Dive Brief:
- Cerner reported revenue of $ 1.41 billion in the first quarter of 2020, up 2% year-over-year. The company missed Wall Street and internal expectations due to lower-than-expected bookings and reimbursed travel amid the pandemic.
- Bookings of almost $ 1.1 billion were at the low end of the Kansas City, Missouri-based EHR vendor’s guidance as the coronavirus outbreak depressed volume in the last two weeks of the quarter ending March 31. Cerner, which still saw growth in software as a service products in the first quarter, expects the largest impact from the pandemic will hit in the coming months and downgraded its expectations accordingly.
- “It would be an understatement to say this has been an uneventful quarter. It’s been extreme,” CEO Brent Shafer said on a call with investors late Tuesday, but so far the pandemic has had “only minor impacts” on the vendor. Cerner saw a profit of $ 147.2 million in the quarter, down more than 11% from $ 166.2 million in the same period last year.
Dive Insight:
It doesn’t seem the coronavirus outbreak is slamming health IT vendors to the same extent as their health system clients. However, providers tightening their purse strings did result in notable bookings drop in the quarter for Cerner, which is in an otherwise strong position to weather the pandemic due to its large clients, strong balance sheet and $ 13.5 billion backlog of client orders yet to be filled.
“Although we expect near-term COVID headwinds, longer term we believe shockwaves such as this global pandemic will act as an accelerant for healthcare electronification. With this in mind, we remain positive on CERN,” SVB analysts wrote in a Wednesday morning note. Cerner stock dipped slightly following the results.
Revenue from professional services, which makes up one-third of the vendor’s top line, grew only slightly in the quarter by 4% to $ 511 million as it’s difficult to provide many of those virtually, executives said. Reimbursed travel revenue also plummeted 43%. Revenue from subscriptions and managed services grew 12% and 2% year-over-year respectively, but revenue from supportive maintenance fell 1%.
Operating earnings of $ 178.4 million weren’t significantly dinged by the pandemic, but it did have an estimated $ 1.9 million negative effect on earnings due to trade show cancellations and cleaning and sanitation expenses.
On Tuesday, Cerner lowered its full-year guidance because of COVID-19. The vendor expects full-year revenue to land between $ 5.55 billion and $ 5.7 billion, down from prior expectations of $ 5.73 billion to $ 5.98 billion.
Executives expect the brunt of negative COVID-19 impact to hit in the second quarter, where bookings will lower to between $ 1 billion and $ 1.2 billion. By comparison, bookings in the second quarter last year were $ 1.43 billion.
However, leadership expects project and sales activity to improve in the second half of 2020, with Cerner CFO Marc Naughton calling the crisis “a relatively short-term, defined event.”
The 41-year-old company doesn’t plan to layoff or furlough any of its 27,000 employees, instead shifting its workforce to other work on the backlog and business optimization efforts. Cerner spent $ 40.8 million on organizational restructuring in the quarter, compared to just $ 2.4 million in the first quarter of last year.
The vendor is also banking providers will once again reinvest in software later in the year, once they’re on firmer footing as some of the $ 175 billion pot of Congressional relief funding reaches their bank accounts.
“We know there’s a lot of demand out there. We have government contracts ramping up, we have commercial contracts ramping up,” Naughton said.
Earlier this month, the Department of Veterans Affairs delayed the embattled rollout of its multibillion-dollar EHR project with Cerner, the second pause this year. The partnership to co-develop an EHR with the Department of Defense has hit a series of snags since it was inked in May 2018.
Cerner, which launched a health information exchange with VA and DOD this month to help their providers exchange data with private sector partners, has said it expects its federal business to drive significant growth as the VA contract eventually ramps up to $ 1 billion a year in annual revenue. But COVID-19 will likely significantly push back EHR launch dates.
“They’re entering a go-live stage, so there’s not much we can do virtually,” Naughton said. “These projects tend to be on a timeline and if the initial project is delayed, a little bit can waterfall. There’s perhaps an opportunity to do more go-lives in the fall.”
Cerner has partnered with Amazon Web Services to offer researchers fighting the pandemic free, de-identified patient data to track disease spread. Almost one-third of its health system clients are providing COVID-19 data into a surveillance network Cerner is working on with the Centers for Disease Control and Prevention, executives said. Cerner has also updated its core Millennium EHR to help health systems manage the virus, and was tapped by the United Kingdom’s National Health System late March to install Millennium in a 4,000-bed temporary hospital in London.
The 2019 fiscal year was a mixed bag for Cerner as unwieldy expenses stifled operations, causing the vendor to shift its business strategy away from its EHR legacy business and toward software as a service. Cerner plans to continue pursuing mergers and acquisitions across several markets while divesting flagging businesses, executives said.