jefferies healthcare conference corporationv.pdf · • 86% of 2016 revenue recurring or highly...

Marc Naughton

Executive Vice President and Chief Financial Officer

June 7, 2017

Jefferies Healthcare Conference

© Cerner Corporation. All rights reserved. All Cerner trademarks and logos are owned or licensed by Cerner Corporation and/or its affiliates. All other brand or product names are trademarks or registered marks of their respective owners. 2

Cautionary Statement Regarding Forward-Looking Statements

This presentation may contain forward-looking statements, including without limitation, those regarding projections of future revenues or earnings, operating margins, operating expenses, product development, new markets or prospects for Cerner’s solutions or services. These forward-looking statements are based on the current beliefs, expectations and assumptions of Cerner's management with respect to future events and are subject to a number of significant risks and uncertainties. Cerner’s performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:

(a) the possibility of significant costs and reputational harm related to product-related liabilities; (b) potential claims for system errors and warranties; (c) the possibility of interruption at our data centers or client support facilities; (d) the possibility of increased expenses, exposure to legal claims and regulatory actions and reputational harm associated with a cyberattack or other breach in our IT security; (e) our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others; (f) potential claims or other risks associated with relying on open source software in our proprietary software, solutions or services; (g) material adverse resolution of legal proceedings; (g) risks associated with our global operations; (h) risks associated with fluctuations in foreign currency exchange rates; (i) the potential for tax legislation initiatives that could adversely affect our tax position and/or challenges to our tax positions in the United States and non-U.S. countries; (j) the uncertainty surrounding the impact of the United Kingdom’s vote to leave the European Union (commonly referred to as Brexit) on our global business; (k) risks associated with our recruitment and retention of key personnel; (l) risks related to our dependence on strategic partners and third party suppliers; (m) difficulties and operational and financial risks associated with successfully completing the integration of the Cerner Health Services (formerly Siemens Health Services) business into our business or the failure to realize the synergies and other benefits expected from the acquisition; (n) risks inherent with business acquisitions and combinations and the integration thereof; (o) the potential for losses resulting from asset impairment charges; (p) risks associated with volatility and disruption resulting from global economic or market conditions; (q) managing growth in the new markets in which we offer solutions, health care devices or services; (r) risks inherent in contracting with government clients; (s) risks associated with our outstanding and future indebtedness, such as compliance with restrictive covenants, which may limit our flexibility to operate our business; (t) changing political, economic, regulatory and judicial influences, which could impact the purchasing practices and operations of our clients and increase costs to deliver compliant solutions and services; (u) government regulation; (v) significant competition and our ability to quickly respond to market changes and changing technologies and to bring competitive new solutions, devices, features and services to market in a timely fashion; long sales cycles for our solutions and services; (w) variations in our quarterly operating results; (x) potential variations in our sales forecasts compared to actual sales; (y) volatility in the trading price of our common stock and the timing and volume of market activity; and (z) our directors’ authority to issue preferred stock and the anti-takeover provisions in our corporate governance documents.

Additional discussion of these and other risks, uncertainties and factors affecting Cerner's business is contained in Cerner's filings with the Securities and Exchange Commission. The reader should not place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made. Except as required by law, Cerner undertakes no obligation to update forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in our business, results of operations or financial condition over time. A reconciliation of non-GAAP financial measures discussed in this presentation can be found in the Appendix to this presentation and Cerner’s most recent earnings release that was furnished to the SEC and posted on the investor section of www.cerner.com.


Cerner – at the Intersection of Health Care and IT

Founded in Kansas City in 1979

• Largest standalone health care IT company in world

• 25,000 associates worldwide

• 25,000 client facilities in over 30 countries

• 18 of 30 largest health systems have Cerner footprint

• Annual R&D investment ~$700M

• $5.6B cumulative R&D

• 5,000+ person IP org

• 2,000 clinicians

• 359 patents

* Operating earnings reflects adjustments compared to results reported on a U.S. Generally Accepted Accounting Principles (GAAP) basis in our 2016 annual report

on Form 10-K. Non-GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental

measure of financial performance. Please see the Appendix for a reconciliation of these items to GAAP results.

