Q1 2021 Cerner Corp Earnings Call
Yeah.
Welcome to Cerner Corporation first quarter 2021 conference call.
Today's date is may 5th 2021, and this call is being recorded.
I would now like to turn the call over to your host Alan kills SVP Investor Relations.
Thank you good morning, everyone and thank you for joining us on the call with me today are Brent Shafer, Chairman and CEO, Mark <unk>, our new Chief Financial Officer, Don Trigg, Our President and Travis Dalton, our chief client and services Officer, Brent will start off the call with observations on our business in the marketplace, then hand, it over to mark to provide more.
And our results outlook and capital allocation plans will then transition to Q&A and be joined by Don and Travis.
Before we start I'd like to remind you that our comments will contain forward looking statements, including projections for our business and other statements about future events. These comments are based on our current expectations and assumptions that are subject to risks and uncertainties.
Our actual results could differ materially from those indicated by our forward looking statements due to those factors identified in our earnings release, which is posted in the investors section of Cerner Dot com and other filings with the SEC.
Cerner assumes no obligation to update forward looking statements or information, except as required by law.
We'll also be referring to adjusted or non-GAAP financial measures on this call for our discussion of operating margins earnings per share and free cash flow a reconciliation of non-GAAP financial measures to GAAP financial measures can be found on our earnings release.
These non-GAAP financial measures are not meant to substitute for or as a substitute for or superior to financial measures prepared in accordance with GAAP with that I'll turn the call over to Brent.
Thanks, Alan and good morning, everyone. Thank you for joining us.
As we all know we're now a year into the pandemic and I'd personally I remain so impressed by the resilience of our clients on the front lines and the efforts of our associates around the world supporting them and.
And as we move past the worst of the pandemic hopefully in most regions and increasing portion of our role in assisting clients has been related to vaccine distribution.
Now we've helped over 175 organizations with our mass vaccination solution, allowing clients to deploy and track vaccinations documented and reported reactions and communicate with patients.
We've also continued supporting our community.
And in partnership with local providers and very proud to say, we've now delivered over 90000, COVID-19 vaccines vaccinations as part of the operation Safe initiatives initiative I mentioned on our last call excuse me.
Okay.
As we've discussed throughout the year the pandemic accelerated many trends in health care that Cerner has been actively monitoring and building out capabilities to support for years.
Among these is that providers face increasing pressure on cost and revenue heightened consumer expectation and.
And shifts in care venues.
So we continue to believe that we're well positioned to help our clients navigate these challenges while also enabling them to deliver improved clinical outcomes.
Now for example, our real time health system offerings bring near real time.
Enterprise transparency to.
To help health systems perform at their peak efficiency and streamline operations and improve care delivery.
In addition, our health network capabilities enable our clients to coordinate across care across multiple organizations, regardless of the core EMR and help them optimize for either a fee for service or value based payment model.
Our enhanced consumer engagement solutions help providers meet the growing expectations by patients who are a seamless digital experience.
We also continued to demonstrate our ability to bring innovation to the provider workflow to save time address the very real issue a physician burnout.
An example of this is our current and our recently successful pilot of our AI powered chart assist.
Which abstract data from the patient's chart and helps ensure correct diagnosis documentation.
This replaces a process of having to do manual queries days. After the patient has been seen to capture missing or often an incomplete diagnosis.
In summary, our ability to provide data driven insights to providers and patients is at the core of the value we're providing.
As a result, our clients are increasingly seeing value in our industry, leading ability to aggregate and normalize data so that meaningful insights can be gleaned.
We're also excited about the opportunity to use insights from data to play a role in improving safety efficiency and efficacy of clinical research.
Consistent with this we took a major step towards this goal with our recent acquisition of Cantor Health and we're really pleased to welcome their highly experienced management team that brings a deep understanding of the needs of the pharmaceutical industry. We believe this is an important step as we partner with our network of provider clients and to fundamentally change the time.
And cost of clinical trials.
I also wanted to comment on the information blocking rules that went into effect last month and the broader interoperability rules in the 20 <unk> century Cures Act.
As you know we've been fully supportive of these rules and we believe they are an important step towards the health care industry. Finally, realizing the potential abroad, digitization, which should lead to improve outcomes.
Lower cost and a better patient experience.
Up to this point as you know the industry has spent billions of dollars on a base level of digitization, but the absence of broad interoperability is limited the return on this investment.
So as interoperability and secure access to data improves in the coming years, we expect our proven ability to derive insights from data and to push them to the right place at the right time would remain a key differentiator.
Now I'd like to provide a quick update on our federal business.
Mark and defense continues to move at full speed ahead with deploying MHS Genesis there sooner powered EHR.
At the end of February They went live at Naval Medical Center in San Diego, which was their largest and most complex go live to date.
And Doj officials said this was their smoothed. Some go lives since the program began.
In late April do you went live with wave Carson across 12 states two time zones and more than doubled the number of D. O D commands now alive.
Now moving to Veterans Affairs as most of you know VA Secretary Denis Mcdonough. It recently launched a strategic review of the V. H E. H R. M program, while at the same time, making it clear he is committed to cerner and the program.
Now we believe this review is analogous to steps taken by the Doj during their initial go live.
We welcome and strongly support this review because it allows us to bring new V. A leadership up to speed on both the successes and the challenges of the program to capture their input and moved forward together as we continue providing seamless care for our nation's veterans.
We expect to exit this review stronger and ready to push forward with deployments at additional sites this year.
