Cerner 3Q - misses expectations

Last week we received third-quarter numbers from Cerner which disappointed the market. The share dropped 9% on the news as forward guidance was revised down. We should put that drop into perspective. Even after that fall, the share price is up 38% so far this year. It all depends on where you draw the line in the sand. Having said that, this has been a volatile ride. This business is a high margin software company with high expectations. A volatile ride usually comes with that package.

Bookings for the quarter came in at $1.1bn. This was much lower than expectations because a few large contracts will now only be included in the fourth quarter numbers. When these bookings reflect, it should result in an all-time high bookings for the full year. It has been a good year with some big government institutions signing up for their healthcare software services.

Revenues came in at $1.276bn which was 8% higher than the comparative quarter; $928 million of that came from support, maintenance and services. You can see that this is a retention business. Once you have signed up a hospital or an institution, their annuity business is a key driver of Cerner's future profits.

Another important factor to note is that only $142 million of these revenues came from outside the US. The potential to expand globally is massive.

Earnings for the year are expected to come in at around $2.42 per share, putting the company at 27 times forward earnings. The business does have gross margins of 83% and very impressive cash flows which explains the high multiple somewhat.

We remain buy rated on this stock as it continues to secure solid government contracts in the US. We will do a more detailed analysis of the full year when those numbers come out next quarter.