Q4 2019 Earnings Call
The Cerner Corporation fourth quarter 2019 conference call today's state its February four 2020, and this call has been recorded.
The company has asked me to remind you that various remarks made here today constitute forward looking statements, including without limitation those regarding projections of future revenues or earnings.
<unk> operating margins operating and capital expenses.
Bookings, new solutions services, an offering development and capital allocation plan cost optimization, and operational improvement initiatives future business outlook, including new markets or prospects for the company's solution and services and the expected benefits of certain of our acquisition or other.
Collaboration.
Actual results may differ materially from those indicated by the forward looking statements. Please see center, our news release, which was furnished to the as you see today and posted to the.
That's a section of started dot com and other filings with the FCC for additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements.
Rick a reconciliation of non-GAAP financial measures discussed in there in this call can also be found in the company's earnings release Cerner assumes no obligation to update any forward looking statements or information, except as required by law at this time I like to turn the call over to Brinci for Chairman and CEO of Cerner Corporation.
Thank you Dylan and good afternoon, everyone and welcome to the call I'm, joining the call from a client events. So I'll start the call with a few comments then handed over to the team in Kansas City, including our CFO, Mark not Chief client Officer, John Peters out.
He VP of strategic growth Dawn true.
2019 was an important and productive year for Cerner, we began the year by introducing a new operating model to refine our operational organizational alignment to enhance our client focus into accelerate scalable innovation to make certain are easier to do business with.
We also initiated a companywide transformation focused on operating inefficiencies business simplification portfolio management and refining our growth strategy to position Cerner for long term profitable growth.
Further we enhanced our governance governance through the addition of four strong board members, who along with our existing members have been invaluable as we work through our transformation.
Our 2019 progress is reflected in our fourth quarter results, which include a good performance across all key metrics, including exceeding arch adjusted operating margin target and delivering record free cash flow.
We also returned 1.4 billion of capital to shareholders in 2019 through our share buyback program.
Our first two dividend payments.
Reflecting our commitment to delivering value to shareholders.
Also significant in 2019 was the announcement of or multifaceted collaboration with Cws and Amazon.
We view this relationship is an enabler to many of the growth strategies, we've discussed on previous calls.
Including Cerners development of a cognitive platform and our evolution to become the software as a service health care T. partner.
Leveraging the powerful combination of Cerner technology that you Ws infrastructure, there artificial intelligence and machine learning capabilities, we expect to create next generation user experiences in innovations to deliver more predictive patient centric care.
Now before turning the call over to Mark I'd like to discuss Cerners position on the topic of interoperability data security and privacy.
For several decades sooner has been a trusted Stewart health information in a leader in the pursued pursuit of data interoperability.
We've seen a.
Vocal proponent of we have been excuse me of vocal proponent of the 21st century Cures Act and look forward to continuing or work with the I wouldn't see with clients and with other Keystone shake shareholder stakeholders to ensure a secure flow of information across disparate systems and health care entities.
We do this because it's the right thing to do.
I'm reminded of it today I started my career in Intermountain healthcare and this is where I spent the day today talking with other leaders about the future of health care.
And we talk a lot about the fact that health care is too important to stay the same and I love the chance to get together and collaborate with other organizations like Intermountain, who are working to help people live the healthiest lives possible.
We fundamentally believe it's wrong to ask patients striving to get better to manage a collection of faxes, Pts and paper filled shopping bags, it's wrong to ask providers to leave their workflows to review and leverage relevant patient information.
It's wrong to waste hundreds of billions of dollars on the highest administrative cost in the world. When we're in the middle of an affordability crisis in the United States Health care.
So we're going to continue to be a positive worse for change in the industry.
Access to the right information at the right time in the right place continues to drive our advocacy in Washington, and the global markets we serve.
In summary, I'm very pleased with everything we accomplished in 2019, we consistently delivered against expectations, we said well driving a significant amount of change throughout cerner.
It was hard work.
And I, specifically appreciate all the Cerner associates hard work throughout the year and their contributions to this progress you have a lot more to do in 2020 ROV too good start and I'm optimistic we'll continue to advance our transformation and more importantly, I believe the work, we're doing will position us to create meaningful value in health care well also draw.
Having good long term growth for Cerner.
Now I'll turn the color to Mark.
Thanks, Brett.
Good afternoon, everyone now before I begin I did want to cover the most important number from the weekend with our 31 and Wendy reflecting the 11 point when for the Super Bowl Champion, Kansas City Chief.
Go Chief.
Now I'll cover our Q4 results in future period guidance.
This quarter, we delivered all key metrics at or above our guidance.
I'll start with bookings, which were 1.665 billion in Q4 exceeding the high end of our guidance.
This is down from Q4, 18, which was the second highest bookings quarter in our history.
For your bookings were 5.99 billion, which is down from 6.7 to 1 billion in 2018.
Decline in Q4 and for the year was primarily due to a decline in long term bookings related to us being more selective on are outsourcing contract as we've discussed throughout the year.
We ended the quarter with the revenue backlog of 13.71 billion, which is down 10% from a year ago, primarily due to the termination of a Rev works agreement that I discussed on our Q3 call also recall that our backlog calculation of the new revenue standard excludes revenue from contracts with termination clauses and even though such clauses are rarely exercised.
When you combine the expected revenue from our backlog and the additional revenue expected from contracts not included in our backlog our revenue visibility remains at nearly 85% over the next 12 months.
Revenue in the quarter was 1.442 billion up 6% over Q4 of 18 inline with our expectations total revenue for the year with 5.693 billion, reflecting growth of 6% over 2018.
Now I'll go through the business model detail and year over year growth compared to Q4, 18 and full year 2018.
Licensed software revenue in Q4 grew 5% over Q4 of 18 to 174 million in full year license software revenue grew 11% over 2018 to 681 million, both primarily due to strong growth in our SAS offerings.
