Oct 23, 2014
Executives
Marc G. Naughton - Chief Financial Officer, Executive Vice President and Treasurer Zane M.
Burke - President Michael R. Nill - Chief Operating Officer and Executive Vice President
Analysts
David K. Francis - RBC Capital Markets, LLC, Research Division Richard Collamer Close - Avondale Partners, LLC, Research Division Garen Sarafian - Citigroup Inc, Research Division Lisa C.
Gill - JP Morgan Chase & Co, Research Division Steven Valiquette - UBS Investment Bank, Research Division Donald Hooker - KeyBanc Capital Markets Inc., Research Division Eric Percher - Barclays Capital, Research Division Steven P. Halper - FBR Capital Markets & Co., Research Division Jamie Stockton - Wells Fargo Securities, LLC, Research Division Michael Cherny - ISI Group Inc., Research Division Sean W.
Wieland - Piper Jaffray Companies, Research Division George Hill - Deutsche Bank AG, Research Division Robert P. Jones - Goldman Sachs Group Inc., Research Division Charles Rhyee - Cowen and Company, LLC, Research Division
Operator
Welcome to Cerner Corporation's Third Quarter 2014 Conference Call. Today's date is October 23, 2014, and this call is being recorded.
The company has asked me to remind you that various remarks made here today constitute forward-looking statements, including, without limitation, those regarding projections of future revenues or earnings, operating margin, operating expenses, product development, new markets or prospects for the company solutions and plans and expectations related to the acquisition of Siemens Health Services. 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 under Item 1A in Cerner's Form 10-K, together with the company's other filings. A reconciliation of non-GAAP financial measures discussed in this earnings call can be found in the company's earnings release, which has been furnished to the SEC today and posted on the Investors section of cerner.com.
At this time, I'll turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed, sir.
Marc G. Naughton
Thank you, Denise. Good afternoon, everyone, and welcome to the call.
I will lead off today with a review of the numbers. Zane Burke, our President, will follow me with results highlights and marketplace observations; Mike Nill, Executive Vice President and Chief Operating Officer, will discuss operations; Jeff Townsend, Executive Vice President and Chief of Staff is with a client; Neal Patterson, our Chairman and CEO, will be available during Q&A.
Now I will turn to our results. Our total bookings revenue in Q3 was $1.1 billion, which is an all-time high for third quarter and reflects 19% growth over our previous Q3 record results in Q3 of '13.
Bookings margin in Q3 was $976 million or 89% of total bookings. Our bookings performance drove a 21% increase in total backlog to $10.16 billion.
Contract revenue backlog of $9.34 billion is 22% higher than 1 year ago. Support revenue backlog of $814 million is up 6%.
Revenue in the quarter was $840 million, which is up 15% over Q3 of '13.Revenue composition for Q3 was $224 million in system sales, $177 million in support and maintenance, $416 million in services and $23 million in reimbursed travel. System sales revenue reflects an 11% increase over Q3 of '13, with 18% growth in software offsetting a flat technology resale revenue.
The sequential decline in system sales this quarter is a result of a decline in technology resale that was greater than the sequential increase in software. Q3 system sales margin dollars grew 15% over the year-ago period, driven by continued strong levels of software.
Moving to services. Total services revenue was up 21% compared to Q3 of '13, with strong growth in professional services, managed services and ITWorks.
Support and maintenance revenue increased 7% over Q3 of '13. Looking at revenue by geographic segment, domestic revenue increased 16% for the quarter and global revenue grew 14% over Q3 of '13.
Moving to gross margin. Our gross margin for Q3 was 83.3%, which is basically flat compared to 83.6% in Q3 of '13.
Looking at operating spending, our third quarter operating expenses before share-based compensation and acquisition costs were up 14% to $487 million. Sales and client service expenses increased 14% compared to Q3 of '13, driven primarily by a continued increase in revenue-generating associates in our services businesses.
Our investment in software development was up 17% compared to Q3 of '13 and continues to be driven by investments in our growth initiatives. We also had $4 million less capitalized software and $1 million more amortization that contributed to the prior -- the year-over-year increase.
G&A expense increased 14% compared to Q3 of '13, driven mostly by growth in personnel. Moving to operating margins.
Our operating margins before share-based compensation expense and acquisition cost was 25.4% in Q3. This is up 30 basis points compared to Q3 of '13, which is slightly below our 50-plus basis point target for Q3 due to third-party services remaining slightly elevated.
We expect over 50 basis points of margin expansion in Q4. Looking forward to 2015, we expect the first year of incorporating our pending Siemens Health Services acquisition to result in our adjusted operating margins declining to the low-20% range, but we expect them to return to the mid-20s by 2017 based on ongoing leverage in our core business and as the accretion from the Siemens Health Services acquisition ramps.
Moving to net earnings and EPS. Our GAAP net earnings in Q3 were $129 million or $0.37 per diluted share.
GAAP net earnings include share based compensation expense, which had a net impact on earnings of $10 million or $0.03 per diluted share. GAAP net earnings also include costs related to our pending acquisition of Siemens Health Services which had a net impact on earnings of $6 million or $0.02 per diluted share.
Adjusted net earnings were $145 million and adjusted EPS was $0.42, which is up 20% compared to Q3 of '13. The Q3 tax rate for adjusted net earnings was 33%.
For Q4, we expect our tax rate to be between 33% and 34%. Now I'll move to our balance sheet.
We ended Q3 with $1.56 billion of total cash and investments, which is up $90 million compared to Q2. Our total debt including capital lease obligations is $147 million, down from $155 million in Q2.
Total receivables ended the quarter at $617 million, which is flat compared to $615 million in Q2. Our DSO in Q3 was 67 days, which compares to DSO of 66 days in Q2 and 66 days in the year-ago quarter.
Operating cash flow for the quarter was $220 million. Q3 capital expenditures were $68 million, capitalized software was $44 million.
