Q2 2021 Cerner Corp Earnings Call
[music].
I'd now like to turn the call over to your host Alan <unk> Senior Vice President Investor Relations.
Thank you and good morning, everyone and thank you for joining us on the call with me today are Brent Shafer, Chairman and CEO, Mark <unk>, Our Chief Financial Officer, Don Trigg, our President and Travis Dalton, our chief client and services Officer, Brent will begin the call with observations on our business and marketplace, then hand, it over to mark to provide more detail.
On our results and outlook, we'll then transition to Q&A and be joined by John and 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.
These comments are based on our current expectations and assumptions and are subject to risks.
Certainties, 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 to the investors section of Cerner Dot com and other filings with the SEC Cerner.
Cerner assumes no obligation to update forward looking statements or information, except as required by law.
We will also be referring to adjusted or non-GAAP financial measures on this call for a discussion of operating margin earnings per share and free cash flow a reconciliation of non-GAAP financial measures to GAAP financial measures can be found in our earnings release. These non-GAAP financial measures are not meant to be a substitute for or superior to financial measures.
Measured as prepared in accordance with GAAP with that I'll turn the call over to Brent.
Alan Thanks, very much and good morning, everyone on our last call, we talked about our sharpened focus and increased sense of urgency to deliver value to our clients and shareholders and as Mark will discuss this increased focus and urgency helped us deliver very solid results.
In the second quarter.
All key metrics reflected good progress on our transformation initiatives.
On a strengthening market presence and.
And based on this progress we have increased our earnings outlook for the year again.
It Pleases me most is that as we undergo our transformation, we're maintaining an unwavering focus on client success.
Which is truly our northstar, our key initiatives, which include product rationalization, driving operating efficiencies and continuing to refine our operating structure, all revolve around creating client value through accelerated innovation.
And we expect these same efforts to also drive sustainable and profitable.
Yes growth that should create value for our shareholders.
I'd like to share some examples of progress we're making.
Through improved focus and structure in our client organization Travis and his team have grown our sales funnel and improved sales and client relationship management, resulting in 24.
For new client footprints, so far this year, while reducing client attrition.
We've also improved our overall net promoter score by 5 points.
And have delivered 49 major client go lives.
Don and his team have made meaningful progress on several fronts as well.
Including advancing.
<unk>, our product rationalization work, which is creating better focus and freeing investment dollars for products that create the most value for clients.
And driving good sales and go live activity in key areas, such as real time health behavioral health consumer health network and data.
Which the progress with the progress and data space, including a successful onboarding of Cantor health during this ESCO second quarter.
Now in our technology organization, Jerome Labatt, who is our CTO.
<unk> has made good progress on solution and platform modernization, including being ahead of schedule.
<unk> on migrating care aware to the cloud.
Also improving our ambulatory solution and increasing the scale of community works.
All well, maintaining 90, 999% or for 9 of incident free time for our clients.
He has also advanced our digital fab.
<unk>, which is a set of capabilities and services that power the product lifecycle from initial requirements to building delivering and running our products.
This important work should drive R&D efficiencies improve quality increase innovation velocity and speed to market and lower cost of running and.
<unk> our products.
These leaders have made this progress while also delivering cost savings through restructuring and flattening their organizations.
<unk> functions and also implementing tools to increase efficiency and improve the way we are running our business.
And further Tracy Platt.
Our chief Human Resources Officer has helped us navigate these changes while staying focused on culture and ensuring cerner remains a great place to work.
This is reflected in being named 1 of the world's best employers by Forbes and we've also just recently.
We received recognition by Forbes as 1 of the top 60.
Best employers for diversity and also for being among the best employers for women.
In summary, we continue to make very good progress both inside cerner and in the marketplace, our products and services are well aligned with our clients' needs as they face pressure to control operating costs address provider burnout.
Increasing consumer demands expand service lines and also to build networks to improve performance in the evolving reimbursement environment.
Now I'd like to provide an update on our federal business.
The Department of Defense continues to move at full speed with deploying MHS Genesis.
Meet their cerner powered EHR in late April we went live with wave Carson, which included 25 military treatment commenced 148 physical locations across 11 states and 2 time zones in total the Dod is now live at 42 commands 663 locations.
<unk> with more than 41000 activated users demonstrating that the system can be deployed at scale and on schedule.
And later this year <unk> plans to go live at facilities in Hawaii.
And the U S Coast Guard as plan go lives for both their Pacific and Atlantic waves, which will complete the coast guard deployments.
Appointment as planned.
Moving to the Department of Veterans Affairs, VA recently completed their strategic review, which we strongly support it and issued a comprehensive report.
And importantly, these finally.
Generally not technology related instead, they were more focused on governance.
<unk> and site readiness and we're consistent consistent highly consistent with the findings of our own internal assessment conducted earlier this year.
So we're working very closely with the VA on the project plan and ensuring we properly address all identified issues. So we can deliver a time on a lifetime of seamless care for.
For our veterans.
Secretary of Veterans Affairs, Denis Mcdonough has reiterated his commitment to the program and to Cerner and in return Cerner has reiterated our commitment to the VA and our nation's veterans.
And while the VA the VA finalizes their new governance and management structure, we will continue to our pre deployment.
Ointment efforts, including technical development and enhancements solution readiness and site preparation by.
But no further go lives are expected until 2022.
And as a result, we now expect another half point of impact on our 2021 revenue growth.
As reflected in our updated guidance.
<unk> for the year.
Now before I before turning the call over to Mark I'd like to quickly comment on the status of my transition and the search for new CEO for <unk>.
Search process had been very active since we announced the last quarter and as you can imagine it is difficult to provide an exact timeline given the sensitivity and importance of.
On the search, but I believe the board is making very good progress.
I personally remain actively engaged in and believe the team has been executing very very well. So I'm confident we will continue to advance our key initiatives as the search continues and as a result, I believe my successor will step into the role with Cerner well.
Well positioned for success.
In summary, I'm very pleased with Cerner progress. So far this year, we've demonstrated the ability to execute on near term deliverables, while also driving meaningful meaningful organizational change that is positioning cerner to realize our potential and to have a much bigger impact on health care.
Mark I'll turn it over to you.
