Q3 2021 Cerner Corp Earnings Call
Okay.
Welcome to Cerner Corporation's third quarter 2021 Conference call. Today's date is October 29, 2021, and this call is being recorded.
I'd now like to turn the call over to your host Alan <unk> Senior Vice President of Investor Relations. Sir. Please go ahead.
Thank you good morning, everyone and thank you for joining us on the call with me today are Dr. David Weinberg, President and CEO and Mark <unk>, Our Chief Financial Officer.
<unk> will begin the call with his initial observations since joining at the beginning of the month and then hand it over to Mark to discuss our results and outlook. We will then transition to Q&A and be joined by Travis Dalton, Our chief client and services officer.
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 and 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 to the investors section of Cerner Dot com and other filings with the SEC.
<unk> 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 for our discussion of operating earnings 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.
There are these non-GAAP financial measures are not meant to be a substitute for or superior to financial measures prepared in accordance with GAAP.
With that I'll turn the call over to David.
Thanks, Alan Good morning, everyone and thank you for joining us.
I'm going to start by sharing a bit about myself and why I chose to join Cerner, then I'll provide some early observations and areas of focus.
For 30 years, my career has been making health care more accessible more understandable more equitable and more affordable.
Early in my career I developed a strong conviction that focusing on the patient is the only way to be successful. This was true at UCLA, where our focus on patient satisfaction with foundational to an operational and financial turnaround.
As such this patient first philosophy.
Underpinned my approach to everything.
At <unk> once we establish the patient has being the center of everything we do.
We were able to expand that focus to the entire community.
Having an integrated care and payment model, we showed that healthcare can be of the highest quality and affordable. We also created the worlds largest biobank of whole exome sequencing, because we knew that in that DNA with information, we could use to keep our community healthy.
As part of our extensive use of technology at <unk> I built an important relationship with Google, which ultimately led to an opportunity to run Google health.
I am proud of the work we did there on search Youtube maps, we provided the world with timely and authoritative medical information, including our work on Covid Covid symptom vaccines community mobility to report exposure notification and more.
Our Youtube Covid information page had over 500 billion impressions.
We worked in partnership with Tencent with Ascension to help organize disparate medical records, including servers, so that nurses doctors and other caregivers could easily find information about their patients now.
Now transitioning to Cerner I feel that I've left an amazing Tech company that was a playing a role in health enjoined, an amazing health company that is using tech to improve People's lives.
I'd like to share initial observations.
Sooner and frankly other electronic health record companies have done a good job of automating processes and digitizing medical records for more than 40 years by itself. That's a huge accomplishment, but it's very important that we acknowledge the fact that we haven't reached our full potential.
Digitize records for one needs to be more usable and provide actionable information.
They need to be measured by how they enable caregivers to spend more time at the bed bedside and less time at the terminal.
Improving the usability of Cerner solutions is at the top of my list of things to get done.
And usability is just the beginning not the true promise of the digital age.
No need to do a better job of helping patients avoid unnecessary tests and medications of helping clinicians avoid errors and suggest what treatments may work back, allowing us to understand the health of our communities those at risk and what interventions are working they also need to be predicted so we can prevent unnecessary.
And readmissions they.
They need to help identify risks of conditions before they become chronic.
And potentially help the world avoid or at least minimize the effects of the next pandemic.
Achieving these improvements will also require industry cooperation in compliance with interoperability requirements something Cerner has been and will remain passionate about.
The pipes are late which is wonderful, but we must make it easier to get the right information to the right people at the right time.
Cerner has made good progress at improving the flow of information.
Gleaning insights from data.
And helping optimize the coordination of care through offerings like analytics registries referrals and real time health <unk>.
These capabilities remain important to our clients and <unk> growth and we will continue to enhance them as we fortify the EHR.
We will we also continue to believe the potential of harnessing data to accelerate discovery and the deployment of therapies and ultimately improve patient outcomes.
We have a great opportunity to do this through.
Through Cerner in visa, which combines the expertise of the Cerner and Cantor health team.
Something else I've heard plenty about is how important it is that cerner to make enhancements to our revenue cycle solution.
We need to simplify billing for patients and providers and that starts with making the billing more integrated and seamless.
We think the <unk> patient accounting offerings, we announced during our health conference earlier. This month, we will do just that.
Importantly, as we work together to strengthen our solution and make them more dependable, we have an opportunity to improve job satisfaction for caregivers, who are increasingly burnt out by the complexity.
And inefficiency inherent in today's Ehr's.
This focus will strengthen our client relationships and reduced client attrition.
We are going to set reasonable expectations with our clients and meet them.
This will require discipline and focus.
In the past.
Cerner has tried to do too many things often by ourselves.
Moving forward, we're going to change that approach and only focus on a small number of important high value areas.
Some of which we plan to achieve by.
By partnering with highly capable organization. We can we believe can help us achieve our mission of improving the lives of others.