Free cash flow, defined as operating cash flow less capital expenditures and capitalized software, was $107 million for the quarter. Moving to capitalized software.
The $44 million of capitalized software in Q3 represents 38% of the $116 million of total investment in development activities. Software amortization for the quarter was $25 million, resulting in net capitalization of $19 million or 16% of our total R&D investment.
Our outlook for capital expenditures and capitalized software remains the same as what we provided last quarter. We expect capital expenditures to be $260 million to $280 million for the year, which is down from $353 million in 2013.
We expect capitalized software to be approximately $175 million, which is flat compared to 2013. Regarding our share buyback, in light of our Q3 announcement that we plan to purchase Siemens Health Services, we did not purchase any shares back during the quarter, so our year-to-date total remains at 4.1 million shares repurchased or $217 million.
We do still have $100 million of share repurchase authorization that was approved in May. Now I'd like to provide an update on our pending acquisition of Siemens Health Services.
We received regulatory clearance from the U.S. Federal Trade Commission that continued our integration and transition preparation since we announced the deal on August 5.
All this work has supported our positive view of the Siemens Health Services business unit. At this point, we are targeting a close date of February 2, 2015.
Now I'll go through Q4 and full year 2015 guidance. For Q4, we expect revenue between $880 million and $915 million, with a midpoint reflected growth of 13% over Q4 '13.
Our Q4 revenue guidance combined with year-to-date results put us at the high end of our previously provided full year guidance of $3.3 billion to $3.4 billion and reflects 15% full year growth. We expect Q4 adjusted EPS before share based compensation and acquisition costs of $0.46 to $0.47 per share, with the midpoint reflecting 19% growth over Q4 '13 adjusted EPS.
Our Q4 adjusted EPS guidance combined with year-to-date results reflects 17% full year growth. Q4 guidance is based on total spending before share-based compensation and acquisition costs of approximately $520 million to $535 million.
Note that our Q4 ends on January 3 and includes 14 weeks instead of 13, which is why there is a higher than normal sequential increase in expense and revenue. Our estimates for the impact of share-based compensation expense is approximately $0.03 in Q4, which would lead to $0.12 for the full year.
And moving to bookings guidance. We expect bookings revenue in Q4 at $1.15 billion to $1.25 billion, with the midpoint reflecting 9% growth over Q4 '13 and 14% growth for the full year.
Looking at 2015. We are working on a combined plan that incorporates our pending acquisition of Siemens Health Services.
Based on our preliminary view, we expect adjusted EPS to be in a range of $2.05 to $2.15 when you include estimated accretion from the acquisition. At the midpoint, this reflects growth of 27% over 2014.
For revenue, we expect a combined revenue of $4.8 billion to $5 billion in 2015. We view this guidance as preliminary until the acquisition is completed and we finalize our combined plan, but we want to give you our initial thoughts.
Finally, I'd like to mention that our earnings release dates will be later than our normal schedule next year; this is due to the extra week in 2014, which leads to each quarter starting a little bit later next year. And we also plan to add some time to accommodate bringing Siemens Health Services into our closing process.
Per our normal approach, we will announce our earnings release date -- press release a couple of weeks before its release, but I wanted to give you a heads-up that they will be later next year. With that, I'll turn the call over to Zane.
Zane M. Burke
Thanks, Marc. Good afternoon, everyone.
I'll start with our results and some marketplace observations. Our bookings revenue in Q3 of $1.1 billion reflects 19% growth over Q3 2013 and is a record for the third quarter.
We had 25 contracts over $5 million. This includes 15 contracts over $10 million, 10 of which were more than $15 million.
The mix of long-term bookings was 35% in the quarter, which is slightly higher than recent levels in the low 30s due to large ITWorks contract and strong managed services bookings. New business activity in the quarter was good, with 27% of our bookings coming from outside our core Millennium install base.
Our pipeline for new footprints is strong and we are well-positioned to continue driving 25% or more of our bookings from outside of our install base. Overall, we remain pleased with our competitiveness.
The significant investments we have been making in our solutions have led to a very strong offering for the present needs of healthcare providers, while also widening our differentiation in population health and other capabilities that providers will need as healthcare shifts away from a fee-for-service model. As we have discussed, interoperability will be critical for these future models of care to be effective.
Without interoperability, the return on the billions of dollars being invested in digitizing healthcare will be limited. As a result, our commitment to interoperability and having the most open EMR is an important competitive differentiator that is gaining more attention in the marketplace.
Now I'll discuss a few key areas of our business, starting with population health. Our population health organization delivered strong results again in Q3, driven by sales of HIE, Patient Portal, Enterprise Data Warehouse, clinical process optimization and Healthe registries.
A noteworthy deal in Q3 was Cerner being selected by a large health system with no previous Cerner footprint for a broad suite of population health solutions, further validating that our approach expands our addressable market beyond our install base. In this case, the client prioritized their population health procurement even though they intend to replace their EMR in the future.
We expect to compete for their EMR business and believe we are well-positioned, so that it could become an example of our population health capabilities leading to a new EMR footprint. Another observation I'd like to make is that we continue to compete against numerous best-of-breed suppliers.
Our comprehensive open platform approach is gaining attention. We have been having conversations with an increasing number of clients who chose a best-of-breed registry solution as recently as 18 months ago and are already considering a change to our platform because they aren't getting the value out of their niche solution.
The niche providers have not taken on the significant challenge of aggregating and normalizing clinical claims and financial data across multiple systems. As a result, these competing offerings are using incomplete and latent data sets, which limits their value.
I'd also like to highlight an announcement that was made by a Cerner client, Sharp HealthCare, about how the Sharp HealthCare plan members are among the first consumers to take advantage of Apple HealthKit through HealthyNow app from Cerner Wellness. Cerner's integration with Apple HealthKit means HealthyNow users and their health team can seamlessly track information from any number of health and wellness applications together, resulting in an up-to-date view of personal health habits and wellness goals.
