Omnicell Inc (OMCL) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Omnicell second quarter Financial Results Conference Call. At this time all participants are only in a listen only mode. Following today's presentation, instructions will be given for the question and answer session. If any one needs assistance at any time during the conference, please press the star followed by the zero. As a reminder this conference is being recorded today. Thursday, July 17, 2003. I will now extend the conference over to Dennis Wolf, Executive Vice President of Operations, Finance and Administration. Please go ahead sir.

Yes, thank you Rob and good afternoon everyone. With me today is Randy Lipps, our Chairman, President and CEO. Thank you for joining us today for our second fiscal quarter 2003 conference call. You can find our second quarter financial results' press release as well as the financial and statistical information discussed on this call in the Investor Relations section of our Website at www.omnicell.com.

This conference call is the property of Omnicell Incorporated and any taping, other duplication, or re- broadcast of this conference call without the expressed written consent of Omnicell is prohibited. This conference call will include forward-looking statements, subject to risk, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

For a more detailed description of the risks that impact these forward-looking statements, please refer to the information under the heading 'factors that may affect future operation-, operating results in our annual report on Form 10-K filed with the SEC on March 28, 2003, as well as our filings with the SEC.

Please be aware that you should not place undue reliance on any forward-looking statements made today. The date of this conference call is July 17, 2003. And all forward-looking statements made on this call are made, based on our beliefs only as of this date.

Future events or simply the passage of time may cause our beliefs with respect to the substance of forward-looking statements to change. Randy will now update you on the business as well as the strategy on which we have embarked to take advantage of what is currently a very favorable purchasing environment for our equipment.

He will also review with you the progress we have made against our goals during the quarter. I will then review with you the financial highlights for the second fiscal quarter as well as Omnicell's financial outlook for the second half of 2003 and our first projections for all of fiscal 2004. And off course at the conclusion of my remarks, we will open the call up to your questions. I now turn the call over to Randy.

Thanks Dennis and thank you for joining us today. The second fiscal quarter of 2003 has been one of the company's most successful quarters. I'm very pleased with the progress we have made during this past quarter on all fronts.

Revenue and bookings growth, expense control, and product expansions, new business as well as strengthening our Board of Directors. We've received a strong response to our product strategy of providing end-to-end solutions for the medication use process, which we believe has positioned us well for the future.

Our revenue of $25.1m exceeded consensus estimates by $1.6m or 7% and was up almost 14% sequentially. This represents a new record in quarterly revenue for the company.

EPS this quarter of $0.5 compares very favorably to Wall Street consensus estimates of $0.5 as our actual EPS includes $630,000 or $0.3 per share of restructuring and employees severance expenses, which are not included in the consensus estimate.

This expansion in bottom line results was driven by stronger than expected revenue growth, particularly due to a better purchasing environment, but also because we have a significant and very positive response to our new products for our customers. We have also continued to control closely our expenses focusing on new products, revenue expansion, customer satisfaction, and improved internal processes. In addition, we increased our backlog by 2.2m this quarter and it stands at 32.7m at quarter end.

This meets our goal of quarterly backlog expansion of between 1m and 3m per quarter and moves us forward to our goal of exiting fiscal '03 with at least 35m to 40m in backlog. And this should set us up well for fiscal 2004 growth of 25% to 30%. I indicated last quarter that a major part of our strategic direction was to build backlog, so that we have more predictable, efficient, and linear product revenue. This strategy is working well and helps us to improve the overall visibility, sustainability, and operational effectiveness of the company.

As a point of reference, backlog is to find us customer purchase orders received, but not yet installed. New business represented approximately 25% of our total bookings.

Our top 10 customers represented 36% of our revenue and 40% of our bookings for the second quarter. Discontinues indicate that our customers' average orders are increasing as we are winning larger size deals. We closed and began installation of several Omnicell pharmacy central orders this quarter and our pipeline is growing.

We are just seeing our new SafetyMed pipeline is building and we expect it to grow this quarter. As I stated a moment ago, we are bidding much larger deals than we have had in the past. During the second quarter a few came for [Inaudible] . In May we announced that we won a Dual-Source Award from Amerinet, one of the nation's most successful group purchasing organizations. We will offer our end-to-end solutions to Amerinet's 1800 hospitals and 16,000 non-acute members.

