Cerner 3Q numbers - miss on revenue & EPS

Cerner, the IT healthcare services company, reported numbers and issued guidance for the coming quarter. For shareholders who are not looking to add to their positions, I am afraid the guidance and the numbers themselves fell short of expectations. Obviously the market was looking for more, the stock was down around 6 percent post the market close, i.e. in the aftermarket. What does this business do exactly? This is a business that uses current technology to make healthcare systems easier to use.

Eliminating paper and human error, making the entire ecosystem digital from the time you enter the ambulance to the time you are discharged, Cerner can be part of the process. For the better. The company offers solutions to all size healthcare providers to make lives easier for all concerned. Safety of patients, being able to serve those same said patients with high quality care and eliminating wasteful expenditure along the way, making the business more profitable (and by extension more resources elsewhere) means that everyone gets what they are looking for.

The company manufactures software that reduces human error, essentially. By working together with the healthcare staff and administration, they eliminate incorrect procedures and help the healthcare professionals keep a clean sheet means less litigation (yes, true story) and most importantly, the best outcome for the patient and their loved ones. And by using the internet (the cloud) the resources are able to be best utilized at the healthcare facility. i.e. if patient X needs Y and pronto, the pharmacy is already issuing the prescription that the doctor ordered, and the delivery would happen soonest. And therapy X would be facilitated and hey presto, all parties would save time and be kept notified of the progress of the patient. Neat, hey? Think sharing of clinical trials too.

The company is innovative, is licensed in around 25 facilities across the globe, in 30 countries. As per the annual report, they do business in "hospitals, physician practices, laboratories, ambulatory centers, behavioral health centers, cardiac facilities, radiology clinics, surgery centers, extended care facilities, retail pharmacies, and employer sites."

Their strength also lies in their ability to crunch the data being generated. In the 2015 Annual report the chief, Neal Patterson said: "In 2012, digital health care generated an estimated 500 petabytes of data worldwide. By 2020, that number is expected to grow to 25,000 petabytes. The only missing ingredient, then, has been a systematic way to analyze the data and make it actionable in providers' workflows. Fortunately, as we saw this situation developing in the early part of this decade, we knew a good health IT systems company that could take care of the problem."

And then in his closing segment of the CEO's letter in the 2015 annual report, Patterson continues, pointing to the whole prevention is better than cure theme that is currently taking hold: "The next era in health care is a shift toward prediction and prevention, personalized engagement and new types of interactions that are both continuous and contextual. Because Cerner invests in the future, we continue to arrive at the right place and time with systems that address real needs in health care."

Onto results for the third quarter of the previous financial year. Revenues were lower on the comparable period, a tough comp as the previous year had grown by 44 percent, 10 percent lower than the comparable at 1.434 billion Dollars, and unfortunately this was below guidance. Revenue guidance for the next quarter is 1.225 to 1.3 billion Dollars, also below what Mr. Market was looking for. Adjusted diluted earnings per share clocked 59 cents, below Mr. Market consensus of 60 cents. Guidance for the next quarter was 60 to 62 cents worth of earnings, also below the market consensus.

That is exactly why the stock was "downgraded" by Mr. Market, down 6 percent as we said earlier. The early guidance for 2017 looks OK to me, revenues for next year at the midpoint (between top and bottom) expected to be 11 percent better than revenues for this year and adjusted diluted earnings per share to be in the region of 2.50 to 2.70 Dollars. That means that at the indicated opening share price, the stock should trade forward on 20.9 times. I guess with revenue growth lower than before, the market has adjusted away from growth to a more "manageable" multiple.

I feel that the company is in a space that will continue to see massive growth. GDP percentage spend in healthcare in the US is expected to continue the upward trajectory. They have many more territories in which to operate and are one of the real quality operators globally. Non-U.S. revenue represents only 11 percent of Cerner total revenue. The bookings and backlogs are huge, the company has an enormous amount of work to do and could surprise always to the upside, this time around they disappointed their own high standards. We continue to hold the stock of what is a fine business, and ride out the current weakness.