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CERN - Cerner to Acquire Siemens Health Services Conference Call
EVENT DATE/TIME: AUGUST 05, 2014 / 9:00PM GMT
OVERVIEW:
On 08/05/14, CERN announced that it entered into a definitive agreement to
acquire assets of Siemens Health Services from Siemens AG for $1.3b.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
CORPORATE PARTICIPANTS
Zane Burke Cerner Corp. - President
Marc Naughton Cerner Corp. - CFO
Neal Patterson Cerner Corp. - Chairman, CEO, Co-founder
Jeff Townsend Cerner Corp. - EVP, Chief of Staff
CONFERENCE CALL PARTICIPANTS
Robert Jones Goldman Sachs & Co. - Analyst
Garen Sarafian Citigroup - Analyst
Mohan Naidu Stephens Inc. - Analyst
Donald Hooker KeyBanc Capital Markets - Analyst
Jamie Stockton Wells Fargo Securities, LLC - Analyst
George Hill Deutsche Bank - Analyst
Michael Cherny ISI Group - Analyst
Sean Wieland Piper Jaffray - Analyst
Steve Halper FBR Capital Markets & Co. - Analyst
PRESENTATION
Operator
Welcome to Cerner Corporation's conference call to discuss its pending acquisition of Siemens Health Services. Today's date is August 5, 2014, and
this call is being recorded for replay purposes.
The Company has asked me to remind you that all statements in this presentation that do not directly and exclusively relate to historical facts
constitute forward-looking statements. Statements related to the expected benefits of the proposed transaction, and Cerner's post-transaction
plans, objectives, expectations, and intentions are examples of such forward-looking statements. These forward-looking statements are based on
the current beliefs, expectations, and assumptions of Cerner's management with respect to future events and are subject to a number of significant
risks and uncertainties.
Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning factors that could
cause actual results to differ materially from those in the forward-looking statements may be found in the Company's current report on Form 8-K,
out earlier today, under Item 1A, and Cerner Form 10-K and in the Company's other filings.
At this time, I'll now turn the call over to Zane Burke, Cerner's President. Please proceed.
Zane Burke - Cerner Corp. - President
Thank you, Denise. Good afternoon, everyone. Welcome to the call, and thank you for dialing in on such short notice. Today we are pleased to have
announced that Cerner has entered into a definitive agreement to acquire the assets of Siemens Health Services. I'm going to make some opening
remarks, and then Marc Naughton, our CFO, will walk you through a few details before turning it over for questions. Also with us are Neal Patterson,
our Chairman, CEO, and Co-founder, and Jeff Townsend, Executive Vice President and Chief of Staff.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
I'll start by providing some background on how we think about M&A and why we are doing this. Cerner is doing very well. We are growing our
revenues and earnings at more than 15% year to date, generating strong cash flow, and are very competitive in the marketplace. So we didn't
approach this from a position of needing to do a large acquisition, but we did identify it as a great opportunity that I believe can be a big positive
for Cerner, our clients, associates, and shareholders, as well as Siemens Health Services' clients and associates.
Those of you who know Cerner are quite aware of the fact that we have not been an acquisitive company. Our growth has been organic and driven
by billions of dollars of R&D investments over the years that have led to the most comprehensive suite of solutions and services in the industry.
This acquisition does not change our focus on investing in R&D to create solutions and services that have a major impact on healthcare. We would
not be doing it if we thought it would slow our momentum in IP development around physician experience, mobility, revenue cycle, interoperability,
Open EMR and Population Health.
In fact, we believe the acquisition can enhance our ability to innovate. Cerner has always focused on making acquisitions that have a sound strategic
and financial rationale and are in the best interests of our clients and associates. We've demonstrated over the years that when we do this, it also
proves to benefit shareholders. This acquisition easily meets these requirements. It is strategically and financially sound, and we firmly believe it
will benefit our clients, associates, and shareholders.
It also represents a great opportunity for Cerner to play an even bigger role in advancing the delivery of healthcare around the world. To me, the
biggest area of opportunity is around innovation. We will expand our R&D investment to more than $650 million annually. We expect our increased
R&D investments to be a big win for our existing clients, Siemens's clients, and for healthcare. In addition, Marc will discuss an alliance with Siemens
that is part of today's announcement and something we believe can further enhance our innovation potential.
Beyond the increased innovation, we believe our clients will also benefit from greater services scale when we add Siemens Health Services' capacity.
We believe this accelerating innovation and increased scale will enhance our competitiveness in the current EMR era and allow us to expand our
leadership into a new era of Population Health.