This new approach will provide the best and most efficient path to engage clients providers and patients as well as the best way for Cerner to deliver sustainable and profitable long term growth.
The current leadership team has done a lot of good work to address this ahead of my arrival.
Our progress is showing up in improved performance with clients and strong financial result for example.
<unk> <unk>, our Chief Technology Officer has made progress on platform modernization advancing our approach to development.
This is critical to driving needed R&D efficiencies improving quality, increasing the speed.
At which we get capabilities to our clients and lowering the cost of running and supporting our product <unk>.
Traffic Dalton.
Our chief client and service officer continues to grow our federal business, while simultaneously strengthening strengthening our client and services organization.
Tracy Platt, our chief Human Resource Officer has helped cerner navigate a period of significant change while driving improvements in compensation practices associate satisfaction and diversity equity inclusion and belonging.
And since joining earlier this year Mark Erceg has quickly created and put in place new management reporting capabilities that are helping us make more informed decisions relative to our capex spending R&D investments product portfolio partnership arrangement and our operating structure.
Mark has also helped.
US expand our adjusted operating adjusted operating margin and improved free cash flow, we're making better use of our balance sheet by increasing our share repurchase program.
While I've been pleased.
With my direct leadership team I've also been wildly impressed by the passion and enthusiasm of my 25000, plus Cerner associate Ivy.
<unk> already had numerous interactions that make it clear to me that they understand our job is much bigger than digitizing records.
I believe cerner is well positioned to better serve patients.
Meaningful value across health care and drive long term profitable growth profitable growth.
All of Turner has already taken important initial steps towards better execution and focus and this is showing up in our business results are.
A big piece of that has been our success with the federal business.
Which mark will now discuss before he provides his customary financial update thanks.
Mark.
Thanks, David and good morning, everyone. Our federal business remains solid with the department of defense and the United States Coast Guard continuing to deploy their cerner powered EHR for example in August the Coast Guard specific wave went live bringing with it in an additional 14 clinics and 17 six base located in Alaska.
California, Guam, Hawaii, and Washington State. In addition at the end of September the Dod experienced another successful deployment expanding their footprint by 4800 end users across 130 locations in Hawaii.
The Dod is now using Cerner solutions in 17 states over 1000 locations and serving around 64000 end users together.
Together, we are on pace to meet their full deployment schedule on time and on budget by the end of calendar year 2023.
Moving to Veterans Affairs in July VA officials released the findings of their 12 week strategic review.
Throughout the review the VA Secretary remained committed to Cerner and we remain committed to the secretary and all of America's Veterans.
During that same month, our team also worked with VA leadership and providers at manned Grand staff Medical center to implement additional capabilities as we continue providing seamless care for our nation's veterans.
And just last month, we secured additional funding to support deployments to future locations.
Now moving to our financial results overall, we're very pleased with our third quarter results bookings were up 23% versus a year ago to $1 8 billion bookings. This quarter included strong contributions from our federal business and also reflect new footprints.
That said please note that some of the bookings strength was the result of some larger transactions getting done in the third quarter that we had originally expected to transact in the fourth quarter.
The strong bookings this quarter brings year to date bookings growth to 13%.
Our revenue backlog also grew ending the third quarter at $13 1 billion, which is up 1% versus year ago.
Revenue of $1 $4 7 billion was up 7% over the year ago quarter, driven in large part by strong growth in federal and approximately $45 million of incremental revenue from the Cantor Health acquisition, we completed earlier this year.
Organic growth in the quarter was approximately 4%.
Just like bookings or revenue in the third quarter was a little bit stronger than our initial expectations with about a half point of growth, which we originally expected to post in the fourth quarter, finding its way into the third quarter driven by the bookings upside.
Gross margin was down 20 basis points from a year ago at 82, 9%, primarily due to a slightly higher mix of third party services adjusted.
Operating margin, however, expanded 150 basis points from 24% to 21, 9% driven primarily by continued expense cost control, including the initial impact of the actions we discussed last quarter.
Namely a reduction enforce the classification of several properties as held for sale and the write down of certain in process R&D for products that we deprecated as part of our drive to focus on the core which David referenced during his remarks.
Those actions were a good start but we have identified and are actively pursuing additional opportunities to improve profitability as we work towards our goal of delivering a mid 'twenty.
Percent adjusted operating margin by fiscal 2024.
For example, we continue to shrink our physical footprint as evidenced by the designation of two additional buildings as held for sale during the third quarter.
These two buildings represent an additional 435000 square feet of space, bringing the total amount of square footage, we have already sold or plan to disgorge up to one 5 million square feet since the start of the year.
We are continuing to critically review and evaluate our product set and take end of life decisions. So our R&D investment can be channeled towards the products with the highest return profiles.
We are systematically reviewing our extensive list of partnerships, which currently number in the hundreds while we have a tremendous opportunity to improve the top and Bottomline performance of many of our partnerships. We also plan to reduce or eliminate some non value added arrangements. So we can focus our precious resources on the most impactful or promising relationships.