Brent Good morning, everyone today I'll cover our second quarter results and provide a guidance update overall, we are pleased with our second quarter results bookings were up 2% versus year ago to 136 billion, which brings year to date bookings growth to 7%.
Importantly, we believe this represents a pause.
Positive inflection point since total bookings were down during fiscal 2019 and fiscal 2020.
The higher rate of bookings added to our revenue backlog, which ended the second quarter at $13.2 billion, which is 1% up sequentially and down slightly versus a year ago due primarily to divestitures.
Revenue of $1.
6 billion was up 10% over the year ago quarter, which was admittedly heavily impacted by Covid.
The increase in revenue was driven in large part due to strong growth in federal services.
In addition, it is worth noting that virtually all of the growth we experienced during the second quarter was organic with $45 million of incremental revenue from the <unk> health acquisition.
Acquisition, being largely offset by $39 million of divested revenue.
Gross margin was down 200 basis points from a year ago at 82, 1%, primarily due to the mix of revenue in the quarter.
Specifically higher levels of lower margin technology resale third party services and reimbursed travel.
Adjusted operating margin, however, expanded 220 basis points from 18, 4% to 26% driven primarily by tight expense control and have negatively impacted the year ago margin due to COVID-19.
Now to build on this progress we took bold action across our largest spend pools during the second quarter.
<unk> for example, we incurred $54 million of employee separation costs due to a sizable reduction in force related to productivity improvements we recently implemented.
We also incurred a charge of 68 million to reduce the properties line on our balance sheet to fair value in connection with the sale of 1 property and the designation of 2 other properties as held for.
For sale.
Since the start of the year, we have sold 260000 square feet of office space and have earmarked an additional 750000 square feet of space for future sales.
Lastly, we recorded a charge of $48 million to reduce the carrying amount of certain capitalized software development costs to estimated net.
Stable value as part of our comprehensive product portfolio rationalization work, which is designed to improve over time the return on our nearly $800 million annual R&D investment.
Each of these actions and their related charges are captured in our reconciliation of GAAP to non-GAAP results.
These actions are also consist.
Distant with our previously communicated efforts to operate more efficiently drive more value for clients and better position cerner for sustainable long term profitable growth.
Wrapping up the P&L adjusted diluted EPS was <unk> 80 per share, which is up 27% over last year due to stronger adjusted operating earnings a lower non.
Realized tax rate and a lower share count.
Moving to our balance sheet, we ended Q2 with $885 million of cash and short term investments, which is down from 1 point for $7 billion last quarter.
There are 2 things that account for the change first we used $350 million to close on the can't our health acquisition.
We.
Spent $400 million on share repurchases during the quarter, which brings our purchases through the end of the second quarter up to $750 million.
We've been using a large portion of our excess cash and short term investments throughout the year to repurchase shares because we continue to believe that cerner stock at current trading levels represents a good return on investment for.
Non-GAAP for holders.
Sequentially, our quarter ending debt position was unchanged versus Q1 at $1.84 billion.
Operating cash flow for the quarter was $369 million after $123 million of capital expenditures and $84 million of capitalized software free cash flow came in at 100.
For our <unk> 2 million.
This brings year to date free cash flow to $453 million, which is more than double the amount we generated during the same period last year.
The significant increase in year to date free cash flow was driven by strong operating cash flow growth against the Covid impacted first half of 2020.
Yeah.
Hundred assuming the guidance, we expect revenue in Q3 to grow approximately 6% compared to Q3 of 2020. This includes just over $40 million of revenue from Cantor health slightly offset by a partial quarter of impact from a 2020 divestiture, bringing third quarter organic growth to the low to mid single digit range.
For the full year, we continue to expect mid single digit revenue growth. This range is consistent with our prior guidance, but we do now expect to be approximately a half point lower within that range due to the impact of the VA assessment that Brent discussed during his prepared remarks.
Despite our slightly lower revenue expectations, we are confident in our ability.
<unk> to more than offset this top line impact with ongoing expense control as reflected in our enhanced EPS outlook.
That outlook calls for third quarter, adjusted diluted EPS growth of 12% to 15% over Q3 of 2020 and.
And for the full year, we now expect adjusted diluted EPS to be approximately $3.2.
25 <unk>.
Reflecting growth of about 14% over last year and up from our prior guidance on more than $3.20 per share.
For the third and fourth quarters, we expect our tax rate to be approximately 19% to 20% and we expect to generate approximately $900 million of free cash flow for the full year up from $857 million.
<unk> last year.
Finally, we remain on track to repurchase up to $1.5 billion of stock this year, which we believe will make better use of our strong balance sheet and free cash flow, while still maintaining ample access to capital to fund high return organic growth opportunities and potential future acquisitions provided of course that.
Positions are attractive both strategically and financially.
In summary, I am pleased with our second quarter results and believe the work we have done and are continuing to do will position us and our clients for success in the second half of 2021 and beyond we are making good progress against our strategic focus areas behind.
<unk> operational execution during a time of significant change.
Personally I am very proud and genuinely appreciative of the dedication and professionalism, we're seeing each and every day from Cerner associates, all around the world and I want to take a moment to thank all of them on behalf of Cerner his entire executive leadership team.
With that I'll turn the call over to the operator for.
Those actions.
If you'd like to ask a question at this time. Please press. The Star then the number 1 key on your Touchtone telephone.
To withdraw your question press the pound key.
Our first question comes from Elizabeth Anderson with Evercore.
Hi, guys. Thanks, so much for the further question.
Thanks, John.
Got a question about that.
On the overall demand environment..1 can you talk about sort of how hospitals are engaging ads.
And where we are with Covid.
Can you talk about the confidence in that top line in the back half of the year. What are you seeing in different sectors, what's resonating with clients.
That would be helpful. Thank you.
Yeah, we ask Don and then travels to comment a little bit.
Good morning Elizabeth.
So 1 I think as <unk> seen from some of the.
Investor owned provider organizations that are reported out and I think they track with our conversations with Ceos in the market I think.
Volume levels are returning to pre COVID-19 levels and so.
People are feeling good about core aspects of the business on the provider side on how it's recovering.
From the disruption last year.
At the same time sort of watching with a wary eye is the delta variant place.
