Can Higher System Sales Drive Cerner's (CERN) Q1 Earnings?

Cerner Corporation’s (NASDAQ:CERN) first-quarter 2018 results are scheduled to release on May 2, after market close. While System Sales is likely to be a growth driver, improvement in other segments might also lead to better results.

In the fourth quarter of 2017, Cerner reported adjusted earnings per share of 58 cents, down from 61 cents a year ago. The figure also missed the Zacks Consensus Estimate by 3 cents. Cerner has an average negative earnings surprise of 1.2% for the trailing four quarters.

Meanwhile, revenues of $1.31 billion rose above 4% year over year but marginally missed the Zacks Consensus Estimate of $1.33 billion.

For the first quarter, the Zacks Consensus Estimate for earnings is pegged at 59 cents, while the same for revenues is $1.34 billion, reflecting year-over-year growth of 6%.

Cerner Corporation Price and EPS Surprise

Cerner Corporation Price and EPS Surprise | Cerner Corporation Quote

Let’s dig deeper.

System Sales in Focus

In the last reported quarter, this segment accounted for 27.7% of total revenues. Revenues in the segment totaled $363.5 million, up 3.2% year over year. Per management, the upside can be attributed to growth in licensed software. Moreover, for the full year, System Sales revenues grew 7% and margins increased 6% from 2016.

For the first quarter, the Zacks Consensus Estimate for this segment’s revenues is pinned at $338 million, up 5.6% year over year.

Other Factors at Play

EHR Prospects

Cerner’s Electronic Health Record (EHR) platform has majorly triggered growth. Lately, the company witnessed a slew of developments in its EHR platform. The Cerner Millenium EHR has been chosen to be implemented through the new Cerner IntegratedBehavioral Health deployment model by Texas-based The Menninger Clinic.

Cerner was also selected by the Illinois Rural Community Care Organization (“IRCCO”) to implement Cerner HealtheIntent, across its accountable care organizations. Notably, the HealtheIntent played a significant role in driving Cerner’s earnings in the last reported quarter. The company ended the year with 144 HealtheIntent clients. Resultantly, population health bookings grew 42% and revenues rose 20%.

Furthermore, in the last reported quarter, the company witnessed record bookings growth of more than 50%, which can be attributed to the latest EHR deals, with 22% of the bookings coming from outside core Millennium installed base.

Support, Maintenance & Service

In the last reported quarter, this segment accounted for a whopping 70.2% of total revenues. Revenues in the segment came in at $922 million, up 4.7% on a year-over-year basis and in line with management’s expectations.

For the first quarter, the Zacks Consensus Estimate for revenues in the segment is pegged at $967 million, reflecting a 5.3% rise year over year.

Guidance Solid

Cerner expects first-quarter 2018 revenues between $1.315 billion and $1.365 billion. Adjusted earnings per share are projected in the range of 57-59 cents.

For 2018, revenues are forecasted in the band of $5.450-$5.650 billion. Full-year adjusted earnings per share are estimated in the range of $2.57-$2.73.

New business bookings in first-quarter 2018 are expected in the range of $1.250-$1.450 billion.

Declining Margins & High Debt

In the last reported quarter, operating margin came in at 20.5%, which contracted 280 basis points (bps) on a year-over-year basis. The downside was caused by a 9% year-over-year surge in operating expenses. The rise was driven by personnel expenses related to revenue-generating associates and non-cash items.

Additionally, long-term debt amounted to $527 million at the end of the quarter.

Our quantitative model does not conclusively show a beat for Cerner this earnings season. This is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates.

Zacks ESP: The Earnings ESP for Cerner is -0.91%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. Earnings ESP Filter.

Zacks Rank: Cerner carries a Zacks Rank #3, which increases the predictive power of ESP.

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post a beat this earnings season.

Stryker Corporation (NYSE:SYK) has an Earnings ESP of +0.13% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hologic, Inc. (NASDAQ:HOLX) has an Earnings ESP of +0.94% and a Zacks Rank #3.

Edwards Lifesciences (NYSE:EW) has an Earnings ESP of +1.28% and a Zacks Rank #3.

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