With Amerinet, Omnicell now has agreements with three largest GPOs or Group Purchasing Organizations in the United States. In June we announced the signing of our largest ever Sole-Source agreement with the 11 hospitals of the Sisters of Mercy Health Systems, which is a 10-year agreement worth an estimated $11m and it was a bid with our partner Amerisource Bergen.

We are pleased with our progress and our customers' response to our end-to-end solutions. We are committed to growing our business faster than our competitors in order to expand our market share.

We are always mindful of our expense control. In order to expand our market share, we have recently launched the largest advertising campaign in our history. Our primary focus is to emphasize and convey the message of our end-to-end solutions that medication safety begins in the pharmacy and ends at the bedside.

In early June we had a very successful American Society of Health System Pharmacists summer meeting in San Diego. Here we unveiled two exciting new products - SafetyPak, our automated barcode medication packaging system and the Omni Dispenser model, an automated, single dose medication dispenser that is available in our Omnicell cabinets.

These were new products, SafetyPak and Omni Dispenser are the latest examples of our ability and commitment to strengthen the safety features of our dispensing systems and address the entire medication use process.

It is also a testament to the continued invention that is going on within Omnicell. The fact that we are the only company exclusively dedicated to the problems, confronted by nurses, pharmacists, and materials managers is resonating extremely well of our customer base and helps us retain not only our own installed base, but enabling us to win fair share of competitive bids.

Turning to our Board of Directors, we've strengthened our Board by adding four new members. Sara White, formerly the Director and Professor of Pharmacy at Stanford Hospital and Clinics, who has had an extensive pharmacy experience.

Randy Lindholm, the former Chairman, President and CEO of Vidamed brings over 25 years of experience in products and services for the medical market.

Brock Nelson, the President and CEO of Regions Hospital and St. Paul, Minnesota, who has more than 25 years experience as an Executive at hospitals, and Joe Whitters, the CFO of First Health, who has about 20 years of experience in Senior Financial Manager's positions in Healthcare Corporation and is well respected on Wall Street.

Joe now heads our Otic (ph) Committee. These four individuals have in common tremendous experience in healthcare, and we are already benefiting from their knowledge of expertise. During each conference call, I committed to you that I would review the progress against the following objectives.

Number one, great solutions that address the most important industry drivers, medication management, healthcare efficiency, and patient safety. Number two, organize our business to further penetrate our existing customer base. Number three, improve our internal system so that we have predictable, efficient, and more linear product revenue.

I am very pleased with the progress we have made against each of these objectives. Taking each of these goals one by one, we have succeeded in the following ways. First, both of our new products, Omnicell PharmacyCentral and SafetyMed continue to build a strong pipeline and gain the endorsements of several of our key customers. Additionally, we introduced two of our solution sets, safety pack and Omni dispenser. These products are at the cutting edge of the market's demand and have been a strong catalyst for our growth.

As I just mentioned, the average deal size of the company has increased significantly and a backlog for new products is growing at an increasing rate. The invention capability of our R&D staff has never been better.

Secondly, our backlog is growing, and we are focusing on key accounts in order to improve our productivity within each account. As I mentioned earlier, new business represented 25% of total bookings last quarter, which means that 75% of our business came from our existing customer base.

This is consistent with our goal. We are also adding sales professionals focusing on selling our new products. Our internal systems are improving. Backlog model that I discussed with you is really working and has galvanized those involved to seek a more stable and predictable revenue base and drives better operating performance.

In addition, we are in the midst of improving our analytical system, deepening our use of sales, manufacturing and operational systems as well as developing new systems to help us fully understand where we should invest.

Essentially, we are building information and process infrastructure necessary to take us to the next revenue level. As evidence of these operational improvements, inventory levels have dropped, cash is up, and expenses are down.

As a next step to operational improvements, we have implemented systems for new product introductions and this has helped because(inaudible) focus our research efforts. In addition, during the quarter, we hired a senior member of the staff to manage the company's quality programs with the intention of bringing Omnicell to ISO 9001 compliance within the one year. This phase of ISO includes design, manufacturing, installation, and service.

As I outlined during the last two conference calls, we have the people, products and attitude to continue to build a highly successful company and a market leader. We are also putting the processes and people in place to be a much larger company, but still focused on tight, expense limitations.

The needs to ensure pace and safety and prevent medication errors as well for continuing pressure on healthcare institutions to improve efficiency and reduce cost are still driving customers to choose our solutions.

