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Cerner Corporation. HIMSS 2005. Investment Community Meeting Dallas, Texas February 15, 2005. Cerner Corporation. Introduction & 2004 Review. Paul Black Executive Vice President & Chief Operating Officer. Safe Harbor Statement.

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Investment community meeting dallas texas february 15 2005

Cerner Corporation

HIMSS 2005

Investment Community Meeting

Dallas, Texas

February 15, 2005


Investment community meeting dallas texas february 15 2005

Cerner Corporation

Introduction & 2004 Review

Paul Black

Executive Vice President &

Chief Operating Officer


Safe harbor statement

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.


Agenda

Introduction & 2004 Review

Services Update

Financial Focus

Cerner Vision & New Initiatives

Healthcare Policy

Client Panel

Closing thoughts / Q&A

Paul Black, EVP and COO

Mike Valentine, U.S. Client Organization

Marc Naughton, SVP & CFO

Bill Dwyer, Senior Vice President

Jeff Townsend, SVP & Chief of Staff

Don Trigg, Chief Marketing Officer

Neal Patterson, Chairman & CEO

Dr. Don Crandall, VP, Clinical Informatics, Trinity Health

Gary Jump, CIO, Our Lady of the Lake Hospital

Neal Patterson, Chairman & CEO / All

Agenda


Cerner at a glance

Cerner at a Glance

  • Founded in 1979; founders still actively leading company

  • Largest company focused on clinical information and transformational solutions for healthcare

    • Over 5,800 Associates Worldwide (including recent acquisition of VitalWorks Medical Div.)

    • 1,600member Services Organization; 1,900 person Intellectual Property (IP) Organization

    • 2005E Revenues of $1.08B - $1.1B

  • History of organic growth through investment in IP

    • 10-year Revenue CAGR of 20% driven primarily by organic growth

    • $1.5 billion revenue backlog, nearly doubled in last three years

    • A single, comprehensive healthcare architecture (Cerner Millennium)

    • Over 5,000 live solutions at more than 1,500 client facilities

      • Includes more than 3,700 live Millennium solutions at nearly 750 client facilities


2004 year in review

2004 Year in Review

  • Sales

    • Bookings revenue up 13% to $917M

    • Good market share gains with over 30% from new clients

  • Operations

    • 1,079 Millennium solutions converted – up 22% from 2003

    • Significant improvement in Professional services profitability

    • ASC / Bedrock will allow further improvements in implementations

    • Delivering CPOE – nearly doubled live CPOE sites

    • Delivering value and getting paid

      • Record Cash Flow: $168M operating / $53M free cash flow

(Cumulative)

  • Cerner Millennium is Industrial Strength

    • 3,767 live Millennium Solutions

    • 287 Clients

    • 749 Facilities


Delivering cpoe

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 was 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’


Cpoe acute care market share

CPOE: Acute Care Market Share

Currently Marketed Platforms*

(Top 7 Suppliers)

All Existing Platforms*

(Includes currently marketed and old platforms)

  • 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 2% penetration of ‘real’ CPOE (over 50% of orders electronic)

*Source: HIMSS Analytics Database, January 2005

(Based on survey of 3,989 acute care hospitals)


Investment community meeting dallas texas february 15 2005

INet Virtual: Extending Critical Care

  • Critical Care is 1.5% of US GDP and 24-35% of hospital costs

    • High demand for expensive, ICU beds

    • Inappropriate utilization (people in the ICU often don’t need to be there)

    • Staff shortages linger (nurses, intensivists)

  • Cerner provides a comprehensive solution

    • Multi-disciplinary charting/documentation on a unified EMR with Knowledge (Content and Critical Care Alerts) and Benchmarking/Outcomes solutions

    • Central monitoring sites enable scarce providers to observe multiple critical care locations

      • Can be leveraged to PICU, NICU

      • Can be used to monitor sites outside of organization affiliation

    • Improves communication between care providers by offering 24/7 on-call assistance

    • Virtual intensivist proactively monitors and tracks early patterns of impending complications

Borgess Medical Center (MI): Live November 2004 with all pieces of the Critical Care solution: INet, INet MD, Knowledge and Outcomes for Critical Care, INet Virtual


Global healthcare it market

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


Investment community meeting dallas texas february 15 2005

Cerner Corporation

Services Update

Mike Valentine

U.S. Client Organization


Professional services organization

Professional Services Organization

  • Benefiting from experience

    • Average field consulting has 4+ years experience

    • ‘Velocity’ program provides experience in implementation and support before going to client sites

  • Strong 2004 Performance

    • Revenue up 8% to $251M

    • Contribution margin percent increased from 15% to 23%

    • Contribution margin dollars up 70% to $58M

    • Margin per average associate up 80% to $36,000

  • Accelerated Solution Center / Bedrock

    • Over 20% of conversions utilized ASC in 2004

    • ASC is critical element of Velocity training program

    • Higher productivity

      • Average of 12 solutions per site (vs. 5 in traditional implementation)