The acquisition will also bring an impressive, worldwide client base. We believe this is a big positive for the Siemens Health Services clients, as we
will support their existing solutions while also providing them access to our proven and comprehensive suite of solutions and services. We also
believe their clients will benefit from investments we are making in our rapid migration approach, which facilitates faster implementations based
on best practice system designs.
We believe our commitment to supporting their clients is a key reason Siemens agreed to sell their HCIT business to Cerner, as they want their
client base to be in good hands. This is important for them, as they will continue to be a key supplier of modalities and other products into healthcare.
Finally, we are very pleased to be bringing on this strong team of associates from Siemens Health Services. We are very impressed with their
leadership team and associates and expect them to add significant intellectual capital to Cerner.
With that, I'll hand the call over to Marc.
Marc Naughton - Cerner Corp. - CFO
Thanks, Zane. What I'd like to do at this point is walk you through the slides that are available at cerner.com in the Investors section. On slide 3,
you'll note that we have our Safe Harbor statement, so we may be making future-looking statements here.
Proceeding on to slide 4, Cerner Acquiring Siemens Health Systems. Several strategic reasons for this acquisition. Certainly, it enhances our position
as a global leader in the HCIT market. The combined revenues for 2014 estimated will be over $4.5 billion for the combined companies. The annual
R&D investment is over $650 million for the combined companies, so significant funds being spent on innovation by both of us.
Combined presence in over 18,000 different client facilities, including leading health systems in all major markets. Over 20,000 associates in more
than 30 countries will be in the combined companies post-acquisition. And these associates are very high quality and a key reason that we would
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
do a transaction of this nature. Finally, I'll talk a little bit later about the formation of a global alliance with Siemens to fund innovation. So those
are the basic reasons behind the strategic acquisition we're announcing.
Let me just tell you a little bit about Siemens Health Services overview. Their FY14 estimated revenue would be about $1.2 billion. They have
approximately 5,000 client facilities in over 40 countries with both direct and indirect sales channels, over 5,000 associates worldwide. They are a
global provider of healthcare information technology solutions, enterprise-level clinical and financial healthcare IT systems, as well as departmental
connectivity solutions, and population health and care coordination.
For their clients, they offer complementary and supporting services, including hosting and managed services, implementation, strategic consulting,
as well as clearinghouse and health information exchange capabilities. And obviously, we all know they have a strong track record in revenue cycle
management solutions. On the global front, they have a strong presence in Germany, Sweden, Austria, Spain, Norway, and the Netherlands and
are very complementary to our existing global footprint.
So let's move to the next slide, which is slide 6, Key Transaction Terms. We are acquiring Siemens Health Services from Siemens AG for $1.3 billion.
It will be an asset purchase on a cash-free, debt-free basis. 100% of the consideration will be in cash, and we expect to fund the acquisition with
cash on hand at Cerner date of close.
Financially, this is projected to be more than $0.15 accretive to non-GAAP EPS in 2015 and more than $0.25 accretive in 2016. And for a non-GAAP
number, it would be before share-based compensation, one-time transaction costs, acquisition-related amortization, and deferred revenue
adjustments. So highly accretive. Projected annual pre-tax synergies from cross-selling and cost savings are expected to be greater than $175
million by 2017. Relative to close, we expect to close in early 2015, and obviously, the transaction is subject to regulatory approval and other
customary closing conditions.
Moving on to slide 7, this is a strategic acquisition that adds the impressive client base of Siemens Health Services, their knowledgeable and
experienced associates, and this will continue to drive our growth and innovation. We certainly see it a great opportunity in the post-meaningful
use era for this industry, and we think it significantly enhances that position. Our proven solutions and services will be available across the expanded
client base.
Many of you have seen us talk about our 2020 view of growing double-digit top line for the decade. Many of those solutions and offerings that we
talk about as drivers of that future growth are things that this client base will be very interested in.
There's a significant R&D investment that drives innovation. As I indicated earlier, $650 million annual investment will allow us to continue to focus
on our key imperatives that we've shared with you -- physician, revenue cycle, and population health. This enhances Cerner's robust, standalone
organic growth opportunities. That is our key strategy. This expands the base into which we can sell our broad suite of solutions and services, and
certainly, it's a complementary geographic footprint that will enhance our worldwide HCIT presence.
Going to slide 8, and I will close with this slide -- tell you a little bit about the strategic global alliance that we're entering into with Siemens. Certainly,
Siemens is very cognizant of the value of matching their therapeutic and diagnostic technology with the health information system, and one of
their primary reasons for buying Shared Medical back in the day was to deliver that integration. We are entering into a joint initiative to integrate
health IT and medical technology, looking at enhanced workflows and improved clinical outcomes. This will support Siemens's commitment to
advancing HIT with their modality clients, which has been a key focus of theirs.