In addition, we recently completed a comprehensive analysis of third party software and discover we are running over 750 unique titles, which currently cost us over $330 million annually for perpetual licenses subscriptions and support.
He will be taking concerted steps to actively manage and hopefully reduce this number and the associated cost going forward.
I could continue but let me comment on just one more area because I am, particularly excited about it over the past several years and in large part because our client satisfaction has not been as high as it should be it has been hard for cerner to consistently pass along CPI escalators, which are embedded within many of our contracts.
Going forward as we take up David's challenge the focus on the patient and only do a few critically important things really well, we plan to stop or jettison side pursuits that in many cases have proven to be nothing but resource drains and distractions.
As we do this we should have an opportunity to strengthen our price integrity in the marketplace, which I believe has the potential to be a significant source of incremental and profitable revenue growth in the years ahead.
So in summary, we've made good progress at improving margins this year and plenty of opportunities remain to help us achieve our goal of mid 20% adjusted operating margin by 2024.
Wrapping up the P&L adjusted diluted EPS was <unk> 86 per share, which is up nearly 20% over last year due to stronger adjusted operating earnings a lower tax rate and a lower share count.
Moving to our balance sheet, we ended Q3 with $782 million of cash and short term investments, which is down from $885 million last quarter, primarily driven by $375 million, which we spent on share repurchases during the quarter.
This brings our purchases through the end of the third quarter up to $1 1 billion.
Our quarter ending debt position was unchanged versus Q2 at $1 8 billion.
Operating cash flow for the quarter was $435 million after $48 million of capital expenditures and 76 million of capitalized software free cash flow came in at $312 million, which is 32% higher than a year ago year.
Year to date free cash flow was $765 million, which is up 66% compared to the same period year ago.
Moving to guidance, we expect revenue in Q4 to grow upper mid single digits compared to Q4 of 2020. This includes approximately $50 million of revenue from the Cantor Health acquisition, which is now part of Endesa, bringing fourth quarter organic growth to the low to mid single digit range. This.
This guidance also implies full year 2021 revenue growth of approximately 5%, which is consistent with our prior guidance organic growth for the year would also be in the mid single digit range.
We expect fourth quarter adjusted diluted EPS growth of 10% to 13% over Q4 of 2020. The high end of this range would bring full year adjusted diluted EPS of $3 30, a share which would be growth of about 16% over last year.
Importantly, this is <unk> <unk> higher than the full year guidance, we provided last quarter and 15 cents higher than the midpoint of the original guidance, we provided at the beginning of the year.
For the fourth quarter, we expect our tax rate to be approximately 19%.
And I am very happy to communicate that we now expect to generate more than $950 million of free cash flow for the year, if achieved that would be a new record amount breaking last year's $857 million, which was also a new record high at the time by roughly $100 million.
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 those acquisitions are attractive both strategically and.
Financially.
In summary, I'm very pleased with how the entire Cerner team has been performing which has directly contributed to our strong third quarter results and year to date results. I also want to take a moment to extend my warmest welcome to David and express my genuine excitement upon his arrival Dave.
David has quickly bonded with the entire Cerner family connected with an impressive number of clients and sharpens <unk> strategy and focus we are all energized by David's presence and feel like all the pieces are quickly coming together, which we believe will over time allow cerner to fully realize its significant potential to positively impact healthcare while also.
So generating meaningfully higher levels of total shareholder return.
With that I'll turn the call over to the operator for your questions.
<unk>.
Thank you and ladies and gentlemen, if you have a question at this time simply press Star then the number line on your Touchtone telephone. If your question has been answered or you wish to ILUVIEN.
Jay cells from the queue. Please press the turnkey. Your first question comes from the line of Charles <unk> of Cowen. Your line is open.
Hi, it's actually James on for Charles.
Can you maybe talk more about the recently launched Cerner and visa and maybe what the financial profile of that.
Operating unit looks like and how we should think about that growth profile going forward.
Call correctly at the 2020 Investor community meeting I think you sized the Tam.
Data as a service at about 45 billion and four year CAGR at around 40%.
That opportunity changed since then because it seems like with the pandemic. There has been an acceleration of demand for these types of solutions.
Thank you for the question. So I'll say a few things just about the financial profile, then I'll, let <unk>.
David comment more fully on the strategy elements. So at this point, we're really very pleased with how the integration is performing I can tell you that versus the going in acquisition economics were running about $2 million high on revenue and about $5 million high in both adjusted EBITDA and adjusted operating margin, we're actually running about 340 basis points ahead of our plan as it.
Related to that and we're looking at an adjusted operating margin of roughly 19% at this point in time, so from a financial standpoint.
Is playing out really very well, we feel really good about where we are if we have about $130 million of full year revenue and of course, that's a partial effects. Since we closed on the acquisition on April one and then as far as how we think about it more holistically I'll turn that over to David. Thanks, James to me, it's pretty straightforward that theres, a tremendous amount of data that we have.