Place forward and certainly disrupt certain hotspot. So I think broadly volume feel good there's a lot of areas I think that have momentum and focus some of which Brent.
Articulated in his script I think a lot of interest in real time hospital.
Hospital strategies in part because of the workforce.
Disruption that they're dealing with with their providers.
Our strong and ongoing interest in consumer strategies.
I have to think through now what that is going to look like in a post pandemic new normal.
And then I think interestingly a lot of conversations on active conversations about value based care and how.
They want to think about.
Our business model going forward, particularly as.
As it relates to areas such as Medicare advantage. So it's an interesting landscape I think people feeling good in the main about how they've recovered in the first half and asking I think some questions about where they want to take the business that create real.
<unk> opportunities for us.
Great traps, you want to add to that.
Yeah. Thanks, Thanks, Mark Thanks, Don.
Yeah, I think our ability to be confident in the top line and the work. We're doing is directly related to our ability to meet our clients' needs. Brent had noted some of those in the script on Don reiterated that.
You know my Michael and our focus really is on improving our funnel health. So were for focus on sufficiency of the funnel on velocity through our sales process and growth of that funnel.
I think we then we've we've got improved process discipline and inspection inside of our business.
Broadcast processes and so we're really working to underpin our plans on our forecast.
So tools automation and discipline and that that will give us greater confidence as we move in visibility to the top line forward.
I think Don spot on I mean, we're we're seeing in our U S client base.
For the first half was some challenges on our federal business, although I'm I'm confident in that business Holistically moving forward.
But we were able to perform well on our U S client business and globally and so we see good opportunities in a large expansion and extension base inside of our U S client or focused on that.
We see great.
Great opportunities to campaign around client value with our strategic growth businesses and products I think there is buying opportunity and community works that we expect to go and be aggressive and win and then our federal business and global business has been very robust. This year as we've had great wins in the middle East the U K.
There are parts of the globe in Canada, So I'm confident in the second half of the year I think we've accurate accurately reflected the nature of the federal business had been transparent about that and so I think.
It's underpinned well on resilient and will continue to move forward.
Got it and then maybe just as a follow up James you can think about it.
On the gross margin line in the back half of the average burdens.
Fourth quarter.
I think what I would say is that I expect to see those relatively comparable.
Both third and fourth quarter.
Okay. Thank you.
1 thing to note on gross margin is.
And I can't or uses a fair amount of third party services and about 80% of the revenue in services.
So that that's just on location on the P&L issue. So it's really their overall upper teens margin at the operating margin, but it does dilute the gross margin level, just a little bit.
Got it thats helpful. Thanks.
<unk>.
Our next question comes from Sandy Draper with Truth Securities.
Yeah.
Thanks, very much just wanted to see if I could get a little bit more color on the comment that you brought up about looking at potential M&A.
Strategic and financial 1 I guess do you have specific.
Financial targets that youre willing to share whether it's ROIC.
Revenue contribution earnings accretion anything along those lines and then I would assume strategically they would be primarily focused on the new strategic growth areas, but just any other commentary maybe from.
To pick on whoever else on that Mark would be great. Thank you so much as.
As far as the criteria I think we articulated for in the first earnings call. We said that for us to action something it would have to enhance our competitive position in the marketplace first and foremost second it would have to exceed our cost of capital third it would need to be accretive over time.
From that in fourth we'd have to clearly create shareholder value as far as like where we might be looking currently I'll defer to John at this point.
Good morning.
So 1 I think if you just think about the core enterprise business I think we like aspects.
That space.
Areas like cyber and cyber security are.
Our areas, where we've seen traction inside both our data strategies and.
Some of our third party partner strategies in that space I think once you move outside the 4 walls. We as I said earlier I think there's a lot of traction and trend around provider network and what it looks like to make those operate.
8 in an integrated fashion for fee for service and fee for value. So that's an area, we like quite a bit and then I think the Qantar post.
Post close integration work has given the team a very good view of what the opportunity set looks like in the data space and that's an area, where I think we will look to.
Take a hard look at how.
Panic acquisition can help us go faster.
Great. Thanks.
Our next question comes from Donald Hooker with Keybanc.
Oh Hello.
Oh, sorry about that I was on mute.
Hi, Good morning, Yeah, just wanted to maybe maybe here, maybe a little bit more on on the V. A as we think about maybe next year is the hope can you maybe just elaborate on all of the moving parts of the VA. It seems like you lost some revenue due to the pause in deployments, but it sounded like there were some other stuff.
Stuff Youre doing that.
Maybe offset that and can we what do you think about next year, we're going to get back to a normal cadence can you just elaborate your thoughts there.
Travis let you take them yeah, absolutely happy to ticket thanks for the question.
Always appreciate the opportunity to discuss the business I think.
I think about our federal business Holistically. It it is encompassed by D. O D. P. A another opportunity as Brent noted you know, we're very pleased with the D. O D. The deal deep space I mean that wave Carson go live was probably the single largest go live that we've ever had in my 20 years I've seen in the industry and so.
So we're moving forward very well with D O D, which bodes well for us as it relates to our VA business as well for those that you know you can recall and I was on the journey.
After our fair child go live with the O D. We earn a similar position. So we are to what we are in D. E. And we took we took about 12 months.
Work on a lot of the similar things were working on EBITDA and so as Brent noted in his opening remarks, the strategic assessment. It wasn't a surprise for US we supported it we both need to be ready to move forward collectively and as the administration came in and the Secretary the Deputy Secretary, who we've spoken to and expressed.
Breast mutual support and come in we're really going to be focus on governance training site readiness change management.
To your to your question directly I think on the second half we expect to continue to do value add work, we've got opportunities and we've got on backlog service work that we're doing we've got.
To readiness assessments that we'll be doing we'll be doing technical and solution configuration and deployment. So we'll all be very productive work in support of going forward in 'twenty 2.
We've noted the way of impact to the right on.
I'll also note that the VA contract is a 10 year idea of acute contract.
On the revenue opportunities on the other opportunities aren't losses, there was a deferred into out years.
Expect that we'll exit this year with a good plan with better alignment at the agency level.
With governance collectively and it will start to move into wave activity and go live activity in 'twenty, 2 and then I really think we will start to hit.