The terms of this agreement will be a 3-year initial term and up to $50 million of investment from Siemens and from Cerner. The initial areas of
funding that we look to do are through laboratory automation and cardiology information systems, but we will have a separate Board that will
analyze various opportunities, present them to the Board, and then upon the approval of both Siemens and Cerner, determine whether that is
something that we jointly believe we should use this separate funding, that's outside of the Company, to go pursue. So I think that's a key element
of the transaction, certainly in line with our continued innovation in this space.
So with that, I will turn it over to the operator for questions.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
QUESTIONS AND ANSWERS
Editor
(Operator Instructions.) Robert Jones, Goldman Sachs.
Robert Jones - Goldman Sachs & Co. - Analyst
Questions. I think on the surface, the obvious big risk here that many would have from this deal would just be around customer attrition. I was just
hoping you guys could share with us a little bit of how you got comfortable around that aspect of the transaction. And then maybe anything specific
around your attrition assumptions behind the deal would be helpful.
Marc Naughton - Cerner Corp. - CFO
Yes, this is Marc. Clearly, that was a key concern for us, because that's a major component of the transaction. We did a lot of looking in the diligence
process at their client base. We were actually pleased at the retention levels that they have had most recently. We understand that we're going to
have to create a very secure future for these clients, one with a clear path that they can follow to get to that clear future. And I think we are certainly
well suited to go do that.
I think we have, in our estimates in looking at it, have assumed there will be some client attrition. But I think, when I step back and look at this, I
look at the options in this space would be for Cerner to pursue that client base on a one-at-a-time basis over the next 7 to 10 years and try to pick
off as many of those clients as we might be able to do so.
Assuming that half those clients would move in that time period, and assuming we were able to win 50% of that, you might be able to attract 25%
of that client base. With this acquisition, we are getting access to the entire client base, and our job, clearly, is to provide them a comfort level with
remaining a Cerner-Siemens client going forward. We've spent a lot of time working on what that will look like and how we will do that.
We already have started using what we call a rapid migration tool that allows us with clients to take what had been a 12- and 18-month process
down to a 6-month process. And that's a pretty big deal, and it's certainly inherent in how you take a client base that over time is looking to migrate
to another platform and to make that as inexpensive and as painless as possible. So we certainly have looked at it a lot. We have some level of
attrition built into our models, but we think our client organization and what we have to offer will be compelling for this client base.
Neal Patterson - Cerner Corp. - Chairman, CEO, Co-founder
Hey, Rob, this is Neal. So it's pretty cool when your CFO can talk that directly to that subject from -- so this, there was a certain amount of that base
would come to the marketplace, and we would get a percent of that. We think this is a much more stable base than it has been in the past, and we
think these are a lot of very good clients. So we're just going to go win their trust and show them an unbelievable, compelling value proposition
going forward.
So it will be work. It isn't anything we don't know how to do. And we're bringing across a very, very good experienced associate base to help with
that work. So we're pretty comfortable with it.
It happened to be there were two fundamental questions that -- thresholds that we had to get over internally before we would do something,
because this is not how we've grown the Company. And so the first one really is would it slow down our momentum? We think we have very good
momentum across, really, about every place in Cerner, including some key areas in the marketplace that is going to make us very hard to beat. So
there's a momentum factor -- will this slow us down? And two, will that base stay with us and can we protect the base? So we got very comfortable
with both questions.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Robert Jones - Goldman Sachs & Co. - Analyst
And nothing like a captive audience, I'm sure. And then just Marc, I'm not intimately familiar with the Siemens business. Anything you can share
with us, just as far as revenue trajectory and then maybe just how their corporate margins compare to Cerner's today? That would be really helpful.
Thanks so much.
Marc Naughton - Cerner Corp. - CFO
Yes, I think at a high level, their revenues, basically, as we indicated in the fact sheet, they're $1.2 billion of revenue. Their revenues have actually
been fairly flat over a period of time. They haven't decreased, but they haven't grown significantly over a period. So I think that's something that
we can change the trajectory of. I think certainly the financial benefits here and some of the synergies are twofold. I mentioned our new solutions
and offerings such as Works and Population Health that we think we can take into this space.
But even on the cost synergies, there's significant overhead coming from their parent company that isn't really reflective of any real work that got
done. So there are some things that we can cut out very quickly to increase their profitability, and then just centralizing some of the administrative
functions. So much of the $175 million of synergies that we talk about, a lot of that is from very low-hanging fruit. And as you know me, we tend
to be conservative with what we talk about delivering in the future. And certainly, I will personally be disappointed if we don't exceed the numbers
that we presented today. Next question?
