The ABCs of systemic healthcare reform - Cerner Corporation

London which significantly enhances the Company’s ability to make reliable estimates of the work effort for the
remainder of the contract. These events, combined with our experience since the contract signed in 2006 and our
experience in the Southern region of England, allowed the Company to conclude that reasonably dependable
estimates of work effort could be produced and allow for margin recognition. As a result, the Company’s fourth quarter
2008 revenues included a cumulative catch-up adjustment, resulting from the significant change in accounting
estimate, in the amount of $28,640,000 which represents the margin on the contract which had been previously
deferred as a result of the zero margin approach of applying percentage of completion accounting. The remaining
margin attributed to the services subject to SOP 81-1 will be recognized over the remaining service period until the
services are complete and amounts allocated to the other support services subject to SOP 97-2 will be recognized over
the relevant support periods. The contract expires in 2014.
• The other region in England the Company is participating in is the Southern region. During the second quarter of
2008, the contract with Fujitsu, the prime contractor in the Southern region of England, was terminated which had the
effect of automatically terminating the Company’s subcontract for the project. A transition services agreement was
signed during the third quarter of 2008 that provides for ongoing services for the Trusts that already have live systems
for which margin was recognized. No formal timeline has been set for addressing the implementations at the
remaining Trusts, but the Company currently expects to play an ongoing role in this region. Margin recognized in 2008
was not significant.
• Cost of revenues was 19% and 18% in 2008 and 2007, respectively. The higher cost of revenues was driven by a
higher mix of hardware revenues in 2008.
• Operating expenses for the year ended January 3, 2009 decreased less than 1%, compared to the year ended
December 29, 2007.
Other Segment
The Company’s Other segment includes revenues and expenses which are not tracked by geographic segment. Operating
losses increased 6% to $589,138,000 in 2008 from $557,028,000 in 2007. This increase was primarily due to increased
research and development and general and administrative spending and a settlement with a third party supplier in the second
quarter of 2008 related to the prior period usage of their software in the Company’s remote hosting business. The third party
supplier settlement increased Other segment expense by $8,014,000 in the second quarter of 2008.
Year Ended December 29, 2007, Compared to Year Ended December 30, 2006
The Company’s net earnings increased 16% to $127,125,000 in 2007 from $109,891,000 in 2006. The effects of SFAS No.
123R, which requires the expensing of stock options, decreased net earnings in 2007 and 2006 by $10,159,000, net of
$6,030,000 tax benefit and $11,746,000, net of $7,275,000 tax benefit, respectively.
Revenues increased 10% to $1,519,877,000 in 2007, compared with $1,378,038,000 in 2006. The revenue composition for
2007 was $500,319,000 in system sales, $397,713,000 in support and maintenance, $585,067,000 in services and
$36,778,000 in reimbursed travel.
• System sales revenues decreased 1% to $500,319,000 in 2007 from $505,743,000 in 2006. 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 slight decrease in system sales was
primarily attributable to a decrease in software revenue, which was largely offset by an increase in hardware,
sublicensed software, and subscriptions revenue. We believe the decline in software revenue was primarily caused by
much of our client base being focused on upgrading to the Cerner Millennium 2007 release. Cerner generally sells a
perpetual license, so our clients do not have to pay new license fees when they upgrade to a new version of our
software, so the focus by much of our base on implementing the upgrade impacted our software sales.
• Support, maintenance and services revenues increased 18% to $982,780,000 in 2007 from $833,244,000 in 2006.
Included in support, maintenance and services revenues are support and maintenance of software and hardware,
professional services excluding installation, and managed services. A summary of the Company’s support,
maintenance and services revenues in 2007 and 2006 is as follows:
The $92,239,000, or 19%, increase in services revenue was attributable to growth in CernerWorks managed services
and increased professional services utilization rates. The $57,297,000, or 17%, increase in support and maintenance
revenues was attributable to continued success at selling Cerner Millennium applications, implementing them at client
sites, and initiating billing for support and maintenance fees.
41