During the review, we expect impact on our results will largely be mitigated since work on the ground continues as we prepare for go lives at future sites.
However, the review could shave up to one point off our projected revenue growth this year versus what we had originally expected.
Moving to our results, we had a solid first quarter and as Mark will share. We now expect to deliver stronger earnings than our prior outlook look despite slightly lower topline growth due to the V. A strategic review.
This is possible because we have sharpened our focus and are moving forward with a renewed sense of urgency to continue delivering value to our clients and shareholders.
Specifically, we're going faster on efficiency initiatives already being action by our transformation office, continuing and broadening our product and business portfolio reviews, and adjusting our organizational design to centralized key functions.
These actions I will have a common goal and thats the tighten our strategic focus so we can more effectively deliver value to our clients. While also contributing sustainable long term profitable growth to our shareholders.
You'll hear markers that can in a moment, but I'd like to say them. The two months he's been our CFO. He has just been invaluable in helping us identify additional opportunities to improve our business and has done a terrific job of providing enhanced management reporting that is enabling much better informed decisions and we're delighted to have him as part of the Cerner family.
I'd also like to comment on the recent passing of leak Linda Dillman, a long standing member of the Cerner Board. She spent 10 years on our board and was a trusted advisor to many on the leadership team.
And great Wise counsel provided to all of US, including me, especially as I joined the company.
While theres no directly replacement for Linda as a person we do have an open search interactively seeking qualified candidates and Linda is deeply masked by all of us.
Before I turn the call over to Mark I'd like to comment on news of I might have expected departure.
As noted in the press release, the board and I have started a process to identify cerner as next CEO.
And once the board has named a successor I plan to serve as an advisor to ensure a smooth transition its.
It's been an honor to be part of Cerner. These past three years and I can tell you I connected with Cerner as mission from the very beginning and the dedication of our associates and clients just inspires me every day.
I am proud that sooner is in such a strong position and now we've made good progress towards improving our operating model and strengthening our leadership team.
This progress I believe my successor will take the reins at a time when Cerner is poised to accelerate its impact on health care.
Mark.
I'll turn it over to you.
Thanks, Brent and good morning, everyone. Today, I will cover our first quarter results and provide a guidance update but first I'd like to share. Some early observations from my first two months of Cerner.
First the people are incredible Cerner associates are dedicated passionate professionals, who are fully committed to the cause which is emerging technology with health care to improve outcomes for those we serve and love as.
As Brent often says cerner striving to bring the joy back to practicing medicine and that is our mission I can proudly lend my full efforts against.
Second the business is fundamentally sound Cerner provides real solutions to real problems Cerner has deep technical knowhow unique capabilities and significant competitive advantages as well as an exceedingly strong balance sheet.
Third wall Cerner does have the associates and the capabilities and has created significant value for clients and shareholders. Since its inception. There is a clear recognition that a lack of focus and at times suboptimal execution has caused revenue growth to slow and margins to compress which in turn has resulted in bottom quartile total shareholder return.
<unk> versus our proxy peer set over the past several years.
This understanding is what led board Brent and the senior management team to initiate a series of actions to improve results I.
I believe the actions taken so far are a good start and I'm excited to play a role in increasing the pace of change so cerner can realize its full and considerable potential faster.
We believe these actions will allow cerner to help more people than ever before whilst also generating leadership levels of total shareholder return.
So with that understanding and my sincere thanks to Brent and the board for giving me the opportunity to be part of the team. Let me move on to summarize our first quarter results.
Please note that my commentary will focus on key points of emphasis since I have no intention of simply repeating information already contained within the press release.
Overall, we had a solid quarter bookings were up 13% versus a year ago to 123 billion and we ended the quarter with a revenue backlog of $13 1 billion. While this is admittedly down 3% from a year ago that was primarily due to the impact of divestitures.
Revenue in the first quarter of $1 three 9 billion was down 2% compared to last year and included lower than anticipated software technology resale and reimbursed travel.
However, after adjusting for divestitures, our first quarter revenue grew roughly 2% year over year.
Gross margin was up 140 basis points from a year ago to 83, 4%, reflecting improved revenue mix due to lower levels of outsourcing third party services and reimbursed travel and adjusted operating margin expanded 200 basis points from 19, 4% last year to 21, 4% this year.
Year.
Adjusted operating margins benefited from our continued cost optimization efforts and divestitures and to be fair. We also had some additional expense benefit related to COVID-19 of approximately $10 million in areas such as facilities and travel.
As Brent indicated we are leaning into our operational improvement efforts and based on my initial assessment I believe mid 20% adjusted operating margins should be attainable by 2024 as per our pre COVID-19 commitments.
To achieve this we are moving faster on our existing road map of cost optimization and process improvement initiatives and adding additional initiatives, including a full review of where COVID-19 era savings can be made permanent in areas such as facilities.
We are also going deeper on our product portfolio review with an eye towards consolidating and focusing on items that create the most client value.
Finally, we are significantly building up our internal management reporting capabilities to enhance decision, making and drive accountability.
Importantly, these actions will enhance not dilute our primary focus which is delighting, our clients and motivating and encouraging our associates to reach their full potential because we know that having fully engaged associates and satisfied clients is a clear recipe for marketplace success and strong shareholder return.
To finish off the P&L, our tax rate was 21% for the quarter and adjusted diluted EPS was <unk> 76 cents a share this was up 7% over last year due primarily to operating margin expansion.