That's a real strength and pick up in 'twenty 3 'twenty for beyond similar to like we did on the Dod business.
Okay now I'll just ask 1 follow up on that thank you for that that's that's good clarity and then would you would you may not know the answer to this but just any thoughts you have would be interesting. Just do you think there will be a catch.
Maybe they've sort of delayed some of the deployments, where we could get.
Maybe kind of a more of a bolus in some future period, because maybe they want to keep the overall timetable stable.
What do you think about that.
Yeah, I think our goal is to finish the program on time and on budget on the 10 year basis as we've noted collected.
And I think that as I noted 22 will continue well, we will see continued or increased activity and our hope and our goal would be a similar to D. O D is to speed up activity and be able to do more than we originally plan in out years, when and exactly how that comes together I can't I can't say.
Say today, but that is our expectation that it is our goal on the middle of the program.
Great. Thank you. Thank you so much.
Thank you.
Our next question comes from Anne Samuel with Jpmorgan.
Hey, guys. Thanks for taking the question Mark I was wondering if you could maybe quantify some.
Some of the expense reduction actions that you took in the quarter for the model and then also you know is there anything else that you think that there is left to do any low hanging fruit. Thanks.
No I appreciate the question. So we talked about 3 principal items, 1 was the $48 million charge for the capitalized R&D and this is related to the.
Optimization work, we're doing on the portfolio itself, where theres a lot of redundant products and features and we're finding ways to drive that into a into a more normalized state that probably has about $8 million to $9 million of annual savings associated with it on the.
Property side, we talked about the $68 million adjustment there to bring the 1 property that we're marketing largely in line.
Line width at fair value based on the assessments that we've had done in the appraisal that we've received that's probably going to save us about $10 million annually between depreciation and operating costs. At this point, we plan to action roughly 15% of our total owned office space, We had to add about $6.5 million square feet before the actions, we took and as I cited.
600, 260000 square feet of space and we now have another 750000 square feet that is being marketed for sale and then on the reduction in force, we talked about $54 million charge that covered you know a little bit north of 500 people. We also eliminated about 300 open positions and normally what you see in something like that.
We set the annualized savings is roughly equal to the amount of the severance costs themselves. So maybe call that an additional $50. So between those 3 items, that's by about $70 million of annualized savings that we've been able to capture.
Yeah.
That's really helpful color. Thanks, so much and then I guess you know as <unk>.
Do you think about costs.
Streamlining the cost structure, you know going forward is it still fair to think about low double digits as the target for Bottomline growth or do you think that you can achieve something higher you know on on mid single digit revenue growth. Thanks.
I think that's probably right when you look at it all in when you look at what we're doing with respect to the balance sheet right where we.
That is able to increase our dividend payout ratio a little bit each year, where we should be able to continue to buy back shares at attractive prices.
Where we should be able to monetize that mid single digit revenue growth by expanding margins towards our goal of being in the mid twenties by fiscal 'twenty for yes, I think that low double digit EPS progression is just about right.
We should be that's great. Thanks very much.
Thank you.
Our next question comes from Charles <unk> with Cowen.
Yeah. Thanks for taking the question.
You know maybe just.
Thinking about I think for summer is the start of the enforcement of the.
Interoperability rules across the industry.
Can you talk about sort of the readiness for your clients and you know what is that.
What kind of extra services are they looking for me you guys to help them.
Comply with all the day, new rules coming coming through and then secondly, you know, particularly as it relates to your data business can you talk about how what kind of opportunities.
This has created for you you know, particularly as you integrate can turn to the business and maybe just a little bit more around that area. Thanks.
That is a fantastic question. So 1 I think we have been.
Making some material investments around 20, <unk> century cares on what it looks like.
For our end to end product set to be fully compliant with it.
I think clients are early in terms of really thinking through magnitude and impact of those changes.
Which are not just technical in nature, but as your question implies also has a big.
Applications for them in terms of how they think about master data management across their enterprise assets and their provider network. So I think we're early in that conversation.
With our clients and they are kind of thinking around it.
I think it sets up a ton of business opportunities for us.
<unk> first and foremost it is a good example of where the relevance of our.
Technology assets to a regulatory action.
Make us center front and center in terms of how clients need to think about their strategies and approach. So we're right in the middle of that conversation and we're relevant to it by definition.
<unk> sets up some of those.
Those growth opportunity dialogues that I described earlier that has some thinking about cyber and how they want to think about security risks associated with data management and has some thinking about near real time data strategies for how they tackle things like capacity management and work force.
And importantly, it has some thinking about the role of data not just in terms of transforming their hospital operations, but also larger commercial opportunities for provider organizations in that space. So it's a it's a great example of where if we can be smart around regulatory landscape understand it better.
And early stage companies are big Tech companies, who want to get into this vertical and then have the right conversations with our clients. It can be a huge tailwind for us from a book revenue and revenue perspective over the next 36 months.
That's helpful and just a follow up there.
And you kind of alluded to it is that you know.
With these chain.
It does kind of moving up the vertical to other players who have not traditionally been a healthcare lets say new stars and Victor.
They don't have to have that.
The integration partners has made a lot easier I guess.
What does the competitive landscape look like right now and.
Do you find that your.
Chamber coming to you first before looking out or or is it that you are hearing.
Lots of different new competitors coming in and pitching you on existing client to talk about services. They can now start to provide what does that landscape credit look like today, we'll look theres a lot of noise.
I agree.
Clients, there, but I think we're set up to have this conversation with our clients well they look to us for strategic clarity around how they ought to be thinking about it and our systems as I said earlier are central to what their operational strategy needs to look like.
At the at the end of the day, particularly as you see us trend.
With you inside the hospital in the provider network space, they're looking for integration is there someone who has the size and scale capabilities to integrate and make that provider network operate effectively against their contract strategies and we're set up incredibly well to do that not only with the EMR assets, but also with.
And out there and with more importantly, healthy intent so.
That's where this market is going to move away from hundreds and hundreds of point solution buying decisions to looking to who is someone who I can can count on to drive integration.
And importantly that really understands.
On the provider workflow integration opportunities both within the standards that exist today, but also the integration that needs to occur to actually profitably manage a patient for fee for service or take first dollar risk in an area like MMA.
