1 2013 cfa institute research challenge kansas state university target company: cerner corp. ticker:...

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


Significant Growth

Opportunities

BUYRecommendation:

Target Price:

Potential Upside:


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


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





• EHR System Implementation

Meaningful Use Stage 1 (2011-2013):

• Interoperability & Health Information Exchange


• Performance-Based Reimbursement



$10.3BTotal Amount

Spent as of Dec. 2012


Industry Overview

Core Business Model





• EHR System Implementation


• Interoperability & Health Information Exchange


• Performance-Based Reimbursement



$10.3BTotal Amount

Spent as of Dec. 2012 Other Regulations Impacting Industry:

ICD-10 and Computerized Physician Order Entry (CPOE)

Affordable Care Act (ObamaCare)


Industry Overview

Core Business Model


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


CERN & Epic: Becoming Clear Market Leaders



1 Meditech 19%

2 Cerner 16%

3 McKesson 14%

4 Siemens 9%

5 Epic 7%



1 Epic 24%

2 Cerner 21%

3 Meditech 19%

4 McKesson 13%

5 Siemens 8%

Industry Overview

Core Business Model


% 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




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




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


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


CERN Core Business Segments

System Sales:34%

Support, Maintenance & Services:

66%

Industry Overview

Core Business Model


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


Business Model Generates Recurring Revenue

Licensed Software

13% Technology Resale

15%


27%

Managed Services

16%


23%

Sub/Trans6%

45% Recurring

Industry Overview

Core Business Model


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


Managed Services

Subscription/Transaction


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


Managed Services



Technology Resale

Licensed Software

5-Year Total Revenue CAGR = 13%

Industry Overview

Core Business Model


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


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


$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


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


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


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


CERN Positioned for International Growth

13% of total revenue from international segment

Presence in 25+ countries

Current International Footprint

Industry Overview

Core Business Model


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


Potential Future International Footprint

Industry Overview

Core Business Model


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.


(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


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


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


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


$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


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


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


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


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


Significant Growth

Opportunities


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


Significant Growth

Opportunities

BUYRecommendation:

Target Price:

Potential Upside:


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


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


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

1 2013 cfa institute research challenge kansas state university target company: cerner corp. ticker:...

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