Technology resale of 60 million in Q4 increased 31% compared to a weak Q4 of 18 full year technology resale revenue was up 1% to 247 million.
Subscription revenue grew 7% in Q4 to 93 million.
Full year subscriptions revenue was 359 million up 10% from 326 million in 2018.
Professional services revenue grew 9% in Q4 to 509 million, primarily driven by solid growth and implementation services and partially offset by approximately 23 million less revenue determination of the revenue works agreement, we previously discussed.
Full year professional services revenue grew 10% to one point.
992 billion.
Managed services was up 3% in Q4 to 309 million full year managed services revenue was 1.214 billion an increase of 5% will 2018.
Support maintenance was down 1% to 274 million for the quarter, which is our expectation, Maine and reflect the impact of some past attrition that we discussed last quarter.
Full year support and maintenance revenue was also down 1% 2018 at 1.105 billion.
And finally reimbursed travel 22 million was down 9% in Q4 and down 2% for the full year at 95 million.
Looking at revenue by geographic segment domestic revenue was up 6% from the year ago quarter at 1.276 billion and non U.S. revenue of 166 million was up 3% from a year ago quarter for the full year domestic revenue grew 7% and non U.S. revenue grew 3%.
Moving to gross margin our gross margin for Q4 was 80.8% down from 81% in Q3 of 19 and 82.6% year over year full year gross margin of 81.2% is down from 82.5% in 2018.
The declines in our quarterly and full year gross margin or both 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 and net earnings for these items, we provide both GAAP and adjusted or non-GAAP results.
Adjusted results exclude share based compensation expense acquisition related adjustments organizational restructuring and other expenses and other adjustments that are detailed in the reconciled to GAAP in our earnings release.
And our operating spending our fourth quarter GAAP operating expenses of 982 million were up 2% compared to 965 million in a year ago period.
Full year GAAP operating expenses were 4.0 to 1 billion up 10% from 3.654 billion in 2018.
Our adjusted operating expenses were up 4% for the full year, where the fourth quarter essentially flat compared to Q4 of 18, reflecting good progress on our cost optimization effort.
Looking at the line items for Q4 sales and client service expense increased 1% of Q4 software development expenses grew 4% over Q4 of 18, driven by 1% increase in gross R&D.
7% increase in them, but they.
The 3% decrease in capitalized software.
DNA expense.
15% driven by 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 Q4, 12.7% compared to 12% in the year ago period, our adjusted operating margin for the quarter was 20.3% up from 18.7% in Q4 of 18 and 18.1% last quarter.
Our Q4 adjusted operating margin is in line with our expectations and above the 20% adjusted operating margin target for Q4 of 19 that we committed to last April our GAAP operating margin for full year 2019, with 10.6% compared to 14.4% in 2018, our full year adjusted operating margin was a.
Team, 0.5%, which is down slightly from 18.8% last year.
We believe our ongoing business optimization effort keep us on track for delivering our targeted Q4 20, adjusted operating margin of 22.5% I'd note that some of the margin expansion is expected to be back end loaded like last year due to the timing of our initiatives and some seasonality however, our guidance, which I'll discuss it.
A minute does reflect a full year adjusted operating margin of approximately 21%, which is about 250 basis points higher than 2019 and reflects the cumulative impact of all the optimization work, we've done and expect to do this year.
We also believe we can continue improving profitability beyond 2022 ongoing optimization efforts and a longer term opportunity to benefit from platform modernization.
As we discussed the benefits from platform modernization will be a multiyear process, particularly for millennia and most near term benefits are largely offset by modernization investments.
However, we expect lower operating costs associated with this move along with efficiencies and improvements we are driving in our development process the meaningful meaningfully contribute to our profitability. While also helping us deliberate differentiated solution to our clients at a lower total cost of ownership.
Moving to net earnings and EPS, our GAAP net earnings in Q4 were 154 million 49 cents per diluted share is up from 40 cents in Q4 the 18.
For the full year GAAP net earnings were $529 million 65 per diluted share adjusted net earnings in Q4, what's going on 37 million adjusted diluted EPS of 75 cents compared to 63 cents in Q4 of 18.
For the full year adjusted net earnings were 862 million and adjusted diluted EPS was $2.68 up 9% from 2018.
Our GAAP tax rate was 19% for the quarter end year.
Non-GAAP tax rate was 20% for the quarter in year.
20, plenty would we expect our GAAP and non-GAAP tax rates to be between 20 and 22%.
Moving to our balance sheet. We ended Q4 with 542 million of cash and short term investments, which is down from 633 million last quarter with our free cash flow being offset or 75 million dollar acquisition that they will that.
300 million of share repurchases in.
For the year, we repurchased 18.8 million shares for $1.3 billion, an average price of $69 in success, keeping us on track against our plan to repurchase 1.5 billion by the end of Q1.
Moving to debt our total debt remained flat to last quarter at 1.038 billion.
Total receivables ended the quarter at 1.4 billion down from 1.155 billion in Q3 of 19.
Our Q4 DSO was 72 days, which is down from 74 days in Q3 of 1979 days in the year ago period.
Operating cash flow for the quarter is 438 million.
Q4 capital expenditures were 83 million and capitalized software was 63 million free cash flow defined as operating cash flow less capital purchases and capitalized software development costs was 292 million for the quarter.
For the full year operating cash flow was 1.313 billion capital expenditures were 472 million in capitalized software was 274 million.
Full year free cash flow is 568 million, which is down $166 million for 2018, driven by higher capital expenditures and restructuring costs.
For 2020, we expect some level of restructuring costs to continue we still expect higher operating cash flow and lower capex to drive strong free cash flow growth.
Moving to capital allocation as I indicated, we repurchased 1.3 billion shares of stock in 2019 and remain on track to meet our targeted level of 1.5 billion by the end of Q1.