Great. That's helpful. Thanks, a lot. Thank you.
Our next question comes from Kevin Kelly <unk> with UBS.
Great. Thanks for the question this is actually Adam noble in for Kevin.
I was curious if you could comment on that.
The recent announcement by Amazon of general availability for Helpfully and weather.
In your view that complements what your offering and looking to develop with with Amazon or whether that more competes with you and just you know beyond that if you could just give us an update on the re platforming efforts.
Onto AWS and where those stand at this point.
Yeah.
Yes, Thanks Adam.
Yeah, Great question, so as Brent framed up in his remark.
Now not only have publicly cloud enabled.
Healthy intent, but we've also now had a second for successful platform move with care, where which drives.
Not only our device integration strategies, but.
So is core to our growth strategies in that space around real time hospitals, So I think.
That has been really good technical learning for us in terms of what path to modernization looks like it's also surface. Some really important non technical capabilities that we need to build out in.
Terms of how we think about contract management and other parts of what it looks like to go work through that strategy across our client base. So I would I would say the progress there has been positive.
<unk> some important milestones in the first half of this year.
In terms of Amazon.
And AWS has sort of strategy.
But all of these around the health care vertical.
Again as I said earlier, there's a long history of big cap entry and Big Capex. It from health care. There is an inherent complexity at the intersection of health care and I T.
I see I see market interest in the areas that we're focused on is very validating of the.
<unk> opportunity that exists and what we need to be able to do is be smart around where we can competitively differentiate.
From.
A fire based strategy for data aggregation.
That's interesting, but in our case, where we have deep competency around the very dirty data.
Ada in health care, and what it looks like to normalize that data around master data management.
And have a level of clarity around it that you could imagine it being pushed into the provider workflow and being leveraged as part of a care process those are very different things.
Got you that's super helpful on if I.
Growth I'll sneak 1 on 1 more question and yes, there has been a rush of companies that have come to the public market over the past year.
Tech enabled primary care space and so on.
I'm just wondering if that's a marketing services you think would be attractive for you guys. Given your health system relationships and technology assets and I guess more broadly than that can you envision cerner.
I can just getting more deeply into care delivery over time as you explore additional growth opportunities.
So I think youre right that has absolutely been a trend again.
What are the strategy is going to look like outside the 4 walls on the hospital and how are these provider.
Cerner or it's going to get built out on a market by market basis, I think we're incredibly well positioned to be the technical foundation of those strategies to help with systems level thinking and design and activation.
We have strategies today, where we partner with.
With players like <unk>, where they are signing up for performance risk around managing lives.
And we use that as a way to refine our own thinking to Mark's point around where and how we want to play to drive the right level of profitable growth around our provider network strategy. So I think that's how we're.
We're moving our way into it what's the technology and services strategy need to look like to support it and is it attractive for us to start to think about taking performance risk around provider networks.
I think when you deliver a lot of value you start thinking about how you can benefit and profitably take advantage of it.
Yeah.
Great. Thanks for the questions.
Thank you.
Our next question comes from Sean Dodge with RBC capital markets.
Thanks.
Mark maybe just to clarify 1 of your earlier comments around the cost actions on the.
Cost saving you mentioned coming from the facility.
Conversations I think you said $10 million.
Is that just tied to the 260000 square feet, you've already sold or does that include what should be.
Realized once you sell the 750000 square for you you currently have for sale.
Yeah, we expect that to be the annualized savings when we effect the sale.
All of the additional properties being marketed for sale.
Okay. So thats all in.
And then.
Maybe staying on the cost actions.
Brian.
Maybe if you could talk a little bit more about what's happening across the R&D organization.
You're spending $800 million annually it sounds like Theres been a lot of work to rationalize lower.
Really red ROI projects and reinvest at a higher 1.
I guess, you see an opportunity to reduce your R&D budget at some point or do you think you're spending the right amount and you just need to kind of focus a little bit better on on.
Are you kind of more of the optimal projects.
I think it's a great question I think it's 1.
Lower we're going to continue to work through and process a little bit right. We know we've been spending $800 million a year in the R&D area, we talked about the fact that our product portfolio. At this point is very dispersed wheat 25000 features we combine those into the Neal 400 different products that were assembled into 82 different product groups and those top 25 product.
Product groups accounted for 85 plus percent of our of our revenue. We also talked about the fact that 1 of the opportunities. We have is to dramatically enhance our management reporting systems and that's 1 of the things that we've been spending a lot of time doing so that we can really allocate that $800 million specifically to projects and 1 of the things I'm really excited about that we've been able to bring forward here.
And just the last few weeks frankly is we now have an internal system that lets us look at every single 1 of our scrum teams for 641 of them to be exact and we can now know exactly what those scrum teams are doing each and every week.
There's clear milestones on markers for the work that needs to be delivered and we can literally neal penetrate that variable.
And just the granular level now which was a capability we didn't previously have so I.
The answer is probably going to likely be.
Yes in the sense that we are going to be able to do a whole lot more with that money and if in fact, that's true we might be able to do with a little less we've been spending roughly 14% of sales on R&D each and every year, that's a very large number.
But we'll see as it plays itself out the great thing is is that we're getting a lot of visibility and line of sight, Don and his team is leading a very comprehensive review of that product set and then Jerome with the work. He is doing on the digital factory is going to make the dollars. We are spending a whole lot more efficient just as a matter of course, so I'm very excited about what's happening in that whole area.
The whole issue.
You have time to market.
<unk> talked about velocity and time to market.
That is a huge win for us.
Because as we've gotten larger and with the scale.
Better processes better ways of managing it'll help tremendously with just working.
Through the development cycle.
Okay. That's great. Thanks again thank.
Thank you.
Our next question comes from Jeff Garro with Piper Sandler.
Good morning, and thanks for taking the questions maybe I'll continue on the innovation front. It seemed like there were fewer remarks on the script on the strategic growth areas.
Although Dan definitely mentioned some of those here in the Q&A, but would like an update on on how those areas are progressing and being addressed operationally.
Hey, Jeff.
So yes, I absolutely did speak to a couple of those earlier I think.
We're still very excited.
In the core enterprise space around.
