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Innovation You Can Trust March 7, 2005 Cerner Corporation Marc Naughton Senior Vice President and Chief Financial Officer Raymond James Institutional Investors.

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Presentation on theme: "Innovation You Can Trust March 7, 2005 Cerner Corporation Marc Naughton Senior Vice President and Chief Financial Officer Raymond James Institutional Investors."— Presentation transcript:

1 Innovation You Can Trust March 7, 2005 Cerner Corporation Marc Naughton Senior Vice President and Chief Financial Officer Raymond James Institutional Investors Conference

2 Innovation You Can Trust Safe Harbor Statement This presentation may contain forward-looking statements that involve a number of risks and uncertainties. It is important to note that the Company’s performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: quarterly operating results may vary, stock price may be volatile, market risk of investments, potential impairment of goodwill, changes in the healthcare industry, significant competition, the Company's proprietary technology may be subjected to infringement claims or may be infringed upon, regulation of the Company's software by the U.S. Food and Drug Administration or other government regulation, the possibility of product-related liabilities, possible system errors or failures or defects in the performance of the Company's software, risks associated with the Company’s global operations and the recruitment and retention of key personnel. Additional discussion of these and other factors affecting the Company's business is contained in the Company's periodic filings with the Securities and Exchange Commission. The Company undertakes no obligation to update forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

3 Innovation You Can Trust Cerner at a Glance Largest company focused on clinical information and transformational solutions for healthcare  Founded in 1979; founders still actively leading company  Most comprehensive suite of solutions on single architecture (Cerner Millennium)  2005E Revenues of $1.08B - $1.1B  10-year CAGR of 20% (mostly organic growth)  Over 5,800 Associates Worldwide (including recent acquisition of VitalWorks Medical Div. )  1,600 member Services Organization; 1,800 person Intellectual Property (IP) Organization Why is CERN a compelling investment opportunity?  Market leader in a strong market  Expanding addressable markets by leveraging R&D investments  Strengthening Business Model  Strong cash flow and margin expansion  Increasing levels of recurring and more visible revenue

4 Innovation You Can Trust U.S. Healthcare IT Market Washington is engaged  Increased efforts to formalize a national architecture (Brailer)  Series of interconnected regional health information networks  Physician offices have become focal point  President Bush has called for PHR for each American in 10 years  Looking for ROI proof points Cerner is well-positioned  Proven performance on Choose and Book national transaction system in England  Reach additional 3,500 physician offices through VitalWorks Medical Division acq.  Now reach 130,000 physicians  $4B ambulatory market opportunity  Cerner providing PHR’s to 1.3M children with juvenile diabetes  Cerner co-sponsored a RAND study that will make compelling economic case for IT investments in healthcare

5 Innovation You Can Trust Market Leadership: Delivering CPOE Accelerated delivery of CPOE in 2004  378 live locations  65 acute care ( more than double 2003 levels )  313 physician office/clinic KLAS Recognition  Cerner Millennium PowerChart highest rated solution in the CDR, Orders, & Charting category  ‘Primary/Detail indicators’, January 2005  Top CPOE choice for third year in a row when respondents asked first choice if they could ‘start fresh today’

6 Innovation You Can Trust CPOE: Acute Care Market Share *Source: HIMSS Analytics Database, January 2005 (Based on survey of 3,989 acute care hospitals ) Cerner has strong market share lead, particularly vs. currently marketed platforms CPOE Market still has room for growth  HIMSS Analytics estimates only 9% have CPOE installed & another 11% have contracted to do so  KLAS estimates less than 3% penetration of ‘real’ CPOE (over 50% of orders electronic) All Existing Platforms* (Includes currently marketed and old platforms) Currently Marketed Platforms* (Top 7 Suppliers)

7 Innovation You Can Trust Global Healthcare IT Market Global represents large opportunity  Over half of world healthcare IT spending is outside U.S.  Cerner has a presence in 70% of global clinical IT markets  United Kingdom, Germany, Austria, Canada, Australia, Malaysia, Singapore, Saudi Arabia, UAE, Grand Cayman United Kingdom  Cerner continues to meet all milestone on England’s Choose and Book project  Delivering value at Newham Healthcare & Homerton University Hospital  Our performance to date could create additional opportunities Other areas of opportunity  France, Australia, Malaysia, Germany, Ireland, UAE

8 Innovation You Can Trust Investing heavily in R&D has lead to unmatched depth and breadth and strong growth  $1B of R&D in past 10 years  Over 55 Major Solution Categories  Expanded Delivery Platforms and New Markets  Remote Hosting, Community Hospitals, Global Cerner leading way in new Millennium  Grew almost as much as combined growth of competitors between 2000 and 2004  $3.4B of Bookings, >30% from new clients  Millennium ready at the right time –Only single, comprehensive healthcare architecture  Strong execution delivering solutions –More than 3,700 Millennium solutions at nearly 750 facilities R&D investments have lead to leadership position *Estimate

9 Innovation You Can Trust Focus for 2005 and Beyond Continue evolving architecture & broadening service offerings  Guaranty reliability; support of real-time evidenced-based medicine; native Web  Broaden Managed Services: Hosting, Application Management Services, Help Desk  Pharmaceutical / Data, Clinical Trials Enhance Client Value from our Solutions  Significantly reduce implementation and operating costs – ‘Bedrock’  Consulting practice focused on improving clinical processes using data-driven best practices – ‘Lighthouse’ ‘Grid Services’ will extend platform beyond large providers & significantly increase market opportunity  Physician and Metro Grid to offer hosted solutions to physician offices  State & Regional Grid to drive RHIO ( Regional Health Information Organization ) strategy  Governments, Employers & Payers become potential clients  Also includes Population Surveillance: BioSentry / HealthSentry  Condition & Disease Grid to drive condition management strategy (PHR)  Transactional Services Grid will create a ‘new transaction’ that reduces waste and friction

