Omnicell Inc (OMCL) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Omnicell fourth quarter financial results conference call. At this time, all participants are in a listen-only mode. Following today's presentation instructions, will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Monday, January 26 of 2004. I would now like to turn the conference over to Mr. Dennis Wolf.

Good morning. Thank you and good morning again. This is Dennis Wolf, Executive Vice President of Operations, Finance and Administration. With me today is Randy Lipps, Our Chairman, President, and CEO. Thank you for joining us today for Omnicell's fourth fiscal quarter as well as year-end 2003 conference call. You can find Omnicell's fourth 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 and any taping, other duplication or rebroadcast without the express written consent of Omnicell is prohibited.

The call will include forward-looking statements subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied. 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 Operating Results" in Omnicell's annual report on Form 10-K, filed with the SEC on March 28, 2003, and management's discussion and analysis of financial condition of results of operations in Omnicell's quarterly report on Form 10-Q, filed with the SEC on August 7, 2003, as well as our other 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 January 26, 2004, and all forward-looking statements made on this call are made based on the Omnicell's beliefs only as of this date. Future events or simply the passage of time may cause these beliefs to change. Randy will now update you on the business as well as the highlights of the quarter and the full year. I will then review with you the financial highlights for the fourth fiscal quarter, as well as Omnicell's financial outlook for Q1 '04 and projections for the remainder of fiscal 2004. And of 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. Thank you for joining us today. The fourth fiscal quarter of 2003 was another record quarter for Omnicell. It follows on records for each of the last three quarters. The ability to post growing revenue, backlog, and operating results in each of these last five quarters gives us confidence that our expansion strategy for Omnicell is working.

At the beginning of 2003, we outlined as goals first, to stabilize the business and attain at least 10 percent operating margins by the end of 2003 or beginning of 2004. We accomplished this goal sooner than we had expected and have moved to 10 percent operating margins in Q3 and 10 percent operating margins in our last fiscal quarter, which included a $300,000 restructuring charge.

Second, integrate the new product lines in the mainstream of Omnicell's business. We met this goal. As a matter of fact, the ability to sell PharmacyCentral and SafetyMed as part of a full suite of end-to-end offerings has been central to our ability to garner larger and larger deals each of the last three quarters. It is clear that the strategy of being a multiproduct end-to-end vendor is key in the current environment, and we continue to increase our success rate. During the fourth quarter, our top 10 customers represented 49 percent of our total business, up from 36 percent in the beginning of 2003. Furthermore, our average deal size has increased from 148,000 in the beginning of 2003 to about 162,000 now, or about 10 percent. But even more importantly, deals that represent more than $1 million have increased significantly throughout the year and we enter 2004 working on more deals greater than 1 million than at any other time.

Third, introduce new and leading-edge products this year. This has been a good year for invention and market introduction. During the year, we completed and introduced OmniDispenser and SafetyPak. Both of these products are now shipping and are gaining traction. As a matter of fact, during the fourth fiscal quarter we booked a very significant Omni dispensing order. In addition, at the ASHP mid-year clinical meeting in December, we introduced our Omnicell 8000 software release, which includes safety (indiscernible) bar coding that contributes to verification of the right drug and cabinet stocking and dispensing. Our Touch-and-Go (ph) biometric fingerprint scanner that quickly identifies the person accessing our dispensing units, protecting against theft or user identifications and passwords, and helps ensure that only authorized users can access drugs from the cabinet. Finally, integration of Omnicell PharmacyCentral and SafetyMed with our medication dispensing cabinets, enabling real-time communication between our systems. All of these new offerings were well-received at the trade show.

Our fourth goal was to reshape the overall management of the Company. We have essentially restaffed Omnicell with Silicon Valley veterans of successful multi-billion dollar enterprises. These new leaders are experts in helping grow technology companies and their expertise in this regard has begun to be incorporated into Omnicell.

Fifth, establish Omnicell as the clear number two market share leader in the hospital and pharmacy automation. Our success in 2003 has enabled us to establish our position as the clear number two provider in the marketplace. We currently represent approximately 17 percent in the marketplace and intend to get about 20 percent within the next year or two, toward our overall goal of 40 percent market share within the next several years.