Another highlight of the quarter was good results in our Revenue Cycle business. Last quarter, I highlighted the success of our extended business office, which is RevWorks service that includes augmenting client staff with our associates.
These associates specialize in areas such as billing and collection, denials management, coding and backlog and legacy follow-up and support all venues of care from ambulatory to acute and the post-acute. We have more than doubled our extended business office this year and now have over 300 associates.
A highlight in Q3 was signing several acute care clients to assist them in their billing operations from our extended business office in Kansas City. Moving to the ambulatory and small hospital market where we continue to do well.
We had record ambulatory bookings and displaced several key ambulatory competitors as our large IDN clients continue to favor our integrated solution. We also established a key alignment deal with an investor-owned post-acute care company to do outsourced billing for their providers in several markets.
In the small hospital market, we gained multiple new footprints with our cloud-based CommunityWorks offering, winning against 4 different niche community hospital competitors and against our primary competitor's extension offering in these new footprints. Outside of the U.S., we had another strong quarter from a bookings standpoint and revenue growth improved to 14% after a slow first half of the year.
We had particularly strong performance in the U.K., Middle East and Canada. We have a strong global forecast for Q4, so I expect to finish the year on a positive note.
Also the strength of global bookings in 2014 which has included high levels of hosting and professional services should lead to more predictable global revenue growth in 2015. One additional highlight is that Cerner client, Croydon Health Services NHS Trust, a 540-bed South London hospital, was recognized by HIMSS Europe as the first hospital in the U.K.
to achieve Stage 6 certification. Before turning the call over to Mike, I'd like to make a few comments on our pending acquisition of Siemens Health Services.
In the 2.5 months since we announced our intent to acquire them, we've had time to do additional analysis and get feedback from the marketplace. I am pleased with the results of both.
Additionally, we continue to be impressed with the quality of the clients and the people at Siemens Health Services. They will both be big assets to Cerner.
Feedback from the marketplace has also been positive. Our existing clients see value in the increased R&D investment that result from the acquisition, and we've already seen instances where the pending acquisition has improved our position in potential new EMR footprint opportunities in the Siemens Health Services client base.
In summary, I'm very excited for the Siemens Health Services client and associates to join Cerner. With that, I'll turn the call over to Mike.
Michael R. Nill
Thanks, Zane. Good afternoon, everyone.
Today, I’m going to discuss ITWorks and provide client success highlights. I'll start with ITWorks.
As some of you may have seen when it was announced in August, we created a strategic partnership with Georgia Regents Medical Center that included our ITWorks offering. The agreement is designed to help them create a more efficient and cost-effective healthcare delivery model through technological innovation and advancement.
The new alignment called Jaguar Collaborative, encompasses the health system, GRHealth, as well as some information technology services for the university. It also provides for improved information technology performance, EHR usability and client services.
Cerner will provide remote hosting and add enhanced monitoring and system capabilities to provide increased security for the health system's electronic health data. The third quarter also included our first non-U.S.
ITWorks deal. This is a partial ITWorks engagement that will have the initial focus on the Millennium upgrade, technology and support assessments, solution roadmaps and physician experience enhancement.
While this agreement is small compared to our other ITWorks contracts because it's just a limited engagement, it has a potential to grow to something much larger over time and we expect it to become a great proof point for our ITWorks model outside the U.S. In summary, some of these -- each of these agreements represents good examples where we have significant opportunities to expand relationships with long-term clients as they look to keep pace with changes in healthcare, manage cost and position themselves as leading healthcare providers.
Similar to last quarter, I'd like to briefly highlight a client accomplishment. Today, I'd like to discuss Adventist Health who is rolling out Cerner Revenue Cycle solutions to all their hospitals and clinics and is also our largest RevWorks client.
They're replacing 19 separate patient accounting systems with 1 standardized Revenue Cycle platform, which should eliminate duplicative processes and streamline workflows across this enterprise. Adventist Health has already launched the Cerner Revenue Cycle suite of solutions at 9 hospitals and related clinics.
Their annual report noted a 39% decrease in accounts that were discharged without a final bill, as well as a 40% decrease in accounts that were discharged without final coding. The more efficient billing process also led to a $61 million decrease in accounts receivable and has helped Adventist Health achieve 100% of their cash collections goal.
The key to their success has been having registration scheduling and patient accounting workflows on a single platform, which enables a more cost-effective and accurate billing and coding and is also more efficient for the users. Adventist Health has also implemented Cerner PowerChart ambulatory at 179 outpatient locations and has had a success rate greater than 90% for provider meaningful use at these stations.
The progress the Adventist is making has not gone unrecognized. They were recently included along with about 80 other Cerner clients on Hospitals & Health Networks' Most Wired list.
As we have discussed in the past, the success of Adventist Health and other large integrated delivery networks are having with our solutions has been a key factor to our strong competitiveness in the marketplace. With that, I'll turn the call over to questions.
Operator
[Operator Instructions] Our first question comes from Dave Francis with RBC Capital Markets.
David K. Francis - RBC Capital Markets, LLC, Research Division
Could you guys give us an update on some of the bigger, new contracts that are out there in the marketplace, whether it be the DOD, Mayo and some of the foreign things that are out there on the horizon?
Zane M. Burke
Dave, this is Zane. Both of those opportunities are in different stages in terms of selection process.
The DOD is just at the point where they are at the -- RFP responses are due this week after a couple of delays in the deadlines for submission of RFP. That's likely to be a selection in the first half of 2015, contract in the back half of 2015.
So we feel well-positioned and are excited about the opportunity there. On the Mayo processes, it's not something that's probably appropriate to comment since it's not a public procurement, but it's actively ongoing.
We feel well-positioned there and competing well.
