a remaining.
Smaller revenue stream with some other revenue cycle services that you're providing does it still makes sense to stay in that business and then I think it your recent at CHC and the analysts discussion.
Talked about kind of maybe the varying levels of.
Scale and penetration that you might have achieved in some of your international markets. What are your thoughts about a about shore persistency in international markets. Thanks.
Yes. This is mark clearly the non us market is still a huge opportunity for us.
John can comment on that thanks.
Overall, we are still in the process and working through that portfolio review process. So I don't want to.
Talk a whole lot about the results of that and tour at a point, where we've we've worked through it and can be more more precise.
Clearly the think one of the things we've talked about for a while is being selective and some of these outsourcing opportunities.
And the fact that we could work with at Ventas.
Who is interested in taking back the associates every server associate that was working on the now has a job with advantage. So all of those people are employed so thats that was a great result.
Yeah.
For them to take that over it was consistent with the strategy. They currently have consistent with our strategies, but there are going to be a lot of opportunity we're going to look at the remainder of that revenue cycle business.
If it doesn't meet our selective criteria relative to margins were going to determine what we need to be done with that business from a global perspective, we're going to look at the same lands were when look at the operating margins the opportunities we see how we might address those markets in a more efficient method that can drive margins, where they might we might.
Not by driving them today, John do you have additional comments on Janika comment on the on the international market I still remain incredibly optimistic and positive about the markets outside the us in a couple of fronts. One we addressed a call or two ago, which there are large RFP is pending or about to be released for some on some state wide.
And we just comedies that regional components out there.
At that we're looking at pursuing as well as our strategy of where we where we have embedded in it in a country the ability to expand beyond that first initial our region, our footprint and expand beyond in both of those are playing out right now not to mention opportunities in countries, where have already embedded in Canada UK your.
Middle East and Australia, so outside us still remains a positive opportunity for someone we look at opportunities everyday there.
And Mark on.
Sorry go ahead, sorry, now that's a gas is going as I just go back to sort of the previous question on growth and the discussion around portfolio management from a growth perspective, we're going to be looking at a combination of build by partnering strategies as Mark discussed I think relevant to that Theres also a divest and partner component thats been a.
Significant piece of how we've been thinking about the business I think having last 180 days, there's a good cadence there certainly the decision we made.
Last quarter to partner with get Lau.
From a my station perspective, which gives us a best in class offering there from an experienced perspective and what their getwell loop asset and then this quarter with the decision around home health and the partnership with rest Matt. So I think we are running a process. We have selectively look to make some decisions there and it's part of a framework that we.
Viewing into 2020 that will be part of how we position for growth long term.
Got it thank you I'll cede the floor. Thanks.
Thank you next question comes from the line of Donald Hooker with Keybanc. Your line is.
Okay, Great I'd love to hear maybe a little bit more elaboration on the RASM add partnership kind of maybe kind of what they brought that you thought you could not do and did you and maybe I don't know if it's material it may not be but.
Roughly the size of the business should you had previously that you're I guess on setting.
Can you talk about that now that process will play out.
Sure I'll do a little bit of.
Hi level framing on how we thought about the relationship. So I think first and foremost we really like.
The macro trends playing out from an addressable market perspective in the post acute space.
We think it's Scott.
Interesting trend around it, particularly with large regional IDN, who are building out network strategies within their I must say so it's a space we like a lot in areas like behavioral health continue to be huge growth areas for us within the strategic growth business I think secondly from a home health perspective.
So you will require recall that we acquired a solution in that space called beyond now. So we had an acquired solution in that area and we stepped back and look at it and side is this an area, where we want to make significant investment.
Or alternatively is there a chance for us to partner.
We like the Brightree solution offering its cloud based we think its industry leading.
It has a very accelerated implementation timeline around it and as I started the conversation with Raz Mad we saw an opportunity for Healtheintent.
To be a material network overlay around our post acute assets.
And we also thought they brought some interesting sort of non traditional assets from our perspective around.
Around areas like sleep and respiratory.
That could be very interesting for us as we play through our strategy on a five year basis and start thinking about member and consumer strategies, where that ends up being relevant.
Around premium and first dollar risk strategies, so thats, how we thought about it at the decision tree level, if you will.
And I can tell you as John said the reaction from Cerner Health conference and from our early client conversations has been quite positive Bismarck from it from an economic standpoint, it was not contributing a whole lot of revenue we've not invested in the business significantly the revenue was actually declining from that business and bye.
