Omnicell Inc (OMCL) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Omnicell first 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, Wednesday, April 14, 2004. I would now like to turn the conference over to Mr. Dennis Wolf. Please go ahead sir.

Thank you Erica. Good morning all. Again, this is Dennis Wolf, Chief Financial Officer. With me today is Randy Lipps, our Chairman, President and CEO. Thank you for joining us today for our first fiscal quarter 2004 conference call. You can find Omnicell's first 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 our express written consent is prohibited.

This call will include forward-looking statements that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For more a detailed description of the risks that impact these forward-looking statements, please refer the information under the heading, Management's Discussion and Factors That May Affect Future Operating Results, in Omnicell's annual report on Form 10-K which was filed with the SEC on March 8, 2004, as well as 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 April 14, 2004. All forward-looking statements made on this call are made based on our beliefs only as of this day. 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. I will then review with you the financial highlights for the first fiscal quarter, as well as Omnicell's financial outlook for the remainder of fiscal 2004. Of course, at the conclusion of my remarks, we will open the call up to your questions. I will now turn the call over to Randy.

Thanks Dennis. Thank you all for joining us today. Revenue for Q1 '04 was 27.8 million and earnings per share stood at 8 cents, consistent with the guidance given during our preliminary earnings call of April 5. As we discussed during the call, the first fiscal quarter of 2004 yielded some unexpected results, both negative and positive. To summarize, we noted the following. Our backlog during the quarter expanded significantly and we now have 41.7 million in total backlog. More than 50 percent of our business came from new accounts, a testament to our market expansion. Account expansion came primarily from PharmacySolutions (ph) switch representing about 80 percent of our bookings. As a matter-of-fact, PharmacySolution's represented more than 80 percent of our mix in Q4 and the crossover to pharmacy from supply occurred in Q2 '03. This is sooner than we had expected, more forcefully than we had expected, and clearly establishes us as a force in the pharmacy automation market.

We added 43 new accounts comprised of 31 new hospitals during Q1, a record for the company. Our top ten accounts represented about 50 percent of our business for the last two quarters, versus about 35 percent a year-ago. We believe this is due to the broadened product suite that we have and the market acceptance of our end-to-end solutions. As a matter-of-fact, most of our business was from accounts each larger than 500,000 per order and this increased our time to product installation due to the shear size and complexity of each deal. Our new productline, which includes PharmacyCentral, SafetyPak, SafetyMed and BCX performed very well during Q1 and is an indicator that our marketshare expansion model is working. I stated on the call on April 5, that these new productlines represented about 15 percent of total bookings.

We had expected that by year end, our new products would represent about 10 to 15 percent of bookings, so we are pleased. As a matter-of-fact, new products are the catalyst for winning new accounts and expanding accounts from there. We expect our based business, comprised of pharmacy automation, supply automation, and lease renewals to grow approximately 10 to 15 percent year-over-year. During Q1, we actually experienced a reduction in supply automation business levels. We believe that this is due to the limited staffing that we have in sales and as a result, we have advanced our hiring plans for the field and intend to be adding 20 new sales reps this quarter.

This will provide for over 60 sales reps including those working in our FBU's (ph) selling new product lines. This is very important in order for us to smooth our revenue flow by restoring the balance between new large installations and add-on sales to our current accounts. We have taken several actions to improve the visibility and linearity of our bookings. During the quarter, we asked Chris Crew (ph), Senior Vice President, with more than ten years experience at Omnicell, to manage Omnicell's field operations including installation and service. Chris has spent much at this time here working with marketing and sales and is extremely knowledgeable of operational methods used to overcome bottlenecks. We believe that integrating operations and service will help us install products more efficiently. We believe this is a perfect synergy.

In addition, tools have already been built to improve on this very important operational element. This is a key priority for Omnicell and without improving time to installation we cannot meet our revenue goals, so we are very focused on this. I would like now to share with you additional highlights from Q1. Yesterday, we announced that we had won Lincoln General Hospital, that will install Omnicell solutions in all-medical surg units in the emergency room. These large and more complicated accounts are an integral part of our marketshare growth objective -- as we have many other deals of this size and even larger that we are working on. As we gain more experience winning, installing and managing these very large hospital implementations, we believe that we can reduce the time it takes to install.

During last month's ARN (ph) conference which is the Operating Nurse Association Group in San Diego, we introduced OptiFlex, our brand-new physician preference card and perpetual inventory management system which integrates open bar-code software from our BCX technology division with OmniFlex (ph) storage system cabinets. We are the first vendor to bring such an integrated solution to the marketplace. Based on the extremely positive reception OptiFlex received at the conference, we believe we have a compelling offering for the large surgical services market and we plan to introduce other versions of OptiFlex for the cath lab, med surg areas of the hospital.

