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Cerner (NASDAQ:CERN)

Q4 2011 Earnings Call

February 07, 2012 4:30 pm ET

Executives

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

Zane M. Burke - Executive Vice President

Michael R. Nill - Chief Operating Officer

Jeffrey A. Townsend - Chief of Staff and Executive Vice President

Analysts

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

George Hill - Citigroup Inc, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Donald Hooker - Morgan Stanley, Research Division

Atif A Rahim - JP Morgan Chase & Co, Research Division

Ryan Daniels - William Blair & Company L.L.C., Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

Operator

Good day, ladies and gentlemen, and welcome to Cerner Corporation's Fourth Quarter 2011 Conference Call. Today's date is February 7, 2012, 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, perspective, prospects, constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Private 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, including the company's earnings release. A reconciliation of non-GAAP financial measures disclosed in this earnings call can be found in the company's earnings release filed with the SEC and available at www.sec.gov and posted on the company's website at www.cerner.com. Under the About Cerner section, click Investor Relations then presentations and webcast. At this time, I'd like to turn the call over to Mr. Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed.

Marc G. Naughton

Thank you, Derrek. Good afternoon, everyone, and welcome to the call. I'll 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 our works businesses and 2012 imperatives. 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, is traveling today.

Now I'll turn to our results. Our strong fourth quarter results capped off a record year across all key measures. Bookings were very strong and exceeded the high-end of our guidance range. Our income statement performance was excellent, with revenue and adjusted EPS above expected levels due to [ph] continued margin expansion and strong earnings growth, and we had very strong cash flow performance.

Moving to the details, our total bookings revenue in Q4 was a record $899 million. Bookings exceeded the high-end of our guidance range by more than $200 million and were up 44% from Q4 of '10. Bookings margin in Q4 was $755 million or 84% of total bookings. For the full year, bookings revenue was $2.72 billion, up 37% from 2010. As Zane will discuss, the strength of business in Q4 spanned across all business models and included 2 ITWorks contracts and 1 RevWorks contract. Our bookings performance drove a 24% increase in total backlog to $6.11 billion. Contract revenue backlog of $5.4 billion is 26% higher than a year ago. Support revenue backlog totaled $706 million, up 8% year-over-year. Revenue in the quarter was $615.6 million, which is up 23% over Q4 of '10. The revenue composition for Q4 was $220 million in system sales, $142 million in support and maintenance, $242 million in services, $11 million in reimbursed travel. The upside relative to our guidance was largely driven by higher system sales and strong services. For the full year, revenue grew 19% to $2.2 billion.

System sales revenue reflects 34% growth from Q4 of '10. This was driven by strong growth in licensed software, subscriptions and device resale with the growth in these items slightly offset by flat levels of traditional hardware and sublicensed software. For the full year, system sales revenue grew 28%.

Services revenue was up 24% compared to Q4 of '10 and 20% for the full year with strong growth in both managed services and professional services. Support and maintenance revenue increased 7% over Q4 of '10 and 6% for the full year.

Looking at revenue by geographic segment, domestic revenue increased 21% year-over-year to $524 million. Global revenue was $92 million and grew 35% compared to the year ago period. For the full year, domestic revenue grew 21% to $1.89 billion and global revenue grew 7% to $309 million. As a preview to the annual update of our detailed business model that we'll provide at our Investment Community Meeting on February 22, I'd like to provide you with the total revenue and growth by business model for the full year 2011.

Licensed software grew 21% to $325 million. Technology resale was up 39% to $246 million, driven by growth in device resale. Subscriptions and transactions increased 28% to $136 million. Professional services revenue grew 21% to $550 million. Managed services increased 20% to $351 million. Support and maintenance was up 6% to $551 million and reimbursed travel was $45 million, up 38%. We'll go into more business model detail at our Investment Community Meeting.

Moving to gross margin, our gross margin for Q4 was 78.6%, which is basically flat compared to 78.9% in Q3 and down compared to 81% a year ago. The year-over-year decline in gross margin was driven by the strong levels of technology resale that I discussed, as well as an increase in third-party services. For the full year, gross margin was 80%.

As we've noted in the past, while revenue mix can impact gross margins in any given period, we continue to drive operating margin expansion as I'll discuss in a moment. Looking at operating spending, our fourth quarter operating expenses were $337.8 million before share-based compensation expense of $8 million. Total operating expense was up 15% compared to Q4 of '10 with the majority of the growth driven by an increase in revenue generating associates in our services business. For the full year, operating expenses were $1.27 billion, up 11% from 2010. This compares to revenue growth for the year of 19%, reflecting strong operating efficiencies. Sales and client service expenses increased 19% compared to Q4 of '10, and 13% for the full year, driven primarily by growth in managed services and professional services. Our investment in software development increased 4% compared to Q4 of '10, and 5% for the full year. We expect to continue growing our R&D investments in coming years to accelerate innovation in areas Mike and Jeff will discuss. We expect to be able to do this with R&D still growing slower than revenue, so we maintain the leverage we have achieved from our R&D investments.

G&A expense increased 10% compared to Q4 of '10, and 11% for the full year, driven by personnel and other expenses related to an increase in hiring and training. Moving to operating margins, our operating margin in Q4 was 23.7% before share-based compensation expense and was up 160 basis points compared to Q4 of '10. For the full year, operating margin increased 140 basis points to 22.2%. Moving forward, we believe we can continue to expand operating margins 100 to 200 basis points annually through efficiencies across our business models and expense leverage.