Operator
Garen Sarafian, Citigroup.
Garen Sarafian - Citigroup - Analyst
When it comes to M&A, I'm always curious to hear about timing. So I realize opportunities come at their own pace, but from my understanding, I
thought that this asset was available in earlier time periods. So I'm wondering, what was it this time that something happened that it took it through
to the finish line? Was it a strategic perspective had changed, valuation, or if you could just comment on what it could be.
Marc Naughton - Cerner Corp. - CFO
Yes, this is Marc. I think from a strategic standpoint, certainly the Siemens parent is in a period of reevaluating things that they are good at, the
things they want to focus on. And I think that that probably is a little bit different of a scenario than you would have seen in the past. I think the
valuation expectations were, in our opinion, more appropriate at this time. So I think those are probably two of the key elements that positioned
for this time relative to any time previously.
I think another element is that it's very important to Siemens that they found a strategic buyer that would support these clients. They have a very
large business in the diagnostic and therapeutic equipment and technology area, and they need these clients to continue to hold them in high
regard. And I think that having somebody like Cerner as a buyer, who could give them a good, solid future, was probably one of the paramount
things that they were looking for here.
Neal Patterson - Cerner Corp. - Chairman, CEO, Co-founder
I might add, too, on the relationship with Siemens, that the alliance that we've created with them is very important to us, and I believe it's very
important to Siemens. Siemens still is going to be a big IT company, so you can't be in the medical technology business without being heavy into
IT. Jeff, you might comment a little bit. Be fairly brief around the alliance and how you envision that.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Jeff Townsend - Cerner Corp. - EVP, Chief of Staff
Yes, I think it is, we went through the discussions together. Still, at the strategic level, they believe in a higher integration of the workflow, the
clinical decision-making, and deeper understanding of those diagnostic and therapeutic devices can change outcomes pretty dramatically, both
cost and quality. So for them, that strategy has not changed. The only thing that's changed is they're going to do it with Cerner to supply that other
half of anything from big data discoveries to decision support, contextual inside the workflow in front of a physician.
Garen Sarafian - Citigroup - Analyst
Okay. Now, that makes sense. And then the other question is another major concern when it comes to M&A is management distraction. So could
you speak to perhaps how you've thought through how the momentum will continue? And also, what clients that you've trusted, the larger clients
that you perhaps have gone to, if there's any sort of an early feedback that you've been able to get from them, that they're comfortable with this
acquisition?
Marc Naughton - Cerner Corp. - CFO
This is Marc. Let me start, and Zane can answer some of the client component. Clearly, the approach we have to this acquisition is one of we're not
going to force these two businesses together. We are going to maintain some significant areas of Siemens, let them run their clients, let them
continue serving their clients, delivering a high-quality experience. We've identified two senior Cerner executives, Dick Flanigan and Farrell Sanders,
who will go be part of that executive team.
They have a strong leadership team. We believe we can leverage that leadership team to keep those assets running. We certainly will pull together
areas that are important in joint, such as client relations, but part of our strategy here is those assets stay separate. They don't impede on our R&D
spend, on what we're focusing on, on how we're going to market. We keep them moving forward on the path and don't try to force integration
before it can naturally occur. And I think that makes sense today. And what have you heard from any clients you might have talked to in the hour
since we've been out?
Zane Burke - Cerner Corp. - President
Well, in the 45 minutes we're out, I've actually had opportunity to speak with three clients that are Cerner clients and Siemens clients. So they share
the platforms today, and all three of them were incredibly positive about the acquisition and what it meant for them moving forward and our
overall relationship. And it comes from a very strong track record of us delivering on our side, and the trust that they have in us to continue to
deliver. And that base is very important to us, as well as the Siemens EMR space as well. And we'll have an opportunity to engage, like we do every
day, on the competitive side of that up until the transaction closes.
Garen Sarafian - Citigroup - Analyst
Got it. Great. Thank you.
Operator
Mohan Naidu, Stephens.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Mohan Naidu - Stephens Inc. - Analyst
Marc, Zane, Neal, if any of you want to take this -- in healthcare IT, such large transactions have not gone well. What should we expect differently
from this transaction, and how are you guys planning it?
Marc Naughton - Cerner Corp. - CFO
This is Marc. I think, if you look at the history of what's happened, at least in this industry, is you've seen big cat companies coming in and trying
to enter the market by buying something. They didn't have any necessarily natural muscle memory in this space and found it to be quite challenging.