David K. Francis - RBC Capital Markets, LLC, Research Division
And are there any mileposts we ought to be looking for relative to the DOD contract? Or is that something that's going to stay pretty much in-house there?
Zane M. Burke
It will pretty much stay in-house there with -- once the RFP responses are received, which, again, the deadline was extended to, I think, I believe, it was next week then they'll ask for clarification questions as part of that. But I don't think there'll be anything public that we'll know about until the first half of '15.
Operator
Our next question comes from Richard Close with Avondale Partners.
Richard Collamer Close - Avondale Partners, LLC, Research Division
Just have a really quick one. On the investor-owned post-acute deal, can you go into a little bit more detail what the products were again?
I think, you said RCM, I'm not positive there. And then, is this an existing customer or someone totally new to you guys?
Zane M. Burke
This is a new client for us. It's actually our business office services for physicians that we're providing the outsourced billing for those physicians.
And this represents actually a pilot for them for about 50 to 100 physicians initially. And then, they have about 1,600 physicians.
So once we have success, we have the opportunity to roll out more broadly. But this is a great first footprint for us.
Operator
Our next question comes from Garen Sarafian with Citigroup.
Garen Sarafian - Citigroup Inc, Research Division
First, a clarification question. Going back to the preliminary guidance that you'd given for next year of $2.05 to $2.10 -- $2.15, sorry.
If you back into that number from the consensus, if you look at the $0.15 accretive assumption that you guys have made previously, the legacy Cerner number, it looks like The Street was either too high in their $1.97 I see, or is it that when you look at Siemens, that some of the assumptions you've made are more back end-weighted? Just trying to understand, was consensus for next year organic Cerner too high?
Or are you seeing something different as you dig into Siemens where the accretion is more back end-weighted?
Marc G. Naughton
As we look at the numbers, there's no intent to indicate that our earlier view that we've discussed with you on Siemens has changed in any way. I think, if you look at what -- when we put in our numbers together, we're looking at $1.95 kind of as consensus when we come out of Q3, we don't have a final plan yet.
So what we try to do is give you an idea, are we comfortable based on current status, what consensus looks like. We basically look at that as being $1.95, add in the $0.15 accretion from Siemens, we come up with $2.10, which was the midpoint of our guidance.
So there's no deeper meaning in this other than this is consistent with our normal practice of before we get our plan, then I can give you accurate guidance in detail. That's what we've done.
So does not mean to imply that there's any difference in any of the numbers that we've talked about previously.
Garen Sarafian - Citigroup Inc, Research Division
Got it. No, good point of clarification.
And then, as a follow-up. Just on a broader level, you obviously speak with a lot of hospitals and at least a good portion of the nonprofit at fiscal year June or September end.
So at this point in the year, what are you seeing in terms of their upcoming IT budgets? And maybe if you can split that into 2.
First, are overall budgets increasing or decreasing and by how much? And second, those that plan to spend the most, what shifts in spend patterns, spending patterns, are you seeing so far?
Zane M. Burke
This is Zane, Garen. Not a lot of 9/30 year-ends in clients that I work with, mostly 6/30 and calendar year-end.
So many of my clients are in the middle of budget process as the ones on the calendar year-end elements. And they're looking at continued investment in IT as a lever to -- as ways to improve quality and lower costs and we're seeing pretty consistent mechanisms on the IT spend in those spaces.
That's not a scientific study but that's merely the dialogues that I'm having on an anecdotal basis.
Garen Sarafian - Citigroup Inc, Research Division
And any shifts in spend other than clients being in different points in the IT cycle?
Zane M. Burke
Yes. So it's where they are in their journey.
So those that are further along in the journey are looking at -- they're turning their attention to thinking about more pop health elements and they're prioritizing that at the top of the list. Those that do not have strong foundational clinical systems are out to thinking about the strong clinical foundational systems.
And so it's reflective of our pipeline which is at an all-time high.
Operator
Our next question comes from Lisa Gill with JPMorgan.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
Zane, you had mentioned that you won a large client for your population health service. First, can you talk about what specific products it's for?
And then, second, I think, you also noted that this health system is planning to changing its core EMR. Can you point to any specific reason for that potential switch?
Zane M. Burke
Well, the first part is the solutions they are looking at from us, or actually, that they acquired from us were the Healthe registries solution and the Enterprise Data Warehouse. And then, they're very interested in some of the things that we're doing in the future.
And it was really the -- this is what I call a 2.0 buyer. This is a client that has been taking risk in their marketplace and had some niche solutions out there, but those niche solutions were not meeting the needs as they tried to go take risk and have had to actually think about all the things that go into making up that risk.
And as they look at our platform, they found it to be the most comprehensive out there. And so, it's really a -- they're going to be on the journey with us.
So they're acquiring the things that we have in our toolkit today but they're incredibly interested in what we're doing in the future and the vision piece of that's very important to them. The second part of that was your EMR question.
And they view that their foundational EHR is not what they need on a go-forward basis. So they have, in this case, 43 different ambulatory EMRs.
And they've got a variety of things on the acute side and that they need to shore up their foundational solution, and the selection, I will say absolutely that the selection on the population health side is helping us from a competitive perspective in this EMR battle.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
So on the EMR cycle, they move everything to your product or it will be a step approach? How do you think about that opportunity?
Zane M. Burke
Well, it's a step approach. They're going to do the population health pieces first because they have needs today around managing risk in them.
So they're accepting risk today and they don't have the tools they need, so it's a burning business need. The second piece would be the EMR selection that will occur and we anticipate that to happen over the next 6 months.
Operator
Our next question comes from Steve Valiquette with UBS.
Steven Valiquette - UBS Investment Bank, Research Division
I guess, first, a little follow-up on Garen's question earlier, I think, I'm the one who's guilty of moving The Street from $1.95 to $1.97 because I already put the Siemens deal in my projection. So I guess, I apologize for being early on that.