We believe that there is a broad need for open systems integrated with our supply automation solutions. While I'm disappointed that our revenue has not yet caught up with our marketshare expansion, we are doing everything we can do to smooth it out. The operational problem was a result of growing the expansion elements of our business faster than the base business. We believe that we know what we need to do to smooth out revenue. Taking into account the continued growth in backlog, the expected improvements in time to install, the sheer strength of our pharmacy and new products franchise, the kinds of accounts we are winning, makes me upbeat about our opportunity and our prospects.

All of these milestones taken together builds 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, growing our backlog 15 to 20 million this year and doing all we can do to grow the business organically. I will now turn the call back over to Dennis.

Thanks Randy. As Randy discussed, we are very pleased with the marketshare momentum realized during the quarter and have taken actions on smoothing out timed installation for our current backlog by both improving on installations through operational actions as well as focusing more on our base business. We believe that this will help alleviate the lumpiness in revenue going forward. We still have work to do here but we have a task. Revenue for Q1 '04 was $27.8 million, up 26 percent year-over-year and down 3 percent sequentially. Backlog was up 3.6 million sequentially and 37 percent year-over-year with backlog ending fiscal Q1 '04 at $41.7 million. We posted net income of $2.4 million and an operating margin of $2.4 million or 9 percent and earnings per share of 8 cents on 28.1 million shares.

Our operating expense for Q1 '04 was 14.2 million, compared to 14.1 million in Q4 '03. Headcount stood at 458 at the end of Q1 '04, up 26 (indiscernible) sequentially with a majority of the increase in support and service. Our spending for SG&A during the quarter was 11.9 million, up about 300,000 sequentially. As we have discussed earlier, we do intend to expand the salesforce. R&D spending was 2.4 million, essentially flat with Q4 '03, while we expect R&D expenses to only increase by about 10 to 15 percent this year, the dedicated headcount will almost double through use of our outsourcing strategies which 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 open requisitions for both locations. Turning to revenue and backlog, our first fiscal quarter 2004 results were as follows. Once again, Q1 '04 revenue was 27.8 million, down 800,000 sequentially or 3 percent. Product revenue was 22.2 million, or down about 4 percent and service and other revenue represented 5.6 million, or up about 2 percent. Backlog increased by 3.6 million sequentially, and ended the quarter at 41.7 million, ahead of our first quarter call. Turning now to margins and expenses for the first quarter, our Q1 '04 gross margin was 59.7 percent, up 70 basis points from Q4 '03.

The headcount for our service organization now stands at 56. The transition to an internal field service organization is responsible for our 70 basis point improvement in gross margin. We expect gross margins to be in the 58 to 59 percent range over the next several quarters, due primarily to the shift in product mix. We had an operating profit of 2.4 million this quarter, down approximately 350,000 sequentially, which represented an operating margin of 9 percent. Net income per fully diluted share in Q1 '04 amounted to 8 cents compared to 12 cents last quarter. Total share count stood at 28.1 million fully diluted shares. Share count this year is now expected to range between $28 and $28.5 million -- excuse me -- shares this year. The following are the balance sheet highlights. Cash balances plus short-term investments were $36.2 million at the end of the first fiscal quarter of 2004, or up about 2.7 million sequentially.

The key drivers attributing to the cash generation were as follows. Proceeds from stock option exercises yielded about 4.6 million, net income of 2.4 million and depreciation of 700,000. These were offset by property purchases of approximately 1.5 million, which includes the intellectual property acquired from Ariel, an increase in inventory of 1.3 million, and capital acquisitions of about 1.5 million. Our DSO this quarter was 44 days versus 46 days in the previous quarter. We should have a strong operating cash year in fiscal '04, and expect cash to expand by $10 million to $15 million year-over-year. Inventory increased by about 1.3 million as I said this quarter, and stood at 10.1 million.

We do not expect a material increase in inventory even as we expect to accelerate the revenue ramp. Our guidance for fiscal 2004 remains the same as we have provided at last week's conference call. We expect earnings of approximately 50 cents per share this year, on revenue of approximately 125 million. For fiscal 2005, we expect revenue growth of about 25 to 30 percent. The current analyst range for revenue next year is 150 million to 160 million and we expect to be at the top of the range. The current analyst consensus estimate for earnings per share is 75 cents, which we expect to meet or exceed. Please remember, however, that the risks and uncertainties referred to earlier in our Safe Harbor statements are particularly relevant to this section as this portion pertains primarily to forward-looking statements. We will now open the call to any questions that you might have. Erica?

Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). David Francis (ph).

Jefferies. Good morning. Randy, I've got one question and one follow-up. First, your comment that you're disappointed that, and I'm paraphrasing, but revenue has not yet caught up with your marketshare gains seems to be a little Orwellian (ph) in nature and I'm trying to get a handle on -- is there some other dynamic going on on either the competitive or new business front that we are not seeing in backlog or otherwise that bolsters the view that we are still gaining marketshare despite the fact that the revenue line came in at a subpar level relative to expectations?

Let me just clarify that comment. All I meant by that was we are gaining marketshare by putting in these new customer accounts and new product PO's in the backlog. What we have had difficulty doing is realizing the revenues by extracting those out of the backlog. So I did not mean that as a comment about what is going on in the marketplace, as it is an operational issue for us to continue to convert the revenues as we get these new accounts, and particularly on the pharmacy side out and turned into revenue.

Along the same lines as a follow-up, your backlog guidance I think is in line with where we had been prior to the preannouncement last week even though we brought in the revenue expectations a bit. Is there anything going on from a purchasing environment perspective that is decelerating relative to your previous view, or are we simply setting hurdles that we think should be a little bit easier to achieve and that we won't have to stretch so far for?

I guess it's closer to the latter, but there hasn't been a fundamental change in the marketplace between Q3 and Q4 of last year, and Q1 of this year for us, as far as our strategy in the marketplace, the gains in the new accounts particularly pharmacy. The one thing I did point out was that our supply business typically in our company history has been stronger than our pharmacy business and where most of our current accounts lie today is where we have been a little bit weaker. I think for us, it is not so much a market issue as it is a coverage issue for us with our sales force. They're running to the hottest part of the market which is the pharmacy, it is our end to end solution set and that is our ability to garner large new accounts.

Thank you.

Darren Marhula.

Piper Jaffray. Good morning. Could you just recap for us how your sales force is structured today and how you expect that could change over the next few months as you try to align your sales force with this underlying change that has been going on the last couple of months in your business?

I think what is key is for us is just geographic coverage. By having more folks it allows people to deal with -- obviously gives them more time to not only deal with the new large accounts that really absorb a salesperson's time totally when they get into these deals, as well as having somebody to sort of backup and call on the current account business that are there and available for us to go after. So, mainly we are increasing just geographic coverage cutting down territories, and allowing our focus to not have to travel as much to cover the accounts, as well as we will be adding specialists to focus on areas that we want to see continue to grow like new product lines, and continue to focus on our new supply line of business, the OptiFlex that I talked about earlier on the conference call.

Right now a sales rep can sell either pharmacy or med surg?

That is correct.

And they can sell into both existing and new accounts?

That's correct.

They are chasing the big deals.

That's correct.

And you don't plan to restructure the sales force to have them tiered between new and existing accounts?

We're going to structure it so it is either that or by productline.

That is something that is in-process right now?

Yes.

Did you say earlier you expect to add 30 sales reps this quarter?

Twenty.

What will that bring the total count to?

Sixty.

So you are going from 40 to 60, so you're adding 50 percent?

Yes.

Where do you stand in the hiring process given that we've got ten weeks left in the quarter?

We're more than halfway toward that goal and by May 1st we will have everybody on board.

Great. Dennis, could you give us a quick update on your NOL and when you expect to be recognizing full tax on the income statement?

I think our federal is 27 million and our state is about 20. We should be able to realize those between -- I think sometime by 2006 we will crossover. So, one should assume 4 or 5 percent this year, 10 or so percent next year.

Okay. Just one last question. Regarding the alternate site market, is there a specific subgroup of the sales force that is going after that market or is that just regionally based again?

For us, we have both. There is some regional folks as well as there are some that are specifically calling on specific alternate site accounts.

How many would be specific to the alternate site market?

We really don't give that number out, but the alternate site market for us is not a large percentage of our business.

Okay.

Less than 10 percent.

Thanks guys.

Gene Mannheimer.

Good morning. Roth Capital Partners. One follow-up question, Randy, with respect to the sales count. You mentioned supply was a little weaker than expectations. You were adding 20 new salespeople but they are not focused -- they're not dedicated to supply, correct? They're going to continue to cross-sell products?

I think we are still working that out. It is probably something we're going to rollout next quarter because we're kind of right in the middle of the quarter here. As we do, we will probably transmit that information to you but we haven't quite decided what is the best way to structure it. But it is to get focus on supply, that is one of the goals. The other thing is to help our folks focus on new and existing business so that we can achieve both our marketing expansion as well as our calling on our current accounts. But 20 isn't a magic number for supply or division, it is just the number of people we're particularly adding.

