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Cerner (NASDAQ:CERN)

Q1 2011 Earnings Call

April 28, 2011 4:30 pm ET

Executives

Jeffrey Townsend - Chief of Staff and Executive Vice President

Marc Naughton - Chief Financial Officer, Executive Vice President and Treasurer

Michael Nill - Chief Operating Officer and Executive Vice President

Zane Burke - Executive Vice President - Client Organization

Neal Patterson - Co-Founder, Chairman, Chief Executive Officer and President

Analysts

Michael Cherny - Deutsche Bank AG

George Hill - Citigroup Inc

Atif Rahim - JP Morgan Chase & Co

Jeremy Lopez - William Blair & Company

Steven Halper - Stifel, Nicolaus & Co., Inc.

K. Newton Juhng - FBR Capital Markets & Co.

Donald Hooker - Morgan Stanley

Jamie Stockton - Morgan Keegan & Company, Inc.

Stephen Shankman - UBS Investment Bank

Sean Wieland - Piper Jaffray Companies

Operator

Good day, ladies and gentlemen. Welcome to Cerner Corporation's First Quarter 2011 Conference Call. Today's date is April 28, 2011, 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 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'd like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed.

Marc Naughton

Thank you, Melanie. Good afternoon, everyone and welcome to the call. I will lead off today with a review of the numbers. Zane Burke, Executive Vice President of our client organization will follow me with sales highlights and marketplace trends. Mike Nill, Executive Vice President and Chief Operating Officer will discuss operations. Mike will be followed by Jeff Townsend, Executive Vice President and Chief of Staff who will discuss strategic initiatives. Neal Patterson, our Chairman, CEO and President will join us for the Q&A portion of the call to provide closing comments.

As we announced last week, Mike Valentine will be leaving sooner effective May 13. We would like to thank Mike for his many contributions to Cerner and wish him well in the future. We are pleased to have Zane Burke and Mike Nill with us on the call today. Zane and Mike are both seasoned leaders who have contributed significantly to Cerner's success, and we look forward to having them share their insights on the call.

Now I will turn to our results. All key measures in Q1 were at or above our expected levels. Bookings were very strong and exceeded the high end of our guidance range by nearly $60 million. Our income statement performance was very good with revenue and adjusted EPS above our guidance and consensus and continued strong margin expansion and earnings growth. We again had excellent cash flow performance, with record levels of free cash flow both reflective of strong earnings quality.

Moving to the details. Our total bookings revenue in Q1 was $525 million, which is the best result for first quarter in the company history. Bookings significantly exceeded the top end of our guidance range and were up 30% from Q1 of '10. Bookings margin in Q1 was $443 million or 84% of total bookings.

The total backlog increased 19% year-over-year to $5.3 billion. Contract revenue backlog of $4.46 billion is 21% higher than a year ago. Support revenue backlog totals $666 million, up 6% year-over-year.

Revenue in the quarter was $491.7 million, which is up 14% over Q1 of '10. The revenue composition for Q1 was $140 million in system sales, $132 million in support and maintenance, $209 million in services and $10 million in reimbursed travel. System sales revenue reflects 20% growth from Q1 of 2010 with double-digit growth in all areas including software, hardware, device resale, sublicensed software and subscriptions.

Our device resale business continues to gain significant traction, and had its best quarter in terms of revenue since we launched that business. Services revenues was up 16% compared to Q1 of '10, with strong growth in both managed services and professional services. Support maintenance revenue increased 4% over Q1 of '10. We expect growth in support to increase as we move through the year.

Looking at revenue by geographic segment, domestic revenue increased 18% year-over-year to $420 million. Global revenue to $71 million was down 7% against a tough Q1 comparable. It was up 4% sequentially, and we expect stronger growth for the remainder of the year based on strong Q1 global bookings and a strong pipeline.

Moving to gross margin. Our gross margin for Q1 was 81.6%, which is down 260 basis points year-over-year and up 60 basis point sequentially. Gross margin continues to be impacted by strength in device resale and increased in third-party services. As we indicated last quarter, we expect gross margin to remain in the low 80s, but we expect to continue expanding operating margins, which we did again this quarter despite lower gross margins.

Looking at operating spending. Our first quarter operating expenses were $299.9 million for share-based compensation expense of $7.4 million. Total operating expense was up 6% compared to Q1 of '10.

Sales and client service expenses increased 7% compared to Q1 of '10, driven primarily by growth in managed services and professional services. Our investment in software development increased 6% compared to the year ago quarter, and G&A expense increased 3% year-over-year.

Moving to operating margins. Our operating margin in Q1 was 20.6% before share-based compensation expense. This is up 180 basis points compared to Q1 of '10, which is at the high end of our 100 to 200 basis point target.

Moving to earnings and EPS, our GAAP net earnings in Q1 were 600 -- or $64.6 million or $0.75 per diluted share. GAAP net earnings includes share-based compensation expense, which had a net impact on earnings of $4.6 million or $0.05 per share.

Adjusted net earnings were $69.1 million and adjusted EPS was $0.80, which is up 27% compared to Q1 of '10. Our tax rate in Q1 was 32.9%, which benefited from lower foreign taxes in the quarter.

For the full year, we expect our tax rate to be 34.5%. Note that applying this annual tax rate to normalized Q1 tax expense would have reduced earnings per share by $0.02.

Now I'll move to our balance sheet. We ended Q1 with $949 million of total cash and investments, which is up from $835 million in Q4. Total cash and investments includes $611 million of cash and short-term investments and $338 million of highly rated corporate and government bonds with maturities over one year. Our total debt is $101 million.

Total accounts receivable ended the quarter at $469 million, which is down $8 million from Q4 due to strong cash collections.