In December we announced that our board authorized the repurchase of an additional $1.5 billion stock, bringing the total authorized amount available for repurchase up to 1.7 billion. We intend to continue funding. These repurchases with a combination of cash from operations and debt and the timing and amount of repurchases will depend on how much funding is used for other purposes.
Such as acquisitions or investments.
Moving to our dividend program, we paid our first three quarterly dividends of 18 cents per share on July 26 October 9th in January.
Our quarterly dividend payments in the increased authorization our share repurchase plan reflect our continued commitment to return capital to shareholders.
And our belief in Cerners long term potential.
I'd also note that we completed our acquisition available. That's in Q4 had begun to integrate their service offerings into our portfolio to accelerate our success in the federal space.
As we've discussed we expect to be more active in M&A as we believe there are opportunities that could be foundational to our growth in several markets our strategic growth organization is pursuing.
I'd also note that our portfolio management efforts are expected to lead to some divestiture activity as we look to create more focus in areas most aligned with our refined growth strategy.
Now I'll go through guidance.
We expect revenue Q1 to be between 1.415 and 1.465 billion.
Good point of this range reflects growth of 4% over Q1 of 19.
For the full year, we expect revenue between 5.7 to five and 5.975 billion with the 5.85 billion midpoint, reflecting 3% growth over 2019.
The midpoint of this range is slightly below consensus growth of 4%. We expect this could be do that but it's not fully factoring in the impact of reduced levels of outsourcing bookings in 2019.
Continued approach of being more selective with those types of contracts also.
I'd like to walk you through inorganic growth view of 2020, if you adjust for exit from the Adventist health contract by taking that revenue out of 2019 or 2020 growth would be over 5%.
Adjusting out able best revenue would bring pure organic growth back to 4%, but we don't view all of the revenue from able bets as inorganic because we expect to leverage their associates and performing on the VA contract as it ramps up this normally would have been done through organic hiring but would we believe there is value and leveraging their highly qualified workforce.
As we've discussed there will likely be additional actions. We take this year that could result in revenue reductions. There's also the potential that we do M&A, which could serve as an offset to divestiture activity.
Overall, we do expect there to be several moving parts on the topline in 2020, but we believe the actions we take will set us up for solid and profitable growth.
Moving to keep yes, we expect Q1 adjusted diluted EPS to be 60 971 cents per share.
The midpoint of this range is 15% higher than Q1 of 19.
Our adjusted diluted EPS guidance reflects the ramp up throughout the year that it's similar to last year.
Was biggest sequential increase in Q4. This reflects the expected timing of ongoing efficiency and operation there.
The efforts.
For the full year, we expect to just adjusted diluted EPS to be 309 to 319 with the 314 midpoint, reflecting 70% growth over 2019.
As I mentioned, we also expect our adjusted operating margin to ramp during the year with Q4 were expected to be slightly higher than our 22.5% target due primarily to a lower mix of outsourcing revenue.
I'd also note that our expected full year non-GAAP tax rate of approximately 21% is 1% higher than 2019 impacted EPS by about four cents.
Moving to bookings guidance, we expect bookings revenue in Q1, a 1.1 billion to 1.3 billion. The midpoint of this range reflects a 3% decrease compared to the first quarter of 2019, driven by an expected decline in long term bookings.
In summary, we are pleased with our strong results in the fourth quarter and believe we made a lot of progress. This year. There's a lot of hard work left to meet our profitability and growth targets, but we have a good plan in place and expect to executed in 2020 and beyond.
Before I wrap up I'd like to remind you that we will host our annual investment community meeting at Tims on Tuesday March.
If you plan to attend and if not registered please do so through the link at the top of the Investor section of Cerner Dot com.
Unable to attend in person there will be a webcast available with that I'll turn the call over to John.
Thanks, Mark Good afternoon, everyone. Today, I will provide results highlights and an update on our federal business.
Start with our bookings as.
As Mark mentioned, we delivered bookings ahead of our guidance range for the quarter driven by strong contributions across multiple segments, such as investor owned academic and idea and we also had good contributions from revenue cycle solutions and across our strategic growth businesses, which Don will discuss.
Consistent with recent quarters, we had a lower level of long term bookings compared to last year, which drove the decline in overall bookings for the quarter the percent of bookings coming from long term contracts was 29% compared to 38% in Q4 last year long term bookings for the year represented 28.
Percent of total bookings compared to 36% last year with this decline in long term bookings driving total bookings down for the year bookings, excluding long term contracts increased slightly for the full year.
Looking at the broader marketplace. Many of the same trends continued to play out during 2019 with health care cost growth outpaced the economy elevated levels of industry consolidation rising consumer expectations around cost convenience and service and the continued gradual evolution of reimbursement models.
Adding to pressure on providers to lower costs and advance their risk based strategies.
These forces are contributing to an overall challenging macro environment providers are simultaneously seeking to grow key service line drive operational efficiencies to make money and Medicare rates and build out the competencies required to take and effectively manage risk and participation in value based reimbursement models information.
Technology as see there's an enabler of these efforts, which separate say represents an opportunity for cerner at the same time, the lower margin nature of provider businesses can make it difficult to fund required investment make it is important for solutions and services to have a clear return on investment.
As we look at 2020, we see solid opportunity both in our installed base as well as well as continuing to gain new clients. This opportunity is reflected in our pipeline, which is up year over year for both new business and opportunities for sales back into our base in our base, we're focused on getting our clients current.
We're also filling out there cerner solutions suite with a focus on increasing penetration of revenue cycle solutions and solution supported by our care aware and Healtheintent platforms.
Our communityworks pipeline remains strong and we have opportunities outside of our traditional provider base in areas such as state government employer and long term post acute care. We also have opportunities to continue growing the presence of our HR agnostic care aware and Healtheintent solutions beyond our E HR base.
Yes.
Moving to our federal business, we continue advanced both our VJ and Deo de projects on the VA project Cerner, along with our VA and our partners remain focused on initial operating capability or I don't see go lives. We have completed initial integration validation and are doing a significant amount of.
