1 2013 CFA Institute Research Challenge Kansas State University Target Company: Cerner Corp. Ticker: CERN (NASDAQ) Industry: Healthcare Information Technology (HCIT)
Dec 16, 2015
1
2013 CFA Institute Research ChallengeKansas State University
Target Company: Cerner Corp.
Ticker: CERN (NASDAQ) Industry: Healthcare Information Technology (HCIT)
Leader in HCIT Industry
Solid Core Business Model
Significant Growth
Opportunities
Current Price: $90.76 (as of 3/19/2013)
Investment Thesis:
Investment Overview
12.89%
$102.46Leader in HCIT
Industry
Solid Core Business Model
Significant Growth
Opportunities
BUYRecommendation:
Target Price:
Potential Upside:
Current Price: $90.76 (as of 3/19/2013)
Investment Thesis:
Investment Overview
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN4
Company Overview
Founded in 1979, based in Kansas City, MO
11,900 employees worldwide
Provides information technology solutions to healthcare providers
Core product offering is Millennium Software Platform
Sets up Electronic Health Record (EHR) Systems
Combines clinical, financial and general IT system solutions
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN5
Regulatory Environment Driving Industry Growth
HITECH Act and Meaningful Use
Passed as part of ARRA Stimulus Act of 2009
$32.7BTotal Amount Allocated By HITECH Act
Source: Healthcare IT News (Data as of December 2012)
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN6
Regulatory Environment Driving Industry Growth
HITECH Act and Meaningful Use
Passed as part of ARRA Stimulus Act of 2009
• EHR System Implementation
Meaningful Use Stage 1 (2011-2013):
• Interoperability & Health Information Exchange
Meaningful Use Stage 2 (2013-2015):
• Performance-Based Reimbursement
Meaningful Use Stage 3 (2015-2021):
$32.7BTotal Amount Allocated By HITECH Act
$10.3BTotal Amount
Spent as of Dec. 2012
Source: Healthcare IT News (Data as of December 2012)
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN7
Regulatory Environment Driving Industry Growth
HITECH Act and Meaningful Use
Passed as part of ARRA Stimulus Act of 2009
• EHR System Implementation
Meaningful Use Stage 1 (2011-2013):
• Interoperability & Health Information Exchange
Meaningful Use Stage 2 (2013-2015):
• Performance-Based Reimbursement
Meaningful Use Stage 3 (2015-2021):
$32.7BTotal Amount Allocated By HITECH Act
$10.3BTotal Amount
Spent as of Dec. 2012 Other Regulations Impacting Industry:
ICD-10 and Computerized Physician Order Entry (CPOE)
Affordable Care Act (ObamaCare)
Source: Healthcare IT News (Data as of December 2012)
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN8
Industry Overview
Top 5 EHR Vendors in 2006Large Hospitals ( >200 Beds)
Rank Vendor Market Share
1 Meditech 19%
2 Cerner 16%
3 McKesson 14%
4 Siemens 9%
5 Epic 7%
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN9
CERN & Epic: Becoming Clear Market Leaders
Top 5 EHR Vendors in 2006Large Hospitals ( >200 Beds)
Rank Vendor Market Share
1 Meditech 19%
2 Cerner 16%
3 McKesson 14%
4 Siemens 9%
5 Epic 7%
Top 5 EHR Vendors in 2011Large Hospitals ( >200 Beds)
Rank Vendor Market Share
1 Epic 24%
2 Cerner 21%
3 Meditech 19%
4 McKesson 13%
5 Siemens 8%
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN10
% Bookings from Outside of Installed Client Base
CERN Capitalizing on Displacement Opportunities
0%
5%
10%
15%
20%
25%
30%
35%
2009 2010 2011 2012
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN11
% Bookings from Outside of Installed Client Base
CERN Capitalizing on Displacement Opportunities
0%
5%
10%
15%
20%
25%
30%
35%
2009 2010 2011 2012
User satisfaction/Ease-of-Use
Single-Vendor capability
Meaningful Use attestation
Interoperability
Cerner’s Key Competitive Strengths:
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN12
% Bookings from Outside of Installed Client Base
CERN Capitalizing on Displacement Opportunities
0%
5%
10%
15%
20%
25%
30%
35%
2009 2010 2011 2012
Continued displacement opportunities
Potential to capture additional 15-25%
market share over next 3-5 years
User satisfaction/Ease-of-Use
Single-Vendor capability
Meaningful Use attestation
Interoperability
Cerner’s Key Competitive Strengths:
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN13
Porter’s Five Forces Analysis
Threat of Substitute Products/Services
Competitive Rivalry Within Industry
Bargaining Power of Clients
Threat of New Entrants
Bargaining Power of Suppliers
4 = Most Favorable to CERN