Privilege.
Sharing with the health care providers that we work with.
And what we need to do.
And I think it's been a promise all along is to make that data understandable and actionable and we think that bringing in folks from cantor combined with our team allows us to understand that data in a better way analyze that data and then really provided back.
To our partners in a way that they can take actions to improve People's health.
Okay, and just one follow up as we approach 2022 is there any large customer attrition, we should be mindful of.
I mean, there's been some.
Loan losses in the past.
That will continue to play out over time.
But as we think about our growth algorithm all of that has already been contemplated and I think it is reasonable to assume that when we do come forward with guidance. It will be along the lines of what we indicated previously which is.
Mid single digit topline revenue growth and thus then moving our way towards a mid <unk> operating adjusted operating margin by fiscal 'twenty four.
James.
Sure Jim Let me add to that my sense is that we may have attrition because of mergers and acquisitions and while that's disappointing and that's built into our models.
It might be difficult to avoid the attrition when it is not due to mergers and acquisitions, but rather.
Hi, disappointment in our products and services is something that is completely unacceptable to me and.
<unk> challenged the team to make sure I'm in front of those clients.
In my first hundred days, so that I can build those relationships and show them how important they are and that we can actually delivering and solve some of their problems. So.
I would expect that.
Tricia overtime becomes less of an issue with Cerner.
Okay. Thank you for the color.
Your next question comes from the line of Stephanie Davis from SBB Leerink. Your line is open.
Hi, guys. Thank you for taking my question.
David I wanted to touch on longer first amongst the term regarding the layoffs, just asking a little bit more teams specific balm, Florida overall as you've seen the path.
So I was hoping you could give us some thoughts on how you optimize infrastructure.
<unk> historical approaches.
Yes, let me ask Mark first to talk about the structure and then I'm happy to cover kind of layoffs and my philosophy in general Yes, I think we've talked about the fact that we have six business models that are really kind of revenue recognition construction's. So what we've been doing is putting in all of the piping. So that we can have a real world class management reporting.
System, that's going to be based on a number of operating units that will have fully allocated P&L that I think is going to enable us to drive our cost profile and frankly operate more efficiently. So that we can serve our patients and our clients better and a big part of that is then being able to.
Drive operating efficiencies through all the processes that we are building out and that goes all the way through the R&D side of the house and to everything else that we're doing and I think we're starting to see some early results in wins as it relates to that because when you understand your product level profitability your client level profitability Youre fully allocated operating unit profitability you can make better decisions. So for example.
For the past five years through fiscal 2020, we had our revenue growing roughly 4% per year, but our operating expenses were growing by six right. During that timeframe. We saw 440 basis point contraction in our adjusted operating margin and Thats to be expected because your 200 basis points to the bad when your expenses are growing 6% and your revenue is growing for a while.
Fiscal year to date for 2021, our revenue has been growing four 9% our operating expenses have been growing one four so now we've increased our margin by 190 basis points on an adjusted basis year to date, because we were operating 350 basis points to the good thats a huge reversal of 550 basis points the management report.
Structures, we're putting in place are allowing us to do that and do that efficiently and effectively and I think that's critical to our long term success and Thats why im so frankly confident that we're going to get to the mid twenties by fiscal 'twenty four.
Stephanie let.
And let me add my philosophy.
My sense is that.
When you lay off of person.
Youre actually not laying off a person you oftentimes are infecting an entire family. So I like to multiply any lay off in my mind by four or five about how many people are being affected and I think it's terrible I think it oftentimes is a reflection of management not predicting where the business is going.
And getting folks retrained for areas of growth. So that this stuff doesn't happen, we need to right. The ship and I think thats part of the process here, but in some ways to me, it's been lack of discipline and lack of focus not only do layoffs effect the individuals and their families. It also affects those that remained at the organization because theres that survive.
Guilt and there is fear about what's coming next so we will work our way through this going forward, we will be more disciplined about.
Thinking about where our business is going and how we can retrain our folks.
To be best positioned to help us as were going forward, there's no way, we're going to shrink our way to greatness.
So while these are some immediate measures and I think their corrective and I'm supportive of them. They don't fit with my philosophy going forward.
Yes.
Yes, Paul on that.
About a little bit.
How should we think about R&D spend will it be shrinking less and we're pivoting folks in new teams and new initiatives.
And that will have less internal investments as a result, alright.
Or is there something that youre going to be North American outlet project, given where we are now.
It's a great question I think we've talked about the fact that we had like 671 scrum teams. We now have a system in place that allows us to actively manage where those teams are signed and what the output from their work is.
Do have any meaningful investment in that area is about $800 million a year I would expect as we think about our modeling that that $800 million of probably stay relatively constant for the next couple of years, but I wouldn't expect it to increase necessarily and as we continue to grow the top line I would expect R&D as a percent of sales then to drop I mean for us to get to a mid twenties.