20% 10-yr Operating Earnings CAGR

• $4.8B 2016 revenue

• 13% 10-yr CAGR (mostly organic growth)


• Robust replacement market: ~2,400 facilities on retired/legacy platform

• Cerner benefitting from:

• Our increased competiveness and other suppliers struggling

• Vision and investments in future capabilities such as population health

• Openness and Interoperability

• Predictable costs and ROI

Electronic Health Record

• Integrated clinical / revenue cycle favored• Need for solutions that support population health, coding, analytics and

alternative payment models• Significant opportunity in installed base and part of almost all new deals• Increasing interest in revenue cycle services

Revenue Cycle

• Near inflection point; health care business models shifting

• Largest shift projected 2018-2020

• HealtheIntent well positioned against niche competitors

• Diverse buyers – providers, health plans, employers, states and governments

Population Health

Marketplace Observations


Financial Highlights

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

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Free Cash Flow*

* Adjusted operating earnings, adjusted operating margin, adjusted diluted earnings per share and free cash flow reflect adjustments compared to results reported on a U.S. Generally Accepted Accounting Principles (GAAP) basis in our 2016 annual report on Form 10-K and most recent Form 10-Q. Non-

GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of financial performance. Please see the Appendix for a reconciliation of these items to GAAP results.

FCF = Operating CF less Capital Expenditures and Capitalized SoftwareDollars in millions except for EPS

Top Line 2016 Growth

2017

Q1 Growth

Bookings 5,446$ 0% 1,250$ 7%

Revenue 4,796$ 8% 1,260$ 11%

Revenue Backlog 15,927$ 12% 16,098$ 10%

Bottom Line

Adjusted Operating Earnings* 1,133$ 5% 289$ 10%

Adjusted Operating Margin* 23.6% 22.9%

Adjusted Diluted EPS* 2.30$ 9% 0.59$ 11%

Balance Sheet & Cash Flow

Cash and Investments 466$ -32% 609$ -14%

Cash used for Share Repurchases 700$ 103% -$

Days Sales Outstanding 69 -14% 71 -5%

Debt 564$ -7% 550$ -8%

Operating Cash Flow 1,246$ 31% 304$ -10%

Free Cash Flow* 493$ 54% 144$ -11%


Recurring & Visible Revenue

• 86% of 2016 Revenue recurring or highly visible

• Up from 83% in 2015

• Grew 13% in 2016 (19% excluding support)

• SaaS now about third of total software and trend expected to continue

• Works component of services expected to grow as well

Type of Revenue Includes 2016 2015

Non-Recurring Traditional Software, Tech Resale 14% 17%

RecurringSupport, Managed Services,

Subsriptions, Works, SaaS60% 58%

Highly Visible Professional Services 26% 25%


Long-term Growth

• Targeting 7-11% long-term

growth 2016-2025

• $9B-$12B in 2025

• Internal target remains

double-digit

• Near-term growth from

expected from EHR

replacement, solution

whitespace, RevWorks, and

ITWorks

• Contributions from Population

Health expected to ramp in

2019-2020

• Timing of large Works deals

and Population Health ramp

will impact growth rates


$45B+ Non-U.S. Health Care IT spend (Gartner)

EHR less penetrated than in U.S.

Associates or offices in more than 25 countries; market leader in many

Industry PMPM ranges from single digit to $65+ depending on solutions and services

Our current target supported by PMPM below $5

Identifying more services opportunities with higher PMPM

Bookings ramp in 2018-2020, followed by ramp in SaaS/PMPM and services revenue

$45B+ addressable software and services market (MarketandMarkets Dec. 2016)

Growth includes ongoing penetration of revenue cycle in client base and with new EHR

footprints and increased RevWorks activity

$8B+ annual revenue opportunity in installed base

2025 target assumes 40-50 new clients by 2025

Over 400 prospects in client base

Represents EHR replacement (primarily through ~2020), Federal Government, Device

Resale, non-ITWorks Hosting and Support, Ambulatory, Post Acute, CareAware,

Emergency, Lab, Interoperability, Critical Care, Pharmacy, Perioperative, Women’s

Health, Imaging, Behavioral Health, Oncology, Rehab, and related implementation and

consulting services

Current client has installed less than 20 of 70+ solutions

Model assumes 3% growth through 2020, then 2% growth 2020-2025

Key Assumptions


U.S. Acute Market Snapshot

• Cerner and Epic clear leaders

• Each hold ~24% of the acute EHR market

• Both involved in most major opportunities

• Cerner momentum

• Market noise on Epic cost overruns

• Increased head-to-head wins

• Success in their base

• HealtheIntent, CareAware

• Highly active replacement market

• ~2,400 sites on legacy/acquired platforms

• Continued progress at Health Services

clients migrating to Cerner Millennium

• 83 facilities and 12,300 beds since 2015

• ~75% win rate

Health Services

Source: HIMSS Analytics


Revenue Cycle

• Organic revenue growth of 19% in 2016

• 5-year organic revenue CAGR of 21%

• Continued success in our base and new business

• About one third of Millennium base has purchased revenue cycle and growing quickly

