TOP CONTRIBUTORS

Naveen Kasthuri

CERN AT A GLANCE

P/E ► 47.5 AVG EV/EBITDA ► 23.0 AVG ROA ► 7% AVG ROE ► 9.6% AVG Debt to Equity ► 0.363 LOW Current Ratio ► 3.30 HIGH Interest Coverage Ratio ► 91.4 HIGH

 

 

 

 

 

 

U.S. based Cerner Corporation is the second largest provider by market share of healthcare information technology (HIT) services in the healthcare industry, with 2007 revenues of $1.6 billion.^{[1] [2]} Cerner's primary business involves leasing software to help medical organizations manage data and finances electronically.

Since 2005, the percentage of hospitals primarily relying on HIT technology has increased by 18.4%, to 28.4%, or 1620 of the roughly 5,700 hospitals in 2008.^[3][4] These hospitals cite its ease and lower cost as reasons for having adopted an IT-based infrastructure. Increases in healthcare spending, safety and quality concerns, and insufficient care create a favorable environment for IT-based healthcare.^[5] This has contributed to Cerner's 31% growth in revenue since 2007. ^[6] Since those issues aren't isolated to the U.S, Cerner has pursued aggressive growth in international markets. The company's non-U.S revenues increased by 157% between 2005 and 2007. ^[7] However, Cerner invests more than a third of its operating expense to develop IT services for international markets while only 19% of its revenues are from its international segment. ^[8]

Due to the 2008 global economic crisis, the healthcare sector has decreased its investment in HIT. Since Cerner relies exclusively on service and support contracts, the company acknowledges that a nationwide slowdown in hospital spending will halt growth.^{[8] [9]} The company is focusing on growth in the international sector in order to compensate for revenue lost in the U.S. ^[10] In the third quarter of 2008, the diminished revenue growth of 8% in the domestic sector was offset by the 37% increase in revenue in the international sector. ^[11]

Corporate Overview

Cerner Revenue and Net Income from 2005 to 2007 ^[14]

Business and Financial Metrics

In 2007, Cerner reported 11.2% growth in sales revenue since 2005.^[16] However, sales revenue decreased in 2007 due to the company's shift in focus to upgrade its family of HIT services. Since Cerner sells time-based contracts for its services, the company's clients did not have to pay for this upgrade. Cerner's focus on upgrading their IT services impacted its software sales due to cannibalization. However, sales revenue decreased by only 1% due to an increase in hardware sales.

In 2007, Cerner's total revenue increased by 10%, almost completely due to a 40% increase in revenue in the company's international segment.^[17] The international segment contributed roughly 10% of Cerner's total revenue in 2005. ^[17] The 2007 10-K shows that Cerner's international business contributed 19% to the total revenue.^[17] This increase is the primary cause of the 30% increase in revenue between 2005 and 2007.^[17]

Net income as a percentage of revenue has increased from 7.4% in 2005 to 8.4% in 2007. ^[14] Since Cerner spent on average 18% of its revenue since 2005 on research and development, net income grows at a slow pace. ^{[15] [18]}

Segment Comparison of Revenue and Operating Expenditures ^[8]

Cerner's activity and focus indicate three main company-specific trends:

• Aggressive growth in international markets: Cerner's international markets revenue increased from $29 million in 2002 to $290 million in 2008. ^[19] In addition to the U.S, the company operates in all countries in Eastern Europe and in Puerto Rico, Aruba, Cayman Islands, Chile, Canada, India, Malaysia, Saudi Arabia, Singapore, Hong Kong, and the United Arab Emirates. ^{[20] [6]} The majority of the company's international revenue comes from anglicized, western developed countries due to the similarity in healthcare sophistication and language.^[21] 31% of the company's expenses are spent on international markets although only 19% of Cerner's revenue come from international operations. ^[10] This is because Cerner actively invests in translation and expansion of its international IT services. ^[8] However, most of the investment is devoted to creating software that is compatible with the rapidly-changing foreign healthcare systems, posing investment risk. ^[21]
• Research And Development Spending: In 2007, 21% of Cerner's operating expenses was devoted to research and development of future Healthcare IT Services. ^[15] However, only 3% of the expense was used to create an entirely new IT service.^[22] The rest of the capital was spent on upgrading their IT systems and remodeling existing services to accommodate foreign markets. ^[22]
• Shift from hardware on-site services to remote software services: Due to rising hardware costs, Cerner's clients are shifting from on-site IT services to remote hosting and software consulting. The 2008 financial crisis also contributed as hospitals shifted to the less expensive remote management IT services.^[23] Revenue from remote hosting and software consulting, collectively termed as managed services, has grown by at least 30% year-over-year since 2003, while on-site installation has decreased by 12% in 2007.^[24][25][26]

Business Segments

Cerner has four primary sources of revenue, all of which are IT services sold on a per-contract basis. Cerner divides itself into two geographic segments: domestic and international. Both of these segments are offered all of the following services.

