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Cerner Corporation (NASDAQ:CERN)

Q4 2008 Earnings Call

February 10, 2009 4:30 pm ET

Executives

Marc G. Naughton – Senior Vice President & Chief Financial Officer

Michael G. Valentine – Executive Vice President, General Manager & U.S. Client Organization

Earl “Trace” Devanny, III – President

Jeffrey Townsend – Executive Vice President

Neal Patterson – Chairman & Chief Executive Officer

Analysts

Steven Halper – Thomas Weisel Partners LLC

Glen Santangelo – Credit Suisse

Jamie Stockton – Morgan, Keegan

Atif Rahim – JPMorgan

Ross Muken – Deutsche Bank

Bret Jones – Leerink Swann

Sean Wieland – Piper Jaffray

Richard Close – Jefferies & Company

Operator

Welcome to the Cerner Corporation’s fourth quarter 2008 conference call. Today's date is February 10, 2009 and this call is being recorded. The company has asked me to remind you that various remarks made here today by Cerner’s management about future expectations; plans, perspectives, and prospects constitute forward-looking statements for the purpose of the Safe Harbor Provisions of the Security and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading of Risk Factors under Item 1A in Cerner’s Form 10-K, together with other reports that are on file with the SEC.

At this time, I would like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Sir, you may proceed.

Marc Naughton

Thank you, Jerry. Good afternoon everyone and welcome to the call. I will lead off today with a review of the numbers followed by sales and operational highlights from Mike Valentine, Executive Vice President and General Manager of the U.S. Trace Devanny, our President will discuss our global efforts, physician practice business, and employer and governments initiatives. Trace, will be followed by Jeff Townsend, Executive Vice President and Chief of Staff, who will discuss innovation and Neal Patterson, our Chairman and CEO will participate in Q&A.

Now I will turn it to our results. In this very challenging environment, we delivered solid results. Bookings were slightly below our targeted range for the quarter, but near the record level achieved in the year ago quarter. Revenue and earnings were inline with our expectations and cash flow performance was very strong leading us to exceed our $100 million free cash flow target for the year. While our near term outlook reflects some level of caution in this challenging economic environment, our full year and longer-term outlook remains positive.

Moving to bookings, our total bookings revenue in Q4 was $404.9 million, which is just below the record Q4 '07 bookings level of $406.6 million and $5 million below our guidance range. Moving to backlog, our total backlog increased 7% year-over-year and ended the quarter at $3.5 billion. Contract revenue backlog ended the quarter at $2.9 billion, which is 7% higher than a year ago. Note that contract backlog growth would have been 14% excluding the Q2 '08 backlog adjustment related to Fujitsu. Support revenue backlog was $581 million, also up 7% year-over-year.

Our revenue in the quarter increased 18% over Q4 '07 to $465.7 million. As we previewed last quarter revenue this quarter included $28.6 million related to the prior period margin catch up on our contract in London. This margin represents 21% of the total revenue of a $136 million recognized during that period, which is consistent with the overall margin levels we have communicated. Excluding this our revenue in Q4 was $437 million, which is up 11% over last year and in our guided range.

The revenue composition for Q4 was a $148 million in system sales, $137 million in support and maintenance, $172 million in services, and $8.8 million in reimbursed travel. The majority of the BT catch up revenue was in support, maintenance and services with a smaller amount in system sales. The $148 million of system sales revenues reflects a 12% increase, compared to Q4 ’07. This quarter reflected solid software performance with software revenues slightly up from a year ago.

Technology resale results were mixed, with our strongest hardware quarter since Q2 ’07 being partially offset by a decline in sublicensed software. This combination of higher hardware and lower sublicensed software led to a decline in our system sales gross margin. Services revenue, which includes managed services and professional services grew 15% compared to the year ago quarter driven by continued strong managed services growth.

Similar to our year-to-day performance, our professional services revenue was flat in Q4 after excluding the BT catch up revenue. The lower growth rate of professional services continues to be the result of lower billable headcount in the U.S. and the lower services revenue in the U.K., And as I mentioned last quarter, the success of our efficiency initiatives such as Bedrock, MethodM and our solutions center, have limited professional services top line growth as they have allowed us to get more work done without increasing the services headcount.

Support revenue increased 32% over Q4 ’07 benefited from the extra week in our Q4 and the U.K. catch up revenue. Adjusting for those items, support revenues still grew a strong 17%. Note that the benefit of the extra week for minimal on professional services and system sales as we had low professional services utilization during the extra week due to the holiday and system sales is mostly non-recurring revenue. Looking at the geographic view of our revenue, our domestic revenue grew 6% year-over-year and our global revenue increased 75% including the U.K. catch up and 33% excluding it.

Our gross margin for Q4 was 80%, which is down 250 basis points, compared to Q4 ’07. The lower gross margin was driven by the higher hardware and lower sublicensed software. This impact is concentrated in our systems sales margins, which were down from 65% last quarter to 58% this quarter. Note that similar to other spikes in hardware sales over the past couple of years, the strong hardware sales in Q4 were in our global business as the success of our hosting business continues to impact traditional U.S. hardware sales.

For the full year 2008, our total revenue of a $168 billion was 10% higher than 2007. As a preview to the annual update for our detailed business model that we will provide at our February 24th Investor Day, I would like to provide you with the total revenue and growth by business model for 2008. Licensed software was up 7% to $255 million. Technology resale was up 1% to a $172 million. Subscriptions and transaction processing increased 4% to $95 million. Professional services was up 1% to $444 million, Managed services was up 38% to $200 million. Support and maintenance was up 19% to $472 million, and reimbursed travel was up 3% to $38 million. We'll go into more detail on our business model at our Investor Day.

Moving to operating expenses and earnings, our operating expenses in Q4 were $272.4 million before options expense of $4.3 million. This is up 5% over year ago, with 2% to 3% of the growth related to the extra week in our fourth quarter. Sales and client service expenses were up 7%, with managed services growth being the primary driver. Software development was up 2% reflecting continued efforts to control our R&D expense. G&A expense was flat year-over-year. G&A expense was down $11 million compared to Q3, which had included a $6 million foreign currency translation loss.

This quarter the currency translation adjustment was a gain of about $9 million. Adjusting for this swing, G&A expense was up about $4 million, compared to Q3 primarily due to the extra week in Q4. The primary driver of the foreign exchange gain was the strengthening dollar impact on our dollar denominated assets held in foreign subsidiaries. This gain more than reverses the $6 million FX lost last quarter that we did not adjust out of our earnings and offsets about $4 million of lower global services margin relating to the strengthening dollar in Q4.