But really, my question was really along similar lines, just on the revenue front around the deal because you guys talked about $1.2 billion of revs previously and if we had that in for 11 months, that's $1.1 billion, so if you subtract that out, that's 3.7 to 3.9 for legacy Cerner and it seems to be in line with The Street consensus. So I just want to confirm that, first of all, if that's the right way to think about that?
Marc G. Naughton
That would be correct.
Steven Valiquette - UBS Investment Bank, Research Division
Okay. And then, I forgot if you're able to disclose whether or not you have any synergies in there for 2015, either top line or cost synergies in terms of how you're getting to your bottom line number for next year.
Marc G. Naughton
Yes. I mean, as we talked about on the call when we announced, we look at 2015 and look at approximately $0.15 of synergies, primarily cost-driven, that we expect to see going to the P&L in 2015, that equates to roughly $80 million of pretax OE.
So yes, we continue to see those synergies being things that we can drive and gain benefit in our P&L next year.
Operator
Our next question comes from Donald Hooker with KeyBanc.
Donald Hooker - KeyBanc Capital Markets Inc., Research Division
My question was more around some of the gross margins in the quarter. So if I'm calculating this right, it looks like the support and maintenance and services, that bucket of revenues, I mean, the margins there were a little bit lower, I think, than last year and they seem to be trending down.
Can you just maybe elaborate on that line item, on the gross margin there?
Marc G. Naughton
You're looking at the support and maintenance line?
Donald Hooker - KeyBanc Capital Markets Inc., Research Division
Support, maintenance and services and that drop through to gross profit, it looked there was 91.3. And it looks like it was...
Marc G. Naughton
You will see the impact on some third-party consultants that will come through on the gross margin lines, some of the projects that we talked about a little bit relative to our discussions in the script. So that could impact the gross margin that you're seeing coming out of the services line.
It would hit us in Q2 and Q3.
Donald Hooker - KeyBanc Capital Markets Inc., Research Division
Okay. Got you.
Is that so that maybe comes back up a little bit in Q4?
Marc G. Naughton
Yes. It should be that -- those resources, we are less reliant on those going forward.
Donald Hooker - KeyBanc Capital Markets Inc., Research Division
Got you. And then, maybe just one other question.
You talked about DOD and Mayo. And I guess, there's some interesting business in the Middle East as well, I guess, with Saudi Arabia.
Maybe can you can elaborate on that a little bit, because I think that's another large opportunity for you.
Zane M. Burke
It is. Don, this is Zane.
There is a great opportunity in the Middle East, but there's been some changes in the Ministry of Health and so we continue to do well and have some good business in the Middle East. But with some of those changes, the timeline -- the timing is a little bit questionable about exactly when those will come into the numbers.
We have seen a ton of great activity in the U.K. and our performance in the U.K.
has been strong as well, so we've seen that be very strong and we think that's going to have a very positive impact in 2015, as well as we think the Middle East will be strong, but the timing of that broader Ministry of Health opportunity is a little bit in question right now.
Operator
Our next question comes from Eric Percher with Barclays.
Eric Percher - Barclays Capital, Research Division
I'll continue on international front. So looking at the growth in the back half, do you feel like you're seeing a growth rate that you can sustain longer-term?
Or is this just the high side of the variance? And then, as you look at what your business will become internationally with the addition of Siemens, I'm interested in the fact that you are very complementary in your geographic reach and has that been because there have been markets that weren't attractive to you previously?
Or is it just a matter of you haven't been active in those markets as of yet?
Zane M. Burke
So I'll take the first part of that, Eric, which is around the sustainability of the growth. And we are feeling really strong about the growth prospects globally and sustaining that global presence.
In fact, our pipeline for global was also at an all-time high. And in going through the details of that, I'm feeling very bullish about where we are on the global side of this.
And so the opportunity there remains strong. As it relates to the Siemens Global elements, there are some markets where they played at a little bit of a lower end in terms of scalability of the solution.
And so from a scalability perspective, they have some offerings that scale to a different part of the marketplace that we haven't been in. And it is very nice and complementary and will give us good entrée into those countries.
And many of those places are natural places that we would've looked to have gone over time and as we look at the portfolio.
Marc G. Naughton
This is Marc. I think, Zane's comments were right on.
The interesting thing to be on the Siemens side is certainly Germany is their biggest market. They have a couple of offerings there, at least 3, actually, that cover various levels of cost and what's provided based on those costs.
What we're hearing as we have initial contact with those clients is they're very interested in something that goes beyond the relatively low-end solutions they currently have, especially academic centers, some of the large hospitals. We also believe and have seen at the very start in Germany a push for paying for quality.
Germany right now is -- basically that doesn't enter into the compensation program. Their Minister of Health is certainly focused on trying to move to a pay-for-quality environment, and the existing systems aren't going to be able to be effective if that actually becomes part of the reimbursement strategy.
So it actually feels that there's a lot of opportunity not only to sell the existing solutions into the country, but to bring in Millennium on top of that for those organizations that are really looking to bring in a top line EMR.
Eric Percher - Barclays Capital, Research Division
That's really helpful. And just a quick follow-up is as you look at those markets, is there an element of services either from your side or the associates on Siemens side that is also in play in those markets?
Marc G. Naughton
I think, probably not. They're much more limited on their service offerings.
So today, it's much more implementation-focused. So certainly, we would as we continue to expand our other service offerings, including the works businesses that Mike talked about earlier from a global perspective, we think those are going to be attractive to this client base, especially if they look to enhance their technology infrastructures.
Operator
Our next question comes from Steve Halper with FBR.
Steven P. Halper - FBR Capital Markets & Co., Research Division
As you think about the acquisition of Siemens, we appreciate the insight into 2015, what sort of incremental capital expenditures and capitalized R&D cost are you looking at for 2015?
Marc G. Naughton
Steve, this is Marc. Right now, anything I talk about would really not include Siemens because I don't have a really good view of what their capital requirements are going to be.
