2013 CFA Institute Research Challenge Kansas State University

1. 2013 CFA Institute Research Challenge Kansas State University Target Company: Cerner Corp. Ticker: CERN (NASDAQ) Industry: Healthcare Information Technology (HCIT)

2. Investment Overview Investment Thesis: Leader in HCIT Industry Solid Core Business Model Significant Growth Opportunities Current Price: $90.76 (as of 3/19/2013)

3. Investment Overview Investment Thesis: $102.46 Target Price: Leader in HCIT Industry BUY Recommendation: Solid Core Business Model Significant Growth Opportunities 12.89% Potential Upside: Current Price: $90.76 (as of 3/19/2013)

4. 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

5. Regulatory Environment Driving Industry Growth • HITECH Act and Meaningful Use • Passed as part of ARRA Stimulus Act of 2009 $32.7B Total Amount Allocated By HITECH Act Source: Healthcare IT News (Data as of December 2012)

6. Regulatory Environment Driving Industry Growth • HITECH Act and Meaningful Use • Passed as part of ARRA Stimulus Act of 2009 $32.7B Total Amount Allocated By HITECH Act $10.3B Total Amount Spent as of Dec. 2012 Source: Healthcare IT News (Data as of December 2012)

7. Regulatory Environment Driving Industry Growth • HITECH Act and Meaningful Use • Passed as part of ARRA Stimulus Act of 2009 $32.7B Total Amount Allocated By HITECH Act $10.3B Total Amount Spent as of Dec. 2012 • Other Regulations Impacting Industry: • ICD-10 and Computerized Physician Order Entry (CPOE) • Affordable Care Act (ObamaCare) Source: Healthcare IT News (Data as of December 2012)

8. Industry Overview

9. CERN & Epic: Becoming Clear Market Leaders

10. CERN Capitalizing on Displacement Opportunities

11. CERN Capitalizing on Displacement Opportunities • User satisfaction/Ease-of-Use • Single-Vendor capability • Meaningful Use attestation • Interoperability Cerner’s Key Competitive Strengths:

12. CERN Capitalizing on Displacement Opportunities • User satisfaction/Ease-of-Use • Single-Vendor capability • Meaningful Use attestation • Interoperability Cerner’s Key Competitive Strengths: • Continued displacement opportunities • Potential to capture additional 15-25% market share over next 3-5 years

13. Porter’s Five Forces Analysis Competitive Rivalry Within Industry 3 Bargaining Power of Clients Threat of Substitute Products/Services 4 4 3 Bargaining Power of Suppliers Threat of New Entrants 4

14. CERN Core Business Segments System Sales: 34% Support, Maintenance & Services: 66%

15. Revenue Mix Breakdown

16. Business Model Generates Recurring Revenue 45% Recurring

17. Projected Revenue Mix 5-Year Total Revenue CAGR = 13%

18. Projected Revenue Mix 5-Year Recurring Revenue CAGR = 15% 49% 48% Recurring 47% 46% 46% 45% Non-Recurring 51% 52% 53% 54% 54% 55%

19. Operating Leverage Driving Margin Expansion • Projecting margin expansion of 100-200bps per year • Leveraging R&D and SG&A expenses • Increasing proportion of revenue from higher-margin segments Total Revenue Operating Expenses

20. Strong Financial Position from Significant Excess Cash Total Cash & Investments: $1.5B Artist’s rendering of completed campus New Kansas City, KS campus construction as of Dec. 2013

21. CernerWorks Solutions Create Up-Selling Opportunity +71% +23% +110% +106% +60% +580% 21

22. Population Health Management is Future of HCIT • 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 22

23. CERN Positioned for International Growth • 13% of total revenue from international segment • Presence in 25+ countries Current International Footprint 23

24. CERN Positioned for International Growth • 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 24

25. CERN Positioned for International Growth 25

26. 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

27. Weighted Average Price Target • Short-Term Perspective • Driven by Market Sentiment • Long-Term Perspective • Value-Oriented Investors 40% of Price Regression Analysis: CERN Price Change vs. S&P 500 60% of Price R2 = 0.40 Target Price = $102.46