Moving to operating margins, our operating margin in Q4 was 17.6% before options expense and excluding the U.K. catch up revenue on margin, which is up 60 basis points compared to last year. Year-to-date, our adjusted operating margin of 16.6% reflects a 180 basis point increase over the adjusted 2007 operating margin of 14.8%. The 16.6% 2008 operating margin is about 40 basis points below our 2008 interim goal of 17%. This slight difference coupled with the increased economic uncertainty makes achieving 20% operating margins for the full year 2009 less likely. But we still will be targeting a 20% operating margin as we exit 2009. At our Investor Day, we will walk through the detail on our operating margin expansion in 2008 and expectations going forward.

Moving to earnings and EPS. Our GAAP net earnings in Q4 were $71.5 million or $0.86 per share. GAAP net earnings include stock options expense, which had a net impact on earnings of $2.7 million or $0.03 per share. GAAP net earnings also include a net impact of $20.6 million related to catch up of margin on our London contract. Adjusted net earnings were $53.6 million and adjusted EPS was $0.65, which is $0.04 higher than the consensus estimate. Not included in the adjusted net earnings or EPS, but worth noting was a tax rate of 31.5%, which was about 2% below expected levels and benefited net earnings by about a $1.5 million. The lower tax rate was related to strong income levels from global regions that have lower tax rates and the extension of the R&D tax credit.

The currency translation gain I referenced earlier also benefited net earnings; but as I mentioned it was partially offset by the impact of currency on our professional services business, was not much larger than the translation loss last quarter. Even if the benefit of these items were discounted, EPS would still have been within our guidance range and we believe it reflects a solid results in a very tough environment.

Now, I will move to our balance sheet. We ended Q4 with $309 million of cash and short-term investments and a $105 million of auction rate securities. The auction rate security balance reflects the net impact of marketing securities to market and also valuing the option provided by UBS to buy the securities at par. We ended the year with total debt of a $141 million.

Total accounts receivable-ended Q4 at $469 million. Contracts receivable or the unbilled portion of receivables were $141 million or 30% of total receivables, which is down from 33% last year. Third-party financings were $18 million or 4% of the $441 million of total cash collections.

Note that our balance sheet still reflects billed and unbilled receivables related to the Fujitsu contract that represents over 10% of total receivables. While there will be some period of time before Fujitsu and the government unwind their contract and we finalize turns with Fujitsu, we currently expect to fully collect these receivables. However, they will have a negative impact on DSOs in the meantime.

Our DSO was 92 days in Q4, which is down one day compared to Q3 and up two days compared to a year-ago. Operating cash flow for the quarter was a record $98 million. Q4 capital expenditures were $34 million and capitalized software was $18 million. Free cash flow defined as operating cash flow less capital expenditure and capitalized software was also a record at $46 million. This brings full year free cash flow to a $104 million, which is above the high end of our $80 million to a $100 million guidance range.

For 2009, we expect capital expenditures to increase from about a $110 million in 2008 to a $140 million to a $150 million with the increase being driven by the success of our managed services business, as some planned 2008 CapEx projects that will occur in 2009. Even with this increase, we are still targeting an increase in free cash flow in 2009 over the record 2008 free cash flow. We expect this increase to be driven by growth in operating cash flow, which should offset the increase in capital expenditures.

Similar to prior years, we expect free cash flow to be back-end loaded with Q1 free cash flow expected to be lower slightly negative due to the normal impact of a large Q1 tax payment and higher CapEx related to projects that pushed into 2009. We purchased about $24 million of our stock during Q4 and we still have $17 million remaining on the authorization that we announced in April.

Moving to capitalized software, the $17.7 million of capitalized software in Q4 represents 24% of the $74 million of total spending on development activities. Software amortization for the quarter was $13.5 million resulting in net capitalization of $4.2 million or 6% of the total.

Consistent with what we said last quarter, the release of the next generation of Millenium became generally available last week. This will trigger an increase in amortization expense of about $5 million per quarter. Since the GA date occurred in the month of the Q1, the Q1 increase will be about $3 million. The Q1 increase will be offset by the completion of amortization of amounts capitalized in 2003, which reduced amortization by about $3 million per quarter.

Total Q1 amortization will be approximately $13.5 million similar to Q4. After Q1 amortization will include full amount of the new amortization relating in amortization of approximately $15.5 million per quarter after Q1. Now, I will go through the guidance. Similar to last quarter, we widened our guidance ranges due to the uncertainty associated with the current economic environment. Our solid Q4 results reflect our ability to navigate through tough economic environments due to the benefits of our high level of recurring and visible revenue, our large and geographically diverse client base and the depth and breath of solutions and services.

We still believe it is prudent to factor in the macroeconomic uncertainty and tighter credit markets. And while our guidance reflects some caution, our pipeline supports a good year and both our Q1 and full year guidance ranges included current analyst expectations. Looking at Q1 revenue, we expect revenue in the $410 million to $430 million, which is about 9% growth over the last year. We expect Q1 EPS before options expense to be $0.48 to $0.54 per share. Note that our Q1 '08 results included an FX benefit that led to a $0.03 EPS over attainment of $0.47. Adjusting for this the midpoint of our Q1 '09 guidance range reflects a 16% increase compared to Q1 '08 EPS of $0.44.

The Q1 guidance is based on total spending before options expense of around $280 million with a sequential increase removing the benefit from the Q4 FX gain and factoring in the increase in payroll taxes that occurs in Q1. Also our guidance assumes we have no material negative impact from foreign currency exchange. Our estimate for option expense for Q1 '09 and 2009 is approximately $0.03 and $0.13 to $0.14 per share respectively.

Moving to booking1 guidance, we expect bookings revenues in Q1 of $330 million to $370 million with a midpoint of that range reflecting modest growth over Q1 of last year. Looking at full year 2009, current consensus for adjusted EPS of $2.48 still appears attainable based on our pipeline, and we are providing the guidance range of $2.40 to $2.50. Current revenue consensus of $1.79 billion also appears reasonable, and our guidance is $1.75 billion to $1.8 billion.

The midpoint of this range reflects growth of 8% over 2008 revenue excluding the BT catch up. In closing, we are pleased with our results in Q4 and looking at full year 2009 including solid bookings in a tough environment, good revenue growth, continued progress on our margin expansion initiatives, strong earnings growth in excess of 20% and record free cash flows exceeding the high end of our $80 million to a $100 million target.

Finally, I'd like remind you that we're having our investment community meeting on February 24 here at Kansas City. If you're interested in attending and didn't receive the e-mail invites or haven't responded please contact Allan Kells at akells@cerner.com. With that, I'll turn the call over to Mike.

Michael G. Valentine

Thank you, Marc. Good afternoon all. Today, I'm going to cover sales, operational highlights and some marketplace trends. From a sales perspective we had a solid quarter particularly given the tough environment. In Q4, we had $404.9 million of bookings, which is near our record level of $406.6 million set in the Q4 of 2007. We had good mix, size mix with a 11 contracts over $5 million, seven of which were over $10 million. We had very strong bookings contribution from outside of our Millenium installed base with 30% of contract bookings from new Millennium footprints.

