By Matthew Holt

Gathered at at hobnobbing summit in Tokyo, executives from high technology companies planned recently for economic troubles. And, apparently, troubles are mounting because consumers are running out of money, having to spend it on rising gas and food costs.

Virgin Mobile USA Inc (VM.N), the prepaid mobile phone service company, expects economic problems to last into the first half of next year for its mostly young customers.

Meanwhile apparently government spending isn’t guaranteed either.

Fujitsu Ltd (6702.T) Senior Executive Vice President Chiaki Ito said he was concerned that the costs of absorbing the crisis in subprime mortgages — the risky home loans that have gone bust for many U.S. and U.K. lenders — could divert government funds usually spent on technology." I am extremely worried about the indirect effects of the subprime problem," he said. Meanwhile, manufacturing faces risks from rising food and fuel costs. "If costs go up, this could trigger a recession," he added.

And even the ones that are doing well, such as IBM, are basing their success on infrastructure projects in the developing world.

"If I were in a business model where I needed double-digit growth out of the G7 to drive my performance, I would be in a cold sweat," said IBM Chief Financial Officer Mark Loughridge, referring to the Group of Seven nations.

But that’s apparently not the case in Kansas City, home of Cerner, the largest independent health care information technology company Indeed at their recent shareholders meeting Cerner’s two longtime leaders, Trace Devanny and Neal Patterson, said that things couldn’t be brighter.

Why such confidence? Either health care costs are going up very fast (from $2 trillion to $4 Trillion in the next ten years) in which case Cerner will get its share.

"The delivery of care and the spending around care delivery is relatively recession proof …," Cerner President Trace Devanny said. "There’s no way to slow down this train."

Or government will squeeze the health care industry, in which case Cerner will get more than its share.

Former U.S. Sen. John Danforth, a Cerner board member, agreed, saying the only way federal politicians attempt to rein in health care costs is by "putting the squeeze on providers." That will prompt doctors and hospitals to look for greater efficiency, which will make Cerner more valuable to them, Danforth said.

And not only is the U.S. market guaranteed, but foreign markets may also offer growth opportunities.

International business continues to account for a greater percentage of Cerner’s annual revenue, which hit $1.52 billion in 2007. Devanny said the company’s global revenue had grown tenfold to $290 million in 2007 from $29 million in 2002. "We hope to scare the daylights out of $400 million" in global revenue in 2008, Devanny said.

And even better, there is an open field in the relatively underserved ambulatory EMR market and other places

Cerner officials outlined several other areas of growth. They include expansion of Cerner’s core U.S. hospital market, where adoption of physician order entry software is still only 17.5 percent; the physicians office market; retail pharmacies; sales of aggregate patient data to big pharma companies and other clients; integration of care devices into hospital electronic medical record systems; and employer services, such as on-site clinics and regional health information exchanges that use Cerner software.

So what could possibly go wrong?

Well you may not read about it in the Kansas City Business Journal, but it hasn’t all
been sweetness and light at Cerner. By anyone’s standards the last 5
years have been great, with the stock going from around $10 in mid-2003
to about $60 at the end of 2007. But 2008 hasn’t been so pretty with
the stock off some 30 percent until the recent recovery.

And more importantly, it looks like the easy credit that
fueled the capital building and spending bonanza at American hospitals
over the past several years may also be coming to an end. In that
environment, it’s not so clear that IT budgets will continue to expand. That means Cerner may well have to look seriously at
other sources of revenue.

Here’s where Scott Shreeve’s very cogent analysis of what went wrong at Allscripts,
(leading to the shotgun wedding with Misys) is well worth a look. Scott
suggests that the middle-market EMR players on the ambulatory side
cannot compete with the low-end players (particularly eClinicalworks)
and the SaaS vendors (meaning AthenaHealth). If you look at the rest of
the technology market, the same thing has been going on for years.
SaaS companies like Salesforce have blindsided bigger enterprise vendors
like Siebel.

Cerner will rely on its current enterprise
technology (which isn’t that new, doesn’t always get the best
applause from its users, and seems to lose more RFPs to Epic than it
wins) to increase its revenue in the hospital market, while moving into
the smaller markets like ambulatory EMRs. The problem is that the
technology trend has moved away from enterprise systems to cloud computing
via SaaS. And there’s little evidence that an enterprise vendor can
easily play in that market. Now health care is slow to adopt these new
techniques, but that day will come.

I’m not suggesting that Cerner’s stock will see a collapse like
Allscripts. I think the speed of that surprised everyone,
and Cerner is much bigger and more diversified. But it is more likely
that the disruptive innovators will start at the lower end of the
market and move towards Cerner’s core business, rather than the other
way around.

Cerner may remain the largest independent health
care IT firm, but I’m not quite sure that I share its executives’ rampant
optimism for how great things will be in 2018.