We are positioning Omnicell to more effectively respond to the growing needs and opportunities in the marketplace, particularly in our own existing customer base. We believe that fiscal 2003 has been the turning point for Omnicell. I believe that we now have the right business model. We are in the market at the right time with a top-flight management team.

Our initiatives have changed from short-term operational performance to market expansion, and we are confident that we can grow faster within the market and we are very excited about our prospects for 2003 and particularly 2004. I will now turn the call back to Dennis to review the financials and outlook.

Thanks Randy. Before I discuss the elements of our financial performance for the second fiscal quarter. I would like to review with you the business model.

Our goal is to drive that 20% operating margin as soon as possible it is the multi-year goal with the expectation that we would achieve 10% operating margin by year-end and 15% to 20% in late 2004 or early 2005. In construct with this goal are goals for inventory management, cash expansion and gross margin improvement.

The second fiscal quarter aligns well with these goals and we believe puts these goals within reach. I will now review the second fiscal quarter beginning with operating expenses.

Our OPEX for Q2 '03 was $13.3m which was up $1.1m sequentially. This includes restructuring in employees sovereign charges of approximately $630,000 as discussed previously and so, therefore out side of these charges, our OPEX is up only about $400,000 or 3% but our revenue is up about 14%.

We regard this as an effect of trade-off. Our spending for SG&A during the quarter was $10.6m up 680,000 sequentially. SG&A is up primarily due to commissions on increased revenue. We do intend to expand the sales force particularly focusing on our new product lines.

R&D spending was 2.1m down 260,000 sequentially. As we continued to see the benefits of our previous restructuring. We will be increasing the new R&D portion of the spend rate through out this year. So, well our R&D spending will remain relatively flat. The investment is moving new R&D.

Turning to revenue and backlog, our second fiscal quarter results were as follows. Q2'03 revenue was 25.1m up 3.1m sequentially or 14%. As previously mentioned this represents record revenue for the company.

Service and other revenue represented 4.7m and product revenue was 20.4m or up about 16%. Backlog increased by 2.2m and so we ended the quarter at $32.7m.

Backlog represents potential future revenue, expected to be recognized in the next 12 months but of course, it is not guaranteed. Turning now to margins and expenses for the second quarter.

Our Q2'03 gross margin was 58.3% compared to 57.2% in Q1'03 or up about 110 basis point. Our standard product margin was also up, which is an indicator that pricing is sound.

As I stated last quarter, we are transitioning our service efforts from an outsource model to one that is a blended model that's primarily provided by Omnicell employees.

While we did expect higher expenses to occur as a result of this temporary duplication of effort, we have been diligently managing this transition and we will continue to do so. We believe this strategy is clearly the right thing to do to improve our service quality. We had an operating profit of $1.4m this quarter, an improvement of approximately $1m sequentially.

Earnings per share in Q2 ‘03 amounted to $.05, compared to net income per share of $0.02 last quarter. As previously stated, Q2 '03 earnings include $630,000 of restructuring and employee severance expenses.

Consensus EPS expectations were also $0.05 but did not include this restructuring and employee severance expense, which amounted to approximately $0.03 per, share.

It should be noted that due to the increase of our stock price, fully diluted shares increased by approximately $2m. Such an increase is difficult to predict and was not included in any of our estimates.

The following are the balance sheet highlights. Cash balances plus short-term investments were $28m at the end of the second fiscal quarter or up about $5m sequentially.

The key drivers attributing to the cash generation were increased profitability, maintaining our DSO at 42 days, reducing our inventory and cash received from stock option exercises. Cash from operations amounted to about $3.5m. Inventory decreased by $1.7m this quarter and stood at $8.7m.

We are pleased with the reduction in the inventory and it is proof that our backlog strategy is indeed working. Our guidance for the third fiscal quarter and the full fiscal year follows. But please remember that the risks and uncertainties referred to earlier in our safe harbor statement, they are particularly relevant here.

We anticipate that total revenue in the third quarter of 2003 will increase about 5% from the second fiscal quarter. Be reminded that the third fiscal quarter is historically the most challenging quarter for a segment of the health care industry. However, due to the strength of our backlog model we believe that the third fiscal quarter this year will indeed be up.