Professional Services (29% of Revenue)

Professional Services is the largest component, comprising of $465.39 million of Cerner's 2007 total revenue.^[27] These services are provided to assist customers in the installation, implementation, and usage of Cerner's HIT technology. Cerner's client employees are educated on how to use the provided software applications. ^[27] In 2007, Cerner upgraded their IT systems and earned more revenue by charging clients to assist in the process of upgrading. Since 2006, revenue from professional services has increased by 15%. ^[28]

Percentages of Total Revenue in Business Segments ^[27]

Support and Maintenance (26% of Revenue)

Support and Maintenance is the second largest component, comprising of $417.25 million of Cerner's 2007 total revenue.^[27] The company offers 24/7 support to all of its clients on a contract basis. The contracts also include unlimited upgrades and maintenance until the contract matures. ^[27] These services begin as soon as professional services finish implementing the HIT technology. Since most of Cerner's clients subscribe to support and maintenance, the percentage of revenues of professional and support services are around the same. Revenues from this segment grew 17% since 2006. ^[28]

Licensed Software (16% of Revenue)

$256.77 million of the company's revenue comes from selling licensed software.^[27] Cerner creates software specifically to meet needs of hospitals or other health institutions. The company sells software licenses to institutions via a lifetime contract. Thus, Cerner's clients have the company's software without a subscription charge. In 2007, Cerner's revenue from licensed software declined by 12% mainly due to a temporary shift in company focus to upgrading their systems. ^[27]

Technology (11% of Revenue)

Cerner sells third-party licensed software from HP, IBM, Microsoft and Oracle after customizing the software for healthcare needs, which comprises $176.52 million of the company's total revenue.^[27] Cerner also sells hardware computer equipment to support the licensed software. In 2007, technology sales declined 20% because of Cerner's temporary shift in focus to upgrading their systems. ^[27]

Managed Services (10%), Subscriptions & Transactions (6%) and Reimbursed Travel (2%)

These are miscellaneous sources of revenue for the company. These are usually constant year over year because these are not part of Cerner's primary focus.

• Managed Services: Cerner offers numerous client data management services, including remote hosting and remote HIT services. Clients use these services to cut costs or manage data in a more efficient manner. Although at the moment only a minor part of Cerner's revenue, the company is aggressively investing in managed services for the future. ^[27] $160.48 million of Cerner's revenue comes from managed services.^[27]
• Subscriptions & Transactions: Outside of the company's primary lifetime contract software license sales, Cerner offers a subscription based HIT service. ^[27] $96.3 million of the company's revenue comes from subscriptions and transactions.^[27]
• Reimbursed Travel: Cerner's travel and shipping charges are paid by the clients in the form of reimbursed travel.^[29] Reimbursed travel accounts for $38.1 million of the company's total revenue.^[27]

Key Trends and Forces

There is a Global Movement Towards Digitizing Healthcare

Since 2005, there has been an 18.4% increase in hospitals using digital healthcare services and digital patient records.^[3] HIMMS, a market research unit, reports that in 2008, hospitals using IT services increased by up to 10%.^[3] With 1620 out of the roughly 5700 hospitals using HIT, HIMMS analysts report that the U.S hospital IT market is nearly $33 billion in the US.^[3] They also report that although the 2008 financial crisis slowed spending on IT in the short term, the migration to IT-based healthcare is inevitable.^[3] The emergence of the electronic medical record has helped hospitals manage data efficiently. Whereas transportation and human error were important factors in paper healthcare systems, digital systems are instant and accessible without error. Hospitals use IT services to ensure smooth performance, ease of operability, proper patient care, and financial flexibility.While the adoption of IT services to manage health institutions has been slow, there is increasing demand for permanent IT-based healthcare systems. ^[23] Cerner and other HIT have the opportunity to provide their services to health institutions in the long term.^[30]

Healthcare is not Recession-Proof

Despite the growth in the need for healthcare, healthcare spending is not recession proof. In 2007, U.S healthcare IT spending grew at a slow pace of 0.2%, the slowest since 1997. primarily due to rising drug prices during an economically unstable period. ^[31][32] Cerner acknowledges the possibility of having diminished growth due to the shortage of money and the expense of healthcare IT.^[9] In the 3rd quarter of 2008, there was an operating loss of 12% mainly due to foreign currency exchange loss. ^[33] In the same time period, total cost of system sales increased by 42.7% while total system sales increased by only 19.3%.^[34] Cerner has begun aggressively pursuing emerging markets in South America and Asia to offset the slowing economy in the U.S and developed countries.