    • Bedrock is next step to further productivity

      • Automate design and build

      • Significantly reduce hours for both Cerner and client

    • More utilization of ASC and rollout of bedrock will drive further services productivity / margin expansion

*Reflects potential optimal level for ASC and Bedrock


Cerner managed services

  • OMS

  • Remote Monitoring

  • Remote Management

Cerner Managed Services

Continuum of Solutions

  • Client Host

  • Hardware

  • Sublicense SW

  • Maintenance

  • Resources

  • Refreshes

  • Facility

  • RHO

  • Hardware

  • Sublicense SW

  • Maintenance

  • Resources

  • Refreshes

  • Facility

  • SLA

  • System Availability

  • Disaster Recovery

  • Hot Site

  • Business Continuity & Recovery Services

Application Management Services (AMS)


Cerner managed services1

Cerner Managed Services

  • Increasing level of interest

    • Lower total cost of ownership

    • Predictable service levels

  • Current Initiatives

    • Improving Scalability

    • Supporting new initiatives

      • Physician Services

      • Payer / RHIO Strategy

    • Growing Global Business Model

  • Financial Highlights

    • 47% revenue growth in 2004

    • Contribution margin of 20% (up from 18% in 2003)

    • 25 -30% contribution margin attainable by 2007

  • Supporting > 100 clients / 215 Facilities


Investment community meeting dallas texas february 15 2005

Cerner Corporation

Financial Focus

Marc Naughton

Senior Vice President and

Chief Financial Officer


Financial snapshot income statement

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


Financial snapshot balance sheet cash flow

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


Investment community meeting dallas texas february 15 2005

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


Investment community meeting dallas texas february 15 2005

Sales Pipeline

Support Contracts

New Contract Bookings

Contract Backlog

Support Backlog

Total 2004 Revenue = $926M

System Sales

Services, Maintenance & Support

Professional Services

$251M

Subscriptions

$26M

Managed Services

$50M

Licensed Software

$213M

Technology Resale

$113M

Support & Maintenance

$241M

x88%

x12%

x20%

x57%

x23%

x20%

$187M

$23M

$3M

$58M

$10M

$137M

Total 2004 Contribution Margin=

$418M (45% of Revenue)

Contribution Margin %

Contribution Margin $

Less:

Indirect Costs

R&D

19% of revenue

($172M)

SG&A

14% of revenue

($131M)

($303M)

D&A

EBITDA

Operating Margin

+

=

Note: Total Revenue includes $32M of reimbursed travel revenue.

$115M, 12%

$91M

$206M, 22%


Investment community meeting dallas texas february 15 2005

Sales Pipeline

Support Contracts

New Contract Bookings

Contract Backlog

Support Backlog

Total 2004 Revenue = $926M

System Sales

Services, Maintenance & Support

Professional Services

$251M

Subscriptions

$26M

Managed Services

$50M

Licensed Software

$213M

Technology Resale

$113M

Support & Maintenance

$241M

$188M

$16M

$34M

$210M

$233M

$129M

x88%

x12%

x20%

x57%

x23%

x20%

89%

10%

18%

53%

15%

17%

$187M

$23M

$3M

$58M

$10M

$137M

2003 Revenue & Contribution Margins

Total 2004 Contribution Margin=

$418M (45% of Revenue)

Contribution Margin %

Contribution Margin $

Less:

Indirect Costs

R&D

19% of revenue

($172M)

SG&A

14% of revenue

($131M)

($303M)

D&A

EBITDA

Operating Margin

+

=

Note: Total Revenue includes $32M of reimbursed travel revenue.

$115M, 12%

$91M

$206M, 22%


Investment community meeting dallas texas february 15 2005

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)


Investment community meeting dallas texas february 15 2005

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%

Recurring and Visible Revenue

System Sales

Support, Maintenance, & Services


Guidance as of february 5 2005

Guidance as of February 5, 2005

Guidance as of February 5, 2005

Revenue $250M – $255M

EPS $0.41 – $0.42

Bookings$215M – $230M

Q105

2005

Revenue $1.08B – $1.1B

EPS $2.07 – $2.12


Investment community meeting dallas texas february 15 2005

Cerner Corporation

Lighthouse

Clinical Process Optimization

Bill Dwyer

Senior Vice President


Investment community meeting dallas texas february 15 2005

Lighthouse: Clinical Process Optimization

  • Transform the Clinical Practice of Medicine

    • By Condition / Procedure

    • Across Venues of Care

    • Data Driven

    • Through a Collaborative

  • Lighthouse Includes:

    • Process Modeling

    • Lighthouse Knowledge Marts

    • Metrics & Benchmarking (via PowerInsight & HealthFacts)