These new footprints includes wins and very competitive deals in the Northeast against multiple competitors and I felt very good about our competitiveness in the quarter and going forward in 2009. Our full year percent of bookings from new Millennium footprints was 29%, which is the highest level since 2004, another indicator of our competitiveness is that our win rate in 2008 was at an all time high.

Our RP and Business Center activity remains solid; and our pipeline reflects good year-over-year and a good level of new footprint opportunities. So, I would expect to continue to see new footprints make a solid contribution to our total bookings. In addition to the solid sales performance, we had a good quarter and year of delivering value to our clients. Operationally, we have positioned Cerner well for these times with our investments over the past five years in structures, processes, and IP aimed at lowering the client’s total cost of implementation and total cost of ownership.

Our Solutions Center and Bedrock capabilities are a big advantage and can reduce the total hours of effort to implement a system by approximately 25%. We also offer the ability to takeaway the upfront hardware costs and ongoing technology risks through our CernerWorks Managed Services offering, which provides unparalleled system performance. And our LightsOn Network, which is a surveillance system that identifies system performance issues in real time and has the ability to predict issues that could create system vulnerability has now over 300 clients connected, creating an evidence-based network that provides enhanced system performance and allows our clients to maximize the value they get out of our systems.

Overall, we believe the progress our clients have made at using information technology to advance the quality, safety, and efficiency of care, is creating a gap in the industry. And as our rate of innovation increases, this gap is widening as we continue to add new solutions and services, such as device connectivity and clinical process optimization that significantly increase the value clients get out of their HIT investments and device investments. While bringing value to our clients, these new innovations are also new market opportunities for Cerner. And this ability to expand our boundaries is important to our future growth. As an example of this, I will highlight some Q4 and full-year progress in the medical device area and our CareAware platform.

We had very good progress in the fourth quarter with RxStation, our medication dispensing units, with our largest order of units to-date and continued implementation progress at existing sites. We also made great progress at building our pipeline and remained optimistic that we are well positioned for contributions from RxStation to accelerate in coming quarters.

In the past few years, we have brought many items from whiteboard to reality though our CareAware platform. CareAware is our strategy to completely integrate the complex environment of healthcare, creating a safer more productive work environment for physicians, nurses, and technicians. For example, our CareAware MDBus device connectivity solution allows medical devices to be connected to the EMR through a USB-like plug and play connection and is beginning a new era of interoperability between devices and the EMR.

In the past, these devices were connected point-to-point or through proprietary networks with the ability to connect a small library of devices, typically just from the manufacturer. We ended the year with a total of 50 clients licensed for MDBus, more than double where we were a year ago. We also doubled the number of device drivers in our library to about 300, ranging from anesthesia devices, infusion pumps, patient monitoring devices, ventilators, laboratory devices, and beds; resulting in a more complete library and greater licensing opportunity. We fully expect this list will continue to grow in 2009.

As we have discussed, we have also extended the CareAware architecture beyond medical devices to connect other technologies common in the healthcare environment, such as HVAC, Lighting, Entertainment, and Internet; creating a contextually sensitive Smart Room. It includes our myStation offering that makes the patient and family an integral and informed part of the care process. We signed several clients for myStation solutions and Smart Room pilots during the year and our pipeline continues to increase for 2009.

A key part of our marketing efforts for CareAware solutions has been our Smart Semi, which is basically a traveling Smart Room. The Smart Semi made another 29 stops in Q4 making it a total of 93 stops and nearly 9,000 client attendees since launching in May of 2008. Our ability to bring a view into the smart hospital room of the future on the road has had a meaningful impact on the sales and pipeline for CareAware solutions. It has also led to almost 60 media coverage hits, reaching millions of consumers and expanding our brand.

Last quarter I mentioned we were beginning to form reseller agreements with device manufacturers. CareAware significantly enhances their products by making them interactive with EMR. These companies also note the strategic relationships we enjoy with our clients. The reseller program got off to a fast start in Q4 with us reselling infusion pumps and beds into our client base. We already have resale agreements with five device manufacturers, and have a quickly growing pipeline of resale opportunities.

I think this activity provides evidence of the value of our client coverage model. Device manufacturers and others are looking to expand their presence in the marketplace, and they view our model as a unique channel for them to tap into. We have relationships at the CXO level; we are strategic to the health systems; and we connect them to the core.

In addition to the growth opportunities associated with our CareAware solutions, we are investing in other growth areas that add to our white space opportunities, both inside and outside of our client base. Overall, we are playing offense while many competitors are playing defense. Examples of areas where we are focused include: Women’s Health, Critical Care, Surgery and Anesthesia, Emergency, Revenue Cycle, Workforce Management, Lighthouse Clinical Process Optimization, and additional IT services that leverage our CernerWorks infrastructure. Most of these areas have a strong ROI and are major focus areas for our clients, so they are well suited for the current economic environment.

I will now make some comments about the U.S. marketplace. As you all have observed, the impact of the economy has started to show up in increasingly bearish hospital spending forecasts and a series of earnings pre-announcements by companies who sell into healthcare. We are not immune to being impacted by this challenging environment and there was some impact in Q4, but we do believe we are better positioned to endure these challenges than most other companies. Each client story is different, so it is hard to summarize the entire market. While healthcare is not immune to economic cycles, it is more resistant to them.

We continue to see organizations that are doing fairly well operationally. However, a key issue they are managing is a reduction in their foundation portfolios caused by the general market decline. Another financial focus is maintaining strong cash balances, as you know, many health systems use a large cash balance to enhance their debt rate thus lowering their cost of capital. In addition, organizations with a large dependency on Medicaid populations are being impacted by the challenging financial condition of their State government. There are also some regional differences that we have observed.

Overall, our clients are conservative in nature and are becoming more selective regarding where they invest capital during this period, taking an anticipatory position of caution. They are planning to do more with less. Our advantage is that many consider our projects to be strategic. Buying the next version of the CAT scan may not make the list, but our solutions make the cut more often than not. We consider that this is a near perfect time to realign our approach to the market to help our clients through this period. Many of our solutions have immediate ROI, and now, more than ever, our clients will focus to achieve these gains. And lastly, our clients still appear to be able to access capital. All of this keeps us in the conversation.

We also benefit from our size, scale, and geographic diversification. The large size of our U.S. client base and our deep strategic relationships with our clients’ senior executives creates an excellent platform to align closely and help them adjust to the current conditions. The depth and breadth of our solutions and services, and the value proposition created by HIT in the form of improved safety, efficiency, and lower costs create many more avenues to help our clients than more narrowly focused HIT companies.