1 = Least Favorable to CERN
4
3
4
43
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN14
CERN Core Business Segments
System Sales:34%
Support, Maintenance & Services:
66%
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN15
Revenue Mix Breakdown
Licensed Software
13% Technology Resale
15%
Professional Services
27%
Managed Services
16%
Support & Maintenance
23%
Sub/Trans6%
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN16
Business Model Generates Recurring Revenue
Licensed Software
13% Technology Resale
15%
Professional Services
27%
Managed Services
16%
Support & Maintenance
23%
Sub/Trans6%
45% Recurring
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN17
Projected Revenue Mix
0.00
500.00
1000.00
1500.00
2000.00
2500.00
3000.00
3500.00
4000.00
4500.00
5000.00
2012A 2013E 2014E 2015E 2016E 2017E
Support & Maintenance
Managed Services
Subscription/Transaction
Professional Services
Technology Resale
Licensed Software
0.00
500.00
1000.00
1500.00
2000.00
2500.00
3000.00
3500.00
4000.00
4500.00
5000.00
2012A 2013E 2014E 2015E 2016E 2017E
Support & Maintenance
Managed Services
Subscription/Transaction
Professional Services
Technology Resale
Licensed Software
5-Year Total Revenue CAGR = 13%
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN18
Projected Revenue Mix
0.00
500.00
1000.00
1500.00
2000.00
2500.00
3000.00
3500.00
4000.00
4500.00
5000.00
2012A 2013E 2014E 2015E 2016E 2017E
Subscription/Transaction
Professional ServicesNon-Recurring
Recurring
45%
55% 54% 54% 53% 52% 51%
46%46%
47%48%
49%5-Year Recurring Revenue CAGR = 15%
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN19
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Total Revenue Operating Expenses
Projecting margin expansion of 100-200bps per year
Leveraging R&D and SG&A expenses
Increasing proportion of revenue from higher-margin segments
Operating Leverage Driving Margin Expansion
Total Revenue Operating Expenses
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN20
Artist’s rendering of completed campus
Strong Financial Position from Significant Excess Cash
New Kansas City, KS campus construction as of Dec. 2013
Current Cash Deployment Initiatives
Stock Repurchase Plan authorized for up to $170MSpending approx. $150M per year to construct new campusInvesting heavily in organic growth opportunities
Potential Additional Cash Deployment Initiatives
Expanding Stock Repurchase PlanContinuing to pursue strategic acquisitionsLow probability of dividend in foreseeable future
Total Cash & Investments:
$1.5B
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN21
ITWorks Revenue RevWorks Revenue
21
CernerWorks Solutions Create Up-Selling Opportunity
CERN currently captures only 17% of clients’ total IT spending Increasing integration of clinical, financial and IT solutions Significant up-selling opportunity within existing client base
▫ ITWorks ▫ RevWorks
0
20
40
60
80
100
120
140
2009 2010 2011 20120
20
40
60
80
100
120
2009 2010 2011 2012
+580%
+106%
+71% +23%
+60%
+110%
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN2222
Major client priority as reimbursement structure shifts
Seeking to develop first comprehensive PHM solution with HealtheIntent platform
▫ Predictive algorithms
▫ Integrated decision support tools
Expecting significant earnings impact in 2-3 years
Per-member-per-month subscription fee is probable monetization model
Potential new market with Employee Health Management
Population Health Management is Future of HCIT
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN2323
CERN Positioned for International Growth
13% of total revenue from international segment
Presence in 25+ countries
Current International Footprint
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN2424
13% of total revenue from international segment
Presence in 25+ countries
Global economic recovery will stimulate industry growth
Leader in adapting software to foreign languages
CERN Positioned for International Growth
Potential Future International Footprint
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN2525
1. Source: International Monetary Fund Data, 20112. Source: Organization for Economic Cooperation& Development (OECD) 2011 Report3. Source: Healthcare Information & Management Systems Society (HIMSS) 2011 Report4. 2011A Value = CERN 2011 Int'l Revenue/ Est. Global HCIT MarketNote: CERN Int'l Market Share is approx. 3% in countries where CERN currently competes.