Moving to earnings and EPS, our GAAP net earnings in Q4 were $91.2 million or $0.52 per diluted share. GAAP net earnings included share-based compensation expense, which had a net impact on earnings of $5 million or $0.03 per share. Adjusted net earnings were $96.2 million and adjusted EPS was $0.55, which is up 26% compared to Q4 of '10. For the year, adjusted net earnings were $324.9 million and adjusted EPS was $1.87, $1.87, which is up 26% from 2010. The tax rate for adjusted net earnings was 35%, which is in line to slightly below what we expected. For 2012, we expect our effective tax rate to be 35% to 36%, with the rate in Q1 likely being lower due to a favorable tax settlement.

Now I’ll move to our balance sheet. We ended Q4 with $1.13 billion of total cash and investments, up from $1.09 billion in Q3. Total cash and investments include $775 million of cash and short-term investments of $359 million of highly rated corporate and government bonds with maturities over one year. Our total debt, including capital lease obligations, is $127 million. Total receivables ended the quarter at $563 million, which is up $15 million from Q3. Contracts receivable or the unbilled portion of receivables were $91 million and represents 16% of total receivables compared to 19% in Q3. Cash collections were a record $638 million. Our DSO in Q4 was 83 days, which is down from 87 days in Q3 and Q4 of '10. Operating cash flow for the quarter was a record at $168.5 million. Q4 capital expenditures were $29.2 million and capitalized software was $21.1 million. Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was also a record $118.2 million. For the full year, operating cash flow grew 20% to $546.3 million and free cash flow grew 31% to $358.6 million, with capital expenditures of $104.8 million and capitalized software of $82.9 million. Free cash flow represents more than 100% of net earnings for both Q4 and the full year, demonstrating strong earnings quality.

Looking at 2012, we expect an increase in capital expenditures compared to the low $100 million range we've seen in the last 2 years. Some of this will be driven by the construction of additional space at our new Kansas City, Kansas, campus that is needed for our growing associate base. We do not expect this to have a material impact on our free cash flow as the construction will span multiple years, and we will also be receiving incentives that will offset a portion of the construction cost.

Moving to capitalized software, the $21.1 million of capitalized software in Q4 represents 28% of the $75.2 million of total spend on development activities. Software amortization for the quarter was $19.2 million, resulting in net capitalization of $1.9 million or 2.5% of our total R&D investment.

Now I'll go through the Q1 and 2012 guidance. For Q1 revenue, we expect revenue between $565 million and $585 million, with the midpoint reflecting growth of 17% over Q1 '11. For the full year, we expect revenue between $2.425 billion and $2.5 billion, with the midpoint reflecting growth of 12%. We expect Q1 adjusted EPS before share-based compensation expense to be $0.48 to $0.50 per share, with the midpoint reflecting 23% growth over Q1 '11. For the full year, we expect adjusted EPS between $2.20 and $2.30 per share, with the midpoint reflecting growth of 20%. Q1 guidance is based on total spending before share-based compensation expense of approximately $335 million to $340 million. Our estimate for the impact of share-based compensation expense is $0.03 in Q1 and $0.12 to $0.14 for the full year.

Moving to bookings guidance, we expect bookings revenue in Q1 of $560 million to $600 million. The midpoint of this range reflects 10% growth over Q1 of '11.

In closing, we are pleased with our strong results in Q4 and the full year, with all key metrics at or above our expected ranges, including record bookings, revenue, earnings and cash flow and strong margin expansion.

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

Zane M. Burke

Thanks, Marc. Good afternoon, everyone. Today, I'm going to provide highlights of our sales results and cover marketplace trends. Starting with our results, we had another quarter of record bookings, driven by robust demand in our client base and strong competitiveness in new footprint opportunities. Our bookings revenue in Q4 of $899 million reflects 44% growth over last year and is an all-time high.

For the year, bookings revenue was up 37% to $2.7 billion. As Marc mentioned, we signed 2 ITWorks contracts and 1 RevWorks contract in the quarter. These contributed to the percent of our bookings from long-term contracts being 34%, which is slightly above historical levels. But recall, that Q4 of last year also had 2 ITWorks contracts and a RevWorks contract, so had a similar mix. These contracts are clearly not our only large contracts as we had an all-time high level of 32 contracts over $5 million, including a record 19 over $10 million.

Another driver of the strength in bookings and revenue this quarter was strong results from our DeviceWorks organization. 2011 was a breakthrough year for DeviceWorks as our client's interest in using Cerner as a single source for connected devices increased and more device manufacturers look to us to be resellers because they recognize the value of our device connectivity platform and the strategic relationships we have with our clients. We have been saying for several years that DeviceWorks concept to flat to declining trend of traditional hardware sales, and we saw this play out this year as essentially all of the 39% growth in total technology sales in 2011 was driven by device resell. This strength came from broad sources, including CareFusion, Pyxis, medication dispensing devices, RxStation, infusion pumps, beds and monitoring devices.

Another highlight for Q4 and the year was the traction we gained in the small hospital market with our CommunityWorks offering. Recall that CommunityWorks is our staff offering for small and critical care hospitals where we leverage our hosting and services capabilities to provide a complete suite of clinical and financial solutions at a very competitive price. In 2011, we added over 20 new small hospital footprints and expect this to accelerate in 2012.

Moving to our physician solutions. We had a strong Q4 that contributed to the best year in our history, with ambulatory bookings growing 60% in 2011. I believe this strength is the result of enhancements we have made to our solutions over the past few years, coupled with the marketplace's desire to have an integrated solution across inpatient and outpatient venues. Evidence of this trend is that we continue to partner with many of our clients in our installed base to extend our solutions to their employed and affiliated physicians. In 2011 alone, we partnered with 42 of our large health system clients to offer physician solutions. In many cases, our clients are displacing an existing ambulatory EHR supplier so they can move to our integrated offering. The recently announced expansion of our relationship with Adventist Health to include 130 outpatient clinics is a good example of this.