In contrast to the near-term challenges associated with the current economic environment, we believe the proposed HIT provisions in the current stimulus package represent a major wild card. The Senate version of the stimulus package passed today with approximately $20 billion of funds to go to healthcare organizations to modernize their operations through the acquisition and wide use of HIT. Congress will now work towards the goal of delivering a final bill by President’s Day. While we are not expecting an immediate boost if it is passed with the HIT provisions, the longer-term potential could be significant. Our large footprint in hospitals and physician practices and proven ability to deliver value positions us very well to benefit from the proposed stimulus incentives.

In general, the current administration appears likely to invest more in healthcare and attempt to deal with many of the systemic issues through a broad healthcare reform initiative, which benefits the entire industry, including most all of Cerner clients. And we believe the provisions in the stimulus package to quickly provide states with badly needed Medicaid dollars would help improve the overall financial health of hospitals.

When the legislation is finalized and we know more of how it will be implemented, we’ll have more thoughts on how we think it will impact us directly and how we are positioning ourselves to participate in the benefits. Right now, it would be premature to start quantifying the impact, but overall, it is a positive to have an administration that is focused on healthcare reform and recognize healthcare IT as a critical component to achieving reform. And we feel we are in a very good position with our clients to deliver the functionality, the workflows and reporting that will likely be required to take advantage of stimulus funding.

In closing, we are pleased that we delivered solid results in a challenging environment. And while our outlook reflects some near-term caution, we like our position in the intermediate and long-term time horizon. As I mentioned, we are playing offense at a time when many of our competitors are playing defense, and we think this will put us in the best position to continue our long-term history of strong organic growth. With that, I'll turn the call over to Trace.

Earl “Trace” Devanny, III

Thanks, Mike. Good afternoon everyone. Today, I will discuss our international business, physician practice business and our employer and government offerings. Beginning with our global business, we had a strong finish to 2008 and are well-positioned for 2009. Our global revenues increased to more than $360 million or about 22% of total Cerner revenues, with profitability also improving. This success was broad-based, as we now are now doing business on six continents and in 25 countries. And in 2008, we had six different global regions contribute more than $10 million of revenue, including four that contributed more than $20 million.

Some highlights of our global success in 2008 include; we further established ourselves as a market share leader in the Middle East by winning the highly competitive Ministry of Health opportunity in the United Arab Emirates. This win was built on operational success where we had several important go-lives in the Emirate of Abu Dhabi. We also established an important first footprint in Egypt. We made solid progress in Australia by bringing several key sites live in New South Wales while gaining strong momentum with our projects in the State of Victoria. We also had success in Queensland, where we extended our relationship with one of the largest, not-for-profit, private healthcare organizations in the country. And we believe our market share success to-date positions us very well for future business in Australia.

In France, as I announced last quarter, we signed our first-ever non-U.S. hosted client. This hosted model is well-suited to the French market and should benefit from the new regulatory requirements that will make compliance to these many, new regulations difficult for the 3,000 small to mid-sized hospitals with automation. In Spain, we successfully brought our first Millennium client live in Q4. We also established a presence in Latin America by signing our first client in 2008. That project is underway and proceeding nicely. I am optimistic that our efforts in Latin America will begin to accelerate in this important new market, despite tough global economics.

Finally, in England, solid progress was made in the second half of 2008. With Atos Origin, our partner on the national e-scheduling solution, we received an important two-year extension of the Choose and Book contract. This was important validation of a key element of the NHS Program, as today nearly half of all appointments are booked through our system. n London, important progress was made at key Trust through work delivered in concert with our partner British Telecom. These efforts position us well for ongoing progress across the London cluster in 2009.

In the South, we are still working under a transition agreement for the 8 trusts that had gone live while Fujitsu was the prime contractor. We will keep you updated on progress as it is made on those eight trusts being assigned to another prime and on other opportunities in the remaining trusts in the South. A final thought around our global business. In 2008, we feel that Cerner established itself as the one HCIT provider that brings the depth, breadth and scalability of solution to global markets that actually transforms entire countries and regions of the world. No competitor enjoyed the successful global expansion we did in the past year. We feel good about our momentum and our future as healthcare continues to embrace IT around the world.

Moving to our physician practice business, we had a good year, particularly with the proven success of our ASP model in this very competitive market. We had a very strong year-over-year increase in ASP bookings, and we saw particularly strong demand for our e-prescribing solution as physicians position themselves to realize e-prescribing incentives. Another 2008 highlight is that our interoperability hub, which allows patient information to be securely shared across multiple providers, went beyond the pilot stage and is currently live in 17 sites.

In addition, we also extended this utility model beyond physician practices by successfully signing and bringing live several ambulatory surgery centers. We entered 2009 with confidence that our model is scalable and we are well positioned to benefit from the large volume of physicians affiliated with our strong core of healthcare system clients. In addition, we believe our low-cost, speed-to-value model is well suited for physician practices looking to buy systems that will enable them to access proposed incentives for quality reporting expected to be in the President’s stimulus package.

Finally, I wanted to make a few comments on our Healthe Employer and Government services organization. I previewed last quarter that our first health center client, Cisco Systems of San Jose, California, would be opening their LifeConnections Health Center in November. The health center, which is staffed by eight providers and numerous other staff, is now available to cover 40,000 Cisco employees and their dependents. It is one of the largest employer clinics in the United States. We believe this clinic will be a shining example of a wellness-based platform improving the health status of a Cisco population of employees and their dependents.

In bringing the Cisco clinic live in 2008, we ended the year with established proof points across all of our Healthe offerings. The clinic adds to successes already established which our Healthe Exchange, Health Management and Personal Health Record solutions. In addition, we are not targeting opportunities in 2009 that would allow us to extend our health economy vision through the establishment of a facilitated network in a community. As we are able to bring this network to life, we will be one step closer to proving a new model for healthcare commerce that would eliminate significant costs and redundancies currently in the system.

With that I’ll turn the call over to Jeff.

Jeffrey Townsend

Thanks Trace. Today, I am going make some comments on our innovation in 2008. A big part of our innovation last year was our work on the Millennium 2007.18 release, which became generally available last week. This release builds on the significant Millennium 2007 release platform and offers more than 2,200 major enhancements along with improved quality. Recall that a major focus of the 2007 release was on the user experience, which we addressed with user interface and workflow enhancements. The 2007.18 release continues the user experience trend across more solutions and added major functionality to solutions such as Women’s Health, Radiology, Imaging, Bedside Care, ePrescibing, and Medication Reconciliation.

In addition to the enhanced usability and functionality, the .18 release represents a significant focus on quality. Having the most active client base in the industry, our clients have a strong appetite for next new. Based on our testing partner experience prior to General Availability, we estimate this release will represent the most hardened release of Millennium to-date. Because we built this release on the 2007 code base, which the majority of our base has adopted, we expect the upgrade process to go quicker and more smoothly, particularly for those who utilize our upgrade center, which can deliver a predictable and efficient experience.