CERN Positioned for International Growth
(values in millions, reported in $USD) BEAR BASE BULL
2011A 2021E 2021E 2021E
Global GDP (20 Largest Economies)1 56,118,000 65,127,230 68,407,529 71,835,784 GDP CAGR - 1.50% 2.00% 2.50%
% GDP Spending on Healthcare 2 9.50% 9.50% 9.50% 9.50%Global Healthcare Spending 5,331,210 6,187,087 6,498,715 6,824,400
% Spending on HCIT 3 3.00% 3.00% 3.50% 4.00%Total Est. Int'l HCIT Market 159,936 185,613 227,455 272,976
Est. CERN % Int'l Market Share 4 0.20% 0.50% 1.50% 3.00%CERN Potential Int'l Revenue 320$ 928$ 3,412$ 8,189$
Potential International Market Opportunity
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN26
Pro-Forma Earnings Expectations
Revenue growth to remain between 12.50-14.50% through 2017
Earnings growth at 5-Year CAGR of 19.28% from 2012-2017
2013 Basic EPS projection of $2.71
▫ 16.81% growth over 2012 EPS
2012A 2013E 2014E 2015E 2016E 2017E
Total Revenue $2,665.43 $3,044.91 $3,434.92 $3,867.35 $4,355.71 $4,910.97
% Growth 14.24% 12.81% 12.59% 12.63% 12.75%
Gross Profit Margin % 77.54% 76.49% 76.88% 77.38% 78.00% 78.74%
Operating Income (EBIT) $571.66 $690.77 $829.00 $993.01 $1,191.13 $1,428.60
% Growth 20.83% 20.01% 19.78% 19.95% 19.94%
Operating Margin Expansion (bps) 124 148 157 170 178
Net Income $397.24 $465.95 $558.47 $668.15 $800.52 $959.08
Basic EPS $2.32 $2.71 $3.25 $3.89 $4.66 $5.58
% Growth 16.81% 19.93% 19.69% 19.79% 19.74%
Pro-Forma Earnings Summary
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN27
Weighted Average Price Target
P/E Multiple DCF
$100.38 $103.84
40% 60%
Method
Valuation
Weight
Target Price = $102.46
40% of Price 60% of Price
Short-Term Perspective
Driven by Market Sentiment
Long-Term Perspective
Value-Oriented InvestorsR2 = 0.40
Regression Analysis: CERN Price Change vs.
S&P 500
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN28
Relative Valuation Summary: P/E Bands
$50
$55
$60
$65
$70
$75
$80
$85
$90
$95
$100
Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13
PE=43x
PE=40x
PE=37x Avg. P/E
PE=34x
PE=31x
Average P/E Band x EPS2013 = Target Price
37 x $2.71 = $100.38
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN29
$50.00
$75.00
$100.00
$125.00
$150.00
$175.00
$200.00
$225.00
$250.00
2012A 2013E 2014E 2015E 2016E 2017E
Relative Valuation Summary: P/E Valuation
Multiple 2012A 2013E 2014E 2015E 2016E 2017E
31.0x -2 STDEV $71.92 $84.11 $100.81 $120.60 $144.50 $173.1234.0x -1 STDEV $78.88 $92.24 $110.56 $132.27 $158.48 $189.8737.0x Mean $85.84 $100.38 $120.32 $143.94 $172.46 $206.6240.0x +1 STDEV $92.80 $108.52 $130.07 $155.62 $186.45 $223.3743.0x +2 STDEV $99.76 $116.66 $139.83 $167.29 $200.43 $240.13
P/E Valuation
HIGH
MEAN
LOW
Current Price:
$90.76
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN30
Intrinsic Valuation Summary: DCF Model (DCFF)
WACC = kd(wd) + ke(we)7.83% = 4.02%(4.76%) + 8.02%(95.24%)
Stage 2 Growth
Stair-Step Growth Rate (7%-2%) FY 2018 - 2027
5-Year FCF
25% FCF CAGR
Terminal Value2% Terminal Growth Rate
Based on Real GDP Growth
$52.8050%
Target Price = $103.84
$35.9135%
$15.1315%
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN31
Other Valuation Methods Analyzed
$85 $90 $95 $100 $105 $110 $115 $120
Comp Group P/E Multiple
Comp Group EV/EBITDA Multiple
CERN Historic EV/EBITDA Multiple
CERN Historic P/E Multiple
Residual Income Model
DCF Model (DCFF)
Current Price: $90.76
Target Price: $102.46
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN32
Comprehensive Risk Overview
Low Medium High
Min
orM
oder
ate
Sign
ifica
nt
Significant regulatory changes
Probability
Impa
ct
Slower margin expansion
Further system crashes