In addition to this example, we are replacing the ambulatory solutions of our primary inpatient competitor. We also displaced all the major best-of-breed ambulatory competitors at least once in 2011. We believe this trend will continue as we have several large clients that chose best-of-breed ambulatory providers in the last 3 to 5 years that are now coming back to the market for an integrated solution.

Additionally, significant greenfield still exists in the market, and we're well positioned for this opportunity as well. Our competitive position in both the replacement and greenfield opportunities will be further strengthened by our constant focus on enhancing our solutions to improve the physician experience and productivity with PowerChart Touch, and our Project Go initiative, which Mike will discuss in more detail.

Moving to our global results. As Marc mentioned, we had a strong quarter outside the U.S. as well, with 35% revenue growth in Q4. After a slow start to the year, these strong results bring the full year growth to 7%. Overall, we continue to see gradual improvements in most global markets, and we had strong years in Canada, Australia and the Middle East. The strength in the Middle East included an agreement with Hamad Medical Corporation to digitize the entire public health system of Qatar. This agreement significantly expands our leadership position in the region and strengthens our position for other large opportunities. In England, despite continuing coverage of changes to the National Programme, we are continuing to execute. In Q4, our [indiscernible] contract was extended, and we expanded our relationship with 2 trusts. Going forward, we believe we are well-positioned for growth in the U.K. as we expect more opportunities to sell directly in all trust -- in all regions.

Moving to the overall marketplace and our competitiveness, we gained share again in Q4 with 35% of bookings coming from outside of our core Millennium installed base. For the last year, 32% of our bookings were from outside our base, which is up from 28% last year. We continue to see significant new footprint opportunities. While many hospitals will use their existing supplier to get to Stage 1 of Meaningful Use, we expect many of them to switch suppliers as they face the rising bars for Stage 2, Stage 3 and additional requirements for Value-Based Purchasing, ACOs and data analytics capabilities. With 2 major installed base largely up for grabs due to challenges with transitioning to new platforms and uncertainty around their ability to keep up with future requirements, we believe we are still in the early stages of a multiyear market share shift. And since only one competitor presents a consistent challenge, we have a great opportunity to gain a significant share of those vulnerable installed bases in the coming years.

I'm also pleased that we had our best win rate against our single toughest competitor in 2011, and I believe this will continue to improve for 2 reasons. First, we have already enhanced and are making significant incremental improvements in the one area that has historically led to their success, the physician experience. We now offer a very competitive physician experience and believe our efforts this year with Project Go and PowerChart Touch will change the game in our favor. Second, we strongly believe we are the smart choice for anyone looking beyond the early stages of Meaningful Use. Our investments in interoperability, data analytics and our Healthe Intent platform provide a meaningful differentiator against a company that has a platform that makes interoperability and data analytics very challenging. From a macro view, while we recognize health care is likely to be targeted as part of the solution to the U.S. deficit, we believe the stimulus plan will remain intact, and other programs such as Value-Based Purchasing to drive ongoing IT adoption. While some level of cuts to our clients funding are likely, we expect any future adjustments to be tied to quality and outcomes, which will make IT adoption essential for organizations looking to remain competitive.

In summary, I'm very pleased with our record results in 2011, and I think we are well positioned for a strong 2012 and beyond.

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

Michael R. Nill

Thanks, Zane. Good afternoon, everyone. Today, I'm going to discuss ITWorks, RevWorks and Cerner's areas of focus for 2012. Let's start with ITWorks which had a great Q4 that included 2 new ITWorks clients bringing our total to 9. One of them is a long-term client that chose to expand their relationship with Cerner by adding both CernerWorks hosting and ITWorks. The second client is brand new to Cerner and chose Cerner to displace their existing EMR provider and to provide hosting and ITWorks services.

This is a second example where ITWorks being part of a new client win, and it demonstrates that ITWorks is not just something we sell into our base, but it's also a part of our competitive differentiation. The success of our existing ITWorks clients is a key factor in the decision-making process for potential clients. Future clients can directly observe the speed of progress against clinical roadmaps, and they can easily conclude that ITWorks' alignment with Cerner is very powerful. It is the best way to accelerate their path to Meaningful Use and to ensure compliance with future regulatory requirements.

Another noteworthy observation about ITWorks is that almost all of our ITWorks clients have executed some form of scope expansion since their initial contract. In total, we had over $50 million worth of scope expansion contracts in 2011. This activity proves the benefit of the tighter alignment that is created with ITWorks and is evidence that there's still room to grow after the initial ITWorks relationship is established.

Moving to RevWorks, we also signed a RevWorks client in Q4. This marks our fourth RevWorks client and is a critical access hospital that chose RevWorks. The signing was an existing CommunityWorks client that is already live with a suite of clinical and revenue cycle solutions. The RevWorks relationship allows them to advance their current system and deploy new capabilities to optimize revenue and generate cost savings.

In addition to adding a RevWorks client, we also had a great deal of success in 2011 with clients increasing adoption of our revenue cycle solutions and services that can become the foundation for a broader RevWorks relationship. In total, our revenue cycle bookings more than doubled over 2010 levels, with the strength driven by patient accounting, access management, care management and health information management. We also continue to execute operationally, and in 2011, we brought patient accounting live at 31 hospitals and 95 clinics. We now have a total of 76 hospitals and 365 clinics live.

Looking ahead, we remain confident that revenue cycle will be a big contributor to our long-term growth. We are building a good foundation in our installed base and are increasing penetration of core revenue cycle solutions and establishing strong examples with our initial RevWorks clients. We also believe that as the industry shifts from the current volume-based reimbursement model to a value-based quality model, providers will increasingly look to clinical solution providers that can offer integrated revenue cycle solutions versus relying on standalone solutions.