Training and site preparation activities ahead of the scheduled go live in March looking beyond the initial go lives. We also expect to go live at additional I'll see sites in 2020 and continued to steadily scalar work to provide additional value and capabilities to be a in the upcoming quarters as Mark mentioned.
And we expect to leverage the able best team as these activities ramp throughout the year.
We're also making good progress on DRD, we successfully completed the code upgrade during the quarter and kicked off the coast Guard project and two additional deployment waves go lives for these waves are slated for late 2020 with that I'll turn the call over to Don.
Thanks, John Good afternoon, everyone.
Our strategic growth organization launched in 2019, our ambition was a simple one scale is set a focused business units that position cerner beyond the hospital beyond our Cerner millennium DMR and beyond the traditional fee for service payment model.
The six business units that make up strategic growth each target large addressable markets in excess of $3 billion with a path to meaningful share in each market.
They getting leverage from existing cerner assets, ranging from the industry, leading data processing and aggregation capabilities of healtheintent to our subject matter expertise around the last mile DMR workflow regulatory requirements are understood surmountable and offer opportunities for differentiation.
Ill six businesses overweight on recurring revenue and high gross margin potential and finally strategic growth leaders focused squarely on speed to revenue as they pursue larger category leading positions.
For full year 2019, our strategic growth businesses generated $520 million and revenue representing 22% growth year over year. We believe we can deliver similar growth in 2020 look forward to our Investor day at Hams, and Orlando, which will afford us the opportunity to review the longer term targets for each business.
As we look at areas of particular strength in 2019, cyber security frames, our strategic approach US health care is seeing data breaches at a rate of one per day.
Technologies are core to how CIO isn't csos are building out their enterprise strategies.
Cyber is an area of growing internal competency driven in part by our critical work to support armed services and veterans.
As a result, our security revenue from health systems grew nearly 40% in 2019.
Our provider communications business, leveraging our earmark Gnostic care, where platform also benefited from strong market Tailwinds and delivered record bookings in 2019 care, where connect solution adoption was strong with an over 100% year over year increase in utilization to almost 75000 monthly users.
We also were pleased with the full year progress in the long term and post acute care market with 23% year over year growth, our baby or health solution within our Multipacks suite was a particular bright spot a deliberate almost 40, new footprints with 80% of total bookings revenue coming from outside our millennium base.
Our unified behavioral health solution is not only strongly differentiated in the market. It also was announced Friday as the 2019 best in class category leader.
For individuals and families that seek help our unified Cerner solutions strives to make it easier for providers to deliver the integrated care that successful treatment demands.
LTE pack is an area we sell at the point solution level and also fit solidly into our larger strategic push to build out our health network strategies in every MSA in the United States and all five of our focused global regions.
The technical platform level, our healtheintent platform as a strategic linchpin of our health network efforts, our market facing push to drive adoption of Healtheintent continued to progress in 2019, bringing us to 175 Healtheintent clients worldwide, including the addition of leading providers like prospect health and to be to help.
As Brent noted in describing our SWS partnership.
Hey, Healtheintent was built as a native cloud platform as the Mark Gnostic and has been recognized been Andrea industry analysts like chilmark as having the best product capabilities in the category. It also has been at the heart of our work with a ws.
As we move nearly all of our non federal Healtheintent clients to every us public cloud in the first half of 2020, you will establish the clear value proposition of the cloud technology approach for provider healthcare. We also see it as a key enabler of our health network strategy and focus global markets, such as England as the NHS accelerates its push to advance and.
Great care systems.
Finally, with the content of health care digitized. We also are advancing a set of strategies around data services.
Our Glasgow and a team and our team launched a learning health network concept in 2019 to make it easier for patients to be identified and participate in clinical trials. The do clinical Research Institute partnership.
Announced in 2019 played a central role in generating research opportunities for Cerner clients and top health systems, such as Medstar announced yesterday are helping us to activate a network. We believe could make it less expensive to create the next generation of lifesaving therapeutics across all six business units our efforts to drive.
Dziedzic growth fit into an emerging enterprise discipline around portfolio management across Cerner and 2019, we were as intentional about the things we decided not to do as the things we decided to do.
Several important strategic growth partnerships help tell that story, our partnership with Reds Resmed Mad offers new revenue generating opportunities and post acute care and advanced analytics around sleep and respiratory. It also featured a decision to make Resmeds Brightree home health offering our preferred go to market solution.
Similarly, our partnership with get while network embedded there help loop asset into our consumer application framework. It also came with a portfolio decision to not invest further and our my station patient engagement solution in favour of get wells industry, leading offering we believe a combination of thoughtful build by partner assessment.
Well bring us closer to our longstanding vision to build the system of health and care with the individual at the center, it's a system where consumers not only have a REIT to their data, but also have the ability to mobilize it in pursuit of better health.
We believe the entrepreneurial opportunities at the intersection of Health care Nightie have never been greater we're excited about what 2020 and the 20 twenties hold for setting an emerging area of strategic growth for server 2019 performance for its part laid a solid foundation premiere the further faster and the quarters to come with that.
Let me turn the call over to the operator for questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone. So we're very a question press the pound King please standby, while we compile the Q and a roster.
Our first question comes from Robert Jones from Goldman Sachs. Please go ahead.
Great. Thanks for all the comments Tonight. Thanks for taking the questions I guess Mark just to go back some of your comments you highlighted.
4% growth ex able that addition, and less the revenue cycle service contract that you guys exited I guess just out of curiosity as we frame the year and understanding the 2020 is.
Been put aside is kind of a transition year, how much of that remaining gross.
Came from federal and then clearly more importantly, I know, we'll hear more in March.
Just some of the major building blocks does as you think about returning.
To profitable growth in the future what are the pieces, we should be at least starting to frame out as we think about growth beyond 2020.