    • Reengineering Consulting Services

    • Monitoring Service

  • Leverage Millennium Solutions to Drive Benefits

Best Practices

National Collaborative

Process Reengineering

Lighthouse Knowledge Marts

HealthFacts

(Benchmarks)

Executable Knowledge

PowerInsight

Millennium

Applications

“Implementing Knowledge Driven Care”


Concentrated impact

Total U.S. Hospital Expenditures

AHRQ, HCUP NIS, 2002

173 Procedures

(75%)

58 Procedures (25%)

Concentrated Impact

  • Conditions / Procedures

    • Targeting Routine Care

    • Orthopedics & Cardiology First

    • 58-60 Developed through 2008


Investment community meeting dallas texas february 15 2005

Continuous Data-based Rapid Improvement Cycles

Digitizing Best Practices

National Collaborative

  • Innovators

  • Thought Leaders

  • Early Adopters

  • Bias for Action

Develop Best Practice

Implement Best Practice

Development Partner #1

Development Partner #2

Library

Development Partner #3

Development Partner #4

Development Partner #5


Investment community meeting dallas texas february 15 2005

TKA Process Modeling and Simulation

  • 238 TKA activities from ortho clinic visit to patient return to the community

  • 128 actors participate in the process;

  • 179 handoffs between actors


Tka model

TKA Model

  • Expected Results*

    • Reduction in Mortality rate (0.17% to 0.10%)

    • Reduction in Complications due to DVT(0.2% to 0.05%)

    • Reduction in Re-admission rate(1.8% to 0.5%)

    • Reduce ALOS by 0.5 days(3.66 to 3.16)

    • Save ~$1M annually on 408 cases

    • Treat an additional 20% of patients without increasing resources

Best Practices

National Collaborative

Process Reengineering

Lighthouse Knowledge Marts

HealthFacts

(Benchmarks)

Executable Knowledge

PowerInsight

Millennium

Applications

“Implementing Knowledge Driven Care”

* Actual results may vary. These results are anticipated based on current state findings at Mayo Jacksonville.


Investment community meeting dallas texas february 15 2005

Cerner Corporation

Cerner Vision &

Strategic Initiatives

Jeff Townsend

Senior Vice President &

Chief of Staff


Community health model

Community Health Model

1.Automate the Care Process

Cerner offers a longitudinal, person-centric electronic medical record, giving clinicians fingertip access to the right information at the right time and place.

2. Connect the Person

Cerner is dedicated to building a personal health system. Medical information and care regimens accessible from home empower consumers to effectively manage their conditions and adhere to treatment plans, creating a new medium between physicians and individuals.

3. Structure the Knowledge

Cerner is dedicated to building systems that bring the best science to every medical decision by structuring, storing and studying the content surrounding each care episode.

4. Close the Loop

Today, the gap between medical discovery and its incorporation into daily practice can be as long as 10 years. Cerner is dedicated to building systems that implement evidence-based medicine, dramatically reducing the average time from the discovery of an improved method to the change in the standard of care.


Investment community meeting dallas texas february 15 2005

Community Health Model – Moving the Boundaries

Connect the Community

Cerner Millennium

  • 287 Clients

  • 749 Facilities

  • 3,767 Solutions

  • ~100,000 Physicians

Knowledge &

Discovery

Health Sentry


Investment community meeting dallas texas february 15 2005

Changing Total Cost of Ownership

Shared Knowledge Distribution Environment

99.00% = 87.6 Hours/Year

99.90% = 8.76 Hours/Year

99.99% = 48 Minutes/Year

50 % Effort, 25% Elapsed Time

50 % Effort, 30% Elapsed Time


Investment community meeting dallas texas february 15 2005

Cerner Vision and ‘Grid Services’

Condition & Disease Grid

Physician & Metro Grid

Transactional

Services

State & Regional Grid

Knowledge & Discovery


Investment community meeting dallas texas february 15 2005

The Next Layer of Solutions

Vital Works Acquisition

Clinical Bioinformatics

Ontology

Country-Wide Solutions

National Disease Management

(Juvenile Diabetes)

Clinical Trials

“Agents”

Administrative Friction


Investment community meeting dallas texas february 15 2005

Cerner Corporation

Healthcare Policy

Don Trigg

Chief Marketing Officer


Understanding the public policy process

Understanding the Public Policy Process

“…improved information technologyto prevent medical error and needless costs”

– President George W. Bush February 2, 2005, State of the Union Address

“…improved information technologyto prevent medical error and needless costs”

– President George W. Bush February 2, 2005, State of the Union Address


Investment community meeting dallas texas february 15 2005

Client Panel

  • Dr. Donald Crandall

  • Vice President, Clinical Informatics

  • Trinity Health, Michigan

  • Gary Jump

  • Chief Information Officer

  • Our Lady of the Lake Hospital, Louisiana


Investment community meeting dallas texas february 15 2005

Cerner Corporation

Neal Patterson

Chairman and Chief Executive Officer


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