So I think that -- I don't expect them to be significant. As we acquire these assets, there'll be some costs as part of the acquisition to get those settled and get them in places they need to be longer-term.
But I think, what you'll see from our perspective is the drivers for our capital spend be -- at least from a building perspective, we are going to be developing the next phase of new space we need for our growth, that will be out of what we call our Trails Campus near our Innovation Campus as some of you may have visited. So this year, we have spent some on building CapEx.
Next year, we think we'll spend more. Then we'll have our normal infrastructure capital spend.
And then, capital software will be relatively similar, maybe slightly lower that's capitalized in '15. So if you're kind of looking at '14 and trying to extrapolate to '15, I think, the building CapEx could cost $75 million to $100 million more in CapEx.
So I think, at a high-level, just looking at Cerner, not looking at Siemens, the cash flow that's going to -- for this year, free cash flow which probably is around $400 million, let's just estimate, that will increment up from there. But there'll be some in total because of our increased profits.
But the total spend will be higher because of that development for the buildings.
Steven P. Halper - FBR Capital Markets & Co., Research Division
Right. Just one follow-up.
Was the historical Siemens CapEx as -- relative to Cerner, was it considerably lower?
Marc G. Naughton
Yes.
Steven P. Halper - FBR Capital Markets & Co., Research Division
And what did they do from a capitalized R&D perspective?
Marc G. Naughton
They capitalized R&D. They clearly did not have the level of investment on new projects that we have had recently.
So they've got -- they have a CapEx component. I don't know that it would be lower than our percentage, but I don't know that I can give you an exact number because there will be some expectation that as we look at that R&D spend and some of their projects become Cerner projects as they -- we move some of that workforce over, focusing on what we want to codevelop, it will be harder to say which is in what bucket.
Operator
Our next question comes from Jamie Stockton with Wells Fargo.
Jamie Stockton - Wells Fargo Securities, LLC, Research Division
Zane, I guess, when you think about the Siemens base and you've had a number of conversations with those clients at this point, I'm sure, do you have a good feel for when you might be able to start to convert some of that base? I mean, should we be thinking about a 1- to 2-year timeframe to start to see some material conversion?
Or is this more of a 3- to 5-year timeframe before you start to see a number of those clients convert?
Zane M. Burke
The first thing is we're going to support Soarian for the next 10 years. So those clients that are on Soarian, we absolutely are committed to their success and making them as happy as possible.
So I'll start with that. Those that are on some of the older legacy solutions.
We do think that, that will play out over -- I do think it is a 3- to 5-year horizon as we move forward. The most important thing is that we earn the trust of those clients and we treat them very well in the service aspects and give them a roadmap for success in the future, and that's what we're beginning to do working with the Siemens Health Services folks.
Jamie Stockton - Wells Fargo Securities, LLC, Research Division
Okay. That's great.
And then, Marc, maybe one. This ITWorks deal in Georgia, they threw out a pretty big number as far as the value of the contract.
Can you give us a ballpark for what actually flowed through your bookings during the quarter?
Marc G. Naughton
Yes. I mean, when we -- if you look at our numbers, basically, I'd characterize it as a contract that's over $200 million, not the number that you're seeing out there.
Operator
Our next question comes from Michael Cherny with ISI Group.
Michael Cherny - ISI Group Inc., Research Division
I'm sorry again as well, I think I had an early pro forma number out there but I was trying to model effectively. I wanted to dig in a little bit to the bookings number a little more, if you don't mind.
And I wanted to dig a little different way. If I do the back-of-envelope math, I see roughly about $300 million of bookings, give or take, from outside the base.
And I know you talked about a couple of big contracts. But as you think about that number and the total dollar number which obviously is a massive magnitude relative to the rest of the market, how do you think about the strategic rationale behind some of those deals?
And how you think a little bit more about what is driving such a massive dollar growth number? Is it the services that you're now providing, education you're doing the markets to show how effective you are on happiness with the customers.
Can you kind of bucket into the moving pieces that's allowing you to drive such strong outside your core bookings numbers?
Zane M. Burke
Well, the first piece does start in our core marketplace, which is the core EMR space. So those that had made selections probably in the 10 to 15 years ago and those organizations did not end up with a strong foundational EMR, those organizations are finding it necessary to make the new decisions or they're in the process to make new decisions or to enter processes to make new decisions.
And I view that as a 5 to 7-year time horizon that the 60% of the marketplace that hasn't made a new contemporary solution decision will make those decisions over this timeframe.
Marc G. Naughton
Michael, this is Marc. I think, the other element is that when you have to bring in a new client into Cerner, they buy a lot.
They buy a lot of services. A lot of them we're seeing actually people looking at works deals as some major award back-office deals which might not rise at the level of works deals.
So they tend to be the bigger deal to come in during the quarter.
Zane M. Burke
I think, Marc's on a great point, which is the size of those deals typically reflect our managed services offerings that we're hosting, sometimes application management. So the size of opportunities are there.
But the activity is frankly at an all-time high on the new business side. And we're seeing that across the community hospital marketplace, the critical access, our CommunityWorks marketplace, our physician office.
And so, it's really -- it's a number of different segments that are driving it, but it's principally there. Then the other -- so those are kind of the new sort of -- sorry, the replacement market for EHRs from a foundational perspective.
Then you have a broad set of people that are like the pop health pieces, so we're starting to see an uptick of new business that's purely in the population health space and so having some of those types of elements. And it's kind of the breadth and depth of what we do across the entire continuum of care, allows us to compete in multiple marketplaces and we actually create new marketplaces like behavioral health where we're being very successful in a number of behavioral health opportunities and using Millennium platform to scale into other areas.
And so those marketplaces also have been successful for us. So it's literally that breadth and depth of what we do.
And so it's a combination of replacement market and new markets that need automation in those new market areas. Does that make sense?