Gross margins for Q3 are expected to be flat to up, compared to the second fiscal quarter. OPEX is expected to be about $13m. Our earlier goal was to keep OPEX at about $12.5m but our revenue expansion necessitates the additional OPEX investment. And therefore, we expect EPS to come in at approximately $0.09 to $0.10 per share or up $0.02 or $0.03 per share from consensus.

Finally, we once again expect our backlog to increase $1m to $3m and cash balances to increase by about $2m to $4m. Turning to full fiscal 2003 expectations we currently anticipate the ranges to be as follows.

The current analyst consensus for fiscal 2003's revenue is 96m. We expect this year to be a record year with revenue in excess of a $100m. We continue to believe that fiscal 2003 margin should average approximately 58% or even greater.

Full year OPEX is expected to be about $51m. And therefore we expect earnings to approximate $0.30 per share this year. This is up from the current consensus of $0.24 per share for the year. This would enable us to reach our goal of greater than 10% operating margins by the end of this year and a slightly ahead of earlier expectations.

We've also completed our negotiations for moving into a new Omnicell headquarters building in [Inaudible] . This new 87,000 square foot facility will consolidate all of our California operations under one roof. The building is being built to our specifications and we expect to save about $500,000 per year by moving to this new facility and do anticipate this move will occur in the last quarter of the year.

Ending backlog for fiscal 2003 of $35m to $40m should position us well for fiscal 2004 growth. And as Randy stated to you during his earlier remarks, we expect to grow by up to 30% next year and are very excited with our prospects.

With revenue growth of 25% to 30%, we expect our earnings next year to exceed current $0.58 per share estimates by at least $0.10 per share and as a point of reference we expect our tax rate next year to be about 10% to 15%. We would like to now open the call for your questions. First question please.

At this time, we'll begin the questions and answer session. If you have a question, please press the star followed by the one on your touchtone phone. If you'd like to decline from the polling process, you may press the star followed by the two.

You will hear a three tone prompt acknowledging your selection, and your questions will be polled in the order that they are received. And if you are using a speaker equipment, please lift the handset before pressing the numbers. Once again to ask a question, please press star one at this time. Our first question comes from Sean McKenna; please state your company name, followed by your question.

Merriman Curhan & Ford. Hey guys, you've done a great job, just a question, you know, in the beginning Randy, you said that you were operating in a favorable macro environment, or favorable environment, I think you said it was in. I was wondering if you could give us a little bit more detail on that, describe that a little bit?

Sure, the - the pressure is in health care, particularly in acute care are treated as one; shortage of pharmacists and we now sell, specific products like go in the pharmacy, we can basically trade, capitol through labor, and so a lot of folks are looking at that new product line pharmacy central.

Second issue is there's the shortage of nursing. With the shortage of nursing, they need more efficient systems on the floor to help them with drug distribution and patient safety issues. So we find our products are right in this - that these two industry drivers, and lastly it's the safety issue, because we have all three sets of these products, starting in the pharmacy to the nursing floors and then to the bedside, we're able to create this safety chain, which is very appealing to folks. So they can put their system together and pieces over time, knowing that we have all the pieces that plug and play out of this platform.

Great, thanks and a follow up to that, could you comment, a little bit about, two things, one the first being, you know what you expect to do in terms of units for the rest of the year, I mean, do you, for example, you expect to place at least as many units in the third and fourth quarter as you did in this quarter and then secondly can you give us a little, can you give us a little bit more about the direction of the ASPs.

So, Sean, as far as units are concerned, we, we really don't break those down, except to say that if our growth is going to be, I mean, we'll be sequentially up every quarter. Up approximately 30% next year, the units should be kind of self-consistent with that.

Okay.

The ASP environment is really very stable right now. We're doing really, you know, we're really doing well with pricing .

I mean is that, is that having to do more with the macro environment, or is it have to do with you selling, in other words one of your strategies was deeper account penetration, I mean would it have to do with that?

It's all about really when it - really comes down to most of all is mix, but if you look at the kind of products that we are now selling, what's really resonating really well, and what's really a good job, that the - that Randy and the team did, as they - they insisted that we have an end-to-end solution. So, the fact that we have Pharmacy Central, soon followed by Bedside enables us to get into larger accounts with richer mix.

Thanks guys.

Our next question comes from Daren Marhula. Please state your company name followed by your question.

Piper Jaffray. Obviously your sweet spot is selling in the domestic hospitals. But, two other growth areas, both international and non-hospital base facilities, can you give us an update on what you are seeing in those two markets?

