EUR 850.00 For Business Accounts Only

Morningstar | Cerner Tackles a Changing HCIT as its Results Were Mixed for the Quarter

While Cerner remains a major player within the electronic health records management space, the firm is still looking for avenues to consistently drive top and bottom line growth. The firm’s third-quarter results reflect this dynamic as it reported decent revenue growth along with margin compression. These developments largely fall in line with our outlook for the healthcare IT player and we are reiterating our $66 fair value estimate and wide moat rating for Cerner. The firm recently turned its management team over and is seeking to find its footing within a rapidly changing HCIT market. Along these lines, Cerner’s management team emphasized its continuing shift toward patient analytics services. The initial focus for Cerner will be within the Medicare Advantage segment. From our perspective, this initiative will be a robust opportunity for the firm given our strong growth outlook for this cohort and the needs of both providers and insurers to better manage this book of business. We believe this effort will build upon its current contracts with the Department of Defense and the Department of Veterans Affairs. These key projects will allow the firm to not only build a strong foundation from these major contracts but will also help it to develop and learn from these complex technology infrastructure builds. From our perspective, this dynamic will assist Cerner in servicing its current client book and position it advantageously for new client wins down the road.

Despite the positive long-term opportunities ahead for Cerner, third-quarter results were a mixed bag as 5% top line growth was accompanied by both gross and operating margin compression. Additionally, management guided its fourth-quarter EPS toward the lower end of its initial range. From our perspective, the shifting and maturing HCIT market is no doubt causing headwinds for Cerner as provider clients seek more value from their vendors and new competition enters the market. This dynamic has led directly to bookings and revenue issues for Cerner over the last few years and the firm is clearly struggling to cope with the new environment. In addition, we believe the firm is also facing increased competition from legacy rivals and new entrants that have been aggressive in gaining market share. While Cerner is facing a tougher growth environment for its legacy EHR services, its sticky client base and top-tier HCIT product/service portfolio should keep it relatively well positioned within the niche. Coupling this dynamic with its efforts to build a top-tier patient analytics management business, will keep the firm in a solid position over the next several years.