Another area of innovation in 2008 was the introduction of our CodeWorks initiative. CodeWorks is a development ecosystem that allows our clients to develop, collaborate and share their innovations. An early example of the potential for this model is the collaboration with University of Missouri I discussed last quarter. In that example, providing the mechanism for collaborative input from clients led to an improved care delivery model around the concept of the virtual medical home. Given how dynamic the quality measurement expectations have become for our clients, the ability to impact the clinical process at point of care will have a direct impact on revenue for our clients. It is much more than reporting.

As Mike outlined in his comments, the CareAware family of solutions evolved significantly in 2008, including the introduction of iAware, which has set the bar for speed to value, with the most recent implementation taking less than 3 weeks from initial code delivery to live productive use. Designing for the entire experience, the scope of our value add has expanded from clicks, to steps. The last topic I wanted to cover is code named Blue Sky.

We have shared several initiatives and innovations over the last two to years within Healthe, PowerWorks, Choose and Book, iAware and our LightsOn Network to name a few. All of these played an early role in the beginnings of our entry in the cloud computing, delivering highly scalable solutions through the Internet, outside the boundaries of a traditional production domain approach. Going forward, 2009 and beyond will include several more solutions and services that leverage the Blue Sky platform, likely introducing new business models and high performance value add for our clients.

In closing, we had a good year in 2008. We started 2009 in a challenging environment, but as a healthy company well prepared to navigate through the current environment and positioned to re-accelerate growth when the environment improves. Operationally, our core capabilities continue to improve, and our ability to execute has contributed to amazing accomplishments by our clients. With several of our established clients, we are now getting to the, what I call the ‘fun stuff’ we envisioned as we laid a foundation together in the last decade.

Going forward, Cerner’s success in the next decade will be a function of the innovations this decade. And we are seeing early signs that many of our investments in innovation are positioned to contribute more meaningfully in the coming years. As Mike said, we are still playing offense, and if we are successful at staying the course with our investments while continuing to execute in the near term, we will be one of the few companies to emerge from the economic crisis position for a great next decade. With that, I’ll turn the call over to the operator for the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Steve Halper with Thomas Weisel Partners. You may proceed.

Steve Halper – Thomas Weisel Partners LLC

Hi, good afternoon. The question is on the catch up first the catch up revenue is that on the GAAP statement that's included in the support and maintenance line?

Marc Naughton

The majority of it is, there is a little bit of systems, but most of it is on the services line, service and support.

Steve Halper – Thomas Weisel Partners LLC

Okay. The next question is, can you talk to us, where you stand on a cash basis, since the inception of the contract now that you have this gain?

Marc Naughton

Sure, relative to the cash collections to-date and now the total revenue we've taken including the catch up, we're pretty much matched dollar-for-dollar so our cash collections have been very close to what the revenue is if not slightly ahead of the revenue. You would have seen a little bit of impact on our referred revenue accounts this quarter when we recognized this amount because it did hit that somewhat so, it is cash and we did feel that it was appropriate for us to put it in our pro forma statement, but it is real revenue, it's revenue that would have been earned if we have the ability to estimate over the last two years, it is not we just make the points here that this is an out of period item at all, it is required to be recorded in Q4 when we show basically we're able to substantiate our ability to estimate cost for the remainder of the contract, but its real revenue and we just thought it was appropriately conservative to reflect it on our pro forma statements.

Steve Halper – Thomas Weisel Partners LLC

Right. So, on a cash basis, is it profitable so far?

Marc Naughton

Clearly, our expectation of being somewhere around 20 plus percent operating margins on this business, yeah it is profitable.

Steve Halper – Thomas Weisel Partners LLC

Okay. And you said that the catch up is for the last two years, is that correct?

Marc Naughton

Basically, from the inception of the contract, which was late '06.

Steve Halper – Thomas Weisel Partners LLC

Okay. And last question is implied in the 2009 guidance, is there EPS profitability or operating profit baked into those assumptions from BT?

Marc Naughton

Yeah, I think we have been pretty clear that once we, that we expected to turn the margin on in Q4, which we did and that it would be impacted in '09. I think the key thing is to note is that currently the projects are kind of in a state of being started back up so the initial revenue, certainly in the early half of the year will be fairly minimal between the south transition agreements and BT, you are probably looking at revenue that might be in the $15 million range with probably contributions to margin in the $2.5 million to $3 million range. So, it's not significant to results, but it is gratifying to be able to start recognizing profit on a contract, it is very profitable.

Steve Halper – Thomas Weisel Partners LLC

Great, thanks.

Operator

And your next question comes from the line of Glen Santangelo with Credit Suisse. You may proceed.

Glen Santangelo – Credit Suisse

Yeah. Hey guys. Just a couple of quick big picture questions I am kind of curious about, in the current environment, what are you seeing in terms of cancellations, are you seeing any of those or is it really just, you are not seeing as much RFP activity, give us a sense for kind of what you are seeing there?

Marc Naughton

Yeah, Glen this is Marc. We don’t cancel contracts so when we see sign a contract, it is a binding agreement and both parties are expected to make good on their commitments, and our history is that’s what happens. So, we have not seen any cancellations in this environment or in basically for those part, in the history of the contract.

Glen Santangelo – Credit Suisse

And then one of your kind of competitors had alluded to the fact that may be you are seeing a little bit of softening in terms of pricing out there, given arguably there is fewer RFPs out there, are you seeing any – any pressures on pricing at all?

Michael G. Valentine

This is Mike I would say that there is no significant change. I think there, we’re way past the days of free shots on goal so every deal is highly competitive and I don't sense anything substantially different than it has been.

Marc Naughton

Yeah., When we kind of look at our discounts off lists and compare those overtime and those are fairly similar to what we have seen for past four quarters.

Glen Santangelo – Credit Suisse

Okay. And then just my last question Marc on the '09 guidance, there does obviously seems to be a little bit more back-end loaded and I appreciate some of the comments you just gave us on the U.K. but are you kind of assuming that there was a little strengthening in hospital CapEx environment in the back or is that something with respect to your current pipeline that you see hitting you guys in the back half of the year versus the first half?

Marc Naughton

Well, I think traditionally you have always kind of seen us go up on a quarterly basis during the year, so our Q4s are always much stronger then our Q1s. So, I think this is our guidance probably is reflective of that normal historical trend that we seen, we have as we indicate, we have very strong pipeline that we are looking at and if the economic environment gets better in the second half of the year clearly that could help strengthen the second half, but a lot of that is pretty much historical.

Glen Santangelo – Credit Suisse

Just, seasonal?

Marc Naughton

Yeah.