Some of the things frankly, we're doing around the core offer in areas like front end access management and engage and access with kind of a patient centric lands around the revenue cycle space lot of traction and trend there from a.
Travis this team in the market.
So excited about that certainly excited about what we're doing in the <unk> space and consumer more broadly has been.
A very strong space for us not only native capabilities, but also partner capabilities inside our consumer framework and on China.
Which is on trend around unified communications. So some really nice momentum I think around enterprise capabilities and enterprise capabilities that extend out into the provider network space.
As we get over on to the continuum side, and we start thinking about provider network landscape, we're seeing a lot.
Non of traction and trend around behavioral health.
On a huge successful outcome there with longtime partner Uhf's on the second quarter that we're very excited about really gives us a chance to build out and to and.
Venue capabilities from a BH perspective, and an area that as you know has a lot of co.
<unk> related.
<unk> I'll say, but obviously the complexity and crisis of behavioral health and mental health coming out of Covid, So really like that area and then look both the.
Organic update as we.
Think about the data space and data strategies around intelligence.
<unk>, but also some of the inorganic activity that we alluded to both today as it relates to the integration of cats are.
But also how we think about putting the balance sheet to work in the future. So.
We're happy with the progress in this space, we see some nice traction in the first half of.
Of the year around areas, where we've made bets.
And now we needed to go further faster for scale impact over the next 2.
2 for 6 quarters, maybe just to pick up on that.
Your.
A question about the operational.
View I think 1 of the things we.
When John set up.
The group set up.
To give a fair amount of autonomy, allowing speed <unk>.
<unk> and a bit of a skunk works approach to go I think as we've benefited from having Jerome join us CTO level. We've found that I think some of the standard tools and processes also can help.
US with velocity consistency working across that portfolio. So we are applying those same concepts through those groups and we see benefit I think that will help us ultimately with speed to market and consistently development, you're absolutely we talked a lot about at the business group level that entrepreneurial scale.
So when we have market strategies that are non provider in their orientation. So when we're in selling to life Sciences and pharma are less prudently through kantar.
We imagine that level of autonomy around the operating model that allows them to move at pace.
And operate in a very different market with.
Very different buyer type, but we're also thinking about scale attributes and what it looks like to elaborate some of the benefits of things like the investment that Jerome and keep John are making in the digital factory and so that.
That gives us scale attributes across all the platforms.
And at the same time allows us to.
B.
Efficient in terms of how we think of cost of sales inside the enterprise space, but also to operate with a little bit more autonomy and flexibility in areas that are very different than our core provider market.
Excellent appreciate all the comments there 1 more for me on customer retention.
Any.
Customer, leaving seems to make it into the price, but you've cited stronger retention of the day. So was hoping you could tell us what's working to improve retention and then any update you could give us on your intent to improve competitive dynamics against your primary competitor. Thanks.
Maybe on Travis I'll, let you comment.
It's been.
Our multi year effort.
Really put in place focused metrics.
Focused focused teams around client retention and it's been a lot of work done there, but perhaps let me ask you to comment.
Yes happy to.
I'll take the wrong.
That was the first question I got on first earnings call. What are you going to do different so where are you now I'm going to talk about what's improve I've talked in the past.
And these aren't these are matters of discipline in a matter of focus on.
That where we're doing more in terms of how we're aligning to our clients.
Uh huh.
Been a earlier some of the actions we've taken on.
Those actions really in my view were to improve our client alignment. So we flattened out our client organization.
We've tried to eliminate the number of touch points for our clients.
So really being more strategic with how we engage with them. We think that's important not only to on a on a.
You've mentioned retention level, but also to expand strategies.
Don and team have noted prior so better client alignment you know our end to end delivery commitments are crucial.
We we we not only sell in and the client organization, but we deliver on our promises and so we're really focused on how do we.
Value or managed services consulting and support businesses and deliver to our clients on an end to end basis to where we not just get to go live, but we actually get there by meeting our commitments with good data insights along the entirety of that path and so.
And then focus on delivery is also crucial for us.
Take on as we continue to meet key client commitments and then we have a we have a set of I think great tools and capabilities that we weren't getting to our clients I think in the most efficient manner. So we've got data driven insights we have a treasure trove of data through our lights on network and we're working closely and.
And to develop comprehensive programming at a client level, so specific client strategic planning based on their needs and their value needs and then bringing the right tools and tool sets market enabled for those clients and we've done a lot of targeted work around blueprint activity in the clinical space around.
As we figuration evaluation.
Around.
Upgrades and uplifts, it's all of those things collectively together that improve the client experience.
And I think we were in the heading on the right direction that work is never done there's always work to do to proceed in that area.
Like how we're thinking about it in a holistic manner and I like our more strategic I think in our approach with clients individually, but we've got a ways to go until the second half of your question I think you know back to the earlier question for <unk>.
You know I I like how we're competing I like our focus I think that you know.
Winning in the market is is driving value for our clients and we know our clients needs I think we've got better market insights working closely with our marketing organization I think that we're improving the way that we think about sales enablement and so as we work on our IP infrastructure as we sharpen our product.
Focus on.
We're also working on how do we generate demand and lead but also how do we get to market more quickly.
As Brent noted with velocity and so the work that we've been doing the last 3 years frankly is starting to come to fruition and we've seen really good progress as Don noted with real time health.
<unk> I think we will campaign around remote patient monitoring referral management key areas that are outside the traditional kind of EMR space that will really allow us to add more value, which makes us more productive with our clients and more competitive and on and I'll. Just say our win rate was very good I'm very happy with how we competed in the community works on Newport.
Our global footprints outstanding our teams are really competing well there. So good progress lots to do we're in a highly competitive environment. We've got a tough competitor, but we welcome the competition makes us better and we are seeking to get better and win every day.
Great. Thanks again.
But for our next question comes from Steve Halper with Cantor.
Hi, when we think about the $70 million of savings that the cost actions are going to go to.
Take.
Is it safe to assume that some portion of that will be redeployed or will that at some point impact.
The whole amount impact.
The ability of the company.
I mean, we're constantly looking to recycle and redirect dollars towards areas within the company that we think we can drive organic revenue growth through.
But I would contend that in this particular case you know much of this will likely go.
On wind right, we talked about the fact that during.