Overall, the 2008 financial crisis has led to a decrease in healthcare spending.The number of uninsured has increased, and hospital revenue has decreased due to a lower number of attending patients.^[35] Hospitals are increasingly turning to mass layoffs and stoppage of services. Consolidation of health institutions to cut costs have lowered investment in healthcare. Even if only in the short term, the lowered investment in healthcare information technology services by hosptials and other institutions is significant.

Healthcare Spending averages 6.7% growth in the U.S. and is increasing abroad

Domestic: With an unending need for more hospitals, blood banks, and other institutions, the healthcare industry is ever-growing. In 2007, the U.S spent 15.7% of its GDP, or $2.26 trillion, in healthcare. Healthcare in the U.S grows at an average rate of 6.7%. ^[36] Think tanks such as Datamonitor and Kalorama estimate the spending on healthcare IT to grow to $25 billion per annum by the end of 2009. With HIT being their specialty, Cerner and the healthcare information services industry benefit from growth in national HIT spending. ^[37]

The U.S. healthcare system has been attacked for its flaws and lack of efficiency. According to the World Healh Organization, the U.S. is the country with the highest cost of healthcare while only being 37th in overall performance. ^[38] Since healthcare IT promises both adequate patient treatment and cost effectiveness, Cerner and the healthcare information services industry has the opportunity to market the much needed health IT services in the U.S. Cerner also benefits from any stimulus package that the government issues due to the 2008 financial crisis .^[39]

International: As more countries modernize, more healthcare systems arise internationally. According to Credit Suisse analysts, around $30 billion dollars of opportunity exist globally for healthcare information technology services.^[39] Datamonitor analysts expect global Healthcare IT spending to grow to $39.5 billion.^[37] In the third quarter of 2008, the company had a 65% increase in operating earnings coupled with a 37% increase in revenue, both from Cerner's international segment. ^[11] Cerner has the opportunity to continue this increase by expanding its operations to reflect the ever-growing need for healthcare in the world.

Competition

Products offered by companies in the healthcare information services industry are different and have different functionality. However, most of Cerner's competitors offer some form of IT management service to health institutions.

Cerner's direct competitors include:

• McKesson (MCK): is one of the world's largest corporations in the $252 billion pharmaceutical distribution industry, with revenue nearly reaching $93 billion in fiscal 2007.^[40] McKesson distributes ethical and proprietary drugs, health and beauty care products, pharmacy hardware, and medical and surgical supplies throughout North America. McKesson also provides enterprise-level software services to hospitals and other healthcare organizations.
• HLTH (HLTH): HLTH Corp (HLTH) is the parent company of WebMD Health (WBMD), and owns ViPS, and Porex. WebMD operates a number of online web sites providing health and wellness information, ViPS is a data analysis and IT services firm. Porex designs and manufactures porous plastics for use in medical products like pipettes, test tubes, and vents. HLTH is in the process of merging with WebMD, contingent upon approval from shareholders. HLTH owns 85% of the voting shares of WebMD so this is likely to be approved within the next few months.^[41]
• Eclipsys (ECLP): Eclipsys Corporation (ECLP) develops and licenses proprietary software for the healthcare industry. The end users of the software include clinicians, physicians, nurses, and administrative support and ancillary staff of healthcare organizations. The company also provides professional services such as implementation, integration, product, training, and maintenance support, outsourcing, remote hosting applications, network services, and consulting services to its customers.
• WebMD Health (WBMD): WebMD creates a private version of its web portal. WebMD then stores a detailed health record for each employee and offers customized content on preventative care based on the employee's health profile. It also uses this information to match the employee with the best healthcare plan. WebMD charges both setup and monthly fees for its corporate services.
• Allscripts Healthcare Solutions (MDRX): AllScripts HealthCare Solutions provides clinical software and information services for physicians that assist in medication.