Disagreement with Resmon being able to give some additional dollar from the healtheintent platforms and leveraging those elements, we actually expect that to turn and actually become a growth business for us.
Which it hadnt been but today's contribution is very small you always have blip on the radar today one of the reason we want to taken action to turn that into something that would be a growth driver going forward.
Okay, and then maybe maybe go with regard to Amazon NWS relationship how does that how do you sort of how should we think about that juxtaposed against your hosting business.
Over time like how are you going to sort of balance.
Kind of some of the overlap there.
Well I think that the clearly the 80% of our clients are hosted today. The first aid obviously, there's a kind of a strategy of one we're moving things there healtheintent is going to be the first platform. We move there it's a cloud developed.
Solution that we host today very unnatural to move that over day, WCS and Thats. The first thing you're going to see move and we'll have that.
Primarily moved the first half of next year.
The benefits of doing that are lower cost of operation from using a platform that I can buy on an as needed basis hour by hour as opposed to building out the maximum capacity I need at that at the hype and having a provision for that in my data Center, but also allows me to take those datacenter component space and re.
Dedicate down to two projects such as the DMD and the VA, which is significant savings of capital as we roll forward so relative to two the co hosting versus they'd have yes.
Tactical level. It just it will drive efficiencies and drive up cost optimization as we move forward, we'll continue to move the platforms care, where we'll be the next platform we move over data of yes, and then.
Obviously over time, then we start moving elements in components of millennium over to that platform, but the first first mover. If you will is going to be healtheintent perfectly in design to go do that we already have healtheintent running the Navy WCS all new clients Weve heads in the last two quarters have been brought up in eight.
Yes, so there'll be a very clean transition to to go capture those benefits and the capital savings.
Real quick could you say, what the currency impact was for foreign revenues.
It was.
Slightly negative.
Okay. Thanks.
Thank you.
Our next question comes from Milan, Stephanie Demko with Citi. Your line is open.
Thank you for taking my question guys. So I saw some improvements in free cash flow conversion. This quarter I was hoping you're kind of walk us through the puts and takes there will be impacting your goal.
Again, given you have move away from some of these little margin.
And the project.
One.
Yes, I mean, I think clearly from a.
The business moves to more recurring in nature.
Healthcare as a only the challenging clutch environment, just because the pace of play news, we get paid but it's always takes longer to get paid in most businesses, where that's why you're you're actually pretty happy when your Dsos 74 days.
But I think the as we continue to move more and more toward these.
He said business models toward the monthly payments, you'll start getting getting into mode for those checks will be more more repetitive in nature similar to our support.
Checks that we get as we go through this this business. So obviously in our mine as we move move to those platforms. It is going to help our conversion.
Lower our DSO will review our as we move forward, we are very happy with the free cash flow that we deliver this quarter very strong and want to replicate that again in Q4 for to get us to us fairly good position for 19, and then just as a reminder from from overall free cash flow.
We will complete the work on our new campus in the first half of 2020, which will then start allowance throw off a lot of expenditures and are being spent on and on that campus, having the potentially $100 million of free cash flows. We we will for past that that completion.
Once all these projects in that.
Second half of 2020.
How should we think about your longer term.
Well I think the clearly as we look forward to 20.
21 and beyond.
If you're looking kind of as a percent adjusted net income.
Say were.
Between 50% to 60% in 2019, we'd expect to be quick quickly act aggregating up to where you're getting to the.
Going from the seventies into the certainly the mid eighties by the time you get into the kind of the end of the three or four year period. So.
The lower we're not going to be spending more money on buildings Thats clear so.
The cash flow statement that will be part of our capital allocation.
Analysis, and certainly we will help us both as we look at opportunities to.
To invest in M&A to invest organically and to look at share repurchases.
Hi, I, just one quick follow up.
Third quarter.
Yep.
The backlog decline will.
Obviously, the H contract that was in the backlog isn't in the backlog anymore. So that was the biggest biggest element.
Thank you.
Thank you.
Our next question comes from the line of George Hill with Deutsche Bank. Your line is open.
Hey, good afternoon, guys and thanks for taking the question I guess Mark are you will or will you quantify for US you talked about the the roll off of the Adventist business I guess can you quantify the total value.
If we think about it like on a 20 910 basis or the works business that might roll off and then I guess as we think about the 2019 in the 2020 margin targets. How much should we think of is kind of the rolling off of the low margin business versus the cost tackling initiatives to companies taking.