I think on the other side, the M&A you've seen is people looking to fill gaps. So they have had to buy other technology to fit an area they don't have
and then do the hard work of not just writing new technology to cover all of this, but to try to make all of this disparate technology work together.
And so those have been the two primary acquisition models that you've seen.
What we're doing here is clearly not for solutions, for their IP relative to some of the platforms they have out there. We are still committed to
Millennium. It is our go-forward platform, and it will continue to be so. But we are basically pooling those resources, working with that client base,
to provide them to a future.
So it's much different than what you see in the past and how hard that can be. We're not saying this will not be interesting and challenging, but
we know this industry. We've been in it a long time. We've grown organically. We know how to do this. And I think adding these types of resources
to our skills, I think it's a win-win situation.
Mohan Naidu - Stephens Inc. - Analyst
And just to follow up, that if you're not going to -- I guess you're going to support Soarian for the next decade or so and not going to force customers
to move -- what is it that this transaction is going to give you that you cannot do by being standalone?
I guess that's it. I'll hop back in the queue. Thank you.
Marc Naughton - Cerner Corp. - CFO
I think the transaction versus not doing the transaction is we'll be working with these clients. We'll be helping plan their future, and I think we will
work together to make sure that they are protected, not only for this decade, but for the next decades and on. So I think the post-meaningful use
era is going to have a lot of need for technology, and these clients will now have a path that they can follow to get there. And I think that's -- doing
them all at once, I think we will get a much larger share of those clients than if we went hand-to-hand combat.
Neal Patterson - Cerner Corp. - Chairman, CEO, Co-founder
Yes, this is Neal. I'd just add a couple or restate that last point. Post-meaningful use, it isn't -- everybody will still have very large imperatives to have
advanced information technology, drive as a platform to practice clinical medicine. But the difference is there's not going to be $24 billion coming
into the marketplace to finance it. So it's a different dynamic, basically, going forward here, number one.
Number two, we're really staging the next business by growing the base at a single moment. And if you study what we're doing in Population
Health, we literally are putting -- there's a layer that's going to come into the information model around organizations that are going to manage
the population versus manage when somebody shows up with a medical problem in the emergency room or in the office and presents that problem.
So that is a different thing. What we are building there and doing quite well with, basically looks at the EMR as a source of data the same way it
looks at the claims and PBM and employer enrollment information as sources of data.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
So there's another layer. So this stages that business and advances the footprint and then it also advances, basically, our ability to prove, on a level
of interoperability and openness, we're going to create basically a new layer of information. So I didn't say that particularly well, but Jeff could
probably say it more brilliantly.
Jeff Townsend - Cerner Corp. - EVP, Chief of Staff
No, I think it's not super-sexy, but we've been talking about it consistently, probably for the last 3 or 4 years, of openness, interoperability, the ability
to use machine learning to map data. So we're in a different technical era with a set of toolkits not only to produce that Population Healthcare
layer, but to take a lot of our innovations and embed them back inside of other EMRs.
And so this also creates, with their blend of platforms, an opportunity for us to take our existing capabilities and solutions and push them back in
to give added runway to their current investments.
Operator
Donald Hooker, KeyBanc.
Donald Hooker - KeyBanc Capital Markets - Analyst
So just on the financials, would you be willing to provide, give us a sense of where their profitability is? You gave us some detail around the EPS
accretion, but maybe moving up the P&L, what we should think about, maybe up to the EBITDA level?
Marc Naughton - Cerner Corp. - CFO
Yes, Don, this is Marc. This is really early. This thing went very fast. We've certainly done a lot of diligence and feel very comfortable with the numbers
and with what we've put out relative to pro forma views the next couple of years. But I think we'll probably have to wait until we get further down
the road before we provide a whole lot of more detailed financial data. I think, certainly, once we approach close and certainly post-close, we'll be
able to give you much more data. But you've got to give us a little time at this point, I think, to be able to get you some numbers that are more
detailed, although I understand the desire.
Donald Hooker - KeyBanc Capital Markets - Analyst
That's fair. And then in the press release, I think -- I don't want to read too much into things -- it said you're looking, you'll be supporting the Soarian
platform going forward. They have a few other platforms. Is there a different strategy around those other platforms?
Marc Naughton - Cerner Corp. - CFO
Well, I think certainly each client will have a different approach to how we're taking them forward. And I think, so that each platform will have a
different approach that we're working on.
Zane Burke - Cerner Corp. - President
This is Zane. Our plan is to support the Invision and MS4 revenue cycle base as we move forward.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Donald Hooker - KeyBanc Capital Markets - Analyst
Got you. And is it safe to assume that the vast majority of the revenues are revenue cycle oriented?