Market Share of Companies in Healthcare IT sector ^{[42] [43]}

References

1. ↑ ^{1.0 1.1} Cerner Corporate Profile
2. ↑ Yahoo Key Statistics: CERN
3. ↑ ^{3.0 3.1 3.2 3.3 3.4} Health Data Management: 06/30/08
4. ↑ American Hospital Association: Fast Facts
5. ↑ Cerner 2007 10-K, Item 1, Sales and Marketing, page 23
6. ↑ ^{6.0 6.1} Cerner 2008 3rd Quarter 10-Q, Item 2, Healthcare Information Technology Market, page 16 (PDF 20) 11/05/08
7. ↑ Cerner 2007 10-K, Item 1, Sales and Marketing, page 24
8. ↑ ^{8.0 8.1 8.2 8.3} 2007 Cerner 10K, Item 7, Operations by Segment, page 39 (PDF 41)
9. ↑ ^{9.0 9.1} Financial Week: Execs concede downturn here, 10/26/2008
10. ↑ ^{10.0 10.1} Kansas City Star: Global Revenue Compensates for Slowdown, 5/12/2008
11. ↑ ^{11.0 11.1} Cerner 3rd Quarter 2008 10-Q, Item 2, Result of Operations, page 19
12. ↑ Cerner 10K, page 8 (PDF 10)
13. ↑ Cerner Corp: About Cerner
14. ↑ ^{14.0 14.1 14.2 14.3 14.4 14.5} MarketWatch Company Financials
15. ↑ ^{15.0 15.1 15.2} Morningstar Financial Statements: Cerner
16. ↑ Marketwatch Financials: Cerner
17. ↑ ^{17.0 17.1 17.2 17.3} 2007 Cerner 10K, Item 7, Result of Operations, page 15 (PDF 17)
18. ↑ 2007 Cerner 10K, Item 7, Result of Operations, page 36 (PDF 38)
19. ↑ The Healthcare Blog: Cerner Immune to Economic Troubles, 5/27/2008
20. ↑ AlphaTrade News: UAE Selects Cerner
21. ↑ ^{21.0 21.1} Funding Universe: Cerner Corporation History
22. ↑ ^{22.0 22.1} 2007 Cerner 10K 2007, Item 7, Result of Operations, page 38 (PDF 40)
23. ↑ ^{23.0 23.1} MSNBC: Severe US Recession Already Having Major Effect on the Healthcare Sector, 08/01/2009
24. ↑ 2007 Cerner 10K 2007, Introduction, Result of Operations, page 6 (PDF 8)
25. ↑ 2007 Calculation using Cerner 10K 2006, Cerner 10K 2007, Appendix: Cerner’s Business Model and Financial Assessment, The Cerner Business Model, page 14(PDF 16)
26. ↑ Credit Suisse Cerner Corp Analyst Initiation, page 9, 06/20/2008
27. ↑ ^{27.00 27.01 27.02 27.03 27.04 27.05 27.06 27.07 27.08 27.09 27.10 27.11 27.12 27.13} 2007 Cerner 10K, page 14 (PDF 16)
28. ↑ ^{28.0 28.1} 2007 Cerner 10K, Item 7, Result of Operations, page 37 (PDF 39)
29. ↑ [2007 Cerner 10K, page 15 (PDF 17)
30. ↑ Seeking Alpha: 5 Bear Market Tech Opportunities, 12/02/2008
31. ↑ iVillage: Healthcare Spending in U.S Grew at Lowest Rate in Decade
32. ↑ While Not Recession-Proof, Health Care, Defense Poised to Endure Downturn, 11/01/2008
33. ↑ Cerner Corp 3rd Quarter 2008 10-Q, Item 2, Result of Operations, page 20
34. ↑ Cerner Corp 3rd Quarter 2008 10-Q, Item 1, Condensed Consolidated Statements of Earnings for the three and nine months ended September 27, 2008 and September 29, 2007 (unaudited), page 3
35. ↑ Forbes: Health Care Recession, 12/22/2008
36. ↑ World Health Statistics 2008: Global Health Indicators
37. ↑ ^{37.0 37.1} Healthcare IT News: Healthcare IT spending to grow to $39.5 billion by 2008, 01/06/2006
38. ↑ WHO World health Ranks
39. ↑ ^{39.0 39.1} InvestorPlace: Healthcare Stimulus would Boost Cerner, 12/23/2008
40. ↑ Wikinvest: McKesson
41. ↑ Wikinvest: HLTH
42. ↑ ^{42.0 42.1} CIBC World Markets Corp Cerner Corp. Analyst Cover Initiation, page 5, 2/22/2007
43. ↑ ^{43.0 43.1} SmartMoney: Upward Price Momentum Bodes Well for Stocks, 3/19/2007