Sixth, compete in every large end-to-end deal in the marketplace. We focused our sales organization this year on winning entire implementations, not just nursing floor expansions. As I have reviewed with you in the past, we have reorganized the sales organization based on a three-pronged focused of winning new accounts through our corporate account team, expansion business with our sales geography teams, and the new technology wins with our emerging business team. This strategy was key to our winning HealthTrust Purchasing Group as I reviewed with you last quarter. HPG is a 700 hospital group and we have already won a couple of accounts since being awarded a non-exclusive agreement with this group. We are very excited about our agreement with this group and prospects with this group, and believe that our work with the group could significantly expand our market footprint in 2004 and 2005.

Seven, strengthen the balance sheet to enable us to continue to exploit acquisition opportunities to grow our business beyond 20 percent market share. Omnicell's balance sheet is the strongest it has ever been. Cash at the end of the year stood at $33.5 million, up $12 million from the same period last year. Shareholders' equity expanded from $16.3 million at year-end 2002 to $34.8 million at the end of fiscal '03. This has enabled us to continue to search for acquisitions that are accretive now or within very short order.

Eighth, prove the overall operating efficiency of Omnicell by consolidating operational cost and utilizing outsourcing wherever possible. During the first week of January we moved to our new facility in Mountain View at 1201 Charleston Road. We have already moved all headquarters into a single building, as well as all of the warehousing that was once done off-site. This new facility is not only a showcase for our customers and a source of pride for our employees, it will also save us up to $500,000 per year. In addition, we opened up our technology center in India for our work with Adidi (ph),and they are working industry on discrete projects that enable us to significantly increase our R&D headcount without significantly increasing expense outlays. Cost control continues to be a very important element of getting us to a 15-plus percent operating margin within the next several quarters.

Ninth, build a service and maintenance organization internally. We believe that in order to be a top-tier player in our industry, we need to provide our own service and support for our products. By the end of this year we completed that goal. We now have 53 individuals in this organization headed up by a strong vice president previously from Siemens, and they have significantly improved the coverage and quality of Omnicell's service and maintenance.

Finally, build a new quality organization at Omnicell. Our focus on quality and the customers always requires more work, but I'm happy to report that product quality in the Company has improved significantly with out-of-the-box quality issues now having been cut in half from the beginning of 2003. In addition, our new facility has numerous testing facilities to ensure that quality standards and protocols are built into the products before we ship them. Finally, we are on target for ISO 9001 by the first or second quarter of this year.

It is through the success of these goals that makes us believe that we are well on our way to reshaping Omnicell as a major industry force. Our revenue for Q4 2003 was 28.6 million and represented year-over-year growth of 40 percent, so we believe that the most important element of our business model, market share expansion, continues to take form. Our earnings of 12 cents per share provided an operating margin of 10 percent after the charge we took this quarter for our move. This result puts us in good position to obtain our goal of between 15 and 20 percent margins by the end of 2004.

But we are not sacrificing profitability for growth. Our backlog this quarter expanded by 1.5 million and now stands at 38.1 million, which meets the goal we set out earlier in the year of a range of 35 to 40 million in backlog by year-end. Most importantly, we left Q4 '03 with more deals greater than $1 million than ever, so we are optimistic that during fiscal '04, our backlog will continue to expand by between 15 and $20 million.

All of these milestones taken together build on the momentum that we have created and provide a pathway for what we believe to be a very significant growth opportunity for Omnicell. We continue to be focused on getting to 200 million in revenue at Omnicell by 2006, and are doing all we can do to grow the business organically and exploit outside opportunities as we continue to perfect the Company's operational performance. This is a very exciting time for Omnicell and we continue to be optimistic about our future. I will now turn it back over to Dennis to review the financials, our outlook, and our business results.

Thanks, Randy. We are very pleased with our fourth fiscal quarter results. We not only met or exceeded Wall Street expectations, but we also once again posted record revenue, operating margin and backlog. Revenue was up 40 percent year-over-year and 8 percent sequentially. Backlog was up $1.5 million sequentially and 35 percent year-over-year, with backlog ending fiscal Q4 at $38.1 million. In addition, net income of 3.2 million and an operating margin of 2.7 million or 10 percent were all records for quarterly results.

Full year 2003 revenue came in at $102.1 million, up 16 percent from 2002. Full-year net income was 7.3 million, compared to -5 million for 2002, or a $12.3 million improvement. EPS for 2003 was 29 cents, compared to a loss of 23 cents per share in 2002. Our OpEx for Q4 '03 was 14.1 million compared to 13.1 million in Q3. Results this quarter included a onetime charge of approximately $400,000 for the move to our new facility. Counter affecting that charge was a onetime rebate for the move below the line of $240,000. Headcount stood at 432 at the end of Q4 '03, or up 28 sequentially, with the majority of the increase in service and sales.