Moving to our balance sheet. We ended Q1 with 1.47 billion of cash and short term investments and 1.84 billion of debt after drawing $500 million on our shelf agreement during the quarter.
We did this at very attractive interest rates, placing 400 million of private placement 10 year debt at 2.59% and 100 million of five year debt at 2%.
We did this to pre fund the Cantor Health acquisition, which closed April one and to partially fund future stock repurchase efforts.
Operating cash flow for the quarter was $450 million after $76 million of capital expenditures and 83 million of capitalized software free cash flow came in at $291 million.
As we move to capital allocation, let me take just a few seconds to share my views as it relates to cash and balance sheet management.
First as an unapologetic capitalist let me state very clearly that whatever cash we have on our balance sheet belongs to our shareholders and we are simply the stewards of those funds.
As such the first call on cash is managing and investing in the core business wisely behind high return propositions.
Second we aim to provide a competitive dividend yield presently our dividend payout ratio was approximately 28%, but I anticipate that trending up over the next several years to somewhere in the low thirties.
Third we will consider strategic acquisitions, if and only if we believe they will enhance our competitive position in the marketplace exceed our cost of capital be accretive over time and create shareholder value.
Finally, with any remaining excess cash or investment grade debt capacity, we may look to opportunistically repurchase our own shares. If we believe the stock is trading below its intrinsic value.
So against that backdrop, we returned $417 million to shareholders during the first quarter, including 67 million in dividends and $350 million of share repurchases.
And as noted in the earnings press release, our Board has recently approved a new repurchase program that authorizes the purchase of up to $3 75 billion of shares through the end of 2023.
With that new authorization in hand, we expect to repurchase up to $1 5 billion. This year up from our previous guidance of up to $1 billion.
Importantly, we believe this level of activity will make better use of our balance sheet and the anticipated cash flow, while still maintaining ample access to capital for potential investments or acquisitions within the confines of a strong investment grade balance sheet.
Moving to guidance, we expect revenue in Q2 to grow organically by high single digits over Q2 of 2020.
This is because while Q2 2020 included about $40 million of revenue from businesses that have since been divested we qantar helped and now contribute a similar offsetting amount.
For the full year, we continue to expect mid single digit revenue growth, which is generally consistent with the growth implied by the previously provided dollarized range, but the recent V. A assessment, which we fully support and the associated review has likely cost of somewhere between a half point and one full point of revenue growth. This year as some deployment what gets shifted.
Out of fiscal 'twenty one.
For EPS, we expect Q2 adjusted diluted EPS growth of approximately 20% over Q2 of 2020, which you will recall included a large negative impact from COVID-19 of approximately 10 to 15 cents per share.
For the full year, we expect adjusted diluted EPS to be over $3 20 per share reflecting growth of at least 13% over last year. This compares to our prior range of $3 10 to $3 20 per share with the higher expected earnings being driven by additional margin expansion efforts and an increase in share repurchase which.
Collectively should more than offset any slight loss in revenue related to the V. A assessment.
For the second quarter and the full year, we are expecting a 21% tax rate and as it relates to cash we are expecting to generate about $900 million of free cash flow for the year up from $857 million last year.
So in summary, I'm very excited to be at Cerner I think we have a tremendous opportunity to positively impact health care, while also growing and creating significant shareholder value. We are acting with urgency to achieve this and I look forward to sharing our progress with you as we move throughout the year.
With that I'll turn the call over to the operator for your questions.
Thank you at this time, if you would like to ask a question simply press Star then the number one on your telephone keypad now we will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of David Windley of Jefferies.
Alright, Thanks for taking my question.
I wanted to ask around kind of industry trends toward value based care and value based reimbursement, which when we listen to some of the payers as well as well as the provider has seen the thought seems to be that that is accelerated by COVID-19 and in turn could be a stimulus for for some.
You're more advanced analytic pop.
Population health type software. So I'm wondering what you see through our software health care I T lens.
Of the trends toward value based purchasing toward value based reimbursement.
Hey, Dave. This is this is Dan that's a great question I think.
Sort of echo some of the industry level sentiment that youre, describing I think we're seeing.
A lot of market interest in that topic, you know providers have worked through.
Recovery.
And to sort of I'll call it margin expansion strategies and signed traditional fee for service as they've looked to recapture electives and but they are absolutely thinking on a parallel path about strategies around value and alternative payment models and so a lot of nice traction as you described for our EDW on <unk>.
Advanced analytics capabilities, a lot of interest in healthy referrals and how you think about referral activities across your provider network and we think over time, a lot of traction around care management.
As they start taking elevated levels of first dollar risk. So I think some nice post COVID-19 tailwind that will help the health network business in those product offerings as we play through the year.
John I appreciate that is there is there potential to put I don't put numbers on.
Either bookings or our clients' uptake on on some of those products you just listed off.
Well, we you'll recall that on a full year basis and last year. We did 24, new footprints for healthy intent and I have every expectation, we'll exceed that number this year and at the solution level I think.
There is some prioritization that you see playing out I think theres a lot of interest and EW that is our most.
Aggressively deployed solution a lot of interest and referrals because it has a benefit both for fee for service use cases and fee for value.
And then frankly, a lot of our weighted pipeline activity that Travis and team had been advancing.
Around our maestro offers offering and our relationship with Lamar S. Because I think providers still see Medicare advantage is a really logical starting point for how they think about moving into risk. So those would be the three areas I'd, particularly emphasize.