Contracts receivable, or the unbilled portion of receivables, were $133 million and represent 28% of total receivables compared to 29% in Q4. Cash collections were $531 million, which is an all-time record. Third-party financings were $16 million, representing 3% of total cash collected. Our DSO in Q1 was 87 days, which is flat compared to Q4 and down from 89 days in Q1 of '10.

Operating cash flow for the quarter was an all-time high of $126.5 million. Q1 capital expenditures were $21.4 million, and capitalized software was $20.5 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was an all-time record of $84.7 million. We do expect capital expenditures to increase as we move through the year, but we still expect to continue generating strong operating and free cash flow.

Moving to capitalized software. The $20.5 million of capitalized software in Q1 represents 28% of the $72.6 million of total spending on development activities. Software amortization for the quarter was $19.1 million, resulting in net capitalization of $1.4 million or 1% of our total R&D investment.

For the rest of the year, we expect capitalized software to be between $20 million and $22 million per quarter and amortization of $19 million to $20 million. Now let me go to the guidance.

For Q2 revenue, we expect revenue between $505 million and $520 million, with the midpoint reflecting growth of 12% over Q2 of '10. For the full year, we expect revenue between $2.07 billion and $2.12 billion, up from our previous range of $2.05 billion and $2.1 billion.

We expect Q2 adjusted EPS before share-based compensation expense to be $0.83 to $0.87 per share, with the midpoint reflecting 23% growth. For the full year, we expect adjusted EPS between $3.55 and $3.62, with the midpoint reflecting 21% growth. This is up from our previous range of $3.50 to $3.60.

Q2 guidance is based on total spending before share-based compensation expense of approximately $303 million to $308 million. Our estimate for the impact of share-based compensation expense is $0.05 to $0.06 for Q2 and $0.21 to $0.23 for the full year.

Moving to bookings guidance. We expect bookings revenue in Q2 of $540 million to $570 million, with the midpoint of this range reflecting 19% growth.

In closing, we are pleased with our results in Q2, with all key metrics at or above our expected ranges. Specifically, we are pleased with our strong levels of bookings and revenue, continued margin expansion and earnings growth and record levels of operating and free cash flow generation. With that, I'll turn the call over to Zane.

Zane Burke

Thanks, Marc. Good afternoon, everyone. As a brief introduction for those of you I haven't had the opportunity to meet. I have been at Cerner since 1996, starting out as an executive in our finance organization where I worked for Marc as our corporate controller and business development leader. Since 2002, I have held several roles in our client organization, most recently being focused on driving new footprints as leader of our Client Development Organization and owning Cerner's relationship with investor-owned hospitals. Additionally, I have had responsibility for employer network service offerings.

With that, I'll move to the discussion of our sales results and marketplace trends. I'll start first with the results. We had a very strong quarter, included excellent progress at expanding our relationships with existing clients, while also demonstrating our competitiveness by gaining several new clients. Our bookings revenue in Q1 of $525 million reflects 30% growth over last year as all-time high for our first quarter. Bookings this quarter included 16 contracts over $5 million, 11 of which were over $10 million. This is also a record for first quarter.

Our competitiveness was strong, with 26% of bookings turning from outside of our core Millennium installed base. Overall, the market is very active and I believe Cerner is extremely well positioned with our broad and deep solution portfolio, our readiness to meet Meaningful Use and proven service capabilities.

This is in contrast with many of our competitors that still have solution gaps, constrained service capabilities and other types of uncertainty surrounding them. As a result, I expect Cerner to have a record year of gaining new footprints in 2011.

The breadth of our solutions and services are also reflected in our bookings this quarter. We had good contributions from all business models, with particular strength in license software and professional services. Additionally, our agile business units continue to drive contribution across the wide range of solutions and services, with noteworthy strength in our Lighthouse clinical optimization, laboratory, oncology, physician practice, Healthe Network and Hub, revenue cycle, medical devices and community hospitals. In the physician practice space, we had very strong results in Q1. The improvements we have made to the physician-user interface and workflow have begun to be and recognized by the industry. And I believe our Q1 results reflect building momentum for physician solutions. Our competitiveness has dramatically improved. And we now have wins in each quarter against all competitors in the physician office market.

While much of our success in the physician practice solution is driven by selling through our large installed base, it is important to note that many of our new hospitals footprints included the selection of ambulatory solution in their core solutions. This is evidence of our ability to offer a fully integrated EMR [electronic medical record] that is very competitive across inpatient and outpatient venues is a highly valued capability. In addition to our strong integrated inpatient-outpatient offering, we differentiate from others in the industry with our ability and willingness to inter-operate with other systems. By providing an option that doesn't require changing out all systems when the client doesn't want to lose the value of the investments they have made, we are an attractive option compared to other suppliers that force the reinvestment because of their inability or unwillingness to connect to other systems.

Moving to other highlights for the quarter: Our DeviceWorks organization had another strong quarter including 2 new RxStation agreements; good contributions from our CareFusion relationship, putting us on a path to have over $40 million of revenue contribution this year; strong device resale with contributions from the resale of pumps, beds, monitors and communication devices; as well as good iBus device connectivity, including 7 new footprints. The progress we have made in the device space with our clients and partners is being well recognized by the industry. Today's announcement that WellSpan, Cerner and Hospira were honored with the 2011 Way-Paver Award for Excellence in Barcode-Enabled Patient Safety is a good example.

A final highlight for the quarter is that we signed our third RevWorks client and have a strong pipeline for the balance of the year. With ICD-10 looming and the likely new payment structures associated with Accountable Care Organizations, we expect a wave of revenue cycle activity in the coming years, and believe we are well positioned.