Yeah, we see a lot of potential in those - both of those segments, and we are working on several areas to make those larger contributing areas to our revenue growth platforms. We really don't see those blooming until probably first part of next year. I think those segments combined relatively are less than 5% of the business, around 5% of the business today.

Okay, but it could be more meaningful in 2004?

Yes.

And if you look at your uptick in revenues this quarter, and you're backlog. Would you best characterize that as your re-organization of the sales force now trying to click on all cylinders, or do you feel like there has been any sort of macro changes in the purchasing environment?

Well I think it's all of the above and - because, and firstly I think, you have to have the right organization and the right people in the right place to execute anything. And secondly you have to have a market that's ready and acceptable to the product suite that we have, and I think we hit correctly on both of those Daren.

Okay, and you - so you have not seen any change in CAPEX, I mean obviously companies like Serner (ph) and some of the more IT based companies are having success going in to the hospitals. Some of the more device based companies are having difficulty and I was just wondering, kind you where you fall out in that spectrum?

You know, I have to say, no we haven't. And I think the issues are we are - a lot of our product solutions are straight capital for labor, and if you have a shortage of labor, they just make a whole lot of the sense, looking on average it is $100,000 a year. So, if you could put up $500,000 piece of equipment, and replace the pharmacists over five year depreciation, it makes it good.

Can you just remind me how much of the systems (inaudible)went into backlog this quarter?

(inaudible) almost .

But from what I estimated - Okay, if that's all future bookings and backlogs in revenues?

None of those revenues that we all have - It's there in the revenue Daren, by the way, one of the two - much your capital equipment comment. We are noticing that our current accounts, the productivity in the current accounts was increased. If you recall that our goal was to get to a $150,000 through account, we are continuing to look move from the 75,000 that we were at about a year ago. So, there isn't - I would say that it is a bit more favorable, we don't know how much of it is an end-to-end solution now, and how much of it is the release of certain capital equipments from priorities for improvement in automation and lower costs associated with that, and the - the move to patient safety?

Okay. Then one last clarification and I will pass it over. Did you say that your '04 EPS guidance, you felt comfortable about $0.10, ahead of consesus.

Yeah. That's right.

Okay, thank you guys.

Thank you Daran.

Our next question comes from Gene Mannheimer, please state your company name followed by your question.

Roth Capital Partners. Great quarter guys, congratulations. I have a couple part question, are you able to quantify for us the Pharmacy Central and Safetymed sales in the quarter?

We can, but we were not going to. [Laughter]

Okay.

We have already taken bookings and revenue for pharmacy central and we are well on our way on patient safety.

Okay and how about in terms of the percentage of RFPs or percentage of bids that include either Pharmacy Central or Safetymet, could you discuss that?

So, I would say that when you look at the largest deals they all do, its almost like pay to play, in order to really be able to improve our overall economic food chain we had to have the ability to have both Safetymet on one end and Pharmacy Central on the other. And it is reasonable to say that if you look at the new customers that we have and the RFPs that we have, they are all asking for information on it. So it's hard for us to now quantify how those RFPs materialize except to say that there should be a pretty good hit rate going forward. And that's why 2004 is even more optimistic for us than ’03.

Okay, very good. And then in terms of that metric you mentioned Dennis on customer, have you been able to quantify that of late?

I haven't noticed the new one here, we went from 75 to about 95 over the last couple of quarters and I am sure it is over a 100 now.

Okay and then last question. What was D&A for the quarter?

The SG& A piece was $10.6m, the G&A portion I don't have it in my head. We [Inaudible] talked about it, but I don't remember that piece.

Yeah, I am sorry, Depreciation and Amortization?

Depreciation & Amortization is about $800K.

800K, Okay thank you.

Sure, thank you Gene.

Ladies and gentlemen, if there are any additional questions, please press star followed by the one on your telephone keypad. And our next question is from Vivian Wall (ph), please state your company name followed by your question.

Hi Dennis and Randy. [Inaudible]

Hi Vivian.

And perhaps the end of the year or next year are farther enough out for you to be more willing to talk about what the composition of the backlog and revenues might look like as it relates to some of the newer product areas that you are excited about?

Perhaps it will be. You know right now I don't think we are ready to do that. I think that it is, you know probably an important metric that we are going to need to put out. But what we would like to do, is have a little bit more experience with SafetyMed and pharmacy central before we do that. I should say that our mix has improved pretty significantly on to the pharmacy side. Vivian about a year ago 40% supply and now we think it is 60% and after this quarter I bet it will be closer to 65% or greater.