Yeah, George I mean, the we've been very clear that our focus.
On the margin expansion is focused on cost optimization and fit for growth efficiencies.
That the topline impact may impact that one way or the other but the the well we're focused on delivering is on the cost side.
I think.
As you look at the.
The H. business.
Q4, it might be $25 million.
Revenue impact.
That's going away so thats.
That's a sense of what that.
What that number looks like and I think the.
So that will give you kind of a sense for the told I think that over the the entire.
Time, it's going to be someplace around 150 hundreds of million dollars someplace in that this entity would be the annual impact once again from an earnings impact it's zero impact on the earning side.
And I think thats.
Clearly one of the reasons or the reason we were looking.
To get out of that business, So I think.
There'll be some impact obviously, if you if you if you look at 25 million Q4 that might be 30 basis points of impact, but I think if you look at our guidance, we're kind of guidance to being at 20 point, something which kind of takes into account getting to 20 without the impact of that but I think once again.
Our focus is on the driving the the optimization cost there'll be some impact on topline relative to that but our focus definitely is on the.
On the cost side of the business.
That's helpful. Then maybe just kind of as a follow up I think what a lot of investors are going to focus on is the adventist is going to roll off to call. It 151, 60, there's probably other business that rolls off.
Thinking thinking about the business that rolls off versus the M&A versus kind of what the companies.
Longer term topline targets are which probably will need to between.
At the Investor day.
I guess stepping back kind of maybe just do you have a timeframe for when you wash through the businesses that you want to exit even if you don't want to quantify them. Just so I guess, we can think of when the business re bases and kind of constructor roll back towards the company's long term targets.
Yes.
Good question I think the our and our goal through this portfolio management processes to make those decisions identify those though areas and basically as we exit 2020, we've got the our base of revenue that we are expecting to deliver from and grow from going forward and ideally, we'll be able to kind of keep key.
If investors in the loop on each of the as each of those decisions becomes public what the impact of those is because as you indicated yes got an element of.
They age is going away.
But starting 2020 I've got an element available that's that's coming in so the right now theres going to be a lot of puts and takes and I can't give you with clarity.
When when those are going to hit but as we will get the hands. We start rolling into 2020, we should be able to give you a better view of kind of the revenue that is in the bucket that we think is likely something that we're going to adjust out relative to portfolio management and the other things that we would expect to be able to bring in as we roll forward. So I.
I think it is the point that you're getting too is really important is that 2020 will reset the base more revenue number and it's going to be the.
Taking out low margin revenue and bringing in.
Big opportunities for growth and higher margin revenue and once we get that kind of based reset we absolutely look to grow from that and levels, we've kind of consistently talked about the best.
Good stuff right Mark Thank you.
Sure.
Thank you.
Our next question comes from the line of Sandy Draper with Suntrust. Your line is open.
Thanks, very much maybe a follow up.
On on George's question.
It would mark with the bulk of the revenue.
Sure, yes between eight and another potential is most of that going to show up in managed services or are there other revenue lines, where that would show up just trying to make sure.
Taking a little bit more near term return of fine tuning the model.
Yes, any it there's a.
As we go through the portfolio management process some of those businesses impact all of the all of the better although the lines and some of them aren't as high.
Impact on the hosting side because our some benefits there are some businesses.
If you look at our home health.
That had nothing to do in a small number but it was more illustrative of solution sales and client revenue stream that we could turn into something that we saw as an opportunity there'll be other businesses that are more focused on shared services.
And there will be other businesses that are just.
In areas that we that are kind of the full company complement of business model.
But that we think they are in areas that we don't see the growth opportunity that we're going to go invest in them. So.
So it.
Can't really give you today hook business models, they're all going to fall out because they're a variety of business models that are going to be impacted ideally as we get start working our way through 2020, we'll we'll be able to give you give you something that lets you.
Get a little bit more of a sensor for those are going to hit.
Okay. That's helpful. And then a quick follow up on support maintenance I missed what you said I can't remember is there any six to six six so five issue that's impacting support maintenance or just remind me. What it is that's caused support maintenance to be flat to down this year and do you think that starts to pick back up going forward. Thanks.
Yes supported maintenance it once again is really more tied to.
The Hs clients that basically when we kind of do the acquisition or.
In slide we're beginning to be in flight, we're starting to see those those clients actually.