Zane Burke - Cerner Corp. - President
No, not the vast majority. They have a significant clinical component as well. I mean, probably roughly, might be 50/50.
Donald Hooker - KeyBanc Capital Markets - Analyst
Okay, that's helpful. Thank you so much.
Operator
Jamie Stockton, Wells Fargo.
Jamie Stockton - Wells Fargo Securities, LLC - Analyst
I guess maybe, Marc, the first one, the $1.2 billion of revenue -- can you give us a sense for how much of that is one time versus recurring?
Marc Naughton - Cerner Corp. - CFO
At this point, I probably won't talk a lot about the difference between recurring and non-recurring. I would make the point that a lot of their revenue
comes from perm contracts, so it is spread over a period of time. So their recurring percentage, at the end of the day, probably isn't -- the recurring
and highly visible -- isn't a whole lot different than what ours is.
Jamie Stockton - Wells Fargo Securities, LLC - Analyst
Okay. And then maybe one other one on the revenue. I think you said earlier in the call that you thought that the $1.2 billion would grow. Do you
mean there that the combined company will do more than $1.2 billion from the Siemens customer base, but that it might be a combination of
Siemens and Cerner products that they're consuming as opposed to the Siemens business itself is actually going to grow?
Marc Naughton - Cerner Corp. - CFO
Yes. No, clearly our expectation is that a lot of the future growth is going to be from the wider portfolio of solutions and services that Cerner offers.
So I think that's clearly the opportunity here, is to take those into this client base.
Jamie Stockton - Wells Fargo Securities, LLC - Analyst
And then maybe my last question. Siemens, I think, has a little more traction internationally than they do domestically. Is there any thought to
retaining some of their technology internationally longer than the domestic platforms?
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Zane Burke - Cerner Corp. - President
Well, currently we're talking about Soarian being retained for at least 10 years, so in our world, that's a long time. I think that each geography, we'll
take a look at what's in that market and certainly what the market needs in the requirements, and certainly what the price points are in that market,
and then make a decision as we go forward as to what the appropriate go-forward solution is in each of those.
Neal Patterson - Cerner Corp. - Chairman, CEO, Co-founder
Yes, this is Neal. But I do think your overall point's good, that there's a different strategy outside the US. And it is a bit country-by-country. But we're
very pleased with the size of that business. It creates a critical mass in Europe between what we already had there and what will come. It creates a
very nice organization.
Jamie Stockton - Wells Fargo Securities, LLC - Analyst
Marc, do you have any sense for the international piece of the $1.2 billion?
Marc Naughton - Cerner Corp. - CFO
I'd say their percent that's coming from non-US sources is probably more traditionally what we used to see -- in the mid-teens.
Jamie Stockton - Wells Fargo Securities, LLC - Analyst
Okay, that's great. Thank you.
Operator
George Hill, Deutsche Bank.
George Hill - Deutsche Bank - Analyst
Neal, maybe a quick follow-up for you. You started to, you briefly touched on -- you didn't say it, but you talked a little bit about the post-high-tech
era with there not being a lot of funding available from the government for the next round of healthcare IT purchasing initiatives.
My question would be two-part. Number one is you've historically loathed these large deals. Not what's changed at Siemens, but what's changed
at Cerner that's now made this an attractive opportunity? And can you give us more color on your thoughts on what drives spending in the
post-high-tech environment, and how this helps?
Neal Patterson - Cerner Corp. - Chairman, CEO, Co-founder
Okay, George, I'll see if I can be succinct. The chances are I won't. It's clear, obvious, on the post-meaningful use, so as far as an external source. But
what did happen during this era is that IT became ubiquitous across healthcare, and it's inside healthcare, and it will never go away. And the
pressures, both from competitive pressures on meeting what I call reigning mandates and measurements, so the demand for healthcare organizations
to report or protect their revenues or to adopt new revenue models is just going to absolutely continue. So IT is an imperative as has never been
before.
So even though the pump was primed, the pump is still going to pump. So the percentage spend of IT that organizations have to continue is going
to be higher than it ever had been. So that basically -- so there's a switch there. I commented on this, in my mind, stages the next evolution of
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Cerner as we evolve to the Population Health and then beyond Population Health, what's beyond Population Health? And you know us very well,
so you know we have some very clear thoughts as to very large opportunities around being a bigger part of the healthcare spend as it's coming
from its source, aka the new middle, if you will.
Now, so I liked how very cutely you put, "Not what changed at Siemens," because you know what changed at Siemens. What changed at Cerner?
And I must admit, my personal enthusiasm for this wasn't real high. But we've always known this is something that when it makes sense, it would
make sense for us. So what fundamentally, I don't think it's changed, but what is solidifying at Cerner is our -- part of it's the work we're doing with
Intermountain, part of it's the work we're doing in other parts of the marketplace.
