The ABCs of systemic healthcare reform - Cerner Corporation

Results Overview
In a challenging economic environment, we continued to execute on our core strategies to drive revenue growth, expand
operating margins, grow earnings and generate good cash flow in 2008. The 2008 results included strong levels of earnings,
and cash flow and solid new business bookings. New business bookings revenue in 2008, which reflects the value of executed
contracts for software, hardware, professional services and managed services (hosting of software in the Company’s data
center) was $1.54 billion, which is an increase of 2% when compared to $1.51 billion in 2007. The 2007 bookings exclude
bookings related to the Company’s participation in the National Health Services (NHS) initiative to automate clinical processes
and digitize medical records in England in the amount of $97.8 million. Revenues for 2008 increased 10% to $1.68 billion
compared to $1.52 billion in 2007, driven primarily by an increase in support, maintenance and services revenues. 2008
revenues and margin include a cumulative catch-up adjustment recognized in the fourth quarter, in the amount of
$28,640,000, resulting from a significant change in an accounting estimate related to the Company’s contract in London as
part of the NHS initiative to automate clinical processes and digitize medical records in England.
The 2008 net earnings increased 48% to $188.7 million compared to $127.1 million in 2007. Diluted earnings per share
increased 48% to $2.26 compared to $1.53 in 2007. The 2008 and 2007 net earnings and diluted earnings per share reflect
the impact of accounting pursuant to Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,”
which requires the expensing of stock options. The effect of accounting under SFAS 123R reduced the 2008 net earnings and
diluted earnings per share by $9.5 million and $0.11, and the 2007 earnings and diluted earnings per share by $10.2 million
and $0.12, respectively. 2008 net earnings also include the catch-up of margin adjustment related to the Company’s contract
in London. The after tax effect of this catch up increased 2008 net earnings and diluted earnings per share by $20,600,000
and $0.24, respectively. In addition to the benefit from the catch-up adjustment, the growth in net earnings and diluted
earnings per share was driven primarily by continued progress with the Company’s margin expansion initiatives, particularly
expanding the profitability of support and maintenance revenue, leveraging R&D investments, and controlling sales, general,
and administrative expenses. Our 2008 operating margin was 17%, and would have been 15% without the catch-up
adjustment, compared to 13% in 2007, and we remain on target to achieve our long term goal of 20% operating margins.
We had cash collections of receivables of $1.73 billion in 2008 compared to $1.65 billion in 2007, with the increase driven by
increased billings. Days sales outstanding increased to 92 days for the quarter ended January 3, 2009 compared to 90 days
for the quarter ended December 29, 2007. Operating cash flows for 2008 were $281.8 million compared to $274.6 million in
2007.
This year also included progress on our strategic initiatives that, while not yet material to our current results, are an important
part of our longer-term growth strategy. For example, we had several sales and implementations of our CareAware MDBus
healthcare device connectivity solution that allows medical devices to be connected to an electronic medical record through a
USB-like connection. We also made progress with our employer-focused initiatives, with our first health center client, Cisco
Systems, opening their LifeConnection Health Center in November 2008. This is a fully-automated employee-based health
center based on Cerner’s own successful on-campus model that has led to improvements in quality, efficiency, and access to
care for Cerner’s associates and their dependents.
The Company’s fiscal year ends on the Saturday closest to December 31. Fiscal year 2008 consisted of 53 weeks and fiscal
years 2007 and 2006 consisted of 52 weeks each.
Healthcare Information Technology Market Outlook
We have provided a detailed assessment of the healthcare information technology market under Part I, Item 1, The Healthcare
and Healthcare IT Industry.
Results of Operations
Year Ended January 3, 2009, Compared to Year Ended December 29, 2007
Revenues increased 10% to $1,676,028,000 in 2008, compared with $1,519,877,000 in 2007. The revenue composition for
2008 was $522,373,000 in system sales, $472,579,000 in support and maintenance, $643,317,000 in services and
$37,759,000 in reimbursed travel. The Company’s net earnings increased 48% to $188,658,000 in 2008 from $127,125,000
in 2007. The effects of SFAS No. 123R, which requires the expensing of stock options, decreased net earnings in 2008 and
2007 by $9,503,000, net of $5,641,000 tax benefit and $10,159,000, net of $6,030,000 tax benefit, respectively.
As discussed in the results overview and more fully described in the Operations by Segment, 2008 revenues and margin
included a cumulative catch-up adjustment recognized in the fourth quarter, in the amount of $28,640,000, resulting from a
significant change in accounting estimate related to the Company’s contract in London. The majority of the catch-up
adjustment revenue was included in support, maintenance and services.
• System sales revenues increased 4% to $522,373,000 in 2008 from $500,319,000 in 2007. Included in system
sales are revenues from the sale of software, hardware, sublicensed software, deployment period licensed software
upgrade rights, installation fees, transaction processing and subscriptions. The increase in system sales was driven by
growth in licensed software, sublicensed software, and subscriptions.
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