Abrupt executive turnover
Slower growth in new initiatives
Industry Overview
Core Business Model
Growth Opportunities Valuation CERN33
BUY
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
Risk Analysis: Monte Carlo Simulation
Key Variables
Revenue Growth
Margin Expansion
Terminal Growth
WACC
Shares Outstanding
Probability of Future Service Outages
71%
SELL
15%
HOLD
14%
# of Simulations
5,000
Leader in HCIT Industry
Solid Core Business Model
Significant Growth
Opportunities
Current Price: $90.76 (as of 3/19/2013)
Investment Thesis:
Conclusion
Regulation Driving Industry Growth Displacement Opportunities
Significant Up-Selling Opportunity Population Health Management International Expansion
Recurring Revenue Growth Operating Margin Expansion Cash Deployment Initiatives
12.89%
$102.46Leader in HCIT
Industry
Solid Core Business Model
Significant Growth
Opportunities
BUYRecommendation:
Target Price:
Potential Upside:
Current Price: $90.76 (as of 3/19/2013)
Investment Thesis:
Conclusion
Industry Overview▫ Company Overview▫ Industry Overview▫ Regulatory Environment Driving Industry Growth▫ CERN Competitive PositioningCore Business Model▫ Business Model Overview▫ Projected Revenue Mix▫ Operating Leverage Driving Margin Expansion▫ Cash Deployment OptionsGrowth Opportunities▫ CernerWorks Solutions Create Up-Selling Opportunity▫ Population Health Management Is Future of HCIT Industry▫ CERN Positioned for International Growth▫ Potential International Market Opportunity▫ Pro-Forma Earnings Expectations Valuation▫ Weighted Average Price Target▫ Relative Valuation Summary: P/E Bands▫ Intrinsic Valuation Summary▫ Other Valuation Methods▫ Comprehensive Risk Overview▫ Risk Analysis: Monte Carlo Simulation
Presentation Slide Navigator
Appendix
Pro-Forma Financial Statements▫ Pro-Forma Income Statement▫ Pro-Forma Balance Sheet▫ Pro-Forma Statement of Cash FlowsIntrinsic Valuation▫ DCFF Analysis▫ WACC Calculation▫ Sensitivity AnalysisIndustry Overview ▫ EP Payment Adjustments▫ Meaningful Use Timeline▫ Medicaid AdoptionBusiness Overview ▫ CERN Business Model▫ Business Segment Revenue Mix▫ Jargon Buster▫ Historic Stock Price
Appendix 1: Pro-Forma Income StatementCerner CorporationPro-Forma Income Statement
($ in Millions)
Period Ended 2011 2012 2013E 2014E 2015E 2016E 2017E
Revenues:System Sales 706.71 902.80 1039.25 1152.35 1273.91 1404.79 1545.38
% Growth 27.75% 15.11% 10.88% 10.55% 10.27% 10.01%
Support, Maintenance & Services 1451.75 1707.33 1945.95 2215.22 2517.61 2865.51 3269.30
% Growth 17.61% 13.98% 13.84% 13.65% 13.82% 14.09%
Reimbursed Travel 44.69 55.31 59.70 67.35 75.83 85.41 96.29
Total Revenue 2203.15 2665.43 3044.91 3434.92 3867.35 4355.71 4910.97
% Growth 20.98% 14.24% 12.81% 12.59% 12.63% 12.75%
Cost of Revenues:Cost of System Sales 296.56 460.69 519.59 578.41 639.63 702.83 767.56
Cost of Support, Maintenance & Services 100.42 125.43 136.68 148.24 159.46 170.17 180.23
Cost of Reimbursed Travel 44.69 55.31 59.70 67.35 75.83 85.41 96.29
Total Cost of Revenue 441.67 641.43 715.98 794.00 874.92 958.41 1044.08
Gross Profit 1761.48 2024.00 2328.93 2640.92 2992.43 3397.30 3866.90
Operating Expenses:Selling / General / Administrative Expense 882.28 1010.12 1126.62 1245.16 1372.91 1513.61 1669.73
Research & Development 207.70 219.64 252.73 279.95 309.39 341.92 378.14
EBITDA 671.50 794.25 949.58 1115.81 1310.14 1541.77 1819.02
Depreciation / Amortization 211.70 222.58 258.82 286.82 317.12 350.63 390.42
Operating Income (EBIT) 459.80 571.66 690.77 829.00 993.01 1191.13 1428.60
Total Other Income (Expenses) 9.90 11.53 15.22 17.17 19.34 21.78 24.55