Complete their their contracts with cerner and move onto a different platform and thats offsetting growth that you would see in the in the support stream normally once those kind of get fully embedded which front should be over the next 12 months or or so I think you're going to see.
Going back to.
Kind of low single digit increases in what is is a very large number from a denominator perspective, but we should return to growth in that space, but there is going to be a near term impact headwind to to get through with some of those clients.
Okay. Thanks.
Thank you next question comes from the line up.
Good.
Hi, Thanks for the question I wanted to ask about the federal bookings side I was hoping to confirm that V.A. Awards helped drive some of the upside to the Threeq you bookings or towards the high end I should say I think mark can you give us a sense for what's embedded within the fourth quarter guidance with respect to V.A. bookings.
Well, there's mark we don't talk about exactly whats.
And our guidance relative to a client specific.
Characterization I.
I think the of from a from a bookings guidance perspective come into this quarter, we certainly.
Yes, there wasn't any large single transaction that we were looking to get from from any one location.
I think we had a good contribution from the federal business.
As is kind of expected given the end of the government fiscal year. So I think that was.
Contribution.
But given.
Given the percent of.
That business versus the total business I don't have I'd say that with the upside to our bookings we had some other things that came in at of larger number than we originally expected.
So I don't know that that was a source of us getting to the high end of the guidance range was it was pretty good performance across Jonathan if you have.
I would help but I'll start first and I was really happy with the Q3 results and I think the.
The strong areas is where you would want to see them strong so revenue cycle not read works, but the actual revenue cycle solutions and those that surrounded.
At a really solid quarter, there, which also reflects.
Progress, we've been making on revenue cycle. So I think thats incredibly positive services were up incredibly positive and then us some of our strategic growth things that Don had mentioned in his components, whether they include population health Ajay Ccs and those type of things by made a strong presence as well I see that continuing and I think it's where I want to see my bookings come from.
Well, it's because what we've been focusing on.
And then we surround it with the normal opportunities we have.
Got it does I'll add thank you.
Thank you.
Our next question comes from the line.
With that research your line is open.
Thank you.
Market given what your hi, your commentary about gross and how much you need to work through in 2020, when we get to February obviously, there'll be a moment, where we see what you've accomplished for 2019 as you think about the budget process for 2020 annual what you'll be able to communicate for the year.
With all those moving parts what does what should we expect in terms of communication at that point.
Yes, well I think the obviously Q.
Q4 results, we'll talk to you about our guidance for 2020.
As I indicated in my comments.
The optimization work is going well, we are we are hitting our targets.
And that means that for Q4, we feel we feel good about giving delivering the 20% margin number that we talked about as soon as target and as I did mentioned based on what were the success. We're having in fact, we're getting to some of those benefits.
Slightly earlier than we would have expected head on the calendar to get to in 2020.
It gives us a good feel for relative the 22 and a half that we laid out for Q4 of 20, So I think from a cost optimization standpoint.
We're right on track.
I indicated on the on the revenue side.
The businesses certainly there are opportunities for us to look through the various elements of business into the portfolio management work that we've talked about and look at M&A opportunities.
That can impact 2020, so all that work is still to be done when we come out and they're able to.
Complete our 2020 plan and kind of share the highlights that with you guys in form of guidance as we do our Q4 call I think thats that will be the next next time, we're able to talk to you about that but as I sit today and I feel pretty good about about where we stand.
Okay, and then one follow up question.
As you get to phase two or three of getting to those margin targets, but theres been some discussion of investment and tools now help facilitate the process and.
Wondering are those significant well they run through non-GAAP metrics and what does weigh on your to some extent next year.
For the most part next year would be products, primarily focused on implementation those tool for the most part that implementation work. We go through on the restructuring line, so won't impact our adjusted earnings.
Okay. Thank you.
Sure.
Thank you.
Our next question comes from a lot of Michael Cherny with Bank of America. Your line is open.
Good afternoon, and thanks for taking the questions.
I guess, if summarizing a lot of what you've said today it seems to US as you go through this portfolio rationalization as you move towards the 2020 margin targets I guess, how do you think about the balance of.
What should be contributed from some of these potential exits and if there are further exits of products are further wind down some of this low margin, particularly services revenue.
Let me be viewing upside potential that Fourq, you target I guess, what would drive the upside to that force you target. If we were to see 140 20.
Yes, once again talking.
In advance of on for Q2 0 other than.
Expressing my comfort with the 22 and a half I would just remind restate that our focus is on the cost optimization to get to that 22.5, so it depends on what the.