10 Innovation You Can Trust Cerner Corporation Financial Snapshot & Business Model

11 Innovation You Can Trust Financial Snapshot – Income Statement 2004 revenue of $926M; 2005E $1.08B-$1.1B Long-term history of profitability  Profitable every quarter since going public in 1986  Met or exceeded expectations 20 of last 21 quarters Sharpened focus on productivity  Driving strong margin expansion (9% OM 2003; 12% OM 2004) Improving revenue quality and visibility  Backlog up 23% YoY in 2004 to $1.5 billion  Recurring/Visible components 64% of revenue in 2004 compared to 61% in 2003 and 57% in 2002 revenue  Strong Managed Services Business is enhancing visibility  VitalWorks’ Medical Division also adds to visibility Maintain long-term goal of 20% operating margins

12 Innovation You Can Trust Financial Snapshot – Balance Sheet & Cash Flow $190M Cash & $131M Debt (as of Q404) Decreasing DSO and Improving Cash Flow  2004 Operating Cash Flow of $168M vs. $134M in 2003 and $68M in 2002  2004 Free Cash Flow of $53M vs. ($8M) in 2003  Full-year 2004 DSO of 105 vs. 110 in 2003  Improvements driven by strong execution delivering solutions to clients –Industrial strength IP creates more predictable and successful projects and lower DSOs *FCF = Operating CF less Capital Expenditures and Capitalized Software

13 Innovation You Can Trust Margin Expansion Update 2004 Progress  Increased operating margins 310 basis points in 2004 (9.3% to 12.4%)  Ahead of plan on Professional Services Margins in 2004 –23% contribution margin in 2004 vs. 15% in 2003  Strong leverage in Support & Maintenance (margins 57% in 2004 vs. 53% in 2003)  R&D and SG&A leverage –R&D leverage expected to accelerate in 2006 and 2007 as amortization of software capitalization moderates –SG&A leverage will be limited in 2005 due to non-cash expense related to Vitalworks acquisition Still target 20% by 2007  Management Target – 20% for full year 2007  External ‘guidance’ – 20% in at least one quarter during 2007  2005 will have less margin expansion due to Vitalworks’ acquisition  $70M of revenue and minimal GAAP earnings (is Cash earnings accretive)  Still driving >20% EPS growth in 2005

14 Innovation You Can Trust New Contract Bookings Support Contracts Support & Maintenance $241M Sales Pipeline Managed Services $50M Contract Backlog Operating Margin x88% x20% x12%x57% $115M, 12% ($303M) Professional Services $251M x23% Total 2004 Revenue = $926M $137M$187M$58M$23M$10M$3M Less: Indirect Costs Note: Total Revenue includes $32M of reimbursed travel revenue. Total 2004 Contribution Margin= $418M (45% of Revenue) R&D 19% of revenue ($172M) SG&A 14% of revenue ($131M) Support Backlog Technology Resale $113M Licensed Software $213M Subscriptions $26M Services, Maintenance & Support Contribution Margin % Contribution Margin $ System Sales D&A $91M + EBITDA $206M, 22% =

15 Innovation You Can Trust New Contract Bookings Support Contracts Support & Maintenance $241M Sales Pipeline Managed Services $50M Contract Backlog Operating Margin x88% x20% x12%x57% $115M, 12% ($303M) Professional Services $251M x23% Total 2004 Revenue = $926M $137M$187M$58M$23M$10M$3M Less: Indirect Costs Note: Total Revenue includes $32M of reimbursed travel revenue. Total 2004 Contribution Margin= $418M (45% of Revenue) R&D 19% of revenue ($172M) SG&A 14% of revenue ($131M) Support Backlog Technology Resale $113M Licensed Software $213M Subscriptions $26M Services, Maintenance & Support Contribution Margin % Contribution Margin $ System Sales D&A $91M + EBITDA $206M, 22% = 89% 17% 18%10%53% 15% 2003 Revenue & Contribution Margins $188M $129M $34M$16M$210M $233M

16 Innovation You Can Trust Margin Expansion Path to 20% operating margins by 2007  Improving consulting margins from 23% to 32% expected to add 160 basis points  Leveraging R&D expected to add 190 basis points  Leveraging SG&A expected to add 120 basis points  Growth & margin expansion in managed services and subscription business expected to contribute 100 basis points  Growth and margin expansion in Support expected to contribute 150 basis points Key Assumptions Organic revenue growth of ~10% per year Contribution margins for licensed sales and technology resale flat for duration (similar to historical experience)

17 Innovation You Can Trust Evolving Business Model Revenue mix shifting  70% of revenue from highly visible or recurring sources by 2007 versus 56% in 2001 and 64% in 2004  Industrial strength software and strong Professional Services driving Support & Maintenance growth  Strong Managed Services business creates recurring revenue and reduces non-recurring hardware sales  Future business models to be more visible & recurring –VitalWorks’ Medical Division adds >$50M of Recurring Rev. –Transaction processing –Employer/payer market  3-year Backlog CAGR of 25% System Sales Support, Maintenance, & Services Recurring and Visible Revenue

18 Innovation You Can Trust Guidance as of February 5, 2005 Q105 Revenue $250M – $255M EPS $0.41 – $0.42 Bookings$215M – $230M Revenue $1.08B – $1.1B EPS $2.07 – $2.12 2005


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