• Part of almost all new EHR business

• Expanding services opportunities

• Targeted projects

• Transition services

• Business office management

• Full outsourcing


Population Health

• Market• Shift from fee-for-service to value-

based reimbursement expected to accelerate after 2018

• Focus on tools that help with FFS and value-based models

• Differentiated Approach• Broad suite of solutions on common

platform• Unmatched data variety, scale, and

intelligence

• Near real-time

• Actionable in the workflow

• Broad client base• Leading health systems

• Cerner and non-Cerner EHRs

• Health plans and ACOs

• Employers

• Government

Financial Highlights

14

Sales Pipeline

Bookings

$5,446

Cerner 2016 Business Model

Revenue Backlog

$15,927

(Dollars in Millions)

* Operating margin reflects adjustments compared to results

reported on a GAAP basis in our 2016 Form 10-K. Non-GAAP

results should not be substituted as a measure of our

performance but instead should be used along with GAAP

results as a supplemental measure of financial performance.

Non-GAAP results are used by management along with

GAAP results to analyze our business, make strategic

decisions, assess long-term trends on a comparable basis,

and for management compensation purposes.

Revenue Streams RevenueContribution

Margin %Contribution

Margin $

Licensed Software $549 91% $498

Technology Resale $274 20% $54

Subscriptions $442 62% $274

Professional Services $1,445 28% $404

Managed Services $981 37% $366

Support & Maintenance $1,016 75% $762

Reimbursed Travel $89 0% $0

Totals $4,796 49% $2,358

Indirect ExpensesResearch and Development -11% ($535)Selling, General and Administrative -14% ($690)

Operating Margin* 24% $1,133

System Sales

Support, Maintenance and Services


Near-term Growth Dynamics

Bookings

• Expect full-year 2017 growth

• Slight growth in traditional software and technology resale off of easier comparable

• Growth in SaaS and Works bookings

Revenue• Increased recurring revenue and reduced reliance on current-year bookings provides solid visibility to upper-

single-digit growth

• Can be in guidance range without requiring increase in percent of bookings recognized

Margins• Expect flat to slightly up adjusted operating margins near term

• Over $70M increase in D&A expense reduces near-term leverage

• Expected acceleration in Works businesses

• Believe margin expansion is attainable longer-term

• Larger contributions from SaaS population health revenue

• Non-cash expense growth rate expected to slow

* Adjusted operating margin reflects adjustments compared to results reported on a U.S.

Generally Accepted Accounting Principles (GAAP) basis in our 2016 annual report on

Form 10-K and most recent Form 10-Q. Non-GAAP results should not be substituted as

a measure of our performance but instead should be used along with GAAP results as a

supplemental measure of financial performance. Please see the Appendix for a

reconciliation of these items to GAAP results.


Balance Sheet and Cash FlowBalance Sheet

• Used excess cash in 2016 for share repurchases

• $700M repurchased in 2016; $1.4B since 2013

• Future uses of cash

• Investing in business

• R&D, technology infrastructure, facilities to support growth

• Increased significantly past 5 years, positioning us for long-term growth

• Expect overall capex to decline in 2017; could increase in future years depending on growth

• Repurchases

• Offset equity compensation dilution plus additional amounts as deemed appropriate

• Acquisitions

• Generally not acquisitive, but may be some opportunities given volume of change occurring in health care

Cash Flow Outlook

• Growth in operating cash flow and reduced capital expenditures expected to drive over $150M increase in free cash flow in 2017

• This would bring free cash flow to over 75% of GAAP Net Income

• Free Cash Flow % of Net Income will fluctuate based on capital needed for growth, but expected to remain above 75% after 2017 and trend to over 90%

* Free cash flow is not a GAAP measure. Non-GAAP results should not be substituted as a measure of our performance but instead should be used along with GAAP results as a supplemental measure of financial performance. Please see the

Appendix for a reconciliation of these items to GAAP results.