Got you. Thanks. The revenue goal of 200 million by 2006, that implies about 30 percent topline over the next couple of years. Is that -- is this revenue going to be comprised of organic growth or are you kind of building an acquisition into this?

Gene, we think that at 25 to 30 percent growth, if it gets you into the 150 to 160 range next year, we think it is eminently doable to get to 200 million in 2006 organically. We are looking at other ways of trying to bring in sooner. At this point right now we are feeling confident on 2006, organically 200.

Terrific. Finally Dennis, I missed the D&A number. Depreciation was 700K. What was amortization?

It was about 200.

Okay. Thanks guys.

Thank you.

Glennn Garmont.

First Albany. Thanks and good morning. Just two real quick questions. Number one, are you guys still comfortable with a op margin of 15 percent or greater by the end of '04? And sort of related to that, if you are able to achieve a $200 million topline run rate in 2006, roughly what type of op margin do you think that would imply? Do you see yourselves achieving like let's say a 20 percent op margin with 200 million of revenues? Thanks.

You've been in our meetings on the inside Glenn, I think. We're thinking operating margin, we should reach the 15 percent level as we had said before by the end of 2004. Two million should be close to a 20 percent operating margin.

Great. Thank you.

Rick Leggott (ph).

Arbor capital. Would you gentlemen just define for us what backlog is? I just want to understand how hard backlog truly is?

Backlog for our company requires that we have a master agreement with all terms and conditions signed by both parties, that we have a valid purchase order in hand from a customer and only for product. We do not include service -- well we just don't include service in that even though we do have sort of deferred service on the balance sheet.

Okay. Next question, it would seem that with backlog rising the way it did, penetration to new accounts, other things we talked about in the past, at some point here we have to get a burst in acceleration in revenue as your changes and implementation are put in place, i.e. your ability to implement faster, gets traction, could cause a pretty big acceleration somewhere if backlog continues to build the way it is. Can you flush out how you see that rolling out?

That is the most complicated portion of the model right now. What we have found is that the deals that we have brought in lately are the large deals that have multi-quarter layouts as far as when the implementation is going to be done. So we have just begun to build the analytical tools to look at a more comprehensive slot plan, planning model. To the extent that we are able to shore up some of the supply-side it will give us a little bit more predictability on the quarter-to-quarter deltas. But I think that you are overall premise is accurate, which is that at some point is that two quarters or three-quarters will get ahead of all of the chinks in the backlog and we will start seeing the larger deals start taking hold.

Am I correct in believing that you are not ramping up the number of bodies to do implementations? You're simply changing -- you obviously hired somebody knew to run that that portion of your business? What is it that will allow you to do implementations, particularly larger ones on a more timely basis?

We have the right number of people right now for installation. So, it is not a matter of having to hire more installation -- people for installation. It is really more a matter of operational efficiency.

Where are the opportunities that you see that will allow this to take place?

Some of it, Rick, this is Randy, is building the large deal pipeline of installs going out into the future. In other words, a lot of these large deals have come in fourth and first quarter in the last two quarters which means that traditionally we would convert a higher percentage of the revenue into next preceding quarters, and now with these larger deals they get stretched out over three or four quarters. That being the case, until your large deal pipeline gets full, you are not converting as much of the revenue out of backlog as you would like in the near quarters. As you move forward in time, those start to layer on top of each other and these large deals do not have as big an impact on the schedule as they might. Does that makes sense?

It does. It is hard for me to really understand because I don't know how laborious the process is. I guess one key question that is in the back of my mind is, what are the gating (ph) factors that are beyond your control, i.e. the ability (multiple speakers) of the hospital to implement new technology affects you. Even though they may sign a deal they have to get their own house in order to implement.

Let me just give you an example and this is a hypothetical. A $4 million large deal. If I get a $4 million large deal, maybe I can install a million dollars of that deal every quarter for the next four quarters. If I got $4 million of business and $250,000 accounts, most of those I can install in two quarters. So I would not have to stretch that $4 million out, if you will, for the extra two quarters. Does that makes sense?

Yes.

Our business has shifted from a lot of these smaller sized deals which can be turned in two quarters or less, to deals that can't be turned in less than four quarters.

Which is not a bad think in terms of visibility of revenue.

Actually that is a good point. We are finding that we are starting to get better visibility for revenue in two to three quarters that we had -- out two to three quarters than we have -- (multiple speakers).

If I was to rank, on a scale of one to ten, your ability to implement, is it mostly internal issues that Omnicell can address, or to what extent is it the hospital simply saying we have the vision for automating, we have signed an order, but we really can't have you come in and implement because we've got to get a number of other things in order before we bring you in.