Net Income Before Taxes 469.69 583.20 705.99 846.17 1012.35 1212.91 1453.15
Income Tax Expense 163.07 190.48 240.04 287.70 344.20 412.39 494.07
Net Income 306.63 397.24 465.95 558.47 668.15 800.52 959.08
Basic Weighted Average Shares 168.63 171.74 171.74 171.74 171.74 171.74 171.74
Basic EPS 1.82 2.32 2.71 3.25 3.89 4.66 5.58
Diluted Weighted Average Shares 173.87 176.18 176.18 176.18 176.18 176.18 176.18
Diluted EPS 1.76 2.26 2.64 3.17 3.79 4.54 5.44
Appendix 2: Pro-Forma Balance Sheet
Period Ended 2011 2012 2013E 2014E 2015E 2016E 2017E
Assets:
Cash and Cash Equiv. 243.15 317.12 444.50 555.31 701.43 882.12 1106.68
Short-Term Investment 531.64 719.67 894.54 1117.54 1411.60 1775.24 2227.15
Total Receivables, Net 563.21 577.85 660.12 744.67 838.42 944.29 1064.67
Total Inventory 23.30 23.68 25.81 29.11 32.78 36.92 41.62
Prepaid Expenses 94.23 113.57 132.34 149.29 168.08 189.31 213.44
Deferred Income Tax - Current Asset 46.80 38.62 38.37 43.29 48.74 54.89 61.89
Total Current Assets 1502.32 1790.51 2195.67 2639.20 3201.05 3882.77 4715.45
Property / Plant / Equipment, Total - Net 488.99 569.71 584.49 587.32 532.16 446.02 330.89
Goodwill, Net 211.83 247.62 247.62 247.62 247.62 247.62 247.62
Intangibles, Net 324.11 399.35 411.99 425.99 441.46 458.55 477.46
Long Term Investments 359.32 509.47 632.90 790.68 998.74 1256.02 1575.76
Other Long Term Assets 113.78 187.82 161.65 182.35 205.31 231.23 260.71
Total Long Term Assets 1138.71 1913.96 2038.65 2233.95 2425.28 2639.44 2892.43
Total Assets 3000.35 3704.47 4234.31 4873.15 5626.33 6522.21 7607.88
Liabilities & Equity:
Accounts Payable 85.55 141.21 128.86 145.37 163.67 184.34 207.84
Accrued Payroll and Other Expenses 160.31 189.67 204.61 230.82 259.88 292.70 330.01
Short Term Debt 39.72 59.58 54.61 61.61 69.36 78.12 88.08
Deferred Revenue 153.14 189.65 202.75 228.72 257.52 290.04 327.01
Total Current Liabilities 438.72 580.11 590.84 666.52 750.43 845.19 952.94
Long Term Debt 86.82 136.56 130.89 108.29 79.16 45.61 25.62
Deferred Income Tax 150.23 143.21 192.98 217.70 245.11 276.06 311.25
Long Term Deferred Revenue 13.79 10.94 20.01 22.57 25.41 28.62 32.27
Total Long Term Liabilities 250.84 290.71 343.88 348.56 349.68 350.29 369.14
Total Liabilities 689.68 870.82 934.72 1015.08 1100.12 1195.48 1322.08
Total Equity 2310.80 2833.65 3299.60 3858.08 4526.23 5326.75 6285.83
Total Liabilities & Shareholders' Equity 3000.36 3704.47 4234.33 4873.16 5626.34 6522.23 7607.91
Appendix 3: Pro-Forma Statement of Cash Flows
Period Ended 2011 2012 2013E 2014E 2015E 2016E 2017E
Net Income 306.63 397.24 465.95 558.47 668.15 800.52 959.08
Operating Activities: Depreciation/Amortization 211.70 222.58 258.82 286.82 317.12 350.63 390.42
Net Change in Working Capital -19.70 115.21 -92.18 -34.04 -37.75 -42.63 -48.47
Other Adjustments to Net Income -22.00 -88.32 -50.54 -43.98 -56.15 -71.83 -94.10
Cash from Operating Activities 476.63 646.71 582.05 767.26 891.37 1036.70 1206.94
Investing Activities:Net CapEx on Fixed Assets (Land, Buildings, Equip.) -95.53 -183.35 -150.00 -150.00 -100.00 -75.00 -50.00
Net CapeEx on Intangible Assets -132.79 -100.27 -74.36 -82.37 -91.04 -100.61 -111.27
Net Change in Short Term Investments -175.13 -188.03 -127.38 -223.00 -294.07 -363.64 -451.91
Net Change in Long Term Investments & Other LT Assets -139.89 -224.19 -97.26 -178.48 -231.02 -283.21 -349.21
Cash from Investing Activities -593.80 -731.63 -449.01 -633.86 -716.12 -822.45 -962.39
Financing Activities:Net Stock Issued (Repurchased) 106.53 119.02 0.00 0.00 0.00 0.00 0.00
Net Long Term Debt Issued (Repurchased) 39.28 39.87 -5.67 -22.60 -29.13 -33.56 -19.99