In summary, we remain bullish about the outlook for all of our works offerings. We believe strongly that if we provide high-quality services that deliver superior value to our clients, these offerings will create an outstanding value proposition and client adoption will accelerate. The key element that makes these offerings compelling is that they do not require incremental spending by our clients. They're just shifting existing spending to Cerner and getting better performance for the same dollars. We have proven this model with CernerWorks over the last decade and now, our new works offerings are following the same pattern.

Before handing the call over to Jeff, I wanted to discuss our 2012 imperatives that I recently shared with our clients as I think they are relevant to everyone on the call as well. The imperatives are: drive Meaningful Use adoption; dramatically improve physician experience with our solutions; and powering population health management.

First, Meaningful Use continued to be a very powerful driver across our client base in 2011 and will continue to be the focus of significant activity in 2012 and beyond. By the end of 2012, the majority of our clients will have attested for Stage 1. The Meaningful Use wave of activity combined with ICD-10 will require our entire client base to migrate to our current version of software, which is a big undertaking, but also very positive from an ongoing support standpoint. In the process, we will significantly impact workflows and activities of our clients' physicians, and it's imperative that we make this a smooth process and provide the best experience possible.

This leads me to our second imperative, dramatically improve physician experience with our solutions. Meaningful Use has driven and will continue to drive physician adoption at unprecedented levels. We believe we have the best underlying technology to support Meaningful Use. And, with the acceleration of physician adoption, we continue to increase our focus on physician productivity and physician experience. During the health conference in 2011, Neal launched Project Go and PowerChart Touch. The core message and driving principles behind these efforts are to make the solutions fast, smart and easy. We're focused on speeding up workflows, reducing clicks and ensuring our solutions provide each user with the information they need at the right point in the workflow in the context of the person, condition and venue. We are building applications that require limited training and support the natural movement of the user throughout the day across the tablet, desktop and phone. In short, we are focused on enabling health care delivery anytime and anywhere.

Meaningful Use is just but one set of requirements in a growing wave of measures and mandates that will continue to impact our clients in the future. Cerner's focus is to future-proof our clients' organizations by providing the technology to withstand changes in reimbursement models and the associated quality and regulatory reporting requirements.

This brings me to our third imperative for 2012, powering population health management. The current narrative uses terms like medical home and Accountable Care Organizations. Our population health management solutions will help our clients exchange and aggregate clinical data to support the advanced analytics required to predict and prescribe the patterns of care that deliver the higher highest quality outcomes at the lowest cost. This is where our competitive differentiation begins to widen.

In summary, we executed very well in 2011, and we're set up for 2012 to be a year that includes significant growth in our client adoption and substantial advancements in Cerner's capabilities and competitiveness.

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

Jeffrey A. Townsend

Thanks, Mike. Today, my comments are going to pick up where Mike left off and expand on how we are getting ready for the second order effects [indiscernible] as health care is digitized. In 2011, we made good progress on this front and are focused in 2012 on future-proofing our client's readiness for measures and mandates as well as facilitating population health management as a continuation of this progress. As we have discussed, we are building a meta data layer agnostic to the source EMR to better position our clients for the increasing use of quality standards, performance measures, interoperability and managing the health of populations. We call this layer Healthe Intent, and 2011 was a foundational year for this platform.

In just over a year, our Chart Search efforts went from a nascent offering to having 115 clients engaged. We are currently adding about 6 million documents and 150 million results on a daily basis, quickly building foundational data for the Healthe Intent platform. There are several differentiators when comparing the Healthe Intent platform to other attempts to aggregate and analyze data. Interoperability is a key one. By being EMR agnostic, we can operate in the reality that not all information will come out of the Cerner source system. We have already proven leadership in the area of interoperability with our Cerner Network and health information exchange offerings, which create better clinical integration and coordination of care by facilitating secure electronic flow of data between hospitals, physician practices and other stakeholders regardless of the EHR system being used. We exited 2011 with approximately 100 million clinical and financial transactions being sent across this network each month. This is double the level of transactions from a year ago.

Another differentiator of Healthe Intent is we were able to capture research, evidence and claims data that when combined with real-time clinical data from the EHR, significantly enhances the power of the platform. We can be predictive and help identify risks as they occur, so care plans can be changed versus just reporting on them after it is too late. The key element of our ability to be predictive is the deployment of agents across the Healthe Intent platform. Concurrent with the rapid growth in data being captured on our platform, we are deploying sophisticated machine-learning algorithms to support mapping of clinical concepts and clinical decision support agents such as sepsis. And to advance this progress we recently launched Cerner Math, which is an initiative aimed at accelerating our ability to discover and develop clinical agents using a hybrid of published evidence on our Health Facts research platform. These tools will be critical to our clients as the health care landscape evolves to having payments tied to quality, outcomes and the ability to manage the health of populations. The dynamic nature of these changes to reimbursement structures will require the ability to quickly adapt to new requirements. As a result, we believe our cloud deployment model is important because we can help our clients be ready for the next requirement without major upgrades or implementation projects.

In closing, I'd remind you of the Wednesday investment community event at HIMSS, as Zane, Mike and I have outlined, there's a lot of innovation now coming to the surface not only in the EMR and physician space, but also in interoperability, population management and new care delivery models beyond the enterprise. We will be using this year's event to formally launch several of these new solutions. We've made great progress in 2011 at building a foundation that will help future-proof our clients while also positioning Cerner for the next wave.

Now I'd like to open up the call for questions.

Question-and-Answer Session

Operator

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[Operator Instructions] Our first question is coming from the line of Jamie Stockton from Morgan Keegan.

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

I guess maybe the first one, Zane, as far as Stage 2 is concerned, do you guys have any expectation for when the rules are going to come out or be proposed and then maybe when demand related to that is really going to kick off?

