While revenue jumped 10% in Q2, Cerner looks to slim down costs by cutting jobs, offices

Reversing four back-to-back quarters of decline, health IT company Cerner’s top line jumped nearly 10% to reach $1.46 billion in the second quarter, up from $1.3 billion a year ago.

Despite the revenue growth, the company’s second-quarter net income plummeted 75% from a profit of $134.7 million during the same quarter a year ago to $32.7 million.

Cerner’s restructuring charges dragged on its margin during the quarter as the company reported an operating margin of 3.4%, falling from 11% in the second quarter of 2020. The expenses reflect impacts from employee separation costs, an impairment related to sold properties and eliminating redundant products, Chief Financial Officer Mark Erceg said during the company’s second-quarter earnings call Friday.

The company incurred $54 million of employee separation costs due to a sizable reduction in force and $68 million in costs related to the sale of one of its major office campuses.

The company laid off 500 employees in the quarter and eliminated 300 open positions, which will result in $70 million in annualized savings, Erceg said.

RELATED: Cerner eyes opportunities in clinical research, population health as it builds data business

“We also spent $400 million on share repurchases, which brings our year-to-date purchases to $750  million, because we continue to believe that Cerner stock, at current trading levels, represents a good return on investment for our shareholders,” he said.

The company now projects its share repurchases during 2021 to reach $1.5 billion.

On a per-share basis, the North Kansas City, Missouri-based company said it had net income of 11 cents. Earnings, adjusted for one-time gains and costs, were 80 cents per share.

The results beat Wall Street expectations. The average estimate of 11 analysts surveyed by Zacks Investment Research was for earnings of 76 cents per share. The company’s quarterly revenue also beat analyst expectations. Eight analysts surveyed by Zacks expected $1.44 billion.

The company was trading higher in morning hours Friday after the earnings call.  

“All key metrics reflected good progress on our transformation initiatives and a strengthening market presence. Based on this progress, we have increased our earnings outlook for the year,” said Brent Shafer, chairman and CEO, during the earnings call.

Cerner expects full-year earnings to be $3.25 per share, compared to a prior outlook of more than $3.20 per share.

The company’s full-year 2021 revenue forecast remains unchanged with growth expected to be in the mid-single digits. 

RELATED: Cerner begins search for new CEO as company ups 2021 earnings guidance buoyed by improved margins

Military EHR projects 

The company is working with the Department of Defense to modernize its EHR, and that EHR is now live at 42 commands and 663 locations with 41,000 activated users. The Coast Guard’s deployment will be completed this year.

Shafer, who is stepping down from the CEO role, told investors that ongoing challenges with Cerner’s electronic medical records project with the Department of Veterans Affairs would put a slight drag on the company’s revenue growth.

The VA scrapped the rollout schedule for its new Cerner EHR for at least six months to overhaul training and fix governance and management problems.

“While the VA finalizes their new governance and management structure, we will continue our pre-deployment efforts including technical development and enhancements, solution readiness and site preparation, but no further go-lives are expected until 2022.  As a result, we now expect another half-point of impact on our 2021 revenue growth, which is reflected in our updated guidance for the year,” Shafer said.

Growth outlook in a post-pandemic world

On a positive note, the company saw solid growth in bookings in the second quarter, up 2% to almost $1.4 billion, bringing year-to-date bookings growth to 7%.

“Importantly, we believe this represents a positive inflection point since total bookings were down during fiscal 2019 and fiscal 2020,” Erceg said.

The company had 24 new client footprints this year and 49 major go-lives, executives said.

RELATED: JPM21: Cerner wants to build a $1B data business as it expands reach into pharma market

As health system clients recover from the COVID-19 pandemic, executives are showing an increased interest in consumer strategies, real-time data strategies for capacity management and workforce management and value-based care business models, according to Cerner President Don Trigg.

“Volume levels are returning to pre-COVID levels and so people are feeling good about core aspects of the business on the provider side and how it’s recovering from the disruption last year, but I think at the same time watching with a wary eye as the delta variant plays forward,” Trigg told investors on the earnings call.

With slowing growth in the medical records software market, Cerner is eyeing opportunities in its data business, including in the clinical research space. The company acquired the health division of Kantar Group, which provides data, analytics and research to the life sciences industry, for $375 million.

During the annual J.P. Morgan healthcare conference in January, Cerner executives said the health IT company was setting its sights on building a $1 billion data business for the healthcare and life sciences industries.

Cerner also is eyeing possible acquisitions that enhance its competitive position, including in areas like cybersecurity, technology to support provider networks operating in both value-based care and fee-for-service arrangements and data.

“This is an interesting space. We’re thinking a lot about it and we see organic opportunities to drive a bigger business there,” Trigg said. 

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