We're building the most advanced EMR, integrated EMR, across the continuum of care that exists in the marketplace with an integrated rev cycle.
So that part will take anybody on, on a competitive side. So protecting the base was a key part of this to us. And so we believe we can just create
a huge value proposition to this base.
And you've known I have been very critical of roll-ups, but if you want to slow a company down in this business, try to take technology that was
developed on a different platform, integrate it with technology that was developed on another platform. That freezes your engineering, the
productivity in engineering. We're not frozen, so our ability to continue our momentum and our confidence that we'll be able to create compelling
pathways for these new clients with high value is quite great. So maybe it's confidence, but you've known us quite a while; we've never really totally
lacked confidence.
So I don't know what exactly changed. And it might be what we see is the next side of healthcare is the layer above the EMR. And so I rambled, I
was not succinct, I predicted that, so --
George Hill - Deutsche Bank - Analyst
I'll say I was hoping you would not be succinct, and then I'll just go with a real quick follow-up to your point. Without naming names, you've seen
every other company in this space who's gone after a deal like this hit the usual pitfalls. You and the team are confident that you guys can avoid
them?
Neal Patterson - Cerner Corp. - Chairman, CEO, Co-founder
Yes, again, I'm pretty direct, so we spent a full day -- one overnight and a full day -- with the team. And I was a little surprised how good I came out
of that meeting. So I sent our Board a note afterwards that says, "We'll do this." So up to that point, I says, "We won't do it if we can't get past these
two thresholds." So we've got a very good team working on this.
If you look at who's produced most of the management in this industry, there's a lot of Cerner talent a lot of places in this industry. So it's not that
we have a factory on creating, finding talent and creating and developing it, but it was not a big stretch for us to go get two incredibly good senior
execs and say, "You may have to get a Pennsylvania driver's license." And there's a great talent pool out there. There's a very good talent pool out
there.
So, George, this is not -- I don't believe this is going to slow us down, and I believe we'll be able to protect the base. Those are the two questions
we asked every time and asked often.
George Hill - Deutsche Bank - Analyst
Okay. Appreciate the color. Thank you very much, and congratulations.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Operator
Michael Cherny, ISI Group.
Michael Cherny - ISI Group - Analyst
Most of my questions have been answered. Regarding the diligence, I was trying to reconcile a couple of these comments that have come up. In
terms of your thought processes, repeat again if you've done this in a slightly different way, but when did this really, this process kick off? I know,
Marc, you said it came together pretty quickly. But could you just talk -- I know you've known them for a long time and they're a competitor of
yours. But roughly speaking, the evolution? Or do we have to wait on the proxy for that for some of those details?
Marc Naughton - Cerner Corp. - CFO
Yes, I don't think I can go into a lot of details as to how we got to where we got. I think it was clear. We talk to different people all the time, and I
think it was their focus on their clients and their future success was clear. And our capability of providing that future in a very, very substantial
manner, I think, was two of the things that just led to the conversations.
And I think that -- I've been talking for quite a while about my cash and what things that we would look for, and one of those things that I looked
for would be, is there something interesting that might, from trying to look at a client base. But I think the one thing I always cautioned was that
I'm trying to get the -- the valuations have to be right. And I think in this case, we got a very good asset. We got some great talent in the associate
base there, and I think we paid a fair price. So I think this is pretty consistent with what our thinking has been.
Relative to the time in transaction, I don't know that it was a big part of the deal. Clearly, once we thought it was a good idea and once we convinced
Neal, apparently, that it was a really good idea -- we'll have him say it was at some point.
Zane Burke - Cerner Corp. - President
This is Zane. I'd just say we've had a lot of respect for Siemens and the predecessor, SMS, and the work they've done in our industry. And when you
look at their client base, they have a strong client base. And actually, they have a passion for innovation as well, and so sometimes there's a challenge
around fully delivering that innovation levels. But there's a very -- culturally, they were decent alignments in that space. And so I think from a cultural
alignment, from a client capacity and respect we have for them, we've had that respect for a number of years. And so it makes more sense in this
regard.
Michael Cherny - ISI Group - Analyst
Thanks, guys, and Marc, I'll stop asking about what you're going to do with your cash now.
Marc Naughton - Cerner Corp. - CFO
Thanks, Michael.
Operator
Sean Wieland, Piper.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Sean Wieland - Piper Jaffray - Analyst
I'll try to limit myself to 26 questions here. How are you going to prioritize the investments in innovation across the two platforms? And specifically,
what are the plans for some build-up platforms like Invision and MedSeries4?