Glen Santangelo – Credit Suisse

Okay. Thanks for the comments Marc.

Operator

And your next questions from the line of Jamie Stockton with Morgan, Keegan. You may proceed.

Jamie Stockton – Morgan, Keegan

Hi guys thanks for taking my questions. Just a quick one Marc, you may have said, did you give a guidance for '09 tax rate?

Marc Naughton

It would be about 34%.

Jamie Stockton – Morgan, Keegan

Okay. And I guess my other big question, when you look at what hospitals are doing on incremental clinical software adoption, what are the main areas that you guys see hospitals focusing on right now, is it, is it still CPOE in medication management what are those most common areas that just be incremental with option going on?

Michael G. Valentine

Yeah this is Mike. I actually mentioned many of the areas that we think are active in a stand-alone purchase sense. So, critical care, emergency, surgery, anesthesiology, revenue cycle et cetera. So, there is many active filling in the white space opportunities and then quite obviously for us there is people continuing the automation journey and expanding either to more facilities or broadening out their automation, CPOE is still a major focus and the meds process and general is still a major focus. The other thing that we see is more focus around the analytics and the peer reporting aspects. So, those continue to be the strong areas.

Jamie Stockton – Morgan, Keegan

Could you just give us an update on the patient accounting system, where you guys are as far as the footprint there?

Michael G. Valentine

I have got the exact count, I believe 39, 35 side, we had a big transaction in Q4, that was a big win for us. So, it continues to be an active market in the revenue cycle processes in general continue to be very active?

Jamie Stockton – Morgan, Keegan

Okay. And then just last question. You did a small tuck-in acquisition in the third quarter, it didn't sound like there was anything in the fourth quarter, what on the acquisition front with valuations being fairly low, what are you guys thoughts there?

Marc Naughton

We traditionally been non acquisitive relative to we build it ourselves, we think this as a good strategy. We will look for opportunities like the small tuck-in that you indicated, but in this marketplace we are looking for things that can fit our technology that can fit with Millennium base and may be take us to the areas where we aren't currently planning to take Millennium, but we can basically pull it into our architecture. So, we will certainly continue to look at things where we actively look at a lot of opportunities, but our requirements are pretty stiff and even in this environment there has still been some valuation expectations that exceed what we see as the value for some companies.

Jamie Stockton – Morgan, Keegan

Okay. Thanks guys.

Operator

And your next question comes from the line of Atif Rahim with JPMorgan. You may proceed.

Atif Rahim – JPMorgan

Hi. Thanks guys. It looks like the gross margin in 4Q in the system sales segment was much softer than this, what would be attributable to the sublicensed software. So, are we seeing a decline in license software margin and, what might be the drivers of that?

Marc Naughton

At the gross margin levels software is a 100% gross margin. So, you're really not seeing, the mix price in that Atif was primarily a very strong hardware quarter. So, it wasn't, while third-party licenses was weaker, hardware was actually much stronger, but the average margin we were making on that hardware was much lower, it was probably in the neighborhood of 10% margins on hardware, which is about as low as we've seen. And that was related to the fact that there were a couple of large transactions that justified having a slightly lower margin, but that's the impact you're seeing on the system sales line. It's the hardware coming through.

Atif Rahim – JPMorgan

Okay. And then on the bookings for the quarter they came in slightly lighter than, which you have guided to, any commentary on whether that where the weakness came from geographically or to the types of systems sold?

Marc Naughton

I don’t think there is any geographic, there is some a little bit of an economic environment that we're within. So, we are actually very pleased to deliver bookings at levels that we delivered. I think that to be within 5 million of the number that we gave guidance on really before, a lot of things impacted Q4, which was not really what we have seen in Q3. So, I think there is nothing geographic, we had success throughout the country, we are very successful in competing against other companies. So, no trends that I would highlight.

Atif Rahim – JPMorgan

Okay, that’s understood. And then finally, if could you provide us any guidance on what the recurring revenue portion is going to be in ’09?

Marc Naughton

Yeah. I think, we will talk a little bit certainly at our Analyst Day about business models, which will give you much better sense for kind of where we ended up, we gave you some of the numbers relative to support maintenance and services. So, I think at this point, we will probably keep our comments on guidance at a high order level, but be willing to go deeper when we have our Analyst Day.

Atif Rahim – JPMorgan

Okay, that’s great. Thank you.

Operator

And your next question comes from the line of Ross Muken with Deutsche Bank. You may proceed.

Ross Muken – Deutsche Bank

Good afternoon. So, the international numbers continue to be quite strong, could you talk a bit about sort of the order patterns you are seeing there, I mean clearly the U.S. has gotten the majority of sort of attention in terms of a lot of the credit disruptions, but to the degree you are seeing anything like that internationally, and clearly it wasn’t present in the quarter, but, I mean is there any sort of change in buying habits and then secondarily to the U.S market, how are we thinking about kind of the add on sales as a percentage of kind of new software for next year, and what we've heard from the consultant is that sort of seems to be where a lot of the hospitals are focused as opposed to sort of larger implementation is that sort of in line with what you guys have seen in the field?

Marc Naughton

Yeah. Ross, I will start with your first quarter relative to the international market and how does it feel? Every region in the world is different, but every region of the world has a greater interest in IT and what IT will mean to the cost and care, the quality, all the privacy issues, with the same issues we see here in the United States. The fact that they are mostly single pay or government based systems allows them to be less susceptible to some of the swings in the economy, the checks with the government rights to cover healthcare are very, very significant in most cases, in most regions of the world. So, we don't see the spikes on the peaks and valleys, you normally see in the U.S. and particularly when it gets down to the individual hospital or trust level is not as meaningful impact. So long story short, we can see is an interest in as our numbers would indicate across all regions of the world and we expect that to continue.

Michael G. Valentine

Ross this is Mike regarding your question on the U.S. contribution. 30% of our total bookings come from net new footprints, net new Cerner clients. The other 70% comes from our installed base, and as I mentioned there in one of three paths. They are continuing the journey by expanding the breadth of what they're doing. So, Phase II, Phase III they are adding facilities either through acquisition or just a rollout sequence or they are filling in the blanks of things that work originally in the road map and those white space opportunities are the ones that I mentioned before.

Ross Muken – Deutsche Bank

I guess in terms of where you are seeing any dislocation specifically or for '09 where you're expecting any sort of shift versus what we saw in '08, is that to any degree different. I guess to start from an incremental standpoint I'm just trying to get a sense for where are the dollars are going?

Michael G. Valentine

I think, this is opinion we're going to see them be hyper-focused even more so on things that will have a very tight turn on return on investment. So, we are gearing up our go-to-market focus around the messaging and the proof points around very quick turn around of return on investment.

Ross Muken – Deutsche Bank

Okay, that's very helpful. Thanks.