Adjusted operating margin by fiscal 'twenty, four we can't continue to spend R&D as a percent of sales at the rates we've been spending in the past now the good news is I think as we continue to spend roughly $800 million a year, we're going to get a whole lot more for it the automation tool that Jerome is putting in place the digital factory that he is standing up.
Simple fact that we're going to a lot more disciplined and focused about where we put our scrum teams, what we expect them to generate and produce.
Is going to I think be somewhat revolutionary round here. So I'm very very excited I think we can get a lot more traction with the same amount of spending or potentially even a little less overtime certainly as a percent of sales.
Okay, perhaps I can provide how you guys are going to make it yet.
Your next question comes from the line of Sean Dodge from RBC capital markets. Your line is open.
Thanks.
Good morning.
David You mentioned narrowing your focus on a small number of high value areas can you give us a little more specificity on what you see there has been and then what are a couple of examples.
Pursuits.
Mark you mentioned, you expect to be winding down.
Here in the near term.
Thanks, Sean Yes, we've had quite a bit of discussion with the team.
Since I've been here over the last few weeks around this particular area. So I don't know that I have the perfect words to describe it but I'll do I'll tell you, where we're at and I think it starts to make sense.
To me we need to.
Make the EHR.
Reliable unusable.
When I say make the EHR reliable and usable when I say that that of course in my mind means and that means billing works too. So I described the EHR of today.
It's not only the digital record, but the ability to conduct the business thats needed for health systems all over.
And that same EHR in my mind also needs to be a tool that allows grandma's blood sugar to get to where it needs to get to so I have to be interoperable. It has to have on top of it analytics that you can make predictions around individual patients.
Round communities, you have to be able to use that EHR.
In a way that allows you to be successful in a.
Fee for service or fee for value model. So that the list of what we're doing when I say fix the EHR to me, it's broader than what millennium does right now, but it's really.
Parts of millennium or all of millennium, along with what we've done around billing. In addition to the population health tools. The predictive tools that are so important in today's.
Ecosystem of taking care of people and then we have actually you asked the second question to Mark, but I'm going to answer it.
You also asked for the list of what are the things we're not doing.
We kind of went down that rabbit hole and what we came to us instead of saying that we're going to say is here are the things we're doing and if it's not on the list that means we're not doing it. So what we're doing is fixed in the EHR to make it usable make it reliable make sure that the billing works and make sure. It has on top of it that layer.
That allows information to flow freely so that patients and families can get the information where they need to get it. So that the list of what we're doing and everything else is on that do not do lift.
Okay. That's helpful. Thank you and then.
And then maybe going back to and visa can you help us better understand the scale and the composition of the data set you are able to leverage there and maybe the extent to which that gives you an advantage versus what others in the market our offering I guess you said you had added.
The pivotal data from health systems, what proportion of your footprint you have rights to and are able to dropdown.
I don't know the specifics to that and we can get back to you on that.
I can give you a real high level on that.
You've probably heard us talk about healthy intent, having several hundred million records in it.
But theres also a subset for which is part of the data as a service strategy, we went and worked with.
No I think we are updating 80 or so clients as part of the learning Health network, where we got where we got basically new clean data rights agreements with them that is part of the overall data as a service strategy and I think those clients represent close to 100 million records and so thats, how I would think of that as as part of the <unk>.
Dataset.
Okay.
Great. Thank you.
Your next question comes from the line of Michael Cherny from Bank of America. Your line is open.
Sure.
Good morning, Thanks for taking the questions David welcome to your first call as well.
I wanted to dive in a little bit on the cash flow dynamics, you've seen some pretty nice step up in cash flow, which I know has been a big focus points of the team and that being said I know, there's also been a pretty large increase in stock based compensation and so as you think out and I'm not necessarily looking for longer term guidance, but how do you balance the dynamic.
Of rewarding your employees, especially the ones that are so crucial for this.
Rebooting, Inc.
Our thought process against managing where that could eventually become a bit of a dynamic issue in terms of the actual cash payouts as that stock based compensation comes to fruition.
Well, it's like you said, it's a balancing act right. So we have been generating a lot of additional free cash flow as we drive our revenue profitably and we can expand our margins that gives us a lot more cash to work with we're also making some very specific and measured steps as it relates to payables and receivables we've been doing a really good job working through decline or.
On collections and.
Managing any bad debt expense or anything else that would come along those ways and that is giving us a lot of discretion, then to do things like share repurchase and potentially future M&A dividend increases in any number of other things.
Far as how we think about using equity to incentivize and reward folks look we want everyone to have skin in the game right. We want to have a ownership mentality across all of the associates. That's important to me Thats important David it's important to the board and we certainly arent going to do anything that gets us too far out over our skis, but we constantly monitor the marketplace for <unk>.
Pay practices.
And certainly with respect to equity we make sure that everything that we're doing is along benchmark. So we feel good about the balance we've struck as we sit here today.