Marc Naughton - Cerner Corp. - CFO
So this is Marc. We're not going into the details as far as our plan. We clearly have done some preliminary work. We have a lot of work to do between
now and close on what we're going to do. I would make it clear that the money that is being spent on R&D for the Millennium platform is going
to be spent on the Millennium platform and our new initiatives and our imperatives. There's not going to be a dilution of that focus in any way. I
can't really, at this point, give you any more granularity as to where the R&D dollars are going to come.
Sean Wieland - Piper Jaffray - Analyst
Okay. Is it going to be run as a separate division within Cerner, or is it going to be integrated?
Zane Burke - Cerner Corp. - President
We are intending to keep that as separate as it makes sense from an operations standpoint. We have not decided whether it serves as a separate
division. There will be some elements that are combined with Cerner from a client perspective, but I think that's probably the best way to think of
it, that we're not going to go disrupt their business, just like we're not going to go disrupt our business.
Sean Wieland - Piper Jaffray - Analyst
All right. And then last one, how does this affect your go-to-market strategy for revenue cycle, considering their strong share within your base?
Zane Burke - Cerner Corp. - President
This is Zane. It doesn't have an impact on our go-to-market strategy at all. Our trajectory on revenue cycle is very good. Our confidence level and
what we've been doing and the progress we've made has been incredible, the growth we've experienced there. That being said, obviously, there's
a strong lineage at Siemens from a revenue cycle perspective, and they have a lot of knowledge and experience in that space, and we anticipate
utilizing the additional resources and capacity of that as part of the overall transaction.
So I look at it as a nice positive for us, access to additional talent and skills and access to the length of what they've been doing from a revenue
cycle perspective. We're incredibly feeling good about our trajectory on revenue cycle and Cerner size we came in.
Sean Wieland - Piper Jaffray - Analyst
Okay, maybe one quick yes/no. Do you get John Glaser with the deal?
Zane Burke - Cerner Corp. - President
We can't really comment on what's going to happen once we close the transaction, so at some point we'll be able to give people an idea of who
might be there.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Sean Wieland - Piper Jaffray - Analyst
All right, got it. Thank you.
Marc Naughton - Cerner Corp. - CFO
Hey, Denise, let's do one final question, please.
Operator
Sure. Steve Halper, FBR.
Steve Halper - FBR Capital Markets & Co. - Analyst
As you think about the balance sheet with the sizable cash balance that you have now, have you given thoughts, post-transaction, to the capital
structure of the Company? What's the plan for continued share repurchase? And are you considering layering in any debt capacity onto the balance
sheet?
Marc Naughton - Cerner Corp. - CFO
Yes, thanks, Steve. This is Marc. Currently our expectation is just our normal cash flow and balances will be sufficient to close this transaction. We
are -- I don't want to preclude any future decision by our Board of Directors to continue buying back our stock. To do that would require some
small level of debt or accessing our revolver until we get cash flow that covers that. We might do that. It's very obviously, very low interest rates
and pretty insignificant costs to doing something like that.
So we still like our stock buyback opportunities. We still like, I think we're an attractive valuation, and certainly the Board of Directors makes that
decision. But we have done that for the past 2 years. We recently increased it. And I don't think it's going to -- we would certainly look at our capital
structure and what we would need to do to continue that on an ongoing basis. If it means a little bit of debt on the revolver for a short-term period
of time to make that happen, maybe we'd do that. But I think this transaction does not preclude us from doing stock buybacks. It might preclude
people from asking me about cash, but it's not going to preclude us from doing stock buybacks.
Steve Halper - FBR Capital Markets & Co. - Analyst
And lastly, what impact on capital expenditures for next year? Is it too early to say?
Marc Naughton - Cerner Corp. - CFO
Yes, it's too early. We'll have to go through that planning structure. I think we have a good idea what we're thinking about, but I think we certainly
have to go through that business and ascertain where they're at and what their needs are.
Steve Halper - FBR Capital Markets & Co. - Analyst
Great. Fair enough. Thanks.
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AUGUST 05, 2014 / 9:00PM, CERN - Cerner to Acquire Siemens Health Services Conference Call
Zane Burke - Cerner Corp. - President
Well, I appreciate everybody joining us. Again, we're very excited about the trajectory of Cerner, excited about this transaction and the opportunity
to bring full-scale IT solutions across a broader client suite and the innovation alliance piece and what that means to the future of healthcare.
Appreciate everyone joining us, and I look forward to catching up with you on our next quarterly conference call.
Operator
This concludes today's conference. You may now disconnect. Have a great day.
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