Yes, no. This is mark I think from a certainly as we've looked after year end and trying to get apples to apples will be a little bit challenging in 2220, we're going to do our best job to do that little bit why we try to Pat.
Talk a little bit about organic growth I think.
If we get back to the overall view of topline growth, we've talked last year about kind of that being the 6% to 9% range clearly the outsourcing.
Hello activity and certainly be Adventist contract will could impact that and I think as we look through that that probably 100 basis points potential impact, which would put you.
Some place in a five day for set top line growth level.
I think thats.
Certainly something that.
That we would expect to be doable for for us.
I think from up from the things that are going to continue driving certainly federal will be part of that growth is that contract. The VA contracts ramps its way up to $1 billion a year of annual revenue. That's you know $250 million or so of additional annual growth in revenue, that's just coming out of the VA contract.
Depending on the time period. So that's certainly good driver and then strategic growth is obviously another area that we're expecting to see growth out of.
That will.
Take the to $5 million to $600 million businesses today continue to grow that at strong growth rates. We also look we opportunity that we have just within our existing base business. So our core business the opportunity still revenues revenue cycle solutions.
Back into that base ability to go attack the white space all of those are things that we think overall our elements that can can contribute to us having overall topline growth and that really all of those things I've talked about or.
Primarily organic we've talked in the past that we also expect there to be a level of inorganic growth for us.
In summary, M&A that will support primarily the opportunities in strategic growth and depending on the size of those opportunities in the size.
Revenue impact they bring that certainly could be accretive to those to the topline growth that we've talked about but.
Certainly as we as we go.
Get get to hands and can have a little bit more time with everyone. We'll try to take you through a more detailed view of strategic growth in the elements of those businesses.
And how we've got to how we've got the.
The opportunities for growing the top line kind of just in the range that weve traditionally discussed, but I think.
To your point, we have talked about 2020 being a reset year, we are looking at opportunities to divest certain things as we do our portfolio management, that's going to negatively impact revenue.
M&A will positively impact revenue and we'll try to do on a quarterly basis is kind of give you an update as to where we're going obviously, we'll be giving quarterly guidance.
If theres any adjustments, but right now we think the guidance we provided for the years really solid no Mark I. Appreciate all that I guess, just a quick follow up on your comments then would be around those those potential further divestitures and potential M&A are those contemplated in the 2020 guidance or is this kind of best case of of what we.
No today is which is where the business stance.
Yeah. The way we did our guidance was basically kind of on that same store basis. So it does not contemplate any of the divestitures. It does not contemplate any any of the M&A potential activity because that that's still as of today something to be determined.
We think it's getting more effective as those items occur that we can talk about them at that point keep in mind.
The H.
If you will divestiture or that networks business going away is by far the largest item that was on the list.
The items after that would be smaller items. So.
Whether they even impact the overall guidance to great extent will be be something we determined at the point they occur but right now the guidance is based on current course and speed and then we will adjust as we.
As anything.
Comes up in that space, one way or the other.
Thanks for all that.
Sure.
Thank you Hi next question comes from Kevin Caliendo from GBS. Please go ahead.
Hi, Thanks for thanks for taking our call.
Hey don't guide for bookings for the full year, but given the shift away from LT service bookings.
When do you think it's reasonable for you to assume you're going to return to year over year bookings growth.
The one can't guide is there any additional comp headwind for the shaft or do you view of the year over year long term bookings compares already normalized entering the year.
Yes, I think clearly the we don't guide beyond the Q1, because we do want to be be pretty accurate relative to our guidance I think as you.
The solid results that we delivered in Q4 actually delivering above our guidance range.
With the opportunity based on some opportunities to pull things in to the quarter based on some of the timing of our clients and their year end.
It's going to impact Q1, a little bit because those things would have normally been landed in Q1, but I think we're still normalizing for some of the outsourcing elements in the booking so I think for 2020, what's kind of a year for resetting the topline from a growth perspective, I think it's fair to say that the bookings will get through the full year of 2020, and then we should.
You get some pretty comparable bookings to be able to do.
Apples to apples growth thereafter, but Q1 is still being impacted by.
By the more focused view of anything that we're going to do on services side that might be in the outsourcing space.
One quick follow up if I might.
So we are raising that NPK Deputy Secretary was let go yesterday and I guess he was someone who is technically in charge of da implementations.
Just wondering if you had been in contact with them with leadership over there since that decision was made is there any any concern or any issues about timing or potential bottlenecks on the implementation of the contract.
Yes. This is this is John I won't comment specifically on the on.
On that activity, but what I would say is that.
Both the veterans da the modernization project, that's significant bipartisan support and the fact that there are changes and political activity, it's not a surprise or unexpected and from the beginning of this project, we took great effort and making sure that we had broad support throughout the hill on the BA Veterans group.
So in other constituents on supporters to ensure when things like this do happen or political activity occurs it doesn't impact where we're going so we don't anticipate any impact from that and we think that our broad based to support is incredibly solid and we're just going to continue on.
Great. Thanks, Thanks, so much for the color on that.
Thank you.
Next question comes from Charles Rhyee from Cowen. Please go ahead.
Yes, thanks for taking the question.
Maybe you want to touch on I think at the beginning you guys talked about.
The interoperability rules the final rules right expected soon.
Any any thoughts on sort of the I know there were some conservatively on providers around compressed timelines or perceived brook compressed timeline for implementation.
How do you view those challenges in what is what would you talk.
I guess say about your preparedness to help clients to work through that.
And any thoughts on maybe seeing a phased implementation schedule put in place instead.
Yes. So this is Don I.
I think I think first and foremost just to echo brents comments. This is space that we've been.
Very vocal on and pushed aggressively on.
For a number of years, so we have a lot of.
I think personal passion around interoperability semantic interoperability and what the space needs to look like for patients and providers and payers.
So that's first and foremost I think secondly.
We feel like we're very well positioned to.
Meet the implementation timelines.
That are being discussed both from a technical and a non technical business perspective, I will obviously finalize those strategies as the final rule comes out.