Zane M. Burke

Sure, Jamie. I think the -- we anticipate the final ruling coming out here by the end of February. And obviously, we've been working based on the drafts as they exist today. We expect the final ruling here in February. We're seeing demand based on Stage 2 today, mostly in the new business area where you're seeing clients that are thinking about making changes after they get to Stage 1 on some -- either an ED system or on a competitors' element, but don't feel good about where they're headed down in -- for the future. The other piece of that is you'll see significant opportunity for us in our existing client base around a couple of particular areas that will drive up the quality reporting, analytics. And then there's some areas around physician documentation and meds administration that will provide opportunities in our core client base as well. So we would anticipate that once those are finalized, that, that will help drive additional demand.

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

Okay. And then I guess maybe, Marc, it looks like the service expense base grew a fair amount sequentially during the quarter. Obviously, you guys are signing more outsourcing deals. But are you hiring a fair amount there ahead of some of these deals? If you could give us any color on that, that'd be great.

Marc G. Naughton

Yes, I think it is twofold, Jamie. We do have, obviously, when we have ITWorks deals get signed, we pull those people into our services organization, and that is a quick bump of the number of people that hits that line right away. We've also been hiring aggressively during 2011 based on our backlog and pipeline of work that we see for primarily implementation services. So we've been adding costs. As when we get to our Analyst Day and investor meeting at HIMSS, we'll talk a little bit about the contribution margins you're seeing from that business, and one of the things that we're proud of is the level we're driving it from that business in the year where we actually incurred a bunch of expense, bringing people on, getting them trained. But now, all those people that we brought on are ready to go for 2012. We don't expect to hire as many people for '12. It'll be dependent on what the activity is. If the activity continues to increase, we'll certainly hire a certain level, but I think we're really well positioned to get those people billable and out on jobs. So that's the expense increase you saw both from the ITWorks and from bringing on people that were getting trained or ready to go out in the field.

Operator

Your next question is coming from the line of George Hill from Citigroup.

George Hill - Citigroup Inc, Research Division

Marc, I want to follow up on one of Jamie's points and did I hear you right, that gross margin in the quarter deteriorated a bit on an increasing mix of services, and now that I thought I understood your comment in the last question to be that you've brought in a bunch more people. Any anticipation of new services business coming online, plus other associates that get put into the field? Should we then think of gross margins as having the ability to expand again in 2012 as opposed to the deterioration we saw the last 2 quarters?

Marc G. Naughton

Well, the really -- the key for the gross margin level, there is 2 components. The key component clearly is our DeviceWorks and the resale of those devices. The higher component of that and the higher cost and the lower margins is clearly the primary driver. The statement relative to services is basically for RevWorks and people that we bring in. And some of the RevWorks deals, we didn't hire the people directly. We actually -- they remain employed by the health system, but we're basically hiring them as consultants outside of Cerner. And so those costs go into our cost of goods sold and to get to our gross margin. So it's those 2 elements. And clearly, we had a great year, so there's going to be an element of higher commissions that will go into that cost line that gets us to gross margins. So kind of in a decreasing order of those are the 3 elements that impact that. We actually continue to see those things to be going forward, so we think that the level you've seen in the last couple of quarters is an appropriate level. And obviously, I would point out that relative to our operating margins, we were still successful in growing our operating margins even with some of the lower gross margins and we expect to be -- continue to be able at these kind of level of gross margins that we expect to see going forward as in Q3 and 4, to continue doing the 100 to 200 basis points growth at the operating margin level. So we're very comfortable with that. We think gross margins are kind of at a fairly consistent level for a period here, and that's all right with us.

George Hill - Citigroup Inc, Research Division

I appreciate that color, and then maybe a quick follow-up for Mike. Mike, it sounded like with respect to ICD-10 and the rollout of new financial software packages, there doesn't seem to be a new license opportunity for people who are on service and maintenance, but it sounds like you might be able to take a service and maintenance increase on that. Did I hear that right?

Michael R. Nill

Yes, that's -- that is correct. We expect there's going to be a significant services opportunity for us as our clients move through ICD-10 and try to control their revenue and maximize the potential there. So we see a -- an opportunity for us in the future.

Operator

Your next question is coming from the line of Glen Santangelo from Crédit Suisse.

Glen J. Santangelo - Crédit Suisse AG, Research Division

I was wondering if I could just ask a quick question on Health Information Exchange marketplace. I mean, you've clearly discussed this in some detail in the past, and I know you've had some success on the private side of things. But maybe could you give us an update in terms of the public side of things? I know you mentioned obviously some of your competitors maybe have issues with interoperability. Doesn't seem like that's an issue for Cerner, but could you just maybe give your assessment of that marketplace and how we maybe evolve from here?

Michael R. Nill

Yes, it's -- I guess a wide variety of options out there. Starting back at the stimulus level, every state has to stand up or come up with a exchange alternative. And so if you start at that level, you'll see a variety of states trying to actually invest in technology and have their own offering for the broader public to states that are just certifying or coming up with a short list of named existing, what you would call, private networks that they're going to sponsor or certify. So at the macro level, every state has an objective to go complete and stand that up to get the dollars associated with it. At the federal level, the ONC is also driving a fair amount of activity, trying to push what they call the Direct Project, which initially is messaging, and that's something Cerner's been very, very heavily involved in and contributed well over half the open source to that effort. At the individual Cerner existing client level, really, anybody that has more than one facility, or more than one care delivery venue, is creating their own private network as well. So I think that if you look at other industries, whether you want to look at telco, cable, all of these kind of follow a similar pattern of there will be a lot of these networks to begin with. And then there's likely to either be consolidation or the standards will take over to where it's more plug and play. But right now, it's relatively chaotic environment, driven by Meaningful Use is requiring you to be able to share. And so it is almost a zip code by zip code thing, to answer that question.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Okay. Maybe if I can ask one quick follow-up question on Stage 2. I know we're sitting here waiting for the criteria to be announced, and, obviously, maybe we'll see a pickup in demand after that criteria comes out. But my question is more around the delay of it. Are you seeing any changes in your customers' behavior, like a willingness to maybe switch vendors or pursue a different strategy kind of given the delays in getting to Stage 2?