Let's move to the geographic mix of our results. As Marc mentioned, our global revenue was down year-over-year, but we did have a strong global bookings quarter, particularly in Canada where we signed a large managed services contract and in England where we added 2 NHS Trusts. We expect a strong start of the year from a bookings standpoint, along with strong a global pipeline to translate to stronger contributions in our income statement by our global businesses as the year progresses.

At the macro level, the fundamental problem of healthcare costs growing faster than overall economy exists in almost all countries. And IT continues to be viewed as the way to break this trend. We believe Cerner is the best positioned global HIT [healthcare information technology] company, and we remain bullish about the potential of the global HIT market.

Turning back to the U.S., I want to provide some marketplace observations. Overall, we are seeing an unprecedented level of activity both inside our client base and in new footprint opportunities. In our client base, we continue to see strong demand as our clients move forward with their Meaningful Use roadmaps. We have already had 12 hospitals in our client base receive Medicaid incentive dollars for Stage 1 Meaningful Use and several others in the process of filing for Medicare incentives. As this activity ramps up, we expect to lead the industry in clients achieving Meaningful Use.

Importantly, we are seeing strong demand for solutions and services beyond Meaningful Use, as our clients prepare for other regulatory requirements and industry shifts. This includes clients looking for the revenue cycle capabilities to prepare for ICD-10 requirements, reviewing their clinical processes, quality levels and reporting capabilities to be ready for value-based purchasing and evaluating various ACO [Accountable Care Organization] strategies, which will require additional IT investments to support capabilities such as evidence-based practices, predictive modeling, remote monitoring across all transitions of care.

All of these factors are also a major focus for our prospective clients. As a result, our readiness for Meaningful Use is just a way why I believe we will continue to do very well in new footprint opportunities. Our ability to demonstrate capabilities that enable prospective clients to navigate through Meaningful Use while preparing them to address the changing world beyond Meaningful Use makes us a very attractive choice compared to many competitors who are focused only on achieving the Meaningful Use hurdle.

A final comment I would like to make on the marketplace is that I believe all the factors I have discussed will drive a multi-year period of strong demand that aligns very well to our core solutions and services. This is not just a 12 to 18 month wave that some people expect. Because of the multiple steps related to Meaningful Use and the different levels of existing adoption across the industry, all of the purchasing related to stimulus will not occur at once.

Further, all the other industry dynamics, such as health reform, value-based purchasing, ICD-10 and HIPAA 5010 will extend the wave of demand. I believe our capabilities are further even differentiated when you look beyond Stage 1 Meaningful Use and at the IT needs that will be driven by reform and value-based purchasing. As a result, I expect our ability to gain share to extend through this multi-year period.

In summary, I'm very pleased with our strong results in Q1, and I think we're well positioned for an outstanding year. With that, I'll turn the call over to Mike.

Michael Nill

Thanks, Zane. Good afternoon, everyone. For those of you I haven't met at one of our analysts' days or meetings at our headquarters, I've been with Cerner since 1996. For the last several years have had responsibility for IP development CernerWorks, ITWorks and support organizations. In my new role as COO, I have added responsibilities for elements of the client organization activities, including sales and professional services. Today, I'm going to focus my comments on professional services, CernerWorks and ITWorks.

I'll start with our professional services business, which had a great start to the year with a record level of bookings for our first quarter. The organization continues to contribute nicely to our income statement, representing a visible element of both revenue and earnings growth. Our execution on projects has been strong, and we remain ahead of schedule on most projects.

We also remain on track with our hiring, which has allowed us to ensure our projects are fully staffed on the planned start dates. We now have over 2,500 associates in our professional services organization, which is the largest IT consulting organization in healthcare IT organization in the world. We are also the most experienced with an average of more than 5 years of experience across our organization even when you include the recent increase in new hires, which often come directly from college campuses. Our size, scale, experience and ability to deliver predictable outcomes at a predictable cost are major differentiators in the marketplace.

Another element of our differentiating services capabilities is CernerWorks managed services, which provides unmatched scale and service levels. As an example, we support approximately 130,000 peak users to our data centers in Q1 and had an uptime approaching four nines or 99.9% system availability. In addition to our unrivaled scale and service levels, we continue to bring down the cost of ownership, which makes the offering even more attractive to our clients. As a result, almost all new clients select our managed services offering and our existing U.S. client base is steadily migrating.

More recently, the demand for these capabilities is picking up outside the U.S. as well. A good example is the large Canadian client that engaged us to provide our managed service offering in Q1. There are several additional global managed services opportunities in our pipeline, so we expect global to become a meaningful contributor to this business in future quarters.

We also continue to leverage our infrastructure and skills sets to add to our portfolio of managed services via the cloud delivery model. A recent example of this is Skybox storage, which is a secure enterprise cloud storage service that allows clients to expand storage capacity in a way that is seamlessly integrated with their existing data solutions. It allows for consolidation of storage for PACS [Picture Archiving and Communications System], radiology, lab and other clinical systems. Our ability to offer this on-demand service in a secure and easily accessible manner is generating a lot of interest among our existing clients and is something that can also be offered outside of our existing client base.

We also have other Skybox cloud services for areas such as security, backup and desktop, which we offer high-quality service with low upfront and ongoing cost compared to traditional models.

Moving on to Cerner ITWorks, while we did not sign an ITWorks client in Q1, we did have a scope expansion at an existing client, and we have a very strong pipeline of new clients. The demand is largely being driven by increased awareness of the success that we've had at our first 6 clients. Many other clients are attracted to ITWorks because they realize they don't have enough internal capabilities to navigate beyond Stage 1 of Meaningful Use or address upcoming challenges related to health reform, value-based purchasing and ICD-10.