Michael Cherny - ISI Group Inc., Research Division
No, that does. That's very helpful.
And just 1 quick clarification on the Population Health contract, I'm just trying to make sure I'm keeping an appropriate count. This is the second one that you have announced, with Advocate being the first.
Are there any others that we missed that you'd want to highlight?
Zane M. Burke
Yes. From a Population Health perspective, we actually have about 38 clients that have -- are on the journey with us.
This is, I believe, the second or third new -- totally new footprint that was a Population Health first footprint. So that's the highlight behind that.
Marc G. Naughton
We won't be highlighting every Population Health deal we do because they're actually becoming part of our normal expectation at this point.
Operator
Our next question comes from Sean Wieland from Piper Jaffray.
Sean W. Wieland - Piper Jaffray Companies, Research Division
One more on Siemens. Do you have any thoughts on opportunities for bookings synergies?
I understand you're committed to the Siemens product line, but there's a lot of other non-Cerner, non-Siemens stuff in that base that offers some interesting cross-sell opportunities. Any thoughts there?
Marc G. Naughton
Yes, this is Marc. I mean, when we -- when you look at certainly a Soarian client, their clinical solutions were not very broad, right, they were focused on EMR orders and a very core set of solutions.
All of those clients are paying a third-party in many places a niche supplier a fair amount of money to -- for their ancillary solutions. So yes, one of the key rationales for this business obviously and the reason we want to retain that client base is, like for like, putting -- exchanging a Millennium for the Soarian, we have a lot of additional solution we can sell onto that base.
And that's one of our expectations. I think, at the end of the day, is that Cerner bookings or Soarian bookings, it will be -- we're not going to spend a whole lot of time worrying about who gets credit internally because obviously our comp plans will handle that.
But I think, there is a lot of ability for us to sell back into that base once we get that base over to Cerner. And it will be likely to be potentially when they replace Soarian, could actually be ahead of when they replace Soarian.
Zane M. Burke
I'd say, remember, the biggest opportunity is in the non-Soarian client base. So the biggest opportunity is in that MedSeries4 and Invision solutions that have been out there for quite some time.
But Marc appropriately indicates that there are some opportunities for cross-sell. And just again, the breadth and depth of what we do versus the breadth and depth of the Siemens Health Services solution set does offer some great cross-selling opportunities and we'll work at ways to create the best integration that we can across [indiscernible].
Sean W. Wieland - Piper Jaffray Companies, Research Division
Okay. And so to be clear, those kinds of synergies are not part of your -- the accretion that you gave us for '15?
Marc G. Naughton
That would be correct. The focus primarily in '15, from our perspective, is some revenue synergies but primarily the spending side.
Sean W. Wieland - Piper Jaffray Companies, Research Division
Okay. And then, just one more.
What are you hitting with regard to cultural challenges with the integration?
Marc G. Naughton
Interesting enough, I'll let Zane talk as well, but we're finding there's a lot of shared med people that are still in -- certainly in the U.S. side of this business, and they had a very similar culture to ours, a very similar let's get things done, let's not have a lot of bureaucracy and let's be successful and let's be the winner in our segment.
And Siemens certainly was focused on doing the right thing, but they're a big company and big companies by their nature have to have a level of bureaucracy that a company like us and a company like Shared Medical [ph] didn't have. So almost -- we're -- at least, from my perspective, people are very excited about the chance to come to work for Cerner given the legacy of those people, lots of experience, they are coming with an excitement to be able to react quickly, make decisions quickly and get to market with the best solutions.
So I think, it's actually better than I would have imagined to be.
Operator
Our next question comes from George Hill with Deutsche Bank.
George Hill - Deutsche Bank AG, Research Division
First one is for Zane or Marc. One of your competitors on a quarterly basis tends to break out the amount of bookings revenue that comes from Population Health targeted solutions.
I was wondering if you guys would tell us either with the big deal that you guys announced this quarter, either what percent of bookings were Population Health-related in this quarter or how that's grown? And maybe how we should expect the mix to change and how we should think about that?
Marc G. Naughton
This is Marc. I mean, when you have a lot of bookings, when you have 1 billion-plus of bookings, breaking out something like pop health is a small percent of that, isn't all that relevant to us, it might be relevant to a competitor because that's all they're selling.
But for us, it really isn't that relevant. I mean, we try to certainly provide some anecdotal information relative to successes we're having in different areas.
This is something that's just in our portfolio. It's early.
A lot of these things are pilot. So from a dollar standpoint, it's still not something that I would say is significantly moving the needle in any case.
But as it gets to be a bigger part of our business, we certainly can look at providing some -- a little bit more detail between those 2. But at this point, I don't think it would be helpful in your analysis.
George Hill - Deutsche Bank AG, Research Division
Okay. And then, maybe just a quick follow-up, just to make sure.
I don't know if I heard you correctly, but as we start to see the results come in for 2015, are you guys going to break out what was the growth of the legacy Siemens business versus the legacy Cerner business? Or are we just going to get it all together, because I thought that you had said in prior calls that for at least 1 year, you were going to give us kind of transparency into the 2 business segments?
Marc G. Naughton
Yes. I mean, I think, the goal would be to create the ability, certainly on the top line, to do some type of same-store view of the businesses.
I think, from an earnings standpoint, as we go forward, that may be more and more challenged. The first report, we filed the 10-K from the first year will break out Siemens on a separate basis to an extent.
So you'll get that information from a GAAP and of that view perspective. And I think, on revenue side, based on giving a sense of same-store sales, I think, that's relevant.
From the expense side, it will be harder, just because there'll be synergies that we get that will come to the P&L, there'll be synergies that we get by being able to move people from Siemens over to our teams doing Cerner work. But we'll certainly -- right now, it's a little bit early.
I don't know exactly what data I'm going to have and what's going to be helpful to you all. But certainly, as we talked about being able to break out elements of Cerner's and Siemens, my focus was on the top line.
