Leading healthcare information technology (“HCIT”) solutions provider Cerner Corp (CERN) reported third quarter fiscal 2011 earnings per share of 45 cents, meeting the Zacks Consensus Estimate and exceeding the year-ago earnings of 36 cents per share. Net income rose 29.5% year over year to $78.8 million (or 45 cents per share) due to buoyant bookings. The stock was up 1.88% to $66.72 in after-hours trading on October 27.
Revenues for the third quarter rose 24% year over year to $571.6 million, and handily beat the Zacks Consensus Estimate of $533 million. Increased revenue from Support, Maintenance and Services (up 15.6% to $371.5 million) was supported by higher System sales (up 41.4% to $188.7 million). Revenues from Reimbursed Travel jumped 44.2% to about $11.5 million.
Bookings and Revenue Backlog
Bookings amounted to $650.3 million, up 31% year over year, which was the second highest in the company’s history. Total revenue backlog stood at $5.66 billion at the end of the third quarter, up 21% year over year, including $4.96 billion of contract backlog and $691 million of support and maintenance backlog.
Gross margin for the quarter dropped to 78.9% from 82.9% a year ago. Operating margin increased to 21.1% from 20.3% in the prior-year period.
Balance Sheet & Cash flow
Cerner exited the quarter with cash, cash equivalents and short-term investment of $755.2 million, up 33.6% on a year-over-year basis. Total long-term debt rose 6.4% year over year to about $99.3 million.
Cash flow from operation was a record $129.2 million in the reported quarter. Free cash flow increased to a new high of $84.5 million.
Outlook
For the fourth quarter, the company forecasts sales in a band of $575 million and $595 million and adjusted earnings per share, before share based compensation expense, of 51 cents to 53 cents. Fresh bookings for the quarter are projected between $630 million and $670 million. Cerner projects stock-based compensation costs to dilute fourth quarter earnings by about 3 cents.
We believe long-term investors may consider Cerner, which serves a sizeable installed hospital base that requires composite clinically-focused applications complying with “meaningful use” requirements, reimbursement problems and complex coding challenges. The company has long-standing, integrated and seamless solutions for both inpatient and ambulatory settings.
On the negative side, the federal Stimulus program will gradually wind down. Moreover, the favorable growth prospects are already factored into the stock price and the risk-reward trade-off is fairly poised. Cerner faces stiff competition from established HCIT players, such as Athenahealth (ATHN), Allscripts-Misys (MDRX) and Quality Systems (QSII) and many others in a crowded field. We are currently Neutral on Cerner.