And and they're completely understood.
But we think.
They are manageable.
And that we're well positioned to do that and I think finally just too.
Reiterate.
Some of the framing on the call, we think theres going to be a ton of business opportunities associated with these elevated rates of data liquidity. So when I think about the types of things that we're doing to enable our strategies around Medicare advantage alternative payment models like bundled payments BPCIA.
The opportunity to think through the technical strategies required to help provider organizations make those business models work.
We think create tons of opportunity for Cerner.
And frankly for the industry as a home.
Great and maybe if I was just follow on in terms of sort of the strategic new model to a little working on.
I'm not sure I might've missed it but didnt hear any mentioned I'll ameris. So just curious on an update on how that.
That partnerships working thanks.
No I appreciate it.
We think we're making a ton of progress there and I'll turn it back to the comments I just made so first and foremost.
Really the thing that was one of the things that were super exciting to US was to take the methodology sort of the best in class methodology able to Maris for Medicare advantage.
Our technical capabilities and their service expertise and use it to bring a total solution offering to the market.
In terms of progress made around that we were very excited to use healtheintent as a foundational platform for running a provider sponsored plan focused on M&A.
And we over attained against those IP milestones over the course of 2019 and now are deploying the solution as part of the go to market strategy for numerous and Cerner and again just to come back to the topic around information sharing.
Think about the four star am a plan that numerous runs in the Saint Louis Mark at 14 different practice as high degrees of technology heterogeneity.
And how do you think about elevated rates of data liquidity both to drive through your strategies for activating that network as well as integrating their best practice capabilities into the last mile workflow of the physician, it's it's nicely complimentary to the regulatory trends that are playing out.
And we think it represents one of several very big business model opportunities for us going forward.
Great. Thank you.
Thank you.
Next question comes from Ricky Goldwasser from Morgan Stanley. Please go ahead.
Yes, hi, good evening.
Going back to see if revenue growth guidance in some of the comments Mark that you made.
So first of all just to clarify because I might've missed it sitting at some point you said, 5% to 8% is scalable for longer term revenue growth and I just try to understand.
The building blocks there that's one.
Second of all I think you highlighted that the FDA is it long term revenue opportunities. So just wanted to make sure that we hear it right that you expected.
Gross debt 250 million that you mentioned beyond the term off the initial contract.
And then lastly, we think about the potential.
Divestitures that are not included in this guidance range that you provided us today.
Who is making this decision is this a decision that.
You are making based on the margin mix or is this something that decline twin contract is up for renewal.
Sites to two not telling you I guess just if you can just clarify why is this taking such a long time to to make the decision a flood contracts.
I being divested or not.
Sure.
First of all the 5% to 8% was really just discussing.
The long term growth, we kind of provided last year at hymns of six to nine with a little bit of.
Hundred Bips haircut based on the lower amount of outsourcing activity, that's going to happen. So.
We're going to be as I indicated a little bit earlier at hymns will be taken you through that long term growth rate, what that looks like we're coming relative to our.
Our core businesses, our strategic growth businesses, our federal businesses, so you'll be able to see how it lays out and then we'll give some more details as to the street the strategic growth businesses that underpin all of those growth assumption. So our goal to lay out a very clear path that kind of.
Falls within that range with the opportunity to over retain depending on what we do from an M&A perspective.
Relative to the VA contract.
When we first talked about it be the $10 billion contract and it's a 10 year contract. The math would say that the billion dollars year. Obviously, there is a ramp up period, when we talk about that and when we talked about we said it ramps up over a four year period grown about $250 million year until it gets to the billion. So my reference to that 250.
Million increase was basically the revenue we're going to be ramping up to in that contract that gets us to the $1 billion runway.
We have talked about the opportunities to certainly sell more.
Of our solutions and services to the VA, which could increase the billion dollars to a bigger number but certainly the 250 I referenced is just kind of current portion speed ramping up the projects doing more and more no plantations and how that drives.
That revenue stream forward, so nothing new there that's just really reiterating what we've talked about that.
Another piece of the growth.
Puzzle that that is we've talked about and that drive a good amount of growth and finally on the defense divestitures age was a little bit of an anomaly in that space that was really.
As a business we're looking dependent.
Decide whether we want to be in or not they were our largest client and that outsourcing. So that was more of a client contractual agreement.
Going forward it will be much more of a us reviewing.
Relative to our portfolio management relative to our growth options for the business or do we want to focus our attention and those areas that we don't want to I don't think are the growth areas for the company, we want to focus on.
We're going to consider divesting as one of the options.
We will consider divesting, we'll consider partnering there are variety of things, we will consider but those divestitures will be in many cases of an existing business. It won't miss it won't be a specific client relationships that will be unwound in some way it will be an existing business.
We will basically go out to market and look for opportunities to say here's this this asset it's something we're willing to to let go and some of these some of these assets has significant value. So I think.
And and from a why the taking so long standpoint.
If there is there's a lot of work we've done in our portfolio management to decide what are the key things we want to drive as we talk that work really was a lot of the 2009 teamwork and really was kind of finalizing as we ended the year.
Certainly some of these activities on divestitures are already underway and ideally will be things that we can share with you in the very near future.
Thank you.
Thank you.
Your next question comes from Jeff Garro from William Blair. Please go ahead.
Hey, good evening, thanks for taking the questions I want to ask a little bit more about eight ws partnership Ben and maybe putting aside the very important work around migration and those long term benefits of of efficiency and lower tier four for clients more curious on the consumer experience innovation side.
And what type of milestones either.
Milestones or bookings related milestones that we can look for in 2020 from that partnership.
Yes, it's a it's a great question, Jeff. Thanks, So let me, let me talk to kind of multiple pieces of it just in terms of one the framework for the relationship I think one of the things that we were excited about from a eight ws an Amazon perspective was not just the opposite.