Zane M. Burke

Glen, this is Zane. I think it's been nothing but beneficial for us in terms of the delay of the Stage 2 enforcement elements of it, and it's allowing some of the marketplaces, some of the platforms, as we've discussed about -- we've discussed that have either been sunsetted or are struggling, some are competitor's platforms that are struggling. It's allowing our clients the opportunity and prospects, the opportunity to go back and take another look at what their strategy should look like.

Glen J. Santangelo - Crédit Suisse AG, Research Division

And then maybe -- I appreciate that, and this is my last question and I'll jump off, hey, Marc, the company's sitting with over $1.1 billion in cash now. I know in the past that we've talked about potential acquisitions or small ones and potentially trying to gain access to their installed base. But the company seems to be doing a good job of winning market share in its own right. So what would you foresee the uses of those cash a couple of years down the road?

Marc G. Naughton

Well, Glen, I think the opportunity to do acquisitions is regardless of whether it's market share or interesting technology that could, we could bundle with Millennium is going to increase. I think in an environment where increasingly the enterprise delivery systems from a technology standpoint are going to be the winners, there's going to be a lot of interesting niche technology whose owners as a company are not going to really have a long-term future ahead of them. So we think there's a lot of opportunity to go be acquisitive in an appropriate way. I agree with your comment that our market share purchases, we talked about that having a useful life. There could still be something there that would be interesting, but we are being very successful in going into the other bases. So I think we're going to continue to hold the cash, focus on ways that we can invest it. I think there's going to be a lot more opportunities than we've talked about publicly that can come up. And as a cash buyer in this market, given that private equity is -- having difficulty getting access to capital, I think we're in a really good position to take advantage of what we think could be a buyers' market coming up. So we're going to keep the cash; we're going to keep looking for opportunities and ways to invest it. And certainly, over the long term, if we don't find a better way to use that money to drive benefit to our shareholders, we’d look at returning it to the shareholders in some form or fashion. But I think over the -- certainly over the next year or 2, there are going to be opportunities that I want to continue to hold that cash balance.

Operator

Your next question is coming from the line of Sebastian Paquette from Goldman Sachs.

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

So my first question is just on the performance analytics market. And while you're giving Sepsis away for free right now, I'm wondering when you're expecting to GA your excess free Admissions product and any initial thoughts on pricing and maybe what proportion of your clients you might expect to purchase the software.

Marc G. Naughton

Yes, this is Marc. I think it's probably a little early to go into a lot of detail. Obviously, our focus right now is getting search out there, getting the infrastructure, the delivery system created, the -- getting our clients used to accessing the cloud for data, which is a little bit different from what they've done historically. I think certainly, we'll start talking about that at the appropriate time. But to try to go into pricing and those types of things at this point is a little premature. I don't know that we've really nailed that down, and certainly, our expectation is to have a portfolio of those solutions available. And obviously, that will impact the pricing as to how we bundle those. So good question. It's just probably little early for us to be able to provide really a definitive answer yet.

Zane M. Burke

The only thing I'd add is that you will see us demonstrate and show the -- some of the other things in that portfolio at HIMSS, so you'll get a better feel for what the next set of solutions that aren't free look like.

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Okay. And if you take a look at the latest CMS data, about half of eligible hospitals in the U.S. have not yet registered for the Meaningful Use program. And I'm wondering, and assuming that not all of these unregistered hospitals have fully implemented HCIT, I'm just wondering what you, from your vantage point, what you’d attribute this lag to compared to the earlier adopters? And then how would you see this later adopter market segment start to show up in your bookings?

Zane M. Burke

This is Zane. I think there's a couple of things. I think first off, there's that part where the change in some of the incentives in terms of there not being an incentive to go little early, created an environment and where some of the hospitals waited for a year to actually attest. So we anticipate in our own client base to be a very significant portion of our own client base will attest in 2012. The other piece of that is this later adopter element, where I think there was some feeling of whether the government would continue to fund it as checks have gotten written. As checks have gotten written, then I believe those clients are coming into the marketplace and saying that they want their share as well. So what they were avoiding was a -- the concern over at -- Cash for Clunkers, and clearly, that did not come about. We are seeing our clients receive their checks in the -- were well in the hundreds of millions of dollars.

Marc G. Naughton

Hey, this is Marc. One other thing that is kind of interesting is that we discussed the strategy of health care to get them to Stage 1 of Meaningful Use with an existing supplier. So you're going to see that list probably at the top of it, Meditech and some other companies that we've talked about that might be challenged having gotten their clients to Stage 1. We think those are additional opportunities. So just because someone's on that list, doesn't mean that they're not a future client for Cerner Corporation. So I think it's -- you've got to look at that as -- it's interesting data, but it doesn't mean that those people have made a final decision.

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Got you. And then just -- one last question here, going back to the additional hirings in 2011, am I in the ballpark of assuming that they're roughly 1,000 additional associates hired on just over 8,000 total base as of the last 10-K filing? And I'm wondering, do you expect to continue that pace of hiring in 2012? Or should you start to see that hiring pace decline?