With our existing ITWorks clients, we have quickly proven that this is not just another IT outsourcing service. ITWorks offers a strategic alignment with our clients that goes beyond traditional outsourcing. While part of the service does lead to the expected benefits of leveraging our scale to improve their basic IT operations, we have seen the most significant progress at accelerating clinical adoption and innovation at the edges of healthcare. A great example of this is our first ITWorks client, University of Missouri, who went from Stage 2 on HIMSS EMR Adoption Model to Stage 6 in just one year. University of Missouri has also been a major contributor to our medical home, condition management and population health initiatives.

Other ITWorks clients have proven to be cutting edge by being early adopters of new offerings such as Smart Rooms, Chart Search, Physician iPad apps and RevWorks. Another noteworthy observation is that similar to CernerWorks, we are starting to see demand outside the U.S. for ITWorks offering. This new demand for services clearly enhances our growth opportunity in the coming years and aligns Cerner with the larger portion of the healthcare spending, not just in the U.S. but around the world.

With that, I'll turn the call over to Jeff.

Jeffrey Townsend

Thanks, Mike. Similar to past calls, I'm going to talk about some of our new initiatives in Cerner's evolution from a focus on helping clients automate the care process to focus on both health and care, as well as the role of our Healthe Intent platform in accelerating the impact of a digitized care delivery system.

As Zane and Mike have discussed, Cerner is very well positioned for strong growth in coming years. Most of this growth will be tied to digitizing the core of healthcare. We believe this digitization sets the stage for another significant wave of growth. Much of this will come from our focus on the health part of healthcare, because when the core is digitized, a new level of consumer health awareness is possible. While the majority of the dialogue today is around cost, we see the entire landscape as more of an iceberg, witas the cost of care being above the surface. The much larger population and future costs associated with the health and well being of that population lurking below the surface. As we demonstrated during our investor day, the majority of the highlighted solutions were running in the cloud as part of our Healthe Intent platform. This allows us both to advance innovations more quickly based on the nature of that platform, but also introduces a new layer of capabilities above the individual enterprise, addressing the range of offerings from coordination of care, quality monitoring and consumer engagement. As many of you know, Cerner spent the last 5 years trying to crack the code on making good health pay. We've made changes to our health plan, hired a third-party administrator, launched the new age on-site clinic and pharmacy, incorporated biometric measurements for our population, realigned the economic incentive for associates in our health plan and rolled out a data-driven wellness management program.

We have also revamped our on-campus cafeterias to include healthier meals and encouraged fresh thinking about work environments, incorporating options such as standing workstations. As this past fall, our executive cabinet engaged our associates in the weight-loss competition that has today, resulted in about 10 tons of weight loss across our associate base. These changes allowed us to do what all employers want to do: bend the healthcare cost curves significantly. But more importantly, improve the health status of our associates and their families. In addition, these health initiatives have shaped our employer services offerings and provided insights to create solutions for our provider clients, who will soon be incented to drive healthier outcomes through new reimbursement models, such as Accountable Care Organizations.

I wanted to share some foundational statistics on a set of our early initiatives around this platform as we introduce both search and sepsis last fall and have also discussed our progress on the Cerner Network from time-to-time.

A core concept to fuel our cloud initiatives is data liquidity from the enterprised sources within healthcare. Recently, the Office of the National Coordinator for Health Information Technology announced that Project Direct had reached a major milestone. This was a collaborative nationwide effort, with over 200 participants across more than 50 organizations to define and create a simple interop solution for healthcare, and making that available as open source. As part of that effort, Cerner became the primary source code contributor to Direct Project's Java Reference Implementation. It shows both our commitment to interoperability across the industry and our fundamental understanding of the potential ahead for our health economy, if data liquidity becomes a reality more quickly.

The ability to contextually share information is a growing reality, driven by the meaningful use criteria, healthcare reform, increasing quality metrics and new coordination in care delivery models. Through our Cerner Network offerings, we have now achieved interoperability with over 46 different EMR platforms across 40 health systems, 166 hospitals, more than 65,000 physicians. Just last month, we surpassed the $70 million transaction mark for the month. These are transactions that are specifically targeted to share information across providers, payers and patients. This represents more than a 50% growth in the last 6 months. And more importantly, we've seen a 5x growth in clinical volumes over the last 12 months.

We expect the clinical volumes will exceed financial by the end of this year and is driven by both the increase of EMR deployments and the early realization of what's possible when both ends of the communication are digitized. Most important, these are providing real efficiency and workflow savings within the care delivery process and will continue to yield new business model opportunities.

After completing our pilot validation, with the Healthe Intent Chart Search, late last year, we are now approaching 15% of our clients actively engaged in deployment and/or use of this solution. While Meaningful Use has the day-to-day attention of our clients, because this is a cloud service, we have been able to activate this offering without disruption to the Meaningful Use journeys. And on average is taking about 4 to 6 weeks to implement and backload history. It only represents a fraction of the eventual volumes, but today, we have more than 40 terabytes of data, growing at a rate of 230 gigabytes a day, processing and indexing between 250 and 350 million records daily. The learning and advancement of the algorithms continue to grow as our volume and diversity of information grows with them.

As a byproduct to these efforts, we have also seen an increase in complementary solution demand, which also leverages the data liquidity wave. Both Health Sentry, a public health submission solution, and Health Facts, a multi-year blended research and benchmarking repository, have seen progress from these efforts. Today, Health Facts contains more than 29 million unique individuals and as a sampling of clinical breadth, more than 1.7 billion lab results. We are on course to double the contribution volume to this platform by the end of the year. As we have previously mentioned, the St. John Sepsis agent, which targets the 750,000 Americans who are affected by sepsis each year is refined and improved using this very large contextually structured clinical repository, creating a closed loop for not only discovery, but continuous and contextual improvement in clinical decision support.