Hey, Mike This is Alan I would like to add one thing just so you understand the increase you've seen in share based comp some of that is temporary.
As you may have noticed over the last few years, we've shifted from what used to be options that vested over five years to.
Two restricted shares that vest over three so what youre seeing now is as overlapping vesting.
That's impacting that you also.
Also had some retention grants during that during a period of the early transformation and then when you've seen some senior people leave and had some accelerated vesting that's impacted it. So there are several factors that have increased the growth rate that are temporary I think as you go forward, you'll see that the growth slows quite a bit after this year.
Thanks, that's really helpful color on both and if I can just ask a question on the bookings never a bad thing to sign things earlier than expected can you just give us a little sense in terms of what was signed earlier than what was pulled forward from fourth quarter, maybe even the first quarter. What was the decision process on the part of your customers to decide that.
Now is the time to make sure we're moving forward drive us that'd be great one for you.
Okay. Thanks, Mark Yeah. Thanks for the question I appreciate it yes, no that we had a really solid Q3, great Q3.
Year to date results are good.
Yes, I would say we had good contribution from all of our business units. One other thing I said when I entered the role was we were going to operate energy enthusiasm and we're going to compete we're doing that in all of our market segments.
I think one thing that's really important for us on the client retention side is that we have a lot of extension and expansion opportunity inside of our client base and we have better insights into those activities I think we're getting to our clients sooner than we were before because of some of the hard work we've done to run the business with more data and discipline.
And so we have the opportunity to go to clients in a more proactive way versus a reactive way at a renewal time to one.
Keep them, but to drive value and three to continue the conversation of how we best serve them and the caregivers and so we were able to move some things forward on the extensions. So we had some very large opportunities we had a great opportunity in the middle East side.
We secured one of our biggest clients inside the U S. At Medstar, which is a great client of ours and we also had really good federal activity and we had several task orders that came in that.
That we were expecting early in <unk>.
Our fourth quarter and the fiscal year. So I would say it was great contribution across the board from all the market segments that are data better insights and competing harder.
I would categorize it.
Yes.
Great. Thank you.
Your next question comes from the line of Elizabeth Anderson from Evercore. Your line is open.
Hi, guys. Thanks, so much for the question and welcome David.
I have a couple of maybe as a follow on to Michael's question can you just talk about just any sort of residual COVID-19 impacts you're seeing whether that.
Employees being able to visit sites or they're now allowed to basically access to everywhere and then any kind of.
Demand shifted like exiting the COVID-19 period that would be helpful. Thanks.
I'll take the first part.
It has seen.
Different by region that it seems very reasonable so I've met with a lot of customers.
Via video conference.
And many actually on at on site now, but some have said were not taken visitors yet so and Thats just me, but I think it's the same for the rest of our team so it really depends.
However, it seems much better than it was 60.
60 days ago. So it seems like it's going in the right direction with the exception of a few hotspots.
And then as far as the workforce goes our plan is after the first of the year to bring folks back in a hybrid.
And right now.
A scattering of people coming in and of course, those that have to be here. So so that's kind of where we're at it.
I don't want to be overly optimistic, but it seems like there's a little bit light at the end of the tunnel.
Got it and so would it be fair to say, though from a client perspective.
Even though there are some hotspots and broader.
Focus on obviously with Covid that they are sort of willing to and able to engage in longer term strategic planning and thought process in terms of looking at your product suite product solutions or extending things of that kind of thing, yes, I would actually say a couple of things one they are burnt out so on.
Our focus on usability is going to be crucial in to what Covid showed the world in health care how important.
Understanding and using data is so I think I don't want to say a silver lining but.
I think it really sets us up in a way to be even more helpful. As people start to think about how much care is going to remain virtual how do we better predict who is coming into the hospital, what kind of supplies, we need workforce issues all of those things I think set us up in a positive way so folks are besides.
Being tired and burnt down I think are very receptive.
To continue to work with us to improve healthcare in particular health care operations.
That's helpful.
Your next question comes from the line of Craig Hallum back from Morgan Stanley. Your line is open.
Sure.
Yes. Thank you a question for David just on the message of a focus on a few value add opportunities.
Commentary on R&D, staying flat to $800 million, which is consistent with prior commentary.
Think about just kind of the implications for longer term growth and how you're approaching it from kind of an organic as well as potential M&A opportunities.
Yes, so the so for me.
The opportunity if we're able to make electronic health records in that broader way that I define it.
Reliable and usable and provide the analytics and the predictions that would allow caregivers and health systems to make better decisions about caring for patients I think the.
I am wildly optimistic about our outlook for long term growth if doctors and nurses start saying. This thing is really helping me I think we will continue to see significant growth going forward as far as organic versus M&A I am still getting up to speed. One of them is I have is to really learn more about the organization.
Before we make any big moves and I have had a team. That's got me up to speed quickly. So we'll continue to evaluate what's out there.