Cash from Financing Activities 145.81 158.89 -5.67 -22.60 -29.13 -33.56 -19.99
Net Change in Cash 28.64 73.97 127.38 110.81 146.12 180.69 224.56
Net Cash - Beginning Balance 214.51 243.15 317.12 444.50 555.31 701.43 882.12
Net Cash - Ending Balance 243.15 317.12 444.50 555.31 701.43 882.12 1106.68
Appendix 4: DCF Analysis
Cerner (CERN) - NASDAQ ProjectedDCFF Analysis ($ in millions) FY 2013E FY 2014E FY 2015E FY 2016E FY 2017E
EBIT (1-Tax) $450.73 $541.30 $648.81 $778.74 $934.53
Depreciation & Amortization $258.82 $286.82 $317.12 $350.63 $390.42
Other Non-Cash Charges -$50.54 -$43.98 -$56.15 -$71.83 -$94.10
CAPEX -$224.36 -$232.37 -$191.04 -$175.61 -$161.27
Change in Net Working Capital -$92.18 -$34.04 -$37.75 -$42.63 -$48.47
Free Cash Flow to the Firm $342.46 $517.71 $681.00 $839.31 $1,021.11
Discount Period 0.93 0.86 0.80 0.74 0.69
Present Value of Free Cash Flow $317.60 $445.27 $543.18 $620.86 $700.50
Stair-Step Free Cash Flow Growth Rate
7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5%
FY 2018E 1092.59 $695.12FY 2019E 1163.61 $686.55FY 2020E 1233.42 $674.91FY 2021E 1301.26 $660.34FY 2022E 1366.33 $643.02FY 2023E 1427.81 $623.17FY 2024E 1484.92 $601.04FY 2025E 1536.90 $576.92FY 2026E 1583.00 $551.08FY 2027E 1622.58 $523.85
$6,235.99
Valuation
Total PV of FCFF $8,863
Terminal Growth Rate 2.00%
WACC 7.83%
Terminal Value $28,396
Discount Factor 0.32
PV of Terminal Value $9,168
Implied Enterprise Value $18,031
Less: Net Debt $197
Implied Equity Value $17,834
Diluted Shares Outstanding 171.74
Target Share Price $103.84
Appendix 5: WACC Calculation
Cost of Debt 6.19%Tax Rate 35.00%Cost of Debt(1-Tax) 4.02%
Inflation 2.10%Real GDP Growth 2.80%P/E Growth 1.00%Dividend Yield 2.50%Risk Free Rate (20 Yr Tr.) 2.68%Market Risk Premium 5.72%
CERN Beta (2/3) 0.8Industry Beta (1/3) 1.2Adjusted Beta 0.93Equity Risk Premium 5.339%Cost of Equity 8.019%
Debt % 4.76%Equity % 95.24%WACC 7.83%
WACC Assumptions
TerminalGrowth
$96.46 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%
2.0% $144.59 $129.57 $117.11 $106.61 $97.66 $89.94 $83.22 $77.33 $72.11
2.5% $154.24 $136.97 $122.88 $111.19 $101.34 $92.94 $85.68 $79.36 $73.81
3% $166.30 $146.01 $129.82 $116.61 $105.64 $96.39 $88.49 $81.67 $75.72
3.5% $181.81 $157.31 $138.29 $123.11 $110.72 $100.42 $91.73 $84.30 $77.89
4.0% $202.49 $171.83 $148.88 $131.05 $116.81 $105.18 $95.51 $87.34 $80.36
Residual Income Sensitivity Analysis (Possible Price Targets)
WACC
TerminalGrowth
101.98$ 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%
2.0% $144.63 $129.57 $117.09 $106.58 $97.62 $89.90 $83.19 $77.30 $72.10
2.5% $154.34 $137.01 $122.90 $111.19 $101.33 $92.91 $85.66 $79.35 $73.81
3% $166.47 $146.11 $129.87 $116.63 $105.65 $96.39 $88.48 $81.67 $75.73
3.5% $182.07 $157.47 $138.39 $123.17 $110.75 $100.44 $91.74 $84.32 $77.91
4.0% $202.87 $172.09 $149.04 $131.16 $116.88 $105.23 $95.55 $87.38 $80.39
WACC
DCFE Sensitivity Analysis (Possible Price Targets)
TerminalGrowth
WACC
102.92$ 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%
2.0% $138.55 $124.41 $112.66 $102.76 $94.31 $87.01 $80.66 $75.07 $70.13
2.5% $147.60 $131.34 $118.08 $107.05 $97.76 $89.82 $82.96 $76.98 $71.72
3% $158.91 $139.82 $124.57 $112.13 $101.79 $93.06 $85.59 $79.14 $73.51
3.5% $173.45 $150.41 $132.52 $118.22 $106.55 $96.83 $88.63 $81.61 $75.54
4.0% $192.84 $164.03 $142.45 $125.67 $112.26 $101.30 $92.18 $84.46 $77.86
DCFF Sensitivity Analysis (Possible Price Targets)
Appendix 6: Sensitivity Analysis
Appendix 7: CERN Business Model
Year 2015 2016 2017 2018 2019 2020+
EP is not subject to the payment adjustment for e-Rx in 2014 99% 98% 97% 96% 95% 95%
