Recently, Cerner (CERN) reported 1Q FY15 operating results. The healthcare IT giant's first quarter performance was impressive to say the least, with 1Q revenue hitting almost a billion ($996m), up 27% y/y compared to $784m in the prior comparable quarter. Diluted GAAP EPS was down 6% from $0.34 to $0.32. In terms of analyst estimates, the company's results were in-line with expectations, posting diluted non-GAAP EPS of $0.45.
Strong 1Q results, outlook remains intact
Aside from the impressive top-line performance during the quarter, the company's bookings grew to a record $1.2b, jumping 32% from $910m over the comparable period. This reflects continued strong demand for the company's offerings, which I expect to continue due to the HITECH Act introduced in 2009. Most healthcare providers are currently focusing on the regulatory transition where they adopt solutions in order to allow them to comply with new legislation. This is evident from CERN's system sales which perform the aforementioned function, inter alia, growing 26% y/y to $259m. Couple these tailwinds with the strong outlook for the industry as detailed in my prior article on the stock, CERN should continue performing very well over the next few years.
As system sales fall to single-digit growth rates, healthcare providers should focus more on reducing costs and streamlining operations, which should provide an additional boost to CERN's support, maintenance and services revenue, which include its SaaS solutions. The segment grew almost 30% during the quarter, over the comparable period, and should continue its double-digit growth in following quarters. Strong increases in booking should ensure a stable growing overall revenue base in the near-term.
DSO issue, Tableau partnership
One area of concern is the company's receivables. During the quarter, DSO (days sales outstanding) jumped to 79 days, up y/y from 66 days. Management has attributed this to timing and revenue issues, and expects DSO to be in-line with historical figures in the following quarters. Although management's explanation seems credible, investors should continue to keep a hawk's eye on the metric going forward, as it may be indicative of future potential problems.
In a prior article, I detailed the Cerner-Tableau partnership, emphasizing the fact that the partnership could result in a strengthening of the HCIT giant's competitive advantage. In a nutshell, I made the assertion that combining the ease-of-use software functionality that Tableau is known for, along with CERN's domain expertise in healthcare, system sales should accelerate slightly as potential customers find it easier to switch (i.e. lower competitor switching costs) to CERN's solutions. The company's strong 1Q system sales backs up this assertion. Over the long term, customer stickiness should increase meaningfully as CERN's customers familiarize themselves with the company's solutions, and this should enable CERN to maintain its moat.
As seen above, my assumptions regarding CERN has been unchanged, due to the fact that the company performed more or less in line with my expectations. I continue to reiterate my bullish outlook on the company.
Due to the fact that CERN's solutions are embedded within their customers' workflow, the company benefits from a defensive end-market exposure. Such a feature also mitigates cyclicality, allowing the business to perform well in any type of economic environment. Without a doubt, such strong qualitative factors should result in the company trading at a steep multiple (which it currently is). Despite its above-average trading multiple, the company still has a lot of upside potential (50%) as shown in my model.
I am of the opinion that value investors holding for the long-term would do well to pay a premium (relative to average market-multiples) for a business that has defensive demand drivers which enable it to perform well even if the economy hits a down-cycle (which it definitely will). One should definitely increase share accumulation in such a scenario, as it is likely the investment would result in above-average capital appreciation when the market preference shifts from growth stocks (in a boom) to defensive stocks (in a recession). I continue recommending a long position in Cerner.
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