Marc G. Naughton

Yes, I think relative to headcount, I think when we file our next 10-K, you'll note that we hired almost 2,000 people net in 2011. So I think, certainly, that was a huge year for hiring. In 2012, the opportunities are there. We will continue to hire where we add 2,000 people. I don't know if that's going to be the case, but we are fortunate to be in a position and have a training program set up where we can bring new people in on a very, just-in-time type of basis, where we're not having to put them on the bench for a period of time. We can sign a contract, know we're going to need resources in 90 to 180 days, and then bring those people on board, get them trained so that they're available to do that. And clearly, as we do more of the ITWorks businesses, we rebadge those people to Cerner. So we will, in that case, it will be chunk of associates that joined Cerner kind of en masse. So a part of that hiring that's going to approach 2,000 for 2011 relates to the ITWorks transactions that we did during that year. So there's 2 elements that are really driving that as I talked earlier, Services business and ITWorks. But I think we've -- certainly, if that's something that you're interested in doing as a profession, our resume factory is open.

Operator

Your next question is coming from the line of Donald Hooker from Morgan Stanley.

Donald Hooker - Morgan Stanley, Research Division

So I was intrigued by the momentum you guys have picked up in the ambulatory side. I know that's a small part of your business. I was wondering if you could provide a little bit, I'm just curious in terms of to what extent of that growth is replacing other vendors? You commented that there was some rip and replaces as you create more integrated health care IT systems. Is a large percent of that growth rip and replaces or is a lot of it greenfield?

Zane M. Burke

This is Zane. At -- on the large systems, those are typically a replacement marketplace, so you see that where you have our integrated delivery networks, they've typically have, made a selection, some sort of selection. Those are typically a rip and replace. There is a large amount of greenfield opportunity in the smaller physician practices out there as well. So there's -- it's divergent based on where you are in the demand curve.

Donald Hooker - Morgan Stanley, Research Division

But you're basically marketing those ambulatory products almost exclusively through your inpatient customers?

Zane M. Burke

No, actually, we're not. We're in both spaces, very active in both.

Donald Hooker - Morgan Stanley, Research Division

Okay. And when -- then I'll just ask one more. I was also intrigued by the pickup in the international revenues. I guess for the past couple of years, international's been -- their global has been somewhat of a dilutive to your top line growth rate. As you look into next year and you gave some guidance there, is that -- is international growth going to kind of catch up to the overall consolidated growth? I saw you had a big deal in Qatar, and it seems like you had some good momentum there. Can you talk about the geographic mix for '12?

Marc G. Naughton

Yes, this is Marc. I think we'll -- it should be probably similar to what we saw in 2011. You certainly -- it's based on the economies of the countries. We certainly see -- saw in Europe in that area that they're not rolling out a lot of RFPs for new projects because of the lack of funding. The U.K., we're doing okay in, but there's not a lot of new projects coming online. We're well positioned when they do come online. But when you look at the Middle East, you look at Australia, you look at Canada. Those economies are doing well and they certainly are helping contribute to getting some growth in our global business on a year-over-year basis. I think probably the slight growth that we see in 2011 over 2010 is more -- as much a factor for relative to an easy comparable as it is to really great performance. But I think we've gone insane. We hope to see some, a little bit of growth in that business. I think when you look across some of those regions, there are potential for some significant procurements. Obviously, Qatar is a good example of getting countrywide support for a health -- from a health system perspective. There are larger countries certainly in that region that would look to do something similar. So I think it's going to -- global, I don't think it's certainly going to reach our overall revenue growth level that we saw as a company. But I don't think it's going to be a significant drag if we can continue moving that forward in mid to upper single digits, we'd be okay with that for next year.

Operator

Your next question is coming from the line of Atif Rahim from JPMorgan.

Atif A Rahim - JP Morgan Chase & Co, Research Division

If I could just follow up a little bit on that prior question about the ambulatory market. You talked about it for a couple of quarters now, but any way you could provide some tangible metrics on how large your footprint is there, what percentage of bookings it might be contributing, how you're actively going after the smaller market since, I think Zane, you mentioned that?

Marc G. Naughton

Yes, this is Marc. Relative to what it contributes, as we've indicated, it's a very small component of our total revenue profile. I think if you try to go say what kind of market share we have relative to all of our health system docs and all the independent docs that we pull up, it's going to be in the single digits or as a percent. So I think that overall, it's a good market. It's going to need IT. We don't have the big footprint in it. We have a nice footprint. We're pleased with where we're at. But the growth of that business on a percentage basis, while not being a huge mover to either [ph] on top line overall for the company, has got a great future potential. So I think -- it's if I'm not -- I think I'm not sure if I'm giving you that good of data, but fairly small market share here, expect to continue to grow and we're going to be pushing both on the health systems side and going basically door-to-door, if you will, and fighting for the individual providers who, to date, are still really, in our mind, a greenfield opportunity.

Atif A Rahim - JP Morgan Chase & Co, Research Division

Got it. So probably view it as a tailwind, but not necessarily moving the needle at this point. Separate question, I guess, staying on that footprint, what's your footprint like on ITWorks or RevWorks just in terms of total hospitals at this point?

Marc G. Naughton

Really small in total. I mean, we have 11 ITWorks clients at this point, actually, 9 ITWorks clients at this point. So relative to the opportunity just in our base, we think that's -- that, that has the opportunity to expand. I don't know that it’s exponentially, but we would expect by the end of the decade to have 50 to 70 of those clients up from the 9 we have today, and that wouldn't be getting all of our client base. So the interesting thing that we did not expect to see in the ITWorks business is that not only are we selling to existing clients to kind be their -- that next up to getting really going fast to getting an all Cerner shop. We're seeing a lot of new clients wanting to go directly into an ITWorks relationship because they go visit clients, that our existing clients that have it, they see the benefits of us managing all their technology from the outset and fixing some of their problems that they're dealing with at this point. So I think that's -- that gives you a little bit of a view. I think, clearly, when we have our Investor Day, we're going to give you a view of ITWorks in the future view that we did last time we've refined that a little bit. So we can kind of give you a 20/20 outlook for what some of those businesses look like. But today, that's a very good progress to date on something that's very new for us. But we think that's got a lot of opportunity for growth.