Last, I want to mention a recent announcement from earlier in the week. Cerner was selected by the Missouri Health Connection to enter in negotiations to be the technical service provider for the State of Missouri's Health Information Exchange. This too is a part of our Healthe Intent cloud-based services platform. The potential reach of this joint effort will cover over 750 provider organizations, 20,000 physicians and nearly 6 million Missourians, positioning Missouri to become one of the first clipboard-free states in the union.

As we demonstrated to during analyst day in March, there is a greater potential for the new middle to change the current state of healthcare and create a more significant opportunity around health than care. I wanted to take the time to step back and help frame some of the emerging building blocks that are fueling the information and content that will make this possible.

With that I'll turn the call over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ryan Daniels with William Blair & Company

Jeremy Lopez - William Blair & Company

This is Jeremy for Ryan. I just wanted to key in on the commentary around the wins you've had with both that have included both inpatient and outpatient. And I'm curious, what is the average increase in deal size when you are selected for both relative to the same client if they just went with an inpatient system?

Marc Naughton

This is Marc. It's hard to generalize exactly what the difference is when you do both inpatient and outpatient. Clearly, it grows the size of the deal. But for the most part, it's the extension of the inpatient EMR licenses to the outpatient clinic. So while the overall dollars are not significant, we're adding the ambulatory. There is -- they certainly increase the number of user, which is the metric by which we get paid. So it's not going to be 50-50 but it could add 25% to a deal depending on how the deal is structured. And certainly, strategically, winning the ambulatory side is key for us.

Jeremy Lopez - William Blair & Company

And how many would you say have either -- have you implemented, and I'm just looking for order of magnitude, not maybe real precise number, but in terms of those that you have already that are either reference-able or in the process of implementing or have ordered at this point?

Marc Naughton

Relative to the ambulatory?

Jeremy Lopez - William Blair & Company

Yes, that are both -- the inpatient and outpatient. What is the footprint look like at this point that either are using that already or are intending to use both together?

Zane Burke

This is Zane, Ryan. I would say we're in excess of 50 clients that are in that realm of having both inpatient and outpatient in our large systems.

Jeremy Lopez - William Blair & Company

Okay. Great. And then the last question is a little bit more strategic in nature, but you quickly are amassing quite the war chest of cash. And I'm curious what your strategy is for capital deployment as that cash balance continues to grow. Thank you.

Marc Naughton

Yes, this is Marc. As we continue to approach $1 billion of cash on the balance sheet, our strategy right now is to look for opportunities in the marketplace, where we could expand our footprint through some type of an acquisition. And we'll continue looking at that strategy. That strategy has a time limit on it because we think it will only be effective, probably at sometime around the next 12, maybe 24 months. At that point, if nothing has come to fruition, we will look to return the cash to our shareholders in the most effective way possible

Operator

The next question comes from the line of Newton Juhng with FBR.

K. Newton Juhng - FBR Capital Markets & Co.

I had a question about the small hospital market. I was just curious how much of an advantage do you have when a nearby large hospital system is running something with Cerner. Do you find that the smaller 75-bed or less type hospitals tend to be more receptive to the solutions you have as a result of just being kind of geographically placed in an area where there may be a particular system that's kind of the big fish in the sea?

Zane Burke

This is Zane, Newton. What I would tell you is in many cases it's very helpful to have that local, larger organization that has some sort of affinity that's related to that other organization. And often times those clients are advocates of ours. And we've proven our value, and we're able to use that as a broad reference site. So yes, it does have an advantage for us.

K. Newton Juhng - FBR Capital Markets & Co.

And then in terms of your, I guess, the broader addressable market there. Is there any way to kind of quantify what has that versus what doesn't, in terms of demarcating the market for the ones that have that opportunity?

Marc Naughton

Is your question, Newton, how many communities do we have major footprint in that we can have leverage relative to new opportunities?

K. Newton Juhng - FBR Capital Markets & Co.

Yes, where you feel like you have that decided advantage, I guess?

Marc Naughton

That would be most of the U.S. and many of the countries we are in because we are obviously a large market shareholder and we're broad. So it is very easy for us and having rolled out the Millennium for a period of time. We have a lot of effective satisfied users that we can look very similar to the person looking to make a buying decision. So we are not lacking at all for reference-able sites that are geographically near to potential new clients.

Operator

Our next question comes from the line of Donald Hooker with Morgan Stanley

Donald Hooker - Morgan Stanley

So the free cash flow looked pretty strong in the quarter and what are you thinking for the year? Any kind of guidance around that?

Marc Naughton

Well, I think it does mark. Clearly, Q1 was very strong we have probably a little less CapEx than we would have normally planned. As you know, we've talked about CapEx for the year being in the $130 million to $50 million range starting off at the low end relative to that range, we would expect to probably end up somewhere in the low end. We think CapEx will probably go up a little bit in the last half of the year relative to our planned investments in our hosting business and our managed services businesses. But overall, for the year, we will be probably at or below the $130 million that we previously used as our base. So I think if you just used the growth in net income with $130 million CapEx, I think you'd be pretty close to where we should end up for free cash flow for the year.

Donald Hooker - Morgan Stanley

Got you. And in the international, the global segment you reported, I guess, revenues down year-over-year. When you look over the next like 4 to 8 quarters, I mean, can you give us any kind of suggestion what markets would you suggest we focus on as potentially turnaround, Middle East, Southeast Asia, Europe or where do you kind of sense that there might be a bounce back?