Marc Naughton

And this is Marc one thing that as we kind of look around we have heard some of the other companies talk about cutting spending and being careful and some of that is hitting their sales force, the front end of the client. We are not reducing our spending on people that are going out and visiting clients and looking to help them with opportunities. So, we think in this environment when other people are looking to cut back in that space that's going to help us even more.

Ross Muken – Deutsche Bank

Actually to followup on that comment Marc to what degree hypothetically if there is a worsening of the economy or we see a further tightening of capital budgets at hospitals because of lower volumes or whatever causes them to be a bit more concerned to what degree do you have flexibility within the P&L. to offset potentially some of their top line weakness with some OpEx cuts?

Marc Naughton

Well I think what you seeing us do certainly this year is be very good at managing our expenses. Clearly, headcount is one of our key expenses, but on things such as the G&A and the R&D line, we are I think doing a pretty good job of making sure we have efficient resources that are doing a job they need do. For R&D we are looking at expanding in India where the resource cost per person is lower. So we have, certainly have different levers to pull, but when you are in a situation where we are where you got a pretty strong recurring revenue base. As Mike said we are playing offense, we are going to be aggressive at taking more market share when other people are pulling back.

Ross Muken – Deutsche Bank

That's great Marc. Thanks.

Operator

And your next question comes from the line Bret Jones with Leerink Swann. You may proceed.

Bret Jones – Leerink Swann

Thanks for taking my question. First question I guess Marc when you talk about the contribution from the NHS in 2009 I was wondering in I apologize if I missed this, how much of your guidance is dependent on that in terms of revenue and EPS?

Marc Naughton

We are identically indicating that it is probably going to be somewhere around $13 million to $15 million per quarter on the revenue side and that's probably nearly $2 million to $3 million margin depending on which contract it is. So from a plan perspective it's, we are talking $60 million of a much, much bigger number. So, it will be a nice contribution, but we are planning to relatively low levels should those situations start resolving themselves, we think there is upside for us in those contracts and we think that could potentially be realized in the last half of the year, but we haven’t built any of that in the contract.

Bret Jones – Leerink Swann

All right. So, that's essentially the run rate you guys have been running. So, it doesn't sound like you're anticipating the Southern cluster coming back on this year or at least banking on it?

Marc Naughton

Yeah. We are being conservative we have got a transition agreement in place and so where that's kind of we built in our plan.

Bret Jones – Leerink Swann

Okay, great. And then when we look at the guidance and I know you don’t give full year bookings guidance, but I guess the booking growth, would that need to accelerate from the 2% we saw in '08 to reach the guidance or do you feel like there is enough backlog and that level of growth would for '09 would be sufficient?

Marc Naughton

Yeah. The way we build our plans is we force an assumption that bookings do not grow over the prior year and that is how we build our plan. So, I can tell you very clearly that our plan would indicate that based on our guidance today, if we just sold what we sold last year we would be fine making delivering our guidance and probably exceeding our guidance.

Bret Jones – Leerink Swann

So, that's helpful. And then a question for Mike I know, so a couple of deals put out of Q3 and Marc sort of alluded to the fact that things deteriorated much more significantly in Q4. I was wondering if you could give us a sense for the impact of the amount of businesses that slipped out in Q4 relative to Q3.

Michael G. Valentine

As in any quarter, there are some shifting around what we saw is specifically some new footprints move into Q1 and some further into 2009. And so I would just say that it was the movement was consistent with some other quarters it just had an impact and probably part of the answer to the question that was asked earlier by Glen, is part of the impact on the bookings was mainly services, which is a component of almost every new footprint deal. So, almost every new footprint that we bring in the door is making a decision to go hosted into our data center and so when those move out they have, they carry along with them some good bookings with them.

Bret Jones – Leerink Swann

All right, but do you have a sense that when you say slipped into Q1 I guess what gives you the comfort that they would sign in Q1 necessarily?

Michael G. Valentine

The process has advanced.

Bret Jones – Leerink Swann

Okay, okay. It's very helpful. And then just last question, in term of Mike is something you kind of touched on in terms of having enough functionality in place for the collection and reporting in order to capture the incentive payments. I guess where does your customer base stand at least in your mind to have that functionality to qualify for a Medicare, Medicaid incentive payments tied to the stimulus plan?

Michael G. Valentine

That's a loaded question, since we don't know what the answer key looks like, but our focus is largely on, if you take the nevers as an example, the first ingredient to being able to softer the never events is making sure you are capturing all the data throughout the process, and have the ability to influence behavior throughout the workflow. The back-end of that is then being able to report on it and do analytics against it. That whole infrastructure needs to be in place to support the kind of, we believe the kinds of behaviors that are going to be influenced by the stimulus fund. So, what we message to our base is go build that infrastructure go build that discipline so that you will be in a readiness state when the answer key does show up.

Bret Jones – Leerink Swann

And in your mind does that require a CPOE or I guess what level of deployment would that require?

Michael G. Valentine

I think it is going to vary depending on what kinds of clinical processes they are targeting. So, I think it's pretty widespread at this stage.

Marc Naughton

Yeah. I’d add we are one of the handful of organizations approved as a CMS registry to report. So, and Max would be the only one in our kind of the competitive space most of them are non-provider based organizations.

Bret Jones – Leerink Swann

That's great. Thank you.

Marc Naughton

Yep.

Operator

And your next question comes from the line of Sean Wieland with Piper Jaffray. You may proceed.

Sean Wieland – Piper Jaffray

Hi, thanks. Just one follow up on the stimulus package you referred to it as kind of a wild card event. So, how do you plan for that in terms of resource and infrastructure perspective if this does come?

Neal Patterson

This is Neal. They want me to answer this. So, I went and spent a day kind of walking, I guess you call it walking the hill, make sure that we were listening to kind of the inside, the people are writing the legislation and how they are thinking, it is, I think literally impossible to say precisely how it's going to come out, but it does look like it, its in, it does look substantial and it does look like this may be the first of more than one.

And the way I think we expect it to come out will be very, it will require people to have highly functional EMRs to report a significant amount of, transparent probably quality data. So, the fact that, Jeff's point, a second ago the fact that we are I think the only one in our whole sector that's a registered registry, or certified registry whatever the process was says, we are playing I think we are skating but the pucks gone here, but it's going to come through the Medicare payment system and it will have a high quality attribute to it and that we will fundamentally, these are our opinions, because we are not writing, we are not actually in the room, but it will basically force people to have to have automated systems in place to measure at that level. So, we feel good about it, but it's we don’t know whether any money will be in place for our clients and if so exactly, it will come down but that's our best thought at this time. Now, how do we ready for it, we have been getting ready for this for two decades. So, we feel quite prepared and wherever it comes in healthcare whether it's on the physician side or hospital side or all the way across, I just think that our basic business platform that is the broadest in the industry, I think we are in a position to take advantage of that for our clients benefit, and it will certainly benefit us too. So, I gave you a long answer, I don’t know.