And also as Mark mentioned think about.
Being more thoughtful about partnerships too.
Great. Thank you and then just a follow up for Mark you mentioned the potential to save on software to the $330 million.
That included in your expectations to get the operating margins to the mid twenties.
Get some savings there could there be some upside.
Look I think of everything we're doing right now is geared towards getting to that mid <unk> by fiscal 'twenty. Four. So that's just another example of the areas that we're going to be using to affect and utilize our abilities to drive towards that last time, we talked a lot about the write down of the capitalized R&D. The designation of a number of properties as held for sale and then the reduction enforced that we have.
<unk> last quarter, you'll recall that there was charges associated with each of those three was $48 million $68 million 54 million respectively. Those things at the time combined for about $70 million of annualized savings, we put additional properties up for sale now we do have an additional.
Limited reduction enforce that is being affected now thats going to affect about 150.
Associates, you put those two things on top of it that's another $20 million of annualized run rate savings and then it's also important to note that we really are trying to manage our cost takeout through attrition wherever possible to David's point earlier, and we are down literally 1000 associates from the end of Q2 to the end of Q3 now half of that was because of the reduction enforced that we effect.
The other half was from managing the attrition and managing that well. So we have a lot of things that we can do and a lot of things that we can deploy.
In order to get.
To that mid Twenty's by fiscal 'twenty four and the software example was just another illustrative of case of things, where we spend a lot of money, where we can do a lot better by just managing things tighter.
Great. Thanks for the color.
Your next question comes from the line of Donald Hooker from Keybanc. Your line is open.
Great. Thank you and I am just trying to get my you guys.
You've obviously had great.
Outcomes here around operating margin improvement.
I'm just trying to get my bearing here my.
Understanding this or is there might be some seasonality to that.
In the fourth quarter, so operating margins could step up even more kind of sequentially in the fourth quarter. But then you mentioned earlier there is some timing around some large sounds kind of like there was some timing around some software purchases it might've been pulled forward into the quarter.
Might cause margins to be artificially inflated in Q3 can you just maybe walk through the seasonality this year of your operating margins.
Yes.
What I'd say there this is Alan.
The seasonality is going away over time right. If you. If you go back a few years ago, we had a much higher portion of our license software coming in in any given quarter.
And in a five year period. It switched from total licensed software being one third recurring and two thirds upfront to the reverse of that today. It's about two thirds recurring so because of that you have less fluctuation in that that upfront high margin revenue.
And as a result, youre going to have a little bit less fluctuation in your in your margins. So they can progress as you go through the year, which is what our Q4 guidance implies that it will go up sequentially, but theres not necessarily a one time thing that's going to cause it to go up dramatically.
Okay Super Super that's helpful. One quick follow up maybe just around the new.
Visa.
Sort of a life Sciences business model are you envisioning this business competing with zeros is this like kind of.
Going to be sort of.
Things that a lot of sea Ray is doing are you going to partner with them. How do you interact with those types of organizations.
We're still trying to get up to speed on it but my take would be this is not a CRO. This is really more about helping that ecosystem.
Better insight into what's happening in real World evidence and then maybe.
<unk> to be more.
Focused on what they are going after so it's really understanding the data.
And having those insights, which I think then really positions us well to partner with Crs.
Other academics.
Okay. Thank you.
Your next question comes from the line of Eric Percher from Metro Research. Your line is open.
Thank you David welcome and I appreciate the candor.
<unk> for the team.
Rev cycle product consolidation she is very significant.
Fair to say if there have been challenges narrow when we talk to your client base can you provide some context for how long you've been developing the new combined product and is it safe to assume this is a multi year rollout and I think maybe theres a question there as well from Mark relative.
Headwind.
For yes, given no incremental license or consulting fees, how do you think about headwinds turning to tailwind.
I guess, what I would offer is look we've been working on our Rev cycle products for a number of years, it's a key portion and key part of what we do so we're going to continue to invest behind that you are right. We do have a large installed base that's out there and so for us to uplift them over to the new product suite, it's going to take a number of years, but it's something that's part of our thinking.
And part of our planning process.
That's been taken into account as we think about our going forward growth algorithms, yes, Eric Let me just add that this decision was made before I got here in my input when I was brought up to speed with this should have been done before right. I think we should have made this move earlier there was kind of a philosophy. If it isn't built here, it's not the best and I think and actually talking with customer.
<unk>.
They really their initial responses finally.
Then they get to well how's the transition going to be and there's issues et cetera, but I think it's.
<unk>.
The right decision.
Can I answer your question, Eric is nephron based on the kidney.
That's right the seltzer.
The filters so that you are an analyst.
Yes.
Has a background in the kidney that's fascinating.
Okay.
Quick follow up there.
That initial response as you introduced this.
A couple of weeks ago.
Our people lining up or is there a wait and see approach given the history and Rev cycle.