Your next question comes from the line of Stephanie Davis of SBB Leerink.
Thank you guys for taking my question.
John not to put you in a heartbeat, but I've always thought of cerus president role as being kind of on <unk>. So first is there a region cerner might go external versus internal for the CEO search and maybe could you tell us a little bit more about the search priorities for the CEO role.
Okay I got one follow up for you.
Yeah.
Sure I can start I think theres, a thoughtful process that's been put in place by the board.
Looking forward to seeing that play itself forward I think.
And my conversations with the board and with Brent I think we're all aligned this is a really interesting opportunity for the company.
Very well positioned to be successful in the quarters ahead, and I think the whole management team is excited about continuing to deliver against the plan that we've been working on this year.
You had a follow up I think.
So from Brent having been in this Steve before I know there are many different types of CEO said my strategy.
Portfolio manager CEO kind of how do you see this role of ball Bang from where you were living in today.
Well, we've made I think really great progress and clarifying our strategy and our direction and improving.
Our emphasis around operations.
There is a lot of work to do on the operational side on execution and that path is laid out and I think having mark join the team.
Helps strengthen our abilities to go after that.
I see an operational emphasis.
And in a clear path ahead to get that work done.
Alright helpful guys. Thank you. Thank you.
Your next question comes from the line of Charles <unk> of Cowen.
Yeah, Hey, thanks for taking the question.
Was curious if you can kind of obviously a year into the pandemic here just kind of give us some updated thoughts on some of the strategic growth markets that you had outlined last year.
Have any of the opportunities kind of shifted around in terms of what you think are.
Better opportunities or maybe a little bit less.
Even sort of the dynamics in the market.
Any kind of insights there would be helpful.
Yes, it's a great question.
I'll speak to both the upsides and also talk about some places where I think there are tailwind so from a upside perspective, I think inside the four walls of the hospital Big focus on real time Hospital systems as Brent talked about in his prepared remarks.
That was a big part of surge response, and economic recovery, So think about workforce management staffing capabilities commute.
Communications Hospital operations I think all of those areas have had.
<unk> seen a lot of COVID-19 related traction and trend.
I think the provider network space is absolutely a focus both for fee for service and fee for value use cases, a lot of focus on consumer we see a lot of traction and trend around our consumer offerings.
As folks trying to think about what does it look like to engage the consumer outside the four walls of the hospital.
So those have been areas that have continued to see traction and trend over the course of the last four quarters reflected by our booked revenue I think there've been some places that have been disrupted.
By COVID-19 I think the post acute space is one that obviously was massively impacted by prevalent.
Prevalence data and fatality data and so I think that was a space that was negatively impacted on a four quarter basis. I also think the work force health space is one that we've talked about in the past I think.
Employers certainly thinking a lot about when it looks like to get the right mix of health and care strategies as they think about return to work and hybrid work strategies, but at the same time, there's been a lot of disruption around those work force population. So those would be two that I think I would put more R&D the headwind or wildcard status realm.
You have to go forward.
If I could follow up on the consumer right I think one of the big trends in this last year has been high.
How do you deliver care into the patient home.
Can you talk a little bit more about the consumer offering done and you know so how you're helping your clients really engage their patients in more of a home setting.
Yes, I think first of all the big thing that we've attempted to do is to really create plug and play capabilities for our clients around how they think about their engagement strategy. So the ability to leverage both native software that we build as well as third party capabilities around things like touch.
Touchless ragin intake. So that's been a big emphasis I think unified communication strategies sort of omni channel communications capabilities as a way to reach.
The consumer has been a big area of emphasis and focus and where we're seeing a lot of book revenue growth.
And then finally I think.
Somewhat correlated to that a lot of focus on CRM.
And.
Our relationship management strategies as folks think about coordination of care strategies across both traditional venues and non traditional venues like the home. So those would be some particular areas of emphasis above and beyond things like television ads and telehealth, which had been a feature of a lot of discussions and <unk>.
Ms calls.
Around this topic.
Great. Thank you yep.
Yep.
Your next question comes from the line of Sean Dodge of RBC capital markets.
Thanks.
Good morning.
Mark you mentioned some of the change in the EPS guidance for the full year of being a higher.
Higher assumed margins can you give us just a little bit more detail on where you.
Steve kind of incremental opportunity there.
Certain bugs the cause or parts of the organization.
Thank God there are some.
I guess lower hanging fruit in.
No. Thanks for the question I think it's I think it's a great. One. So for example, you know we talked about the fact that we're putting better management reporting capability sets in place, that's allowing us to really unpack the business in ways that hitherto we haven't had the access to really have visibility through and see so for example, you've heard us talk in the past, but I. We have 25000 features which we recently.
It down into 400 different products within those 400 products, we have 82 product groups specifically.
And what Youll find within those 82 product groups is that the top 25 account for greater than 85% of our total product revenue. So that's just one example of where we're using better data to kind of penetrate and really understand the business at a more granular level and we'll be able to take actions and clear decisions based on that knowledge. So there are certainly things that we can do to tighten up.
The ship and tightened our belts that will not take anything away from our offering set of marquee clients, which is our focus always.
Okay. That's great. Thanks, and then.
One of the big initiatives going back over the past year or so now was getting clients current you've talked about the importance of that just in terms of things like usability and client satisfaction do you have any metrics you can share on how that has progressed what proportion of clients are now on the most recent versions about cerner software versus versus maybe 12.