Health care is too importantto stay the same.TM


Appendix – Reconciliation of GAAP to non-GAAP financial measures

We report our financial results in accordance with accounting principles generally accepted in the United

States of America ("GAAP"). However, we supplement our GAAP results with certain non-GAAP financial

measures, which we believe enable investors to better understand and evaluate our ongoing operating

results and allows for greater transparency in the review and understanding of our overall financial,

operational and economic performance. These non-GAAP financial measures are not meant to be

considered in isolation, as a substitute for, or superior to GAAP results and investors should be aware

that non-GAAP measures have inherent limitations and should be read only in conjunction with Cerner's

consolidated financial statements prepared in accordance with GAAP. These non-GAAP measures may

also be different from similar non-GAAP financial measures used by other companies and may not be

comparable to similarly titled captions of other companies due to potential inconsistencies in the method

of calculations. We provide the measures of adjusted operating earnings, adjusted net earnings and

adjusted diluted earnings per share as such measures are used by management, along with GAAP

results, to analyze Cerner's business, make strategic decisions, assess long-term trends on a comparable

basis, and for management compensation purposes. We provide the measure of free cash flow as such

measure takes into account certain capital expenditures necessary to operate our business. Free cash

flow is used by management, along with GAAP results, to analyze our earnings quality and overall cash

generation of the business.

Any future period guidance in this presentation includes adjustments for items not indicative of our core

operations, which may include without limitation share-based compensation expense and acquisition-

related expenses, such as integration expenses, and may be affected by changes in ongoing

assumptions and judgments relating to our acquired businesses, and may also be affected by

nonrecurring, unusual or unanticipated charges, expenses or gains, all of which are excluded in the

calculation of non-GAAP adjusted operating earnings, adjusted net earnings and adjusted diluted

earnings per share. The exact amount of these adjustments are not currently determinable, but may be

significant. It is therefore not practicable to reconcile this non-GAAP guidance to the most comparable

GAAP measures.

Please see the accompanying table for a reconciliation of GAAP results to non-GAAP financial measures.

Adjusted Operating Earnings

($ in mi l l ions)Operating

Earnings

Operating

Margin %

Operating

Earnings

Operating

Margin %

Operating earnings (GAAP) 911$ 19.0% 244$ 19.4%

Share-based compensation expense 81 19

Health Services acquisition-related amortization 81 21

Acquisition-related deferred revenue adjustment 20 5

Other acquisition-related adjustments 4 -

Voluntary separation plan expense 36 -

Adjusted Operating Earnings (non-GAAP) 1,133$ 23.6% 289$ 22.9%

($ in mi l l ions , except per share data) Net

Earnings

Diluted

Earnings

Per Share

Net

Earnings

Diluted

Earnings

Per Share

Net earnings (GAAP) 636$ 1.85$ 173$ 0.52$

Pre-tax adjustments for Adjusted Net Earnings:

Share-based compensation expense 81 19$

Health Services acquisition-related amortization 81 21$

Acquisition-related deferred revenue adjustment 20 5$

Other acquisition-related adjustments 4 -$

Voluntary separation plan expense 36 -$

After-tax adjustments for Adjusted Net Earnings:

Income tax effect of pre-tax adjustments (68) (13)$

Share-based compensation permanent tax items - (7)$

Adjusted Net Earnings (non-GAAP) 790$ 2.30$ 198$ 0.59$

Free Cash Flow

($ in mi l l ions)

Cash flows from operating activities (GAAP) 1,246$ 303$

Capital purchases (459) (88)

Capitalized software development costs (294) (71)

Free Cash Flow (non-GAAP) 493$ 144$

Cash flows from investing activities (GAAP) (790)$ (104)$

Cash flows from financing activities (GAAP) (677)$ 4$

2016

Adjusted Net Earnings and Adjusted Diluted

Earnings Per Share

**The 2016 free cash flow presentation has been recast to reflect a new accounting standard (related to share-based

compensation) adopted by the Company in Q1 2017.

*More detail on these adjustments and management's use of non-GAAP results is in our most recent Form 10-K and our

current reports on Form 8-K.

Reconciliation of GAAP Results to Non-GAAP Results*

2016

Q1 2017

2016** Q1 2017

Q1 2017


2016 & 2017 Visibility Comparison

2016

• Expected 79% of revenue to come from backlog and 21% to come from 2016 bookings

• Delivered revenue from backlog, but fell short on revenue from bookings

• ~$150M Technology resale & Software

• ~$50M Services (e.g. ITWorks)

2017

• 82% of revenue scheduled to come from backlog

• In line with actual backlog contribution percent in 2016

• Assumes similar percent of bookings is converted to revenue as 2016

21%

79%

18%

82%

18%

82%

jefferies healthcare conference corporationv.pdf · • 86% of 2016 revenue recurring or highly...

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