65% supply?

Pharmacy.

Pharmacy.

Yeah. So if you give us another quarter or two, we'll probably be willing to start giving you some more information.

And as you see greater backlog building in some of the newer product areas, what are the implications for gross margins from that mixed shift?

I think that the gross margin should continue to improve. We actually are a little ahead of ourselves on what we expected for our gross margin right now and I think it's because of the improvement in the mix that in. We are at 50, as you know 58.3%. I think we could end the year closer to 59% and hope sometime next year to get closer to the 60% number. So I don't see a degradation of the margin. I see a 100 or 200 basis point improvement over the next quarter.

That would be significant. I'll come back in the queue.

Thank you very much.

Our next question comes from Fred Toney (ph), please state your company name followed by you question.

MidCap Partners. Hi Randy, hi Dennis. Seems like you're about a quarter ahead when you reported in the first quarter, and now it seems you're about quarter ahead when you reporting the second quarter.

Few questions, can you talk a little bit about the competitive landscape in any response your seeing to either the Pharmacy Central products or the SafetyMed product, since the big deals are including those now, and along those lines, I guess a 75% of the business was to your customer based, 25% of them to customers outside your customer base. How much of that mix is brand new purchases and how much of that is competitive, taking business away Pixes (ph) or other competitors?

Well I think, we are seeing a lot of strong response from our new product and I would say that, I don't have the numbers, we do have better account penetrationand non-Omnisellaccounts with our product that our own Omnisell accounts with our new products, than we have in our own on the sell accounts. And I think that just shows the strength of the products.

I think that as we get closer to 2004, the whole story that we are selling is an innergrated chain, so in our install base we use these new products as a visionary picture of where they can get to and in competitive situations we are obviously using them as a Trojan horse to get into new accounts.

The only competitive products that we see are, one of our competitors has a carousel like product, but we feel our software's is a much more superior base and I think that really ourBedside product is probably one of the best products in the industry. And we don't really see a major automation competitor's product that often.

And in terms of that quarter the business that's non-existing customer base. Can you break down that mix at all?

You know, actually I don't know that mix Fred, as to how much of these new customers came to us because of pharmacy central or how much is moving to the actual hospital floor. We have the list in front of us, Randy is taking a look at it. I am not prepared on that.

And have you seen any competitive response at all from fixes on the pharmacy central product?

No.

Okay. Some other sort of house keeping questions. With the mix going more toward pharmacy, is the supply business growing year-over-year or sequentially or is it staying flat or is it declining?

It's pretty flattish right now Fred. It's not down but, you know, it's a good solid zero to two percent.

So if you just broke out your pharmacy side of your business, that's most of your growth rate now so that's growing at a faster rate than your revenue, I guess.

Yes.

You gave some backlog goals for the end of the year at 35 to 40m. I don't think that's changed but if we took the low end of that range at 35m, be it low into that range is that what gets you comfortable with a 125m or 25%, I guess is the low end of the growth in revenue range for '04. So if you are at the low end 35m in backlog at the end of the year, are you comfortable with the 125m for the year?

Yes, very much so. You know, we are really pretty bullish about '04. I mean, obviously it all depends upon what the economic environment is and the sector environment is. But if we walk away with 35 to 40m which we are highly confident of right now, it should foretell at 125, 130ish year, next year.

Okay and then in terms of the Sisters of Mercy 11m, can you help me with how that will flow into backlog over time?

It's over the next quarter, a little bit may be in this quarter and little bit fourth quarter and then it will probably spread out over '04.

So it will be 11m over 6 quarters.

Yes.

Okay great. Thanks a lot guys. Keep up the good work.

Our next question is a follow-up from Sean McKenna, please go ahead.

Hi guys. I was wondering if you can give us some indication as to how much in NOL you guys have left. Would you be using some of that before the end of the year?

No,NOL, I am going to guess here, Sean, is 35m to 40m and it will manifest itself over five to seven years. Income tax rates next year of10 to 15% is due to the fact that you don't get that NOL relief for California.

Okay. Thanks a lot guys.

Thank you.

Our next question is a follow-up question from Vivian Wall. Please go ahead.

Hi, Vivian.

Hi, Dennis. So, as you look towards '05, are you looking at the same 10% to 15% tax rate?