Or 15 months ago.
Let me ask this is Brent let me ask Travis adult comment if he could Travis on some of the work going on one of those lines.
Yeah. Thanks, Thanks, Brent appreciate it yeah.
Good morning Travis.
Yeah, we've talked about.
Last time around.
We're focused very heavily.
In our core market.
When we were all very intentional in our clients' uplift program. So we've got a number of programs going there that we've talked about we're working through.
What we call blueprint, where we're looking at clinical capabilities and efficiencies with our clients.
We've got targeted investments in certain solution areas PD.
Pediatrics and others that we think are very impactful.
Working closely with clients, we just Cerner Health Forum.
We had total 5000 participants so for several day is doing education and other sessions.
With us we think that's important in this environment to continue to provide good solid communication sit on vegetation and upgrades.
Another portion of that client uplift.
Great.
What I would say about it is that you know.
It's not keeping clients current and submitted.
There's not one day, it's a holistic strategic approach and so we're approaching it from multiple angles.
I can't give an exact number of the percentage of our clients, but what I can tell you is that we're getting the vast majority of our clients.
With in some capacity with one of those approaches strategies or tools in order to make sure. We travel the entirety of our client base versus having one focus one program that takes us a much longer time to rollout. So I think the comprehensive nature of what we're doing our approach.
As you know I think it's accelerating our speed the volume for our clients and keeping them current relevant.
I'll just make one other note.
We've talked about client currency, but from my perspective, you know protection defending the base is not our goal our goal is to delight, our clients and as Don Don noted prior.
Very I'm very encouraged that we're on strategy based on the conversations on volume are clients globally federally and in the U S client market.
Conversations are trending very much into the things that we're working on we've been a leader.
And the industry.
A number of decades, so I think we're in a good place in terms of getting our clients.
Being competitors and all.
So as it relates to forward looking market trends accelerated by COVID-19.
Okay.
Okay. That's great. Thanks again.
Yeah.
Your next question comes from the line of Kevin Kelly Endo of UBS.
Great. Thanks for the question. This is actually Adam noble in for Kevin I, just wanted to ask two questions. One first on the buyback authorization.
Just curious you guys. Obviously gave a really helpful target for how much you expect to do this year as you think about the entirety of.
Now more than $4 billion authorized total for 2023.
Is it the goal of the company.
Finish or complete most of that or all of that by that data.
Sure.
Did you think about that target as kind of a big.
A big opening in.
You guys will be opportunistic whether you.
It reached that full mark thanks.
Thanks for the question Adam I guess, what I would say is a couple of things clearly we have an intention to buyback additional shares because as I said when we believe the stock is below its intrinsic value. That's a good action for our shareholders at large.
We intend to do what we say we're going to do culturally right. So I think you should think about the targeted date of the end of 'twenty three to complete the program is our clear intention.
That said things can change right and so we have to always be flexible and we don't know what else could happen over that time horizon, but certainly we don't ask to do things or intend to do things that we don't expect to fully action.
Got you.
Related to that.
I noticed when you guys. When you were talking about kind of the updated capital allocation priorities.
M&A was third you guys. Obviously have this very large share repurchase authorization that you announced today.
Does that signal any change in your in your kind of focus on strategic M&A.
Or or openness for large scale M&A, just any any commentary on that would be helpful.
I wouldn't read too much into that I think it's a clear point of order that the business in our core business comes first and that's where we'll put our first dollar, but we have the luxury of having a very strong balance sheet, a very strong investment grade balance sheet and we have the ability to do many things and if they meet our criteria.
Great. Thanks for the questions.
Your next question comes from the line of Michael Cherny of Bank of America.
Thanks, so much for taking the question maybe to build on that last one just a little bit and go back to some of the commentary you had around the data as a service side. What are you seeing in the competitive landscape along those lines in terms of both other EHR vendors using that as a base versus other non traditional companies.
Don't want to leverage their own various different datasets and drives these incremental business opportunities. It seems like this is a market that there's a whole host of different entities that are focused on so can you give us a little more sense as well, where cerner will be better competitively positioned to win over time.
Yes. This is Don.
It's a it's a great question I think a couple of things one we're.
Sure.
Very happy with where we're at relative to the <unk> acquisition, we closed.
That.
Net acquisition on April one and we're very happy with the forward progress around it too.
Two and I think importantly relative to your point on competitive differentiation. We continue to make very good progress in terms of building out our learning health network to activate our provider base and participating in that strategy around.
Life Sciences, and pharma, we have 61 members of the ally Jenn now representing almost 30000 beds. So we're ahead of our kpis targets relative to approach on the churn side.
I guess just the final thing I would say as I look at what's going on with <unk> and.
Other EMR players, who have acquired their way into the space and I see it as very validating of the overall thesis around our opportunity to organize one third of provider health care.
And create unique opportunities for them around life Sciences and pharma so.
I see that competitive landscape as validating a thesis and now we need to execute well with the strategic differentiation that I think we do have and that's playing out.
I guess, just one more thing I would say you heard Travis talk about opportunities around data more broadly defined I think we're very focused on the life Sciences and pharma strategy, but there's multiple data strategies and then I think represent themselves, including some interesting opportunities in the federal space beyond what we're doing with the VA and D O D.
So look for us to continue to think about how to put data to work and to monetize it.
In a way that has to marks point attractive.
Margin profiles around it.
Thanks, and if I can just build a little bit on the commentary you had around the VA and federal opportunity clearly there remain one of the key partners. There. There's also been some other dynamics around federal.