Synergy to think through technical migration to the public cloud, but to really think about broader opportunities around the Amazon relationship and what it would look like in particular to leverage their deep competencies around the consumer.
Coupled with their their strong interest and being part of the healthcare ecosystem. So that was I think a design feature of the relationship and I think we've been very happy with.
Our opportunity to kind of engage with them and to look at key strategies around approach.
Whether those are.
Publicly disclosed activities around how they think about their employee population and some of the things that they're doing in concert with JPM.
And with Berkshire portfolio companies more acquisitions that theyve made around.
Capabilities like Hell pack. So we've had good visibility to that we think it's an exciting piece potential piece of the relationship.
And.
And an important part how we want to think about making the partnership work going forward.
Secondly from a technical perspective, I talked a little bit about the fact that healtheintent has really been a tip of the spirit few well relative to the migration to the public cloud.
Most of that work will be completed in the first half of the year care aware similarly, as part of that early strategy and path I think we've been very transparent in terms of saying that the time frames around millennium I will be more elongated.
Finally in terms of.
What this is going to look like in terms of targeted bookings or revenue impact I think there's businesses within strategic growth that are very excited about the potential pull through impact relative to revenue I would say, our consumer and employer businesses in particular.
Have a lot of energy here and I've been real drivers around the strategic collaboration.
But we're probably not at a point in the lifecycle of the dialogue, where I can put out a revenue target in our bookings target.
You know that we would feel confident we could hit our over a 10.
Thats very helpful. One quick follow up maybe on the technical side on Healtheintent and care, where in those those first half migration, maybe just some more specifics around where the benefits are for first cerner with those migrations and where the benefits are for clients.
Yes, well first of all I think just the ability to be able to stage and think through the migration to the public cloud has had a real value proposition for us as we try to think really comprehensively about.
Not only the technical components, but also how we have this conversation with our clients. How we think about innovation potentials in concert with our provider clients as part of the dialogue in the approach.
In terms of benefits I think there are clear and demonstrably benefits.
And our clients are going to see.
Theres a performance system performance benefit that's very real.
There is a benefit around latency and how we think about the path to near real time data assets that I think can be very important around strategies like hospital operations.
And.
I think this is also relevant as we start thinking about growth opportunities like cyber security, where clients need our competency and expertise around how they manage hybrid environments with on Prem and cloud so.
I think real benefits that were deriving from our performance perspective from a data and utilization of the data against business strategy and some really interesting from my perspective conversations around capability that we have that create white space opportunities for growth.
Excellent. Thanks again.
Thank you.
Next question comes from Sean Wieland from Piper Sandler. Please go ahead.
Hi, Thanks, so much so on the restructuring costs that you're talking about Mark you said 2020 year structuring costs are going to continue can you quantify the impact.
These costs are are to the operating margin that you're forecasting both in 2019 and 2020.
Well the operating the restructuring costs that were incurring that are the restructuring costs currently are being adjusted out of earnings. So our adjusted earnings there is zero impact on that and that is the number on which we've based our operating margin targets.
Okay. Thanks, and then.
Thats helpful. And then the quick clarifying question, you said, you're going to move almost all your hosting clients to AAMC first half. The 20, that's consistent with what you've set but does that.
Impact revenue or profitability cadence throughout the year or you can be backfilling that with government tenants.
Well for the most part the moving to May WCS. The primary impact is freeing up hardware and space in our data center and that will absolutely be used.
To support our federal clients as well as other clients, we have that our hosted by us and on a millennium platform. All of these devices are basically interchangeable relative to to the various architectures. We use so that will be the savings is the impact on coke capital.
Okay. Thanks very much.
Thank you.
Next question comes from Sean Dodge from RBC capital markets. Please go ahead.
Good afternoon, thanks for taking the questions, maybe maybe staying with that the platform modernization from moment understanding the entire projects can be multiyear effort and ultimately the long term positive for Martin can you give us a little more insight into that impact it will have on margins in the interim.
The investment you can have to make as part of it can you put some bookends around how big how much are they going to be consistent or or chunky and are there efficiencies are going to be able to garner in the meantime that will help offset some of it or is this something where the margin lift it really doesn't come until the entire project is done.
Yes. This is mark is done kind of went through the each time, we move.
Element to ADW, yes, there is some savings garnered so certainly from a as we move healtheintent.
Being able to manage that and a that'd be us environment.
As a savings on the people it takes for us to run those environments.
Our data center. So there are there are incremental.
They aren't the.
Significant but they are they're incremental the investment we're going to make relative to.
Our cloud investment on the other flows were primarily millennium.
Thats part of R&D expense right.
Part of our portfolio management goal is to free up dollars that we're spending on things that we don't see as long term growth opportunities.
And put that in to some of the things that are going to be growth opportunities such as the cloud environment. We are still actually going through the the exercise in the process of deciding exactly what the path to modernization is going to entail exactly what's going to move and exactly the timing. So it's a little bit hard for me right now to give you an idea of what those dollar.
Bizarre.
But our expectation is that much of that work is going to get funded out of our normal R&D spend that we'll be focused on those efforts.
As opposed to potentially some other efforts on things that we're going to to not be moving forward with so there is that it's going to be a refocus of it. So we're not going to garner some of the savings.
We might have from some of those divestitures, although we will get gather some.
But we shouldn't have a lower influx of costs relative to this effort and it will as Don said be a period of time before that gets there now once we get there the benefits are significant we've got well over $100 million of annualized cost for hosting our clients in our data center just from software that.
We run them on in our data center that we won't need to use when they go to the cloud there will the advantages of running a single version of the software in the cloud is a significant decrease in the cost we have for supporting our clients.
They will get a much better experience or clients that goes higher so the appetite for more solutions goes higher so.
Those are.
Harder to quantify at this point in other than the actual.
Cost savings from sub license software, but I think for that for the most part that's the goal.
Those benefits aren't going to happen in the next two or three years Thats, we have to get through a lot of work and we'll be able to give you more of a.
