Morningstar | Cerner Is Facing a Challenging and Rapidly Shifting HCIT Market
The outlook for the healthcare IT sector is solid, with the combination of increasing regulation and changing reimbursement structures motivating providers (hospitals, physician offices, diagnostic centers, and integrated provider networks) to build new IT infrastructure. With a highly recongizable and trusted brand, leading software products, and significant customer switching costs, we believe Cerner has a wide economic moat. The integrated and essential nature of the firm’s offerings makes it a key player within the healthcare IT market and will allow it to produce economic profits over a significant period. Strong customer switching costs is the bedrock of Cerner’s competitive advantages. Long product implementation periods (18-24 months), highly integrated/customized software packages, and service contracts that last years lock major provider clients into the firm’s grasp. Boosting the long-term demand for Cerner’s services are several factors, including the increasing complexity of Medicare reporting, strong growth of value-based payer reimbursement schemes, and electronic medical records regulatory compliance. The combination of these factors solidifies the firm's long-term economic profitability. However, Cerner has recently experienced bookings and revenue issues, as it has reported these metrics below management's own guidance over the last several quarters. We believe Cerner is experiencing pressure within a maturing HCIT space that has also seen competition increase dramatically over the last handful of years. The combination of these latest developments will likely pressure future top-line growth for the firm. From our perspective, competition from current and new HCIT players has accelerated given the growing need of providers to build in new reimbursement infrastructure and the prime opportunity this presents to the entire HCIT market. Nevertheless, we expect Cerner to have a better understanding of this operating environment and management’s missteps have built an increased level of uncertainty for the firm.Cerner designs, develops, markets, installs, hosts and supports health care information technology, health care devices, hardware and content solutions for health care organizations and consumers. The company also provides a range of services, including implementation and training, remote hosting, operational management services, revenue cycle services, support and maintenance, transaction processing, employer health centers, employee wellness programs and third party administrator services for employer-based health plans. The company has two operating segments: Domestic, which includes business activity in the United States; and International, which includes business activity outside the United States.
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