Exactly one coast Guard was announced but that was one how do you think about where the remaining federal white space.
And if you think about the gross over the next five years from federal has anything change on an underlying basis outside of the comments you made on the V. A.
Travis let me.
Ask you to comment on that if you would please.
Yeah happy to so appreciate the question Strauss.
Yeah, and I'll make a quick quick note I mean, we're very pleased as Brent noted in his comments with the <unk>.
Operational execution progress on D O D and coast guard. So thanks for noting that that's been a.
Assessable rollout for us as well so we're moving forward at speed and at scale.
With D O D.
Carson go live with 12 States 10000 users in a single day, that's it that's a major accomplishment.
V E. We support the strategic assessment.
That's not being done in the Bakken, we're working together with me a daily on that and so we feel that will come out in a great place with them.
And the new administration on the strength of the schedule and focus around it and so in terms of our core on contract opportunities. We feel very good about the progress, we're making and our ability to deliver our promises and requirements.
As it relates to growing the federal business.
Where we see that.
Our strategies.
And then the same.
Number one it's it's deliver on our promises and continue on contract growth.
We've got a multi multibillion dollar opportunity <unk> Iq.
And that hinges on.
Keeping our commitments or promises.
We got new requirements white space and new opportunities.
With the D O D. We've got opportunity with healthy exactly that opportunity with <unk>.
Solutions that we've been discussing this morning.
Henk that hang off of that platform and aggregation layer and we're in active conversations with them. So I see us having a good possibilities there.
<unk> remains a great opportunity for us.
And the value based care space, I think that we're well positioned with our platform with our data aggregation capabilities.
To be a material.
To provide the longitudinal longitudinal record and bring those clinical and payer datasets together for them and were material in that conversation and then ultimately there there are still new Newport from opportunities Indian Health services is one of the last remaining Augusta, Georgia.
We'll likely make a decision and then we did sign an opportunity in our first quarter with CDC around real world data.
I believe Bob mentioned, so we've got a rich dataset.
As you can imagine and so all CDC and others are active and interested in that so we do view.
Data also as an opportunity on a go forward basis. So I think we've got multiple multiple threads of opportunity for our business.
Your next question comes from the line of Anne Samuel of J P. Morgan.
Hey, guys. Thanks for taking the question I was hoping maybe you could provide a little bit more color around the strategic review just in terms of what maybe some of the potential outcomes might be and is there any potential for impact beyond this year. Thanks.
Yeah.
Sure business travel so yeah, it's a Susan inspected I think outcome of a new administration. This is one of the most strategic and largest program.
Right now and so really I think the review is focused in a couple of core areas.
One is looking.
Looking at and evaluating.
The contract. So are we all the things we set out to do three years ago, we set out to do today.
And through that and we're making progress.
And I think we will be doing strength of schedule evaluation. So we'll be looking at the full schedule.
You know, it's not lost on anyone that we've actually been able to accelerate our <unk> rollout in the in the out years once we've been able to harden solution set.
So I think that we can look at the schedule Holistically.
We are in good position to possibly accelerate the rollout.
The years five through seven but in the short term it.
It will cost and wave activity that pushed to the right as we're undergoing a 12 week assessment Mark noted that in his comments.
But ultimately again I just believe it will.
We'll come out with.
In total of five schedule with them clear kpis that we're going to hold ourselves accountable to clear.
Clear focus collectively with the new administration and leadership so.
I think that's the direction that we're going with some short term headwind long term tailwind potentially.
That's really helpful. Thanks very much.
Your next question comes from the line of Eric Percher of Nephron research.
Thank you and welcome to Mark with the focus on succession I think we may have missed an opportunity to hear a bit of your early thoughts on process and goalposts I know when it comes to our long term revenue, which is a key question for the company right now and there's typically a point where we.
Get into some of the details. It's August this year do you feel like that's a good point for us to look for your perspective on where we go forward or what can you tell us about your process.
Thanks for the question I guess I would offer a couple of things I mean, one it's still early days right I've had at this 0.8 weeks under my belt and so I have a lot to learn and Theres a lot that I continue to absorb and take in as I formulate my own views as it relates to that.
Second I guess, what I would say is I think we have all the tools here to be very very successful in the years in the years ahead, we have nearly 303 million health care providers use cerner systems, each and every day, we have 25000 associates, who have you know an unparalleled and unmatched knowledge of the health care, an intersection where the top provider of aikido the federal.
<unk>, we lead the acute EMR global market.
2400 inpatient facilities worldwide, we have a strong balance sheet. We have 600 patents, we have $800 million a year, we invest in R&D I mean, we have all the tools and we have the team right. So I think we're gonna be able to do considerably better piece of the our shareholders. In the years ahead, because there is a clear acknowledgment that on the T S. Our fraud.
Haven't necessarily always delivered and this is a team that is committed to delivering for our clients and for our shareholders. So I would simply say stay tuned and think good things are coming.
I appreciate that.
Yeah.
Okay.
Your next question comes from the line of Elizabeth Anderson Evercore.
Hi, guys. Thanks, so much for the question.
Just wondering how you view sort of stuff.
Compensation and John does that total.
Compensation for employees in your different areas like how do you see that trending as we go forward.
As it impacts the operating margin line would be helpful.
No. It's a great question you know look we're an IP company, we compete for talent and it's typical that in I T.