I think our team has reached out to folks and they've been we have a planned rollout over a number of years to get folks onboard and so that's being worked on right now, but I do think we have the first couple of rounds already scheduled.
Perfect. Thank you.
Yes.
Your next question comes from the line of George Hill from Deutsche Bank. Your line is open.
Good morning, guys. Thanks for taking my question and David I'll Echo. The welcome aboard I guess my question is about population health and healthy intent, which I think a handful of years ago. We were expecting this to be a very large product and we're seeing a lot of capital markets activity and a lot of provider activity around risk taking in the various flavors of risk taking I guess.
Okay.
David I would ask how do you feel like Cerner is positioned here either as a provider of technology or as a provider of services, where we're seeing a lot of smaller companies make a lot of traction here and a lot of.
Provider organizations, particularly in the ambulatory space, who kind of want to take this risk and manage this risk themselves I know Cerner had had a plane at one point to offer a lot of services.
This space, but kind of like to hear how you're thinking about that segment of the market.
Yes, Thanks, George so.
My philosophy on population health, especially as you if youre not an organization that's been doing it for a long time more than anything it's a cultural shift the data is really really important but it's about changing how you think about running your health system. So we want to do and I think Cerner was right early.
On thinking of this platform as a way to collect disparate datasets, including registries, including electronic Health Records, social determinants of health.
<unk> information and the more data the better to be able to make those predictions and manage it I don't know that we've executed very well.
What I think you see in the market are some point solutions that are probably beating us kind of head to head on some of those point solutions, but to fundamentally change healthcare you need to have that broad view of everything that's going on otherwise there.
A lot of incumbent to sort of push you out. So I think we are positioned if we execute well here to really be able to bring in multiple sources of information to allow our partners those caregivers not only demand and individual patient, but to think about communities in population.
In a way that allows them to think of hospitalization and failures of outpatient care and outpatient care at failures.
Home care and home care as failures of self care and community care right. So if that but that is a cultural change it's really important for us to get the data right and to help them with that but the big lift is really in the mindset.
And thinking of not how many transplant did we do this month, but rather how many Oregon did we say this month. So it's a big shift and I've been fortunate to be in systems, where they've had long histories of doing that and even in those integrated system.
There is often.
Pool toward the old way of doing things. So we think that our I think that the healthy intent was the right strategy I think we have to streamline it some of it is falling behind some of the competition will bring it up to speed and then I think it puts us in a great position to help which is great. Because if we really achieved population health we're talking about improved.
<unk> health for everyone.
Working on the equity issue and we're also talking about decreasing the cost of care as well as improving the quality. So we're all in.
Just need to figure out exactly how we take the healthy intent from today and get it more.
Up to speed.
Great and if I could have a very quick follow up I'd love to know like what is the one biggest thing that you take from your experience at Google that you think can add value with cerner.
The user is super important.
I mean, I think <unk> had been built as billing machines I think they've been built as lab machines and nobody has built an EHR for a nurse in the ER No. One has built an EHR for a busy ambulatory care physician no. One has built an E R.
Our goal is to make it easy for this interventional cardiologist or for that population health care manager nurse right and what I learned at Google was surrounded by some of the smartest engineers and product people, but the UX team.
What why I think Google and some of these other tech companies has been so successful in getting products that have billions of users.
Thank you very much.
Our last question comes from the line of.
Jeff Garro from Piper Sandler Your line is open.
Yes. Good morning, Thanks for squeezing me in maybe we'll close it out by returning to the theme of taking the noise out of healthcare and improving provider satisfaction.
Was hoping you could provide more detail on what needs to be done on the software side and compare that with what needs to be done on the implementation and training side to improve usability and maybe help us think about the appropriate range of timeline over which those changes can be made to impact the end users.
Hey, Jeff I think the key to this is to build the products kind of going back to the last question with the user in mind and the best way to do that is to make sure that everything we're building is clinically infused and if it's clinically infuse that nurse. That's worked 40 years in the ER will go Hey, This makes my job a worse and then we will build it.
That way right and so we need that kind of input and we'll build our own internal team to make sure everything we're doing is synced up with our product folks in our engineering folks and that that clinical person has a very very important voice in that as well as and I heard this over the last month as I've been visiting.
Our customers they want to help the <unk>.
Docs that have picked cerner as their electronic health record partner are actually very tied into our success as we are to theirs and what they're saying to US is we have idea and you haven't listened. So I think we need to be clinically focused here as we are building products and wide open to our current customers to <unk>.
Make sure we're taking their feedback to improve it and what it looks like it means youre not clicking 70 times to get the tylenol. It means youre not looking through a record to try to find did somebody have a pneumovax vaccine. It means that when you. When you think about diabetes. The record says to you well, yes, here's everything on diabetes.
And by the way there's no LDL on this patient have you thought about that so that that's what we're talking about usability where you start.
Currently when you are a frontline docker nurse and youre using our system or <unk>.
If I may be.