Our spending for SG&A during the quarter was $11.6 million, up about $800,000 sequentially. SG&A is up primarily due to commissions on increased revenue, as well as the BCX acquisition. And as we have discussed on previous conference calls, we do we intend to expand the sales force. R&D spending was $2.2 million, essentially flat with Q3. Randy discussed with you our outsourcing strategy. While we expect R&D expense to only increase by about 10 to 15 percent this current year, the dedicated headcount will almost double. Our outsourcing strategy is meant to augment our R&D efforts and accelerate invention. We are focused on maximizing efficiency and attracting the best personnel in R&D, both here as well as India, and have opened requisitions for both locations. In addition, acquisitions also bring to us very capable engineers with specific technology talents and we intend to use that talent in integrating our product lines even further.

Turning to revenue and backlog, our fourth fiscal quarter 2003 results were as follows. Q4 '03 revenue was $28.6 million, up 2.2 million sequentially or 8 percent. As previously mentioned, this represents record quarterly revenue for the Company and follows record revenue from the third fiscal quarter. Product revenue was $23 million, or up about 9 percent, and service and other revenue represented $5.5 million, or up about 6 percent. Again, backlog increased by 1.5 million sequentially and ended the quarter at 38.1 million, meeting our full-year goal.

Turning now to margins and expenses for the third quarter, our Q4 '03 gross margin was 59 percent, unchanged from the third fiscal quarter. We have largely completed our hiring for our new service organization, and our service headcount now stands at 53, as Randy mentioned. This headcount is in the gross margin and we expect gross margins to be in the 58 to 59 percent range over the next several quarters. We had an operating profit of 2.7 million this quarter, which was an improvement of approximately 200,000 sequentially, and represents an operating margin of 10 percent.

Our Q4 '03 tax benefit of $200,000 adjusts our year-to-date tax provision to the actual $250,000 for the year. The Q4 '03 tax benefit partially reflects the impact of California R&D credits available to the Company based upon an analysis conducted in the fourth quarter. Net income per share in Q4 amounted to 12 cents, compared to net income per share of 9 cents last quarter, or up 3 cents per share. Total share count stood at 27.3 million fully diluted. Next year's share count is estimated to be about 28 to 29 million shares.

The following are the balance sheet highlights. Cash balances plus short-term investments were $33.5 million at the end of the fourth fiscal quarter of '03, or up about 2.6 million sequentially. The key drivers attributing to the cash generation were as follows -- option sales yielding about $1.5 million and employee loan repayments amounting to about $2 million. With gross comes cash usage, and during the fourth fiscal quarter we did not generate meaningful levels of cash from operations, as we added $3.2 million from net income. However, this was largely offset by a $3.4 million increase in Accounts Receivable as well as inventory. In addition, our depreciation for the quarter was $800,000 and new capital additions were 1.1 million. Our DSO this quarter was 46 days versus 40 days in the previous quarter.

We should have a strong operating cash year in fiscal '04, and would expect cash to expand by 10 to 15 million, as we have discussed with you previously. Inventory increased by about $200,000 this quarter and ended at $8.8 million for the year. We do expect a small increase in inventory again in this current fiscal Q1 due to the significant increase in revenue ramp expected over the next few quarters.

Results as of December 31, 2003 include $7.7 million of lease receivables and payables. Of our $102 million lease portfolio, we note that $7.7 million, almost all of which are government leases, require an equal gross-up of assets and liabilities to account for FAS 140 standards that are accounting for transfers and servicing of financial assets and extinguishment of liabilities, or true sales. The government portion of our portfolio grew to a level in fiscal 2003 that was material and needed to be grossed up. Our remaining lease portfolio complied with FAS 140 requirements. Of course, this accounting is only a balance sheet gross-up. It has no impact whatsoever on our earnings or cash flow.

Our guidance for Q4 '03 and full fiscal year follows, but please remember the risks and uncertainties referred to earlier in our Safe Harbor statements are particularly relevant to this section, as this portion pertains to forward-looking statements. We anticipate the total revenue in the first quarter of 2004 will increase between 3 and 5 percent from the fourth fiscal quarter. The current street estimate for revenue is about $29.4 million, and we expect to meet this. Gross margins for Q1 are expected to be in the 58 to 59 percent range. OpEx is expected to be about $14 million, or flat; and therefore, we expect EPS to come in at approximately 12 cents per share.