Marc Naughton

Well, I think -- this is Marc, that broadly for the globe, we're seeing activity. Certainly, Europe is still coming from behind. But in the U.K., we saw some very good footprint signings, 2 footprints. This quarter we see more in the pipeline there. So that's expanding and we think the Middle East and the Far East both have potential to bounce back as well this year. I think this year, the revenue being down year-over-year is a little bit the reflection of the strong year ago quarter globally relative to this quarter. And I think as we indicated, we would expect our global revenues to grow as compared to the prior year's as we go through this year. We think there's a very good chance to have a strong global year in a variety of areas, which are really at this point too broad to go into all of them.

Donald Hooker - Morgan Stanley

And if I can sneak one last quick one in. I think in the last quarter you talked about a 30% year-over-year growth in your PowerWorks ambulatory offering, is that kind of a continuing trend into the first quarter of '11?

Zane Burke

This is Zane. I would say it's very similar. If not, a little bit increased to that.

Operator

Our next question comes from the line of George Hill with Citigroup.

George Hill - Citigroup Inc

Marc, quick question with respect to bookings. Two questions actually. Number one is bookings duration, are we starting to see -- are we continuing to see the bookings duration kind of go from the 4- to 5-year range to maybe a period of slightly longer than 5 years?

Marc Naughton

No. I can provide a little color there, George. If you really look at our bookings and kind of look at the managed services which are the longer term 5- to 7-year type of bookings that we have seen, we've really had those in our bookings at this point so long that it's really no longer a differentiation when you go look at the comparable prior periods. So for this quarter, we had approximately 25% to 30% range was coming from the 7-year type bookings. And that's probably actually a little bit lower than we've seen in the last, probably, 4 to 8 quarters. So I think bookings still is a very good measure of our future short term, and as well as longer-term opportunities, but this quarter there was no -- the over attainment on our bookings guidance was really broad. It was across the spectrum in every area, from services to software and managed services was right in its normal percent range of a bigger number. So it also contributed somewhat but it wasn't any unique longer-term type of duration.

George Hill - Citigroup Inc

That's great color. Thanks, and maybe just one quick follow up there. If a smaller company in the space actually indicated that they have started to see deals slip from the current period probably to the back end of the year or maybe even next year as hospitals thought about driving forward to hit Meaningful Use either with best-of-breed solutions or earlier or just pushing off until 2012 to give them a longer lead time to hit Stage 2 with respect to Meaningful Use. Even though the bookings performance was great do you feel like you guys might have seen any slippage?

Zane Burke

This is Zane, George, and I would tell you what we continue to see a lot of opportunity here, and did not see that slippage.

George Hill - Citigroup Inc

Okay. And then Zane I actually had one last one for you. The new UI that you guys are talking about putting out into the field that customers are satisfied with. Is that the iView product that I keep reading about people rolling out?

Zane Burke

No. In this particular case, this will be more of our MPage view, which you may have heard us talk about.

Operator

Our next question comes from the line of Michael Cherny with Deutsche Bank

Michael Cherny - Deutsche Bank AG

I just wanted to dig into the bookings number a little bit. Obviously, it has been the focus of the quarter. You guys put up stellar bookings, well above your expectations. Can you give us a little more breakdown, especially given the amount of clients -- it looks like you signed about 375 new contracts if I'm reading this file correctly. Kind of where the upside bookings strength came from, maybe some of the clients you necessarily didn't expect to win during the quarter that you did. Is there any more color just around the outsized performance of bookings would be great.

Marc Naughton

I think, this is Marc, it's really reflective of a very active market in an active and deep pipeline that we've been building. People, and I think, Zane made the point pretty effectively that people, especially as they're looking are at putting solutions and are already getting past, what do I need for Stage 1, because I think a lot of people have kind of their path to Stage 1 figured whether it's their existing supplier or they're doing something new. But I think that Stage 2 and beyond and all the other initiatives are really driving people to get decisions made. So from our standpoint, there wasn't any, as I indicated, it was broad across all of our businesses relative to the bookings success. There wasn't any one area that drove that success. All of it was, everything was above planned and doing well and as we've looked at our pipeline and finish our forecasting work for the upcoming quarter, we see that strength certainly continuing.

Michael Cherny - Deutsche Bank AG

Great and then just quickly on the U.K. commentary on the new 2 NHS Trusts, were these trusts you have previously been affiliated with anyway or were these competitive wins? Kind of going forward, I know you talked about improved international markets, but how you think about the U.K. in particular, given it has obviously been a little bit of a noisy situation?

Marc Naughton

We've had relationships with a lot of U.K. trusts. These were 2 of them that we've dealt with to some extent in the past as the buying becomes more focused at the trust level and they start going out making their decisions, we expect all the work we've down over the last 2 and 3 years by our U.K. team, which has done a great job of bringing people into our London office, envisioning them as to what can be accomplished. Now that they start having the ability of go make their own choices that is we expect that to actually kind of be the beginning of a period of time when we start seeing individual trusts come into our bookings with some frequency. So the 2 we signed this quarter, yes, we had a relationship with them. But we actually kind -- already, because of the program have a lot of relationships in geographies with almost every major trust in them.

Operator

Our next question comes from the line of Atif Rahim with JPMorgan

Atif Rahim - JP Morgan Chase & Co

If Marc, if I could just ask that previous question in a different way, were those 2 trusts in the South and Southeast slash London region or were they in one of the other regions in the U.K.?

Marc Naughton

They were in London.

Atif Rahim - JP Morgan Chase & Co

Okay. Got it. And plans to expand outside of that, when do you think you could start signing up trust outside of those 2 regions?

Marc Naughton

At this point, we're working our pipeline, and we'll kind of be able to announce things as they happen, but we really can't talk about that to a great extent on the call today.