28. Relative Valuation Summary: P/E Bands Average P/E Band x EPS2013 = Target Price 37 x $2.71 = $100.38

29. Relative Valuation Summary: P/E Valuation HIGH MEAN LOW Current Price: $90.76

30. Intrinsic Valuation Summary: DCF Model (DCFF) WACC = kd(wd) + ke(we) 7.83% = 4.02%(4.76%) + 8.02%(95.24%) 5-Year FCF 25% FCF CAGR Stage 2 Growth Stair-Step Growth Rate (7%-2%) FY 2018 - 2027 • Terminal Value • 2% Terminal Growth Rate • Based on Real GDP Growth $15.13 15% $35.91 35% $52.80 50% Target Price = $103.84

31. Other Valuation Methods Analyzed 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) Target Price: $102.46 Current Price: $90.76

32. Comprehensive Risk Overview • Significant regulatory changes Significant • Further system crashes • Slower margin expansion Moderate Impact • Slower growth in new initiatives • Abrupt executive turnover Minor Low Medium High Probability

33. Risk Analysis: Monte Carlo Simulation H O L D 14% SELL BUY 15% 71%

34. Conclusion Investment Thesis: Leader in HCIT Industry • Regulation Driving Industry Growth • Displacement Opportunities Solid Core Business Model • Recurring Revenue Growth • Operating Margin Expansion • Cash Deployment Initiatives Significant Growth Opportunities • Significant Up-Selling Opportunity • Population Health Management • International Expansion Current Price: $90.76 (as of 3/19/2013)

35. Conclusion Investment Thesis: $102.46 Target Price: Leader in HCIT Industry BUY Recommendation: Solid Core Business Model Significant Growth Opportunities 12.89% Potential Upside: Current Price: $90.76 (as of 3/19/2013)

36. Presentation Slide Navigator • Industry Overview • Company Overview • Industry Overview • Regulatory Environment Driving Industry Growth • CERN Competitive Positioning • Core Business Model • Business Model Overview • Projected Revenue Mix • Operating Leverage Driving Margin Expansion • Cash Deployment Options • Growth 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

37. Appendix • Pro-Forma Financial Statements • Pro-Forma Income Statement • Pro-Forma Balance Sheet • Pro-Forma Statement of Cash Flows • Intrinsic Valuation • DCFF Analysis • WACC Calculation • Sensitivity Analysis • Industry Overview • EP Payment Adjustments • Meaningful Use Timeline • Medicaid Adoption • Business Overview • CERN Business Model • Business Segment Revenue Mix • Jargon Buster • Historic Stock Price

38. Appendix 1: Pro-Forma Income Statement

39. Appendix 2: Pro-Forma Balance Sheet

40. Appendix 3: Pro-Forma Statement of Cash Flows

41. Appendix 4: DCF Analysis

42. Appendix 5: WACC Calculation

43. Appendix 6: Sensitivity Analysis

44. Appendix 7: CERN Business Model

45. Appendix 8: EP Payment Adjustments

46. Appendix 9: Meaningful Use Timeline

47. Appendix 10: Medicaid Adoption

48. Appendix 11: Business Segment Revenue Mix

49. Appendix 12: “Jargon Buster” (AAFP – HIPAA) HCIT Useful Terms [AAFP – HIPAA] AAFP: American Academy of Family Physicians ACO: 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 industry AMA: 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 delivery CHIME: 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 processes EDI: 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 system HCIT: Healthcare Information Technology HHS: 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.

50. Appendix 13: “Jargon Buster” (HITECH Act – VBPP) 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 technology ICD-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, seamlessly IDN: 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 healthcare Medicare vs. Medicaid MU: Meaningful Use – guidelines for receiving compensation upon implementation of EHR MDI: Medical Device Integration NHIN: Nationwide Health Information Network - set of standards, services and policies that enable secure health information exchange over the Internet PHM: Population Health Management RCM: Revenue Cycle Management - process that manages claims processing, payment and revenue generation Stage 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