Update on that as we as we do our work to make to identify the path for but it isn't something I think is going to be big expense impact, but the benefits will be a little bit longer term relative to margin improvement and that's one of things we've kind of talked about as we've got our path. We did we delivered 19, we our path to 2020 how.
Do you keep delivering thereafter, you continue on the optimization and then the next iteration is going to be basically platform based the bring these other additions and other opportunity to increase operating margins.
Okay. That's great. Thanks, Mark and then maybe on margins more broadly you're still expecting to exit 2020 around the 22% level you said, maybe even a little bit better I think you touched on it briefly in the prepared remarks, but can you just walk us kind of quickly through what you see being the primary levers or buckets of opportunities you can take outs.
You from the 20% you just printed to to something north of 22 and half on the next four quarters.
Yes, I think the key to remember is a lot of what we did in 19 really started impact us late in the year right. It really.
Margin improvement from Q3, the Q4 was significant so but we have in place over 50% of the actions we need to go drive what were the margin uplift for 2020. The next set of things that are going to happen are going to happen towards the end of 2020 is we do things based on location of.
Of associates and things like that that will.
We will drive kind of some of those next next year benefits.
For us so the.
The over the the reason that Q4 Q4 in 2020 will be a little bit of.
Backend loaded once again is because those are the next tranche is in it takes time and effort to go get those in place, but I would.
Point out that basically after Q1 will be delivering about 250 basis points of margin improvement each quarter year over year Q2, Q3 in Q4.
And basically for the full year, so that level those margin improvements are the continuation of what we put in place and 19 and delivering on the next phases that occur in 2020.
Got it okay. Thanks again.
Hey, just just to clarify for get the next question my comments around 5% to 8%.
Seem like there's a little bit of confusion on people that.
Talking about that comment.
Im just trying to the indication that I was trying to portray is if you took our previous 6% to 9% target and lowered it for the impact of off of outsourcing it would reduce the range by 100 basis points. So I was just doing math and subtraction is one of the skills I do have.
And we basically we're taking taking that down to the five for 8%.
Just based on what our prior view was in kind of what the impact of the outsourcing that we've talked to you about is but certainly it hymns, we'll give you a more detailed view of what we think the right answer is and how do we get to that right answer. So so I just wanted to clarify that because there is little bit of confusion.
Thank you next question comes from George Hill from Deutsche Bank. Please go ahead.
Good morning, guys and thanks for taking the question just might be one for Don I know Don Historically. This is an interoperability question historically interface management has been an attractive part of the business.
Pretty good margins and as we think about kind of changing interoperability regulations that will probably create some opportunities, but can you talk about how much business risk there might be to parts of the legacy business.
Yes, it's a it's a good it's a good question George I think.
I think we're pretty comfortable that that business I mean, you're right, it's relatively small and it does have.
A good margin profile I think were relatively comfortable that the things that we've been doing on smart on fire enablement.
Our code program.
Mean that the net impact is de Minimis and I think more to my earlier point.
We think it's actually enabling to some of the bigger swing business strategies that were advancing inside strategic growth. So.
While I can't perfectly net that out for you I think we look at it and say in nurse to our advantage in to the upside relative to where we want to go from a topline perspective.
Okay. That's super helpful. And then Mark maybe just two quick number follow ups.
Can you talk about.
Can you give maybe any color on the Capex guidance for 2020, you talked about the number coming down from the 471 number in 2019, maybe just something about that and has any share repo assumed in the 20 to 20 bps guidance.
Yes, I think from a Capex perspective, you can take a $100 million out of that number is.
As we kind of the range that we would expect.
As we look at 2024 Capex based on our buildings being slow down.
Basically being completed.
I think the repurchase we obviously have $200 million scare scheduled for Q1 to complete our 12 month and I think going forward.
Certainly our capital allocation will look at option you invest.
M&A opportunities and other things relative to the use of capital, but I would think at least 200 million quarter of repurchases would seem to be kind of a base amount that we would then adjust relative to what our M&A is.
Okay I appreciate that color like.
What do we take one last question.
Thank you I last question comes from Eric.
So from that from research. Please go ahead.
Thank you.
Question on federal contracts and I know that early in the uptake Youve had third third party service that appears to be weighing on the margin as we think about 2020 versus 2019 does that level of third party support remain about stable or is there any increase or decrease.
Yes. This is mark it for 2020 it'll be about the same.
We continue to leverage our partners in that space.
Clearly able Thats was one example of us working to bring.
Larger workforce quickly inside cerner.
That we can then move to focus on the VA as some of the as we work through their existing projects, which are relatively short term, we get them on the VA that will allow us to bring that down, but that's probably more of a 2021.
Event at this point.
That's helpful and then last on the ex you asked 3% growth.
Last year as you look to 2020, I don't think that was part of the.
Items, you ticked off on growth opportunity, but what is your perspective on growth.
Yes.
This is John I said I think it will be consistent with.
Previous years, Theres still lot of opportunity outside the us in the form of new business two regions on countries in those type of things, which we will we will look at pursuing each one of those opportunities that make a decision, but similar to the US. We're also doing portfolio analysis on non.
Yes, as well so we're going to look to be followed the same process and become much more focused.
And.
Outside the U.S. as well so we may see.
Both ups and downs outside the U.S. as well.
Thanks.
Hey, this is mark I want to thank everybody for participating that one last comment there's still might be a little confusion about our long term topline growth target.
The 5% to 8% I mentioned is absolutely something I think we're going to be deliver absolutely and in fact, I think theres upside to that so I think the number something closer to the 7% range is probably more reasonable but.
Once again my point is we really want to take you through in detail show you. What the building blocks are so you're not just blindly, putting a number in but.
To 5% to 8% level is a level that I have a great deal confidence in so with that I want to thank you for attending this afternoon and look forward to getting together with you at Tims on March 10th until then have a good evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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