Atif Rahim - JP Morgan Chase & Co

Got it. Okay. And then on the DeviceWorks business, the gross margin effect is having, can you just talk about how the gross margin are specifically just on that business and how the DeviceWorks business flow through bookings in terms of the magnitude and how fast you recognized the revenue?

Marc Naughton

Yes. DeviceWorks basically is very similar to our tech resale business. The selling the actual or reselling the actual equipment, or in this case, for example, meds dispensing cabinet resulted in us recognizing revenue and recognizing cost of goods sold. The net margins on those we talked to prior -- are in the single-digit range. So that is going to impact our gross margins. The key for us though is usually those sales will come with it, bringing with it an iBus transaction which is basically 100% or is software, so it brings with it a significant component of that, relative to a bookings, it will depend some -- each item is a little bit different relative to the resale. But for the most part, on the resale of cabinets, that is going to be recognized in revenue when the install happens. So there will be a booking that comes into our bookings and then within a 12-month period the install or revenue recognition or cost recognition will occur down the road. The norm for tech resale, as you know, is it ships in the quarter, revenues in the quarter and usually happens in very short term. You'll see some of these devices that are based on install showing up in our backlog and then rolling out on our backlog, but it will be in the 6 to 9 months timeframe.

Atif Rahim - JP Morgan Chase & Co

Got it and what's the size of the iBus software deal in this case?

Marc Naughton

I don't have that detail in front of me, but normally, you'd probably see it to be 10% of the total revenue of the deal.

Atif Rahim - JP Morgan Chase & Co

Got it. And then one last question and I'll jump off on the RevWorks side any update, any new contracts signed this quarter?

Zane Burke

Atif, this is Zane. We did in the call, in my comments, mentioned that there was one new RevWorks client this quarter.

Operator

Our next question comes from the line of Jamie Stockton with Morgan Keegan

Jamie Stockton - Morgan Keegan & Company, Inc.

Thanks guys for taking my questions. I guess real quick on that RevWorks deal, and Mike or Zane, whoever wants to take this, was that a hospital that we using your patient accounting system?

Zane Burke

Yes, it was

Jamie Stockton - Morgan Keegan & Company, Inc.

Do you feel like roughly that's a prerequisite for a hospital to look at RevWorks as a platform?

Marc Naughton

I don't think it's a prerequisite for our business model. In fact, it's actually -- I would view RevWorks an opportunity for us to utilize some of our software solutions in that space and use bring in our patient accounting in that space as well. So it's not exclusive.

Michael Nill

Yes. We wouldn't expect to just sell only to existing patient accounting clients. We will sell it as part of the revenue of the RevWorks service offering, but that could get us into new places that don't really have our patient accounting.

Jamie Stockton - Morgan Keegan & Company, Inc.

Okay. Zane, you mentioned the number of facilities that have received their Medicaid EHR check. I know that those aren't the majority of the stimulus dollars of hospitals are getting, but do you think that for hospitals that maybe don't have their act together, at this point, as far as the stimulus is concerned that, that has gotten their attention? Have you seen any change in sentiment for some of the hospitals are a little further behind as a result of this Medicaid checks?

Zane Burke

Great question, Jamie. I think we're beginning to see that. So there are about 11 states that have confirmed plans for the Medicaid space. And we're helping to educate the marketplace in that space. I would say there's not as much understanding of what's going on, but it's actually helping to drive some decisions as well.

Jamie Stockton - Morgan Keegan & Company, Inc.

And last question, Marc, on the bookings guidance. Is there anything lumpy in there that we should the expecting when you guys report next quarter?

Marc Naughton

No. I think that guidance reflects our view of the forecast and contribution across the board. If there was something lumpy, I'd expect that to be upside.

Operator

Our next question comes from the line of Sean Wieland with Piper Jaffray.

Sean Wieland - Piper Jaffray Companies

Can you tell us what percentage of your customers have purchased everything that they need to hit Stage 1 of Meaningful Use?

Zane Burke

I've got it, but we can't tell you that.

Marc Naughton

Sean, that's actually pretty hard because a lot of -- there are many of them that are going to hit Stage 1 that may not have bought everything from us they plan to buy. And if they're going to, if they're going to get there once with none Cerner apps in certain places. Zane, do you have some...

Zane Burke

What I would say we're doing analysis with each one of our clients on Meaningful Use and helping them determine what they need to hit Stage 1 and Stage 2 as we believe it to exist today. And so I can't give you the exact percentage, I can tell you we're in the midst of that. We're in the middle of that process. The Medicaid element of this has accelerated some of that need to do that now. So we probably will be able to look at that on a going forward mode to give some additional insight. But we're going through that process right now with each one of our clients.

Sean Wieland - Piper Jaffray Companies

Okay. So if you can't ballpark it for us today, maybe we can get that from you the next quarter? A ballpark?

Marc Naughton

Yes, I think the majority of our clients are looking at Q4 '11 as being their target for doing Stage 1, getting into the next fiscal year with the federal government. And that the vast majority of our clients are comfortable they're going to get to that Stage 1 level if they've been a client for any period of time. And the new ones, we're working to get them there as well.

Sean Wieland - Piper Jaffray Companies

Okay. And second question are you guys following what's going on the Supreme Court reviewing the Vermont prescription data case? And in your view of that decision, I know that there's no decision that's been made, but are there any far-reaching implications for your strategy in how you -- in your business?

Marc Naughton

Sean, this is Marc. I would admit that I have not been keeping up with that case, since there has been no decision, we wouldn't really have any comments until that time. But so I can't really comment on it right now.