Sean Wieland – Piper Jaffray

Okay. Let me just ask something slightly differently, which is do you have the access to capital and access to resources that you would need to execute on the opportunity if it were to fall in your laps?

Marc Naughton

Yes.

Neal Patterson

I believe so.

Sean Wieland – Piper Jaffray

Okay. Thanks. And just one other question is, you mentioned that customers want to keep their cash balances high. So, are you seeing any customers that are looking for alternative forms of financing specifically looking for you to put the deal on your paper in terms of the subscription model?

Marc Naughton

We still don’t see a lot of demand for the subscription model, we offer financing, and this quarter's financing was actually as low as it's been in over multiple quarters. So, I think our clients as Mike said have access to capital. So, it's not been an issue, we have access to financing if they need it, but it hasn’t been a driver of our business.

Neal Patterson

As Mike said every clients a different story broadly, but there is a remarkable number of people I mean healthcare is a very resilient to business cycles as far as an industry, operationally many of our clients are doing fine, in fact some of them are doing really well, but this disruption, this credit market disruption changed some numbers on their balance sheet, there is a whole bunch of stories behind that and they are managing that balance sheet right now they are not in many cases they are not managing operations because operations is feeling good. They are managing their balance sheet and they just got to get basically cash on hand back to where their Board and they are comfortable with and particularly the rating agencies. So, I think we have time for one more question if we squeeze it in, if we can get the operator here.

Operator

Certainly, your last question comes from the line of Richard Close with Jefferies & Company. You may proceed.

Richard Close – Jefferies & Company

Great. I'll keep this quick. Marc I was wondering if you could over the cash flow guidance what you alluded to the increase in the CapEx and what you expect cash from operations in '09?

Marc Naughton

Yeah. I was just indicating that clearly, we have seen our target this year $104 million against target of $80 million to a $100 million. CapEx is, we are looking at it being a little bit higher sort of the $140 million, $150 million range, compared to about a $110 million this year. But even with that higher CapEx when you factor in a higher net income in working capital needs we still expect free cash flow to be higher in '09 then it was in '08. We're still fine turning some of our estimates, but I think that's that broadly gives you a sense of what we are looking for.

Richard Close – Jefferies & Company

Okay. And then with respect to the margins and not 20%, what was the main factor in not exiting '09 with the 20%?

Marc Naughton

Well, the point I'm making is that, our target was to be 20% for the full year '09 and now just based on economic, to make sure we are kind of conservative, we're looking to revise our target to basically exit '09 at 20% operating margins. So, it's a little bit, we're about 40 basis points behind this year in tough economic condition we think it makes sense to moderate that goal that's still a very strong goal for us obviously, but we will provide an update on our kind of half to 20% when we have our Analyst Day we'll give you more details.

Richard Close – Jefferies & Company

Okay. And then on taxes I think you mentioned the 31.5% tax rate in the quarter. Just curious, was there something excluded or what not, having a hard time get to that number?

Marc Naughton

Well, you had the R&D credit basically get reinstated for the full year that happened in Q4, so full year impact hits Q4 the benefit plus on the strong global activity, we paid a lower tax rate globally than we do in the U.S. So, that was the combination that pulled it down from where we originally were looking at.

Richard Close – Jefferies & Company

Okay. And then finally, with respect to follow-on to Glen's earlier question on cancellations. It's great to hear that you don't have cancellations there, but has there been any extensions or moving contracts out, adjusting contracts mid-stream to, make it easier for the hospitals in terms of maybe not taking as much implementation up front or sooner?

Marc Naughton

Once we sign a contract, we don’t modify it, we do have a lot of those, the services component might be on separate agreement letters, and they can certainly adjust the timing of some of those project things, but for the most part, the contract terms stay as the contract terms.

Richard Close – Jefferies & Company

Okay. So, there wasn't any significant movements in terms of people delaying in the quarter pushing things out necessarily?

Marc Naughton

No.

Richard Close – Jefferies & Company

Okay, great. Thank you, I appreciate it.

Neal Patterson

Okay. This is Neal. I’m going to land this. Marc has told me that this is year-end. So, we needed to go a little longer. So, if you're still there I'm going to make a few comments. It is kind of I think appropriate to reflect this is 2009. This decade has been a really good decade. Okay. And it all started kind of with the IOM report in November 1999 and then you all are really focused on Y2K. Okay, and '99 wasn't actually a very good year, because of Y2K. So, there was a lot of kind of confusion there and chaos as we came in this, but I think we were pretty clear about how great we thought this decade would be, our investments with our architecture and all that stuff.

So, looking back there that this has been a really good decade, this is the operating environment out there is not the best. A lot of people are managing things that they weren’t in a normal environment wouldn't have to manage. And if we could change it, we would rather go back to the good days where everybody is really just trying to fundamentally improve their safety and efficiency of their healthcare delivery organizations. But as I said earlier, healthcare is pretty resilient. It's not a perfect environment, but I think we still see a path through this year, and it would be a pretty solid year.

What we really get excited about is what 2019 will look like as far as Cerner. Because we really believe that, this next decade there is some unbelievable opportunities for a platform type company such as Cerner to change a lot of things in healthcare. So, and we'll talk some about that on Analyst Day, but Marc and Allen will try to refrain me from talking a lot about it, because this way out there. The other thing that you can pretty well say 10 years out is the cost of healthcare in the United States at our national spend level will double. And there is nobody I met in Washington that didn't understand that it will double in 10 years and I didn't meet anybody that actually had anything, any answer about that. So, one of the things I was talking about in DC was I do believe there is a fundamental, we can through IT create a systemic change in healthcare and that systemic change in healthcare will drive down the cost of healthcare spend in this country for a period of time.

We think there is a huge benefit there. It's easier to talk to people to know about healthcare and make them understand that, such as senior executives and doctors out in healthcare, when you get to Washington it's little bit harder. So, we think there is a strategic opportunity for the country, which we are really trying to make sure some people understand, but if they don't nevertheless, I think they are still going to put more money in here. So, but the decade is going to be pretty exciting I do, what we're saying to you though is, in this decade this year 2009 we're going to end it on our offense, we think and we think this time window here where people are worried and they are more stressed is an opportunity for us to kind of expand the things we do and really realign with our clients, and in doing that I think a big growth opportunity.

So, we see a window a big opportunity here as it relates to this whatever we now call it, we call it now stimulus package, but so I'm rambling with that. I'll land here, we had a solid year in 2008, 2009 will be tougher, but we think there is a path of a solid year there, and then we're going to have a brand new decade in front of us. So, have a good day. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Cerner Corporation Q4 2008 Earnings Call Transcript
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