The Europe Covid, we really didn't make a lot of margin progress, but we still have set our sights on that mid twenty's by fiscal 'twenty for and so we have a little bit of ways to go and so this will help us in that regard most specifically.
And then if that's the.
A case.
How long of a time period right.
Should that hit the income statement I'm assuming.
Most of it is going to hit the income statement is it all going to hit in 2022 or you'll get to that in 2023.
No great question, So what I would say is.
The body a reduction in force that we affected has been completed at this point in time. So as you think about our third quarter fourth quarter run rates, you know that should be reflective as you think about the charge. We took on the capitalized R&D that of rolls forward immediately in effect.
That amortization isn't.
There to flow through the P&L and then on the property side.
Created the clarifying question earlier, we did sell.
Campus earlier that didn't have a huge amount of carrying value associated with it yet and so once we find ourselves in a position to actually affect the sale and then youll start to see the benefit.
Of that $10 million largely roll through so that one's a little bit more time determinant.
Very helpful. Thank you.
Our next question comes from Eric Percher with Nephron research.
Thank you Mark the progress on cost is increasingly clear, especially.
After the commentary this morning I'd welcome your thoughts on the process for evaluating mid to long term revenue growth opportunities and have your thoughts evolved in early 'twenty, 1 or is this kind of a process. That's ongoing and is there a moment no traditionally it was around HIMSS, but I know you also have the C. H.
H C conference coming up where we might look to you for evolved thoughts on revenue growth.
I appreciate that you made a comment about the margin progression on the cost takeout in and I know we had it in the prepared remarks, but it might just bear repeating here in Q2, our gross margin was down 200 basis points year over year right.
But despite the fact that gross margin compressed by 200 basis points. Our adjusted operating margin was actually up by 220 right. That's a 400 basis point reversal in effect now only 30 of that came from divestitures right. So a lot of this was just hard work being done by the team broadly speaking as we think about the revenue.
Plot going forward 1 of the things that we're doing is we are also like I said strengthening our major reporting capabilities to allow us to have better understanding of the different growth vectors that we have organically. So we right now are building out what I'll call <unk> fully allocated business group P&L within the company, which we never had before we are going to be able to.
You have 16 businesses that we have general managers effectively in charge of with full accountability with multi functional resource teams that we can use for our planning processes and right. Now we are going through that process to build out our 3 year plan. We have a December due date with the board.
Board, whereby we're going to share our fiscal 'twenty, 2 'twenty 3 and 'twenty for plans at a level that we've never built them up before right with full involvement across the full entire broad based leadership team. So that we have clear revenue bridges and everything else that goes along with it.
So I think this <unk>.
That step to get to the 16 internal fully allocated.
P&L for the business groups will be a big enabler for us as we think about where do we want to really drive point of impact across across the business itself and that will then inform I think also our strategic M&A process because once we have a better understanding of what we can really expect internally, we have a better line of sight into what we might need to enhance our capabilities with respect.
Back to.
So more to come on the Arab health, certainly certainly we need time to build out that next 3 year plan at a very very detailed level and I'm committed to doing that.
Very helpful. Thank you.
Okay.
Our next question comes from George Hill with Deutsche Bank.
Hey, good morning, guys and thanks for taking my question Mark 2 quick ones for you I think you said that there were 24, new sites live in the quarter I would first ask is that a gross number or a net number and maybe talk a little bit more about what's going on with the footprint and attrition given the declining maintenance revenue line and number 2 have you guys quantified a COVID-19 impact.
2021 way, whether it's either a headwind or tailwind and should we think of the 325 number as the right jumping off point for 'twenty for brake jumping off point in 'twenty, 1 for 'twenty 2 estimates thanks.
I think that first part was directed towards you.
Thanks, Mark appreciate the question, Yeah, 20 for new client Brent footprints in the first half.
Half of the year.
I also would be remiss if I if I didn't know we also had 51 extensions on 120 expansion. So we had a whole bunch of clients have made commitments to us on a go forward basis based on our work together.
That was a that was a gross number the 24 new I.
I think we can meet or exceed.
For addition to the second half of the year, we've got good opportunities as I've noted.
Going forward.
On the attrition in terms of attrition I'd say, we've made vast improvements over where we've been over the last several years.
I can't say, specifically, where.
We're at but our net gains have been.
And on double digits in terms of our net.
And it's also obviously been revenue positive for us on the net versus attrition versus gain for the first half for the year. That's a that's a good positive turn in trend for us on the last 3 or 4 years as many of you know were tough for us and we had some downward momentum on that but I feel like we're starting to turn that back towards the positive.
On that and so I like I made notes earlier around our competitiveness and how I like how we're focused on competing.
And so I think that that bears that out our first half performance and we have to continue that and we have to continue to improve and highly competitive environment.
With respect to your second question on the 325, I guess, what I'd say.
<unk>.
At this point you know this is the new normal so to speak in the $3.25, I think is a pretty good baseline to use for our forward Neal projections I don't think you didn't hear us talk a lot about year over year differentials driven by Covid impacts Neal knock on wood and then as we start talking about the 22 planes and everything that comes thereafter, certainly we.
Say heavily impacted in the prior year, we have been making adjustments to that with our workforce as it relates to flexible working arrangements. We've obviously been adjusting our properties are in our footprint as it relates to that as well to take that into account, but I think at this point, we're going to say $3.25 is a pretty clean base to build on.
That's helpful. Thank you.
Our next question comes from Dave Windley with Jefferies.
Hi, Good morning, Thanks for taking my questions I wanted to drill in on the on the <unk> data as a service business.
With 1 are you getting are you are in terms of your revenue models. There are you getting paid base.
Basically for the data youre, providing and.
Some analytics on top of that or do you also have revenue opportunity for <unk>.
I'm thinking about the life sciences space, mostly but like for bringing trials to York your community provider claw.
Clients <unk> identifying patients for specifically identifying patients for trial.
And maybe your life Sciences clients I'm, just interested in the revenue a little more detail around the revenue model.
Yes, Thanks, Dave.
So just to level set you've got a fairly small release of information business that sits inside kind of how we define the data as a service business that as you said the the Lions.
Lions share of the revenue is sitting over around the strategies associated with life Sciences and pharma.