Operator
Our next question comes from Robert Jones with Goldman Sachs.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
Marc, I just wanted to go back to the original accretion outlook from Siemens, the more than $0.15 in '15. I was just hoping maybe you could talk a little bit about what could potentially drive that more than $0.15 part of that outlook, now that you guys have provided a more formal outlook for '15.
Could you maybe just touch on where you're seeing the potential upside opportunities to that number?
Marc G. Naughton
Yes. I don't know that what we provided today is a more formal outlook.
I mean, clearly, we'll continue to do work. We continue to do -- to look at the numbers we originally looked at and have confidence in them.
So I'm not really here to go guesstimate what could happen in the future relative to them. I think, in our view, as we said on the call surrounding the Siemens deal, we feel $0.15 is a good number that we should be looking for and that investors should have confidence of our ability to deliver that.
A variety of things could happen to provide upside to that, but I think we're going to be consistent with our early view that has been supported by additional work that, for now, $0.15 is the number.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
Fair enough. And then, I just wanted to switch gears over to Meaningful Use.
It seems like you and your major competitor constitute about 3/4 of the early Stage 2 attestation so far, while other vendors, at least early on here, seem to be struggling a bit. I'm just curious if maybe you could talk a little bit about Meaningful Use as a driver for either replacements or are we at a point where the CMS need to act in order to kind of keep this program moving forward?
Zane M. Burke
This is Zane. I don't see Meaningful Use driving any buying behavior today.
So I think, the thing it does on an individual -- I mean, on an individual stage level. What I think it does is people are seeing how much harder it is if you're not on a contemporary solution to comply with those different Meaningful Use elements.
So I think you'll see compliance with those Meaningful Use stages by other suppliers, but I think, how the difficulty by which those suppliers have to cobble things together and focus their resources on those, almost exclusively on Meaningful Use elements and not moving forward with the solutions is being noted in the client basis, and that's part of why the foundational solutions are -- the replacement market is very active. So I think that's really where that continues to play out.
So the bar continuing to raise is a good thing for Cerner.
Operator
The next question comes from Charles Rhyee with Cowen.
Charles Rhyee - Cowen and Company, LLC, Research Division
Just 2 quick questions here. Zane, obviously, we've talked a lot about in the past and a little bit here today all the things you're doing outside of sort of, call it, core EHR.
When we think about this market, can you help us -- and you might have done this in the past calls and I apologize if I don't remember, but can you help us sort of size what you think the opportunity outside the core EHR market? So -- because as we move away from the discussion just around Meaningful Use, do you envision that this market, the future markets will be larger than sort of the course of even [ph] selling and how big a thing that can be?
Zane M. Burke
Charles, we provided -- in our analyst meetings, we provided some views of what we think the future can look like in a number of those different lines of business, in particular the population health perspective, but there's a number of different lines by which we see that opportunity growing. And so I would refer you back to those investor slides.
Marc G. Naughton
Yes. I think -- Charles, this is Marc.
I mean, we look at -- the pop health is one that's hard to quantify. We've seen various quantifications of $30 billion, $15 billion, whatever.
There's lots of external views of that. I think, the more we work with clients, especially those taking risk and see how that is, they have to focus on how am I going to manage a population, improve the quality of what I provide and reduce my cost of providing that high-quality care.
I think, Population Health is a no-brainer in the future world. So given the limited number of sizable players playing in that market, we think that's a big opportunity.
And I think, the market -- I mean, I think, the potential market is as big as what we've seen in just doing the EMR, and Zane would tell us, it's probably -- it's bigger than that.
Charles Rhyee - Cowen and Company, LLC, Research Division
Yes. I mean, that's what I was really focused on, the population health side, I mean.
So while it's probably a little nebulous today, it's fair to think that this could easily be as big if not bigger than the...
Zane M. Burke
Certainly, our view is this could be as big, if not much bigger, than the core EHR market.
Charles Rhyee - Cowen and Company, LLC, Research Division
Okay. And just a follow-up on the DOD.
When we looked at the RFPs as they were being formalized and in the final RFP, obviously, the DOD made a lot of references to open system architecture and interoperability. It's not as clear to see, just reading the RFP language itself, how important those factors are to DOD, but as you sat in the user group meetings, sort of the vendor meetings heading into the RFP, can you give us more qualitative sense on what aspects are more important to them?
Zane M. Burke
I absolutely do believe that open interoperable is a key driver on what they're thinking about, along with the capabilities to deliver to our servicemen and women across the world and support them in the different theaters-of-war venues that they're going to be in. So I think, it's going to be a combination of that open interoperable.
It's the capabilities across all elements. It's the capabilities of the partners that are driving, so it's not just an EHR discussion.
And we really like our team a lot in terms of what we're doing with both in the partner side of that. So we think we have the best team on that side, and I think that's going to be incredibly important as you move from the current systems to what the new standards will be.
Charles Rhyee - Cowen and Company, LLC, Research Division
If I could just add 1 more. It's not in the RFP itself, but has there been preliminary discussions or at least anecdotally about a view in the future to also connect that to VA, because I thought that was the initial reason DOD was trying to do something with VA in the past?
Zane M. Burke
There hasn't been a lot of dialogue about of late, and that's why the DOD went out for a separate. Initially, you're correct, Charles, there's going to be a -- with the VA and DOD.
And then, they -- the DOD specifically went separate from the VA, and that's what's driving, and that's part of this decision. So supposing what may happen in the future, I can't really look at that.
But the current course of speed is DOD on a standalone basis.
Marc G. Naughton
I want to thank everybody for attending today and appreciate the time. We're very excited about our results this quarter and continue to look forward to bringing Siemens Health Services into the fold in Q1 of next year.
So with that, look forward to talking to you soon.
Operator
This concludes today's conference. You may now disconnect.
Have a great day, everyone.