Firms that you have equity fairly broadly distributed throughout the associate base in order to keep them fully aligned with the company goals and objectives, that's always been cerner approach.
And we have used that at times in lieu of.
Salary increases so we will obviously continue to want to use that as part of the mix will need to make sure that we balance that and that we do it in a way that.
As representative of our deliverables to our shareholders themselves one could argue that over the last several years when our tsi Hasnt really performed.
That maybe we were a little bit too generous in that regard because we are clearly a pay for performance company and the compensation Committee and the board has made it clear that they're going to hold the management team accountable for performance in the years ahead and with that understanding I think equity will remain a key part of our compensation package.
But we have to perform.
That's helpful. Thank you.
Your next question comes from the line of Steve Halper of Cantor.
Couple of housekeeping questions. So when you provided the guidance of $3 20.
Greater than $3 20.
Is there an explicit.
Sort of estimate for the potential delay in some of the VA revenues or is that Donald.
Sort of determine as a TBD.
Now we've taken all of that into account. So all the information that we know presently which Brent commented on them, which I commented on in our prepared remarks.
We think we probably lost somewhere between a half point in full point of revenue.
Based on the <unk>.
Work, that's going on which again, we fully support so that's contemplated in our in our new guidance range.
Great and then.
Also in terms of housing.
Housekeeping.
Capex line increased somewhat from the fourth quarter as well as the.
Capitalized software costs could you just give us a little bit more detail on the on the increases you have some of the capitalized software increase you're seeing relates to the 20 <unk> century Cures Act, where we have brought in some additional third parties to help us manage that sensors are relatively short time frame to get a lot of work done and that's what you're really bumping that up a little bit.
In the here and now.
And Steve if you are talking about the on the on the actual cap. This is allen on the actual on the Capex line aside from capitalized software that is up a little bit.
And that's a little bit of COVID-19, we pushed out a lot of Capex last year and there was a just a little bit of catch up on data center Capex in Q1, but for the year.
Capex should still be.
Down.
When you when you look at it for the year.
Okay.
Helpful. Thank you.
Your next question comes from the line of Jeff Garro of Piper Sandler.
Yes, good morning, and thanks for taking the question wanted to ask about M&A and I appreciate it Mark framework for M&A considerations I would ask him as well as the rest of the team. If there are any strategic areas that will get a deeper look under that financial framework.
Yes. This is Dan it's a great question I think.
We continue to like.
Our th S related strategies inside the hospital I think youre going to continue to see us think about and focus on provider network activation strategies outside the four walls of the hospital and that's a.
Space, we've talked about throughout the morning, as having significant trend.
And that includes strategies around the home is venue and then.
We're still very energized by what's playing out around the data space and secondary day to use strategy. So all three of those areas are a line of sight in terms of where we see the growth potential for the business.
And as Mark framed out part of the dialogue that we'll have around how we deploy capital and put it to work with the right return profile.
Excellent that Hudson, maybe a follow up there by asking about healthy referrals.
That's a product that I believe came from our acquisition that was small enough that you didn't need to disclose that last October, but it's already making a mark so be interested to hear about traction there.
I think Travis might have alluded to it in the context of the VA, which is pretty interesting. But then also more broadly just the ability to integrate cloud native and EHR agnostic technology, that's acquired into healthy impact.
Yeah look mark alluded to it I think.
There's large strategic M&A activity and then I think we're also going to be smart in terms of thinking about tuck ins.
As a component part of how we create total solution offerings strategies. So that's certainly going to be a part of how we think about putting capital to work.
At a broad level and then at a micro level relative to how the referrals.
Look it's a it's a great use case around what's playing out from a provider network perspective, it's an opportunity for our clients to really think about how they manage referrals for key service line areas CV oncology neuro orthopedic center figuring out how to manage supply and demand dynamics around that.
Minor network as they recover from COVID-19, but it also begins to really help them understand what would it look like for me to take elevated rates of first dollar risk as part of our value strategy and so what we're excited about in the provider network space is the chance to.
Help our provider clients navigate that transition maximize fee for service, but also begin to prepare for shifts in payment and then just the last thing I would say is that the big opportunity from a growth perspective that Travis and I think and talk about.
Every day is a week.
Mark right, we do have an enviable position with one third of U S provider organizations, but there's a huge addressable market for us outside the scope of our Cerner millennium base and part of what growth needs to look like for us going forward and strategies to address that piece of the market and referrals is a good example of how we can do that.
Sure.
Excellent thanks for that.
Your next question comes from the line of George Hill of Deutsche Bank.
Hi, its nexium for George Thanks for taking the question.
So last quarter, you talked about the company expects around 15% CAGR in the strategic growth business with 2020 as the new baseline.
Could you provide some more update on how the disease.
Tough for me relative to your expectations like you said that Lee.
Thanks.
You know I think at the end of the day, we expect strategic grow to lead the company and its total revenue progression. We have targeted to have that segment grow at 20 plus percent per year that will vary based on a combination of organic growth and non organic growth depending on the circumstances, we're very pleased with.
Cantor Health acquisition, which was just recently closed on and expect that to contribute about $40 million per quarter about 125 million of incremental revenue. This year. So I would think the strategic growth businesses collectively taken will probably grow closer to it maybe 30% this year, but it'll vary.
As we go forward.
Your next question comes from the line of Robert Jones of Goldman Sachs.
Great. Thanks for taking my question. This is Jack Rogoff on for Bob.