EP is subject to the payment adjustment for e-Rx in 2014 98% 98% 97% 96% 95% 95%
Year 2015 2016 2017 2018 2019 2020+
EP is not subject to the payment adjustment for e-Rx in 2014 99% 98% 97% 97% 97% 97%
EP is subject to the payment adjustment for e-Rx in 2014 98% 98% 97% 97% 97% 97%
EP Payment Adjustments
% Adjustment Assuming More Than 75% of EPs are Meaningful EHR Users For CY 2018 and Subsequent Years
% Adjustment Assuming Less Than 75% of EPs are Meaningful EHR Users For CY 2018 and Subsequent Years
Appendix 8: EP Payment Adjustments
Proposed Implementation Timeline for Stages of Meaningful Use
Year Stage of Meaningful Use Implementation year
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2011 1 1 1 2 2 3 3 TBD TBD TBD TBD 2012 1 1 2 2 3 3 TBD TBD TBD TBD 2013 1 1 2 2 3 3 TBD TBD TBD 2014 1 1 2 2 3 3 TBD TBD 2015 1 1 2 2 3 3 TBD 2016 1 1 2 2 3 3 2017 1 1 2 2 3
Appendix 9: Meaningful Use Timeline
Year 2011 2012 2013 2014 2015
2011 $18,000 2012 $12,000 $18,000 2013 $8,000 $12,000 $15,000 2014 $4,000 $8,000 $12,000 $12,000 2015 $2,000 $4,000 $8,000 $8,000 $0 2016 $2,000 $4,000 $4,000 $0 Total $44,000 $44,000 $39,000 $24,000 $0
10% bonus for shortage area $48,400 $48,400 $42,900 $26,400 $0
Calendar Year (CY) for which EP Qualifies to Receive Incentive
Year 2011 2012 2013 2014 2015 2016
2011 $21,250
2012 $8,500 $21,250
2013 $8,500 $8,500 $21,250
2014 $8,500 $8,500 $8,500 $21,250
2015 $8,500 $8,500 $8,500 $8,500 $21,250
2016 $8,500 $8,500 $8,500 $8,500 $8,500 $21,250
2017 $8,500 $8,500 $8,500 $8,500 $8,500
2018 $8,500 $8,500 $8,500 $8,500
2019 $8,500 $8,500 $8,500
2020 $8,500 $8,500
2021 $8,500
Total $63,750 $63,750 $63,750 $63,750 $63,750 $63,750
Medicaid Eps Who Adopted In
Appendix 10: Medicaid Adoption
Revenue Mix % 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Licensed Software 16% 15% 15% 14% 15% 13% 13% 13% 12% 12% 11%
Technology Resale 11% 10% 9% 10% 11% 15% 14% 13% 12% 12% 11%
Subscription / Transaction 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%
Professional Services 29% 26% 24% 25% 25% 26% 26% 27% 27% 28% 28%
Managed Services 10% 12% 15% 16% 16% 16% 16% 16% 17% 17% 17%
Support & Maintenance 26% 28% 29% 28% 25% 23% 23% 23% 24% 24% 25%
Reimbursed Travel 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
System Sales: 33% 31% 30% 30% 32% 34% 33% 32% 31% 30% 28%
Support, Maint. & Services: 65% 67% 68% 68% 66% 64% 65% 66% 68% 69% 70%
Business Segment Revenue Mix Projected Business Segment Revenue Mix
Contribution Margin % 2007 2008 2009 2010 2011 2012
Licensed Software 89% 88% 88% 87% 87% 82%
Technology Resale 12% 12% 11% 11% 13% 8%
Subscription / Transaction 49% 50% 52% 52% 56% 46%
Professional Services 29% 29% 28% 30% 30% 24%
Managed Services 25% 26% 28% 29% 31% 26%
Support & Maintenance 69% 72% 74% 76% 76% 69%
Reimbursed Travel 0% 0% 0% 0% 0% 0%
Total Contribution Margin 47% 48% 50% 50% 50% 50%
Business Segment Contribution Margins
Appendix 11: Business Segment Revenue Mix
HCIT Useful Terms [AAFP – HIPAA]AAFP: American Academy of Family PhysiciansACO: Accountable Care Organization AHA: American Hospital Association AHRQ: Agency for Healthcare Research and Quality AHIP: America’s Health Insurance Plans – national trade association representing the health insurance industryAMA: American Medical Association ARRA: American Recovery and Reinvestment Act – law that directed approximately $150B in new funding to the healthcare industry. CCHIT: Certification Commission for Health Information Technology CDS: Clinical Decision Support – process to enhance health related decisions with pertinent clinic and patient information to improve healthcare deliveryCHIME: College