Operator

Our next question comes from the line of Stephen Shankman with UBS

Stephen Shankman - UBS Investment Bank

I guess in Q1 about 20% -- 26% of new bookings were from outside the core volume, and I think it was a similar number for this quarter. Wondering if you're seeing any changes there in terms of the mix over the past few quarters from larger hospitals versus smaller ones, and specifically as it relates to the new footprint?

Marc Naughton

Yes, I think relative to the mix of size of clients that are coming to market these days, it's pretty broad I think.

Zane Burke

This is Zane. We actually just came through our review of the business and there is demand across all elements of the business. But in the small markets we've talked about in the community market and actually we are seeing the return of some larger IDNs into the marketplace who have made some decisions previously and are now getting uncomfortable with the technology that provider that they put in place. And that's a trend that we anticipate to continue, as actually some of the larger organizations coming back into the marketplace and looking for somebody they believe can take them to Stage 2, Stage 3 and well beyond.

Stephen Shankman - UBS Investment Bank

So they're coming back into the marketplace in calendar 2011 or would that be maybe next year?

Zane Burke

I think that's actually part of my commentary. I think this is a much broader marketplace than some had expected that it would be a rush for Meaningful Use, and I think this will play out over the next several years.

Marc Naughton

We're starting to see them show up in our pipeline, and when they show up in our pipeline that usually means a 12 months or so timeframe for them to make a decision, to sign a contract. So I think we will probably look to see more of those beginning in '12 but as Zane indicates, we think that actually can fuel activity after '12 through '13 and '14.

Stephen Shankman - UBS Investment Bank

Okay, great. That's helpful. And then switching gears. Just in terms of I guess SG&A and also R&D lines, should we expect a similar kind of step down as we go through the year like we saw in 2010?

Marc Naughton

Step down being...

Stephen Shankman - UBS Investment Bank

As a percent of revenue?

Marc Naughton

We're continuing to look for efficiencies. Certainly, R&D is a very key element to our success and continuing to invest in new things. But as we continue with our revenue, especially at the levels we're growing at now, it's logical that the R&D, as a percent, declines a little bit over time because we just want to make sure we're investing fully in all the opportunities we have.

Michael Nill

But we think we can do that still getting efficiencies on G&A and R&D lines.

Operator

Our next question comes from the line of Steve Halper with Stifel, Nicolaus

Steven Halper - Stifel, Nicolaus & Co., Inc.

Earlier in the call, you talked about 50 clients, presumably IDN clients, that are using inpatient and outpatient are those customers using PowerChart Office or are you including PowerWorks in that number as well?

Zane Burke

Steve, this is Zane. They would be doing a combination of the 2, depending on their strategy for their physicians.

Steven Halper - Stifel, Nicolaus & Co., Inc.

Right. So there'll be some element of PowerChart Office and PowerWorks depending on the size of the physician group?

Zane Burke

Look, remember Steve starting with -- that's the same solution set regardless whether it's PowerWorks or PowerChart Office that's the same code. But yes, you could have both -- they could run both. They could run one or the other, depending on their strategies with their physicians.

Steven Halper - Stifel, Nicolaus & Co., Inc.

Okay, that's helpful. And what about ambulatory on a stand-alone basis? What's going on in that market? Where does Cerner sort of slot in? Are you going for transactions outside of your inpatient base?

Zane Burke

Yes, very much so. In fact, the solution is competitiveness is very strong and on a stand-alone basis we're going after both larger practices as well as single practices.

Steven Halper - Stifel, Nicolaus & Co., Inc.

What have been some of the changes in terms of code development that have led to some of the success there because PowerChart Office has been around for a while but it was not really that successful at first?

Michael Nill

This is Mike, Neal. We have continued to make investments in our ambulatory physician application. In fact, over the last year, there was significant investment made to improve the usability and workflow. And as a result, our competitiveness has dramatically improved in that space. I think many of the companies that survey our clients are showing statistically that it's improving as well. So we think we're making good progress there.

Marc Naughton

This is Marc. I think given the time we're going to cut off the questions. I've asked Neal to see if he has any closing comments for us.

Neal Patterson

Great. Thanks, Marc. This is Neal. So my job is pretty easy when you guys all just grill Naughton here on our business models and see if you can find a hole. I'm going to give Marc a passing grade here. He did a great job. So in summary, I mean, I think my view is probably going to be similar to yours. We're in a good strong marketplace. We are getting good activity and we actually see the activities that will extend from our installed base, from our current clients. We're highly competitive in the new clients that are entering the marketplace for acquisitions. Part of that new buying as just got discussed here a second ago, some of our dear competitors installed base because there is a window here where it's going to force a lot of decisions. And there's probably not too many install bases that are in great shape. We are in great shape. We are not the only one, but there's a lot of people that put together not real strong companies over the last 20 years. And there's kind of strength test being applied here. And then you all got it, frankly globally, most -- because we've always focused on the clinical side, there is a strong marketplace outside the U.S. and you kind of throw a dart at it and when we tell you the story what's happening in those countries. And for the most part, we're -- it's a good story. So we've built this company through innovation. We've been working for -- I've been -- I'm the oldest one in the room here. So, spent most of my adult life working on digitizing the core of healthcare. We are clearly articulating to you all of this activity in the first half of this decade is creating -- is basically digitizing the content of healthcare. And we think there will be big fundamental changes outside of that, we have several ways of narrating that those kinds of changes, but the concept of a new middle is one of those. And then I think we are demonstrating to you today here, too, that there's a great team and this company has got a lot of talent. And the talent is broad and deep. So we have a combination of experience. We also have a passion and a passion to innovate. So those are my closing observations and comments. And with that, I'll wish you good evening. So thank you for your time, too.

Operator

Ladies and gentleman, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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