Turning to fiscal 2004 expectations, the current revenue estimate for the year stands at approximately $132 million. We expect to meet or exceed this revenue estimate. Current street expectations for net income are at about $17 million for the full year. We also expect to meet or exceed this result. Therefore, we expect that EPS will meet or exceed Wall Street estimates of 64 cents per share for fiscal 2004, and this is before the reduction in expected tax rates for 2004. Tax rates for fiscal 2004 are expected to be about 5 percent, and all estimates should be adjusted accordingly. We will now open the call to your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Daren Marhula.

Piper Jaffray. Dennis, just want to get a little clarity on what you just said there. The 2004 EPS guidance -- your discussion regarding 2004 EPS, does that use a 5 percent tax rate or does that use the current street tax rate?

It is the current street tax rate, and you should assume that the tax rate improvement should be worth about one penny per share per quarter.

Okay, I understand. Thanks. And then regarding the HealthTrust GPO (ph) contract that you've got -- obviously, a great win for the Company. Can you give us some color as to what you think that could represent to the Company in 2004/2005?

Well, I think that it is pretty hard to pin down a number, but I think over the term of the contract it has got to be worth more than $20 million and I think that is the minimum amount. We think there are a lot of hospitals in that group that represent a lot of opportunities for us that we have not have access. If you can imagine not being able to call on 700 hospitals with your sales team because you are excluded via the contract and now we can call on them, we expect as the number two market-share leader to be gardening (ph) some significant business there. We also feel like competitively we're in a very good position there because of who was put on the contract and who was left off.

And lastly, you've discussed in prior calls about some international opportunities. Is there anything in this quarter or that you would expect in 2004 from international sales?

We do expect sales, but still probably in the 5 percent or less range for international, until we get little further down the road with some deals.

I would say that. I think we closed a significant order this quarter for Europe, and hopefully we will be able to do well in international, but it is always a wild-card.

Are those international sales booked as a one-time revenue event on your income statement?

Could you repeat?

The sales internationally, because they are done through distributor, are they booked when you ship?

No, compliance with 97-2 is particularly arduous. It is a sales through.

Okay, thanks.

David Francis.

Jeffries & Company. Congratulations, guys. Randy, can you talk a little bit about the -- from a sales and marketing perspective, any anticipated or unanticipated fallout from your terminated relationship with Amerisource, and, to take it a step further, if you have seen any additional activity, again anticipated or unanticipated, from those folks as a result of their focusing on the AutoMed line of products that they are now selling.

We have not really seen any meaningful impact at all on Omnicell with the breaking of that agreement. That agreement basically produced only one or two deals, and actually those deals were brought to AmeriSourceBergen by Omnicell. And it's kind of the opposite -- with AutoMed's product, which is the product they use, which is an inside-the-pharmacy product, we have a product now that we did not have in the past, SafetyPak, to compete directly with them. So where in the past we were using our automated cabinet business and then using their back-end, we now are free to use our back-end solution as well as our bedside solution in all the accounts that we're calling on. And we really push our products with the users and the nurses who make the selection. And I think that is the key in winning these accounts in the marketplace.

If you go to the marketplace, Omnicell is very well-known from a nursing standpoint and a hospital standpoint, and I think we have a lot of leverage over our competition, and that that generally they are known as a supplier and most users don't really recognize the name.

That is helpful. One follow-up if I could. On the sales and marketing front, would you say that you are satisfied with your market coverage now with the sales adds and the HPG contract, that you are seeing all the deals that are out there right now? Or are there other holes in the sales front that you think deals might be slipping through you guys from an opportunity perspective?

I would put it in several categories. I think all the new deals we are getting involved in because I think we're well-known enough in the marketplace that people want to invite us in on an account that has no automation. In competitive accounts, we're probably still not seeing all the deals, and that is why we are going to increase our headcount on the sales side this year by about 40 percent, to just increase our coverage. A lot of our sales team is focusing on these very large deals and we know there are smaller deals we could continue to focus on and it just needs more coverage. And so we look forward to putting more folks in place to cast a broader net, if you will.

Thank you.

Sean McKenna.