Zane M. Burke

One interesting comment around the new client ITWorks that we added this quarter is that was actually a selection that was made by -- a competitor selection about 15 months ago and they failed at moving forward. And basically, our ITWorks model being so prescriptive and having such a high level of both delivery of results and client satisfaction drove the new business and to make a change in the platform within 15 months. And so it's just -- it's proof of our theory and what we're seeing in terms of we think the marketplace is subject to change and up for grabs.

Atif A Rahim - JP Morgan Chase & Co, Research Division

Okay, that's very interesting color, helpful. So one last, clarifying question, if I could. Did I hear you say that the bookings mix from the long-dated contracts was about the same at 34% on a year-over-year basis?

Marc G. Naughton

Yes, you’ve probably seen us around 29% on average if you go across. And this quarter, we were at 34%, so slightly over that. But it's kind of in that --

Zane M. Burke

On Q4 is yes.

Marc G. Naughton

Yes, on Q4.

Operator

Your next question is coming from the line of Ryan Daniels from William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Maybe for Zane and Marc, a lot of discussion on the call tonight about the move towards more shared savings models and increasing technology demands at Stage 2, Stage 3 Meaningful Use and how that will create opportunities. I'm curious, number one, are you seeing that as the stimulus checks are cut and some of the hospitals get those Stage 1 Meaningful Use dollars, is that when they're coming back to the market in the pipeline? And if so, is that a trend you think will accelerate in 2012 as more of the dollars start to flow to that client base?

Zane M. Burke

We are seeing where clients are interestingly using those dollars to actually procure even things that aren't related to Stage 1, Stage 2 or Stage 3. They've, in fact, lab was one of our –- had one of our best years as a lab company. And lab is not specifically in the Stage 1, Stage 2, Stage 3 elements. But what we've seen is clients come and use those Meaningful Use dollars to come back and round out their solution sets in other ways, so yes, it's clearly is adding capital into the system as they've seen those dollars.

Ryan Daniels - William Blair & Company L.L.C., Research Division

What about if you look at the new footprints? I mean if you look at the potential disruption or turmoil in the marketplace and getting net new wins in the acute market, are you seeing a direct correlation to some of these clients getting Meaningful Use dollars and then making a switch to Cerner? Or is it not that directly correlated?

Zane M. Burke

They are directly correlated so that's why you're seeing the Stage 1 attestations coming forward and they're using those dollars to go out and make selections which will carry them for the long haul past Stage 1.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, that's helpful. And then another follow-up there. Just want, lot of talk again about the ACOs and population health management. Obviously, a big piece of that will be the care delivered outside of the ambulatory and acute markets so in post-acute care, Lpacks [ph], et cetera. Are you seeing a pickup in demand there? I know you had a nice contract with HealthSouth, but are you seeing more activity in the non-acute market as well, given all the things that are taking place in the reimbursement front?

Zane M. Burke

Yes, I actually have been engaged in a fair amount of activity and we're the best positioned of any of the major players in this space and particularly, our single primary competitor in both the homecare, hospice and long-term care space.

Operator

Your final question will be coming from the line of Sean Wieland from Piper Jaffray.

Sean W. Wieland - Piper Jaffray Companies, Research Division

I want to go back to RevWorks. Did I catch you right and did you say that you took 31 hospitals live on patient accounting in the quarter or was that the year?

Michael R. Nill

That's correct, for the year.

Sean W. Wieland - Piper Jaffray Companies, Research Division

That was for the year. Okay, so all right, that's -- that makes sense. So can you talk a little bit about what that competitive landscape looks like when you're competing for the patient accounting deals? And within your base of customer, who holds the largest footprint of patient accounting systems within the Cerner client base?

Michael R. Nill

Well the -- what we see is as many of our new clients are selecting Cerner revenue cycle as part of their selection process upfront, so many, if not most, of our new footprints include revenue cycle as part of that upfront. And so you're competing at the broad-based enterprise level, clinical and financial systems. In our existing install base, probably Seimens and McKesson would be the largest other financial systems providers, current state.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Okay. And do you see -- would you say that there's an upper grade cycle overall, industry wide upgrade cycle underway there? How do you think about that market?

Michael R. Nill

I feel -- we feel really very good about that market, that there's going to be good opportunity there. There will be some elements around ICD-10, which may cause that marketplace to not accelerate as quickly as we would like it to see it, and think that, that may happen around some of the accountable care type elements which will drive a lot of revenue cycle selections in our minds. But ICD-10 has to be factored into the overall timeline there.

Marc G. Naughton

Sean, this is Marc. I think certainly, with ICD-10, with pay-for-performance, all of those elements, over time, people are going to want a clinically driven revenue cycle. And so we would expect our client base to, over time, evolve to a Cerner patient accounting system, Cerner revenue cycle. A lot of our clients today, that our existing clients might not have us in all their facilities. But it's certainly interesting that all the new clients a lot of them are purchasing to have a single platform to run both their financials and their clinicals, we think that's probably the trend going forward.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Okay. And then just unrelated question, Marc, any thoughts on the outlook for bookings growth in 2012?

Marc G. Naughton

Yes, I think certainly, Q1 we're looking at double-digit growth relative to bookings. I think it's important from a bookings perspective to realize we just grew bookings 44% last quarter, $200 million over our guidance range. Q1's always the seasonally lower quarter, so double-digit growth in a quarter that the prior year had a 30% growth is we think, pretty good guidance. It is absolutely our expectation to grow bookings in 2012 over our 2011 levels. Thank you, all, for your attention. I appreciate it. Have a good evening.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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