Just adjustments to revenues that could change that number could impact that number.
You know the H. in Q4 could be a 30 basis point positive to it but thats not I'm not really taking that into consideration when I'm looking to my numbers right I'm looking at the cost optimization to drive to those margin targets. So.
Today Miley, it's just too early for me to go tell you Hey, there's upside that Theres downside.
Im focused on the 22 and half and folks on the cost drivers that I need to get to that number. So I think that at this point. That's that's kind of all I can tell you.
I'd and hopefully, we'll get to Q4 and can share our 2020 plan.
Guidance level will be able to give you a little bit more specifics just let me spend on the revenue cycle area from a portfolio management perspective, as John said the primary lens. We have there is a significant white space opportunity in our client based on how we take advantage of real growth opportunity for the business. So thats our laws.
Yes, I'd focus then how do we think about the total solution offering in terms of technologies and services required to go deliver that and as the best way to do that through an organic build a partner.
Or divest and partner strategy, So I think thats that decision tree and the calculus.
In the process that we're working through but I think theres, a big big growth opportunity for us and the revenue cycle space Theres a lot for us to like about what's playing out there it's got significant trend.
In my life, when you look at it clearly.
At least in my mind ages.
From a revenue divestiture standpoint is the largest by far.
So you're not going to see similar levels of businesses.
That we'd be looking to get out of most of the others are going to be.
They will be smaller than that and probably significantly smaller so.
Relative to kind of your question or am I going to see been major changes that business alone is changing slightly but the others will be smaller than that.
Thanks, and just one quick clarification, if I can on the backlog adjustment you mentioned, how some of that came from the change in the Adventist contract.
Obviously meaningfully higher in terms of versus where the adjustments have been over the last few quarters is that should we think about that as the only adjustment that drives it meaningfully higher in terms the backlog adjustment versus where it's been last few quarters are there other kind of onetime items in there that drove some of the changes to the backlog.
That'd be the major driver.
Okay awesome. Thanks.
Yes.
Thank you.
Our next question comes from a lot of Jamie Stockton with Wells Fargo.
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Thanks for taking my questions I.
I guess, maybe two quick ones Mark the bookings.
Commentary for Q4, I think you said, Hey, you know not gonna have as many.
Long term oriented deals deemphasizing some of that stop the also called out that test and I would like.
Extensions of that rubber contract.
I guess my questions around that are.
Thats something that happened every year or you really just calling that out because there was a big impact.
In Q4 last year, and then is there any way to think about the size of that if it was every year.
Sure. This marked the rhythm with them was we renewed.
One added one more year to the deal every year.
And that one more deal would have.
Ben.
Given the revenue number we've talked about would have been a little bit higher than the revenue number based on other elements of it. So in if you're taking $200 million of bookings that would have been on our radar. When we started the year that are not going to be in Q4. This this year and would have been into Q4 last year as a as a direct apples to apples comparison.
That that's the key difference there and it just because it was every Q4 that that number hit the hit the bookings.
Okay, and then maybe just one more quick one on a pro services I think you called out just implementation activity as the driver strength there during the quarter.
Should we think about that is.
Finally centered around the government I think John called out for DMD sites going live in September .
And.
Is it is that Deo de at this point that we should be more focused on.
The driver if it is government or is there already some BA starting to kick in at healthy level.
Yes, I'll answer it in a general term that obviously to de da drive services through our model, but we also saw a very strong.
Services in our optimization components, we have to get current stay current.
Component going on as we as we push our clients and with our clients to make sure there on not only in the most current releases, but are aligned with our model solutions that we know that if you get aligned you have a much better experience all of those are components and drivers of our our services better business and their services the drive value to our clients so while the federal.
Everyone obviously.
Consumes services, it's not the only thing we're seeing growth and upside.
And clearly the federal is helpful I mean that BA.
Waves are going to start kicking off in the spring.
And there is work that's done prior to those getting kicked off we've had a lot of interaction.
With.
The VA.
On our campus recently and I think thats.
Getting all the training and things done so.
So those will be big grant that as John said it was that the broad support personal services business was with hardening and because it does show that the overall business is growing in that the government's country coverage tribute in additional growth.
Hey, given the time on when we get go ahead and.
Stop the questions at this point I think everybody for their time I know you've got to other things get onto so we look forward to talk to you soon thank you.
Ladies and gentlemen that concludes today's conference. Thank you for your participation you may now disconnect everyone have a wonderful day.