Merriman. A question here. First, I was wondering if you could talk a little bit -- I know this is probably pertaining maybe more to '05, but could you talk about the opportunity in Japan first up. And then secondly, can you give us an idea of what exactly you think may have happened to the sales cycle? Is it shorter than it was? Because now we are looking at bigger deals here and it looks like actually just sequentially you are in an uptick of fewer facilities, but it looks like the tickets and the items are higher. Can you comment on those?

First of all, on the Japan question, I think in taking on the Japan market, it all depends on what kind of partner you have, and we think we have a really great partner and that they are innovative and aggressive and have been able to integrate our technology with software that really works in the marketplace. So we do expect some good things out of the Japanese market. But it does take time and it really is more of a probably '05 question before we see the significant results that we would like to see.

As far as the deal size, I think for us it's a matter of pipeline. You can deal with larger deals and more deals, and our overall pipeline is growing significantly. I would say it is a little bit longer to do larger deals, but the urgency for these hospital groups to get these deals done is still there. Once you get the initial order with the customer, usually the revenue flows through pretty quickly from multihospital locations. But it is really the new customers, new customer deals that take a little longer. We have a lot of big deals that are from current customers, that contracts and track records are already in place. And I would say in those cases those deals have not slowed down at all.

Great. And then just a follow-up. You gave -- I think I missed it. You gave total headcount. Did you give a salesperson headcount or a total headcount?

Total headcount was 432. We have probably between 30 and 40 bag-carrying and our goal is to get to 50 in a hurry.

Okay, great. And then one final housekeeping. Do you expect now that you have moved and everything that your requirements for CAPEX will go down?

I think we said about 4 million last year. It is probably roughly the same. With growth comes capital outlays.

Okay, great. Thanks a lot.

Gene Mannheimer.

Roth Capital Partners. Congratulations on a nice quarter. Just a couple questions. First one, regarding backlog, during '03 you handily held to your goals of 1 to $3 million increase sequentially. Do you have any backlog expectations for fiscal '04 you could talk about?

Gene, if you have noticed, our greater than $1 million deals, we can't give you the number, but it's significantly higher that we are working on. Our intention, as Randy was saying, it's one of our top 10 goals for last year, and one of them continues this year, and that is to be able to participate in every large deal that we could possibly participate. And the sales cycle on those are somewhat longer. We would expect therefore that our backlog this year -- we had said before that our backlog will expand this year by 15 to $20 million, and we would expect that that will occur. It will probably be somewhat lumpy because the deals are larger, but at this point we are pretty darn optimistic about that.

Thanks, Dennis. Secondly, the BCX acquisition, you had some expectations on how that would affect EPS on a quarterly basis. I think you were looking for breakeven this quarter. Did it come out that way?

You've got a good memory. Actually it did. We actually posted a small profit already from the BCX acquisition, so it definitely met the goals that we have for acquisitions, which are accretive now or within the next few quarters, and have the ability to get to a 15 to 20 percent operating margin as a standalone. BCX fits like a glove.

Terrific. And last question. SafetyMed, can you comment on the market reception so far to that new product?

SafetyMed has a lot of attraction. I think the bookings have been slow. We did close our first booking already for the product and we have several more queued up coming this quarter. So we are very optimistic about that product, particularly with the release of the 8000 software. Anytime you make a change from our dispensing cabinet or on our SafetyMed product, those changes are reflected real-time, so it really shows well in a really unique format and a unique offering in the industry. So we still know that there is a lot of activity in this area, and generally when we get called in to talk about an end-to-end deal, we quickly move to what is our bedside solution and how does it work with our equipment. So even though the bookings have been a little slower than we would like, it has great potential and I think in '04 we will see a nice ramp.

Thanks, Randy. Again, great quarter.

(OPERATOR INSTRUCTIONS) Sean McKenna.

Merriman. One more. Dennis, do you have handy -- do you know what the deferred product revenue is for the quarter?

Yes, hold on. The deferred gross profit for the quarter stood at 10.1 million. Deferred service revenue was at 12.7.

And what -- we would just -- gross that up and we would just use the product margins that you reported this quarter, would that be accurate -- the get the product revenue?

It is part of the puzzle, but that is how you would do it.

Okay, great. Thanks.

Gentlemen, there are no further questions at this time. Please continue.

Well, have a good day, everyone, and we will visit with you at least in a quarter.

Thanks for joining us.

Ladies and gentlemen, this concludes the Omnicell fourth-quarter financial results conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 or 800-405-2236 with passcode 567448. (OPERATOR INSTRUCTIONS) You may now disconnect and thank you for using AT&T Teleconferencing.