So we have a set of provider organizations that participate in our learning health network. So we're targeting 80.
Participants by the end of the year.
We're well on path based on first half performance, including 6 new clients in Q2.
Who have said hey, we want to participate in research related to economics.
That drives a couple of different kind of business model opportunities for us.
1 we have some partner economics, that's it.
And that strategy related to our partnership and investment with Alagoas. So they have to do some work often if youre not IAA or youre not banner with the USAA asset or youre, not medstar with Georgetown those midsized provider organizations.
Have to do some work around site readiness and what it looks like to be educated for how to partition.
Page document and deal with audit related realities of what it looks like to participate on the clinical trial. So we have some small economics associated with that.
And then yes, we're creating trial opportunities with our cancer business, where we're going in and engaging with life Sciences and pharma.
Participate top 25 players.
And bringing those opportunities back to those learning health network members.
And we're sharing in those we're actually sharing in those economics around that research activity and then finally cancer, obviously has a stand alone.
Set of businesses that pre day.
Pharma, though their integration into Cerner that include as Alan alluded to strategic consulting work that are that are the final component of the business model.
Very helpful. Thank you.
Thanks for the core business when you think about.
Replacement market at this point and hopefully closer.
On the pandemic than the beginning.
Do you do you assess that the.
Placement decisions have legitimately been pushed to the right and is that opening up now.
Just kind of curious what you're now seeing percolate.
Yes, we'll try to get a really nice job kind of framing up net new footprint activity.
<unk> extensions and then importantly expansion. So every time, we're going to have a.
A term driven conversation with a client it affords us a chance to talk about expansion of capabilities around things like our CHS and care aware and probably most importantly capability.
Ability sets that we have and the provider network space associated with healthy intent so.
There is an appetite to want to have those conversations period. They also always feature in any sort of a dialogue around renewal.
With a client and I think to Mark's point and <unk>.
At this point I think we're pushing hard to get better discipline in terms of how we have that conversation and make sure that we're maximizing the value of those those futures.
And also have clear path to actually deploy and deliver value around them as part of that extension conversation.
And Dave since we're on the topic of.
Data as a service and can't tell I'm Gonna do my friend and colleague Allan a favor and answer a question for you all that otherwise youll, probably get individually for each of you. We said that we were using $350 million of cash to close on Kantar and previously we had talked about 375, there's a difference between those 2 points in time is that we're going to end up with $14 million of cash acquired.
It's part of the transaction and Theres, 2 smaller international markets that Havent, yet closed due to some regulatory process work that we're going through so that bridges. The $3.75, we previously spoke with versus the $3.50, net that I talked to today.
Helpful. Thank you.
Our next question comes from Stephanie Davis with SBB.
<unk> Leerink.
Thanks, guys for taking my question Mark as a lot of folks had mentioned the bright spot in the quarter, but how quickly you can hit the ground running on the cost takeout side, a quick 1 that finally for strategy.
Given the maintained EPS guidance on software revenue.
Should we think about the op.
The.
Margin expansion opportunity.
More normalized topline growth year like if you didn't have to be a headwind.
Where would be it ended up.
Well I think what we had said was we lost about a half point of our revenue in the first earnings release as it related to the VA assessment and now subsequently we probably added.
To that point to that.
So I think at this point it would be fair to say there would be almost another full point of revenue rose.
At this point, we've simply said that the full year will be mid single digits.
<unk> added on.
Op margin side, no I guess I would I'd say, yeah, Yeah, I guess, what I'd say is you know an extra point of revenue is call it $60 million.
Another home and you guys know kind of what the pass through rates generally look like and so that would be the way I would model that for you.
Alright helpful. And then on the strategy side, Don I think you mentioned cyber security earlier on the call. So what is your strategy for competing against the large techniques on things that already made on the.
On the cyber security.
The health care space and given the lack of scale health care specific cyber security companies is it safe to assume that this is going to generally be a build over a buying decision.
Yeah that is on.
Awesome question, Stephanie So 1 just an observational youre, making great point isn't it interesting that we don't.
Have any billion plus dollars scale impact cyber businesses specific to healthcare.
It's really it's really interesting.
Do you think we're going to continue to see significant talents there around breach activity.
Absolutely and when you think about hybrid.
Security for men with a combination of on Prem and cloud.
The opportunity set to manage those environments is very high.
So a really interesting space the second thing I would say is.
We've done some really good work I think methodologically to take the NIST framework it really say.
Environment It looks like to look at this space from a systems level.
And and really trying to think about what the holistic opportunity looks like and then finally a lot of what we're doing in that space modestly today from a top line perspective is down market, it's with our smaller and mid sized hospital clients.
<unk>.
Where we're going in and providing those as a service capabilities.
And really I think using it as an opportunity to say what would it look like to do this up market for larger clients.
Clients inside our client community and then importantly, how do you also think about it we're provider network.
Say, well technology heterogeneity and complexity of what it looks like to do this with a combination of owned and affiliated.
Facility footprint. So this is a this is an interesting space.
Our competency and it is growing both in terms of what the business opportunity looks like but also candidly in terms of some of the public sector work.
All of this is driving in terms of what it looks like to fulfill the needs of the Dod VA.
And really imagine what it would be like to do it at scale. So.
I like the space and we're thinking a lot about it and.
We see organic opportunities to drive a bigger business there.
Or do you think for large health systems already.
Who.
Actually look at cyber security is something important for other question James.
I think so I think it tends to be at the I'll say NPR levels greater than $2 million. This is really the big opportunity on a 90 day basis for the CIO and the C. So to get in front of seniors.
Travelers to be visible to the board so they care a lot about it we know how to sell to that buyer type and so yes on our level of conversations around it are increasing.
That's a little bit of a different point than you are implicitly, making which is how are they ready for it and they're looking for a strategy and they are looking for capabilities.
Okay very helpful. Thank you guys.
Thank you well listen thank you all for your time and energy today.
<unk>. So let me just take this opportunity to thank the leadership team for all the hard work over the last 90 days a lot of great progress.
A great team really gaining traction together.
Senior Leto and also shut out to associates worldwide for all the great work. So you take care.
We're closing in.
Thanks.
This.
Today's conference call. Thank you for participating you may now disconnect.
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