Through '05 we'll start using some of our deferred tax assets. Through '05 you should probably look more at 15%. This depends upon whether we reach our stretch goals in 2005 or it's just organicals. We have our own goal for 2005, but we are not going to talk about it right now, but if we are able to hit the other side of what we hope to do, we hope to have a tax problem. So, we will see.

Good luck. I have another question on the balance sheet which is, if you can help us understand. You've done a nice job of turning the deferred gross profit and inventory into cash. I am just wondering how much lower you can take the deferred gross profit and generate cash out of that?

Yes, the true fact is the head of manufacturing hasn't yelled at us yet. Although he is starting to complain that raw material is getting a little short, but you know our real focus is on backlog, which has increased by 13m over the last few quarters and we think that we, in order to get to the calibration point that we feel like, it could go down, we really think it could go down another $5m or $10m.

The bigger issue isn't how far we bring deferred gross profit down, it's how much of that becomes cash, how of that we have in inventory and how well we are doing in managing our installs and most importantly, how fast and aggressively we can build our backlog. So, if I were looking at trying to figure out how the company is doing, its deferred gross profits drops without in concert in improvement in overall backlog, then I'd be concerned, but as long as our backlog continues to standout or greater than the rate we are seeing, we are going to be okay.

All right, now I will be asking it from a different perspective of, if you look at the deferred gross profit in combination with the inventory line, you are looking at about 23m.

Right.

And if you look at that in the context of cost of product revenue, that's in round numbers, about, almost three quarters worth.

Yeah, it should drop.

So, I'm just wondering in managing the working capital, how low can that go and how will you improve the inventory return?

Deferred growth profit by itself would typically be a month, two months worth of insolves (ph) . So, it should continue to drop because we don't actually, I want the equipment in the customer's hands so that it will be insolve (ph) . So, it will continue to drop.

Okay.

The question on inventory, I think it's a different issue not because we can't manage it more but because we are bringing up online and make a bigger investment in new lines of inventory while at the same time [inaudible] and so I think there is a bigger question of how farthat can go down on the inventory side for a while.

Okay, and then, can you just talk about what Boise (ph) might be doing in the way of your interest in booking?

That's the OmniDispenser. We are starting to see some RFPs with them and we should may be have our first one this quarter.

And are you ready to ship this quarter?

Yes, absolutely.

Or are you so as excited about that as you had been previously?

I think so. It's a very great product, it's the best product in the marketplace. It's in the best form factor and I think the bigger impact is 2004 and the margins in the bottom line. But, what's really driving that product is the new regulatory laws, JACO and all these folks were saying, look you've got have absolute control over your narcotics and this thing with the dispensing is the absolute best product in the market place. So, it will be a big driver for our company on the pharmacy side and it has been, just a new form fact.

Great. And one final balance sheet question. What you attribute the reduction other assets to?

Oh, you got me. The other assets have dropped by about $2.5m. The capitalized software is come down some and their customer deposit has come down and there were some re-classes (ph) . So, it's not very real, it's about a million.

Okay, thanks very much.

Our next question is a follow up from Fred Toney, please go-ahead sir.

One quick follow up. In terms of seasonality, I think Pixes(ph) has always said the second quarter is the strongest for them. And is the second quarter the strongest seasonal quarter and is the third quarter typically the weakest seasonally?

Our first and third are probablythe weaker of the quarters and second and fourth are the strongest of quarters. These are generally the fiscal year of the hospitals, as you couldn't change them, June 30th or December 31st.

So, even with a strong seasonal quarter, in the second quarter and a weak one in the third, you are expecting a, you are comfortable giving guidance for the up revenue for the quarter.

Yes.

Okay. Great. Thanks a lot.

At this time, there are no further questions in queue, I would like to turn the conference back over to Randy Lipps for closing comments. Please go ahead sir.

Well, I thank everybody joining us today. I would like to make a note that, we are planning a road show next week, as we do after every quarter. If any of you like, for - to get a meeting with us, please feel free to contact Dennis Wolf's office and set up an appointment. See you next time.

See you later.

Ladies and gentlemen, this concludes the Omni cell second quarter financial results conference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 or 1800-405-2236 with the access code 544-936. Once again those numbers are 303-590-3000 or 1800-405-2236 with the access code 544-936. Thank you again for your precious patience for this calland you may now disconnect.