of Healthcare Information Management Executives Cloud Computing: delivering hosted services over the internet. CMS: Centers for Medicare & Medicaid Services CPOE: Computerized Physician Order Entry CAHs: Critical Access Hospitals – organizations certified to receive cost-based reimbursement from Medicare. ECM: Enterprise Content Management - strategies, methods and tools used to capture, manage, store, preserve and deliver content and documents related to organizational processesEDI: Electronic Data Interchange EDIS: Emergency Department Information Systems – EHR systems designed to specifically manage data and workflow in support of Emergency Department patient care. EHR: Electronic Health Record - collection of patient health information generated by one or more meetings in any care delivery setting EMR: Electronic Medical Record ERP: Enterprise Resource Planning – business management software that allows organizations to use an integrated systemHCIT: Healthcare Information TechnologyHHS: Department of Health & Human Services HIE: Health Information Exchange – transmission of healthcare-related date among facilities, organizations, and government agencies.HIMMS: Healthcare Information and Management Systems Society HIPAA 5010: Health Insurance Portability and Accountability Act – requires Medicare and all other health insurance payers to comply with EDI standards.
Appendix 12: “Jargon Buster” (AAFP – HIPAA)
HCIT Useful Terms [HITECH Act – VBPP]HITECH Act: Health Information Technology for Economic and Clinical Health – part of the 2009 ARRA , promoting the adoption and meaningful use of health information technologyICD-10: International Classification of Diseases, 10th Revision. IHE: Integrating the Healthcare Enterprise - global initiative that creates framework for passing vital health information, whether from application to application or system to system, seamlesslyIDN: Integrated Delivery Network - network of facilities and providers that work together to offer a continuum of care to a specific geographic area or market.Interoperability: ability of health information systems to work together within and across organizational boundaries in order to advance the effective delivery of healthcareMedicare vs. Medicaid MU: Meaningful Use – guidelines for receiving compensation upon implementation of EHRMDI: Medical Device Integration NHIN: Nationwide Health Information Network - set of standards, services and policies that enable secure health information exchange over the InternetPHM: Population Health ManagementRCM: Revenue Cycle Management - process that manages claims processing, payment and revenue generationStage 7 Hospitals: completely paperless facilities VBPP: Value Based Purchasing Program
Cerner Product Offerings: Ambulatory EHR: system designed by physicians to minimize clicks, provide comprehensive yet flexible documentation, and automate reporting processes. CareAware iBus: next generation solution that connects medical devices to the electronic health record to support the entire care process.Healthe Intent: bundle providing access to three powerful cloud based services ITWorks: business unit that provides a full suite of strategic and information technology sercvices to Cerner clients RevWorks Services: provide a unique combination of health care finance experience and information technology intelligence to examine and optimize your operations. Smart Room: incorporates technology and workflow solutions to improve patient care and clinician efficiency
Appendix 13: “Jargon Buster” (HITECH Act – VBPP)
Appendix 14: Historic Stock Price Chart