Wanted to ask if the strategic review of the VA, if those impacts to revenue effect next one way or the other as it relates to margins in 2021.
Yes. This is Alan Yeah. There is there is some software that would've been included in that but also some services. So I don't I don't think there's a whole company level, probably not a huge impact on mix, but there is certainly some high margin mix within that debt.
We are offsetting but all of the work too.
The margin front.
Is obviously more than offsetting any margin impact that that mix shift wood wood costs.
Yeah.
Makes sense. Thanks, and then it looks like the implied back half guidance had a step up in the level of revenues versus the second quarter can you describe what drives that seasonality and that the impact from the VA or is there anything that has to get better and the underlying business in the back half.
Yes, I think you're.
I think a big part of that is the.
The Kantar comes in in Q2, and then there is really there is slight sequential increases factored in the next few quarters, but nothing nothing that substantial other than getting back on track on.
VA as you roll through the year and sort of getting that ramp continuing so it's not really anything unusual relative to sequential revenue increases as you go to Q3 to Q4.
Great. Thanks, a lot.
Your next question comes from the line of Richard close of Canaccord.
Yeah, Thanks, Richard close here.
Lower software called out is there for the first quarter is there any more details you can provide on that and then.
Second question Mark is maybe on the margin expansion expanding on Sean's earlier question.
But longer term getting to that mid 20% level.
Are the efficiencies that have been put in place. So far are those the main drivers and anything that maybe you put your hands on here now that you're in the role of CFO could drive that even higher than the mid 20% level.
Sure. Thank you I'll answer the second question and then I'll, let Alan comment on the first so I talked earlier about the need for us to really put in place a world class management reporting systems. Another. Good example of where that's going to be invaluable as is in our area of R&D spend in the last three years, we spent $2 $5 billion in R&D.
And the simple truth of the matter is is we haven't had the internal systems to allow us to take that spend all the way down to the individual product or project level and our ability to do that going forward is going to dramatically enhance our ability to monetize that R&D investment.
Yeah and on the on the software commentary relative to the quarter I mean keep in mind, we're reconciling a $7 million difference relative to the midpoint of our guidance and we mentioned three things. So I wouldn't cite software has a huge impact in the quarter. So you could pick a lot of different things, but it was just it was one of the few things that led to us being slightly below where we.
You expected.
Okay. Thank you.
Your next question comes from the line of Ricky Goldwasser of Morgan Stanley.
Yeah, Hi, good morning.
Couple of questions.
The first one is for you when you sort of reflect on your time at Cerner.
<unk>, you talked about sort of the <unk>.
And in strategic direction.
What do you think has been sort of total limiting factor.
Two.
Or sort of accelerate the shift.
And then the second question refers to something that Mark mentioned earlier on and that idea that you're competing for protect talent I mean, clearly, it's a very hot market.
What are you seeing there in terms of that.
Clive individuals' thank you.
Yeah, No I appreciate it well I think going back to three years ago coming in the door.
There is so much opportunity in cerner, but in a lot of ways our systems in our ways of operating were.
We're not really conducive to speed that had been built up over time.
And at this scale, we're not very efficient so it's.
Sounds kind of mechanical but theres been a fair amount of time getting an operating model in place that's clear because it's understandable accountability is deployed throughout the organization and so the intent to move it.
It's pretty clear the ability to move quickly requires organization alignment.
And great execution. So I think we have we are in a much stronger position to do that today.
Ready to do that and have a leadership team ready to move that forward. So.
I think the.
Stage has been set and the direction is clear and the ability to accelerate now as he has in front of us.
So on your second question about talent.
Yes, there is definitely a global war for talent.
In Tech and we all know that.
So we are.
Doing everything we can to make sure that we are an attractive employer.
For our associates that this is a place.
But you can come in and not only contribute to technology, but you can make a difference in the world because it is healthcare.
And that's somewhat unique.
A lot of the other places intact here.
May not be that Boulder.
Charter, but that is our mission and I think for four especially technical talent that wants to be part of <unk>.
<unk> the world, making a difference.
This is a great fit and so.
We're very much interested in getting that worried about us as an employer and we're proud of some of the progress in our culture over the last year.
And some things our associates have done to make a difference during COVID-19.
And to make a difference in the community.
But it is a competitive landscape for sure.
Thank you.
Your final question comes from the line of Jonathan Young of Barclays.
Thanks for squeezing me in here just on the upper operating margin in the mid 20% by 2020 for giving you are accelerating some of your operational improvements is there a possibility that we could see that come in ahead of that current schedule timeline and then separately you also mentioned going deeper down into your product portfolio.
Its value to clients.
That suggest that you've made that best additional products or just more from a.
Cost savings perspective.
I guess I'd offer a couple of things you know at this point, we have been able to reaffirm our pre COVID-19 commitments to our margin expansion endeavors.
Whether we get there sooner.
And that time will tell but we are acting with a sense of urgency and we believe that we have a great opportunity in the years ahead to monetize all the investments that have been made to date.
Two great leadership levels of T is our that's our clear objective as.
As far as the.
Product and portfolio review.
With better data, we're able to sharpen our thinking and I think it'll be a combination of various matters. All the time balancing our internal needs for profitable growth with our clients' needs in order to better service the healthcare industry, which is our which is our mission.
Okay.
Alright, I think thats. It. Thank you everybody for joining us and we look forward to talking to you next quarter.
Thank you. Thank you.
Again, thank you for participating in today's conference call you may now disconnect.