It is two things. It's the hospital and the large deals that we can't do as you have just said. What we can affect is our product mix and backlog which if we get more of our supply business, more of our current customer business mix, then we will have more flexibility in our schedule. But Q1 is about large deals that don't really -- can't get installed no matter how many people we have to install it. They don't want to install it as quickly as we want to and would like to.

Okay. Next question for me. The new salespeople you're bringing in -- it was my perception from the previous call that these people would be brought in focused solely on selling into the installed base, that their compensation program would be tied to that. Was I incorrect in understanding that because it sounds like now what you are doing is just dividing up territories to allow each person to have more time but that everybody is comped the same way.

I think like I said, we're still deciding how best to do that, but the objective is with these new additional folks, we want to give more time and more focus to current accounts as well as focus more on our supply of productline.

So that will be embedded in some change in the comp plan then?

Comp plan or there could be some structural changes, but as I said we're just in the midst of that, and we are really not ready to announce that either externally or even internally because obviously we have folks going to a game plan this quarter.

Okay. Thanks.

Vivian Wohl (ph).

Good morning guys. Federated Kaufmann Fund. I'm wondering with the addition of the new salespeople, when you think they would really hit the ground for you in terms of productivity. Will it take until the end of the year? And then what kind of expense add are we talking about with 20 new people? Thanks.

We would expect that they would be become productive within six months Vivian. We would also expect that our expense structure for the year won't be changed a whole lot because we're going to change the -- we're going to keep our headcount at 500 or less. For the remainder of the year, we're just changing the mix. So this past quarter we had operating expenses of 14.2. For this current Q we would probably be at about 14.7, probably end the year pretty consistent with what we were saying before, 59 to 60 million in operating expenses.

Okay. One question on the whole installation cycle. I'm trying to understand the stretch out in the installation cycle with the 17 percent sequential decline and deferred growth profit.

Could you maybe give me a better idea what you're asking?

It would seem that if you had -- if there were issues in installing then you would have more product out in the field and that deferred gross profit as a result of having more product in the field, would be up, but it was down.

We are still adhering to the model that we not ship until we install. So what you found is while deferred gross profit has dropped over the year, our overall unshipped bookings have grown at about twice the rate as the drop in the deferred gross profit.

Okay. So the delay in the installation, is it more on the software integration side rather than something else?

No, it is really more a matter of the kind of deals that we are getting. What we were saying is that we really had a changeover last year about at the Q2 time frame where we moved primarily to pharmacy, and the deals -- if you look at the deal size, we talked about $500,000 deals representing more than half of our total business now. The layout for those installs are anywhere between two and six quarters. For instance an example, Lenox Hill, which we were able to book in Q3 of last year, we haven't taken a dollar of revenue on it yet. That is more, partially because it is an end-to-end solution which requires new technology, it is partially the hospital layout. We're waiting for them to be ready to be deployed. So that is really the construct of what has caused the installation program to lengthen.

Okay. So essentially the backlog has a different time distribution to it? It is really not an issue of installation issues on your end?

That is exactly right.

Okay. Thanks.

Dick Drury (ph).

Constitution Research. Did you guys, by any chance, have deals that might have slipped from the first quarter into the second quarter? And if so, what was the amount of sales that barely missed being posted in the first quarter that is now going to be booked in the second quarter? Thanks.

Obviously we've got deals that going to backlog that maybe miss a quarter that are now in backlog because we're already into this next quarter. We also have, in particular, lease extensions which for us give us flexibility on the install because by signing a lease extension, we are allowed -- because the product is already installed, we are allowed to count that as an install because we don't actually have to have people go in and do any installs. Both of those types of deals we were hoping to get more of those toward the end of the quarter, and particularly the lease extensions, and those got pushed out in the second quarter.

What was the amount, the rough amount? Was it like $5 million worth of sales that slipped or lease extensions that slipped?

We don't really give out numbers on that.

I can understand that. Is the magnitude more or less in the ballpark?

I think it is roughly the same every quarter, so I don't think that was a big element of revenue.

Of lost revenue?

Yes.

So there was nothing that missed, just barely missed being posted in the first quarter that then has popped into the second quarter and is now going to be recognized?

No, I mean whenever you look at the overall rollover of revenue from one quarter to another, it is nice to say that if we had an extra week or two we would've been able to do it but then we would have fifteen week quarters. I think the reality is that I think it has positioned us -- every quarter we try to take the position, rather, that we will have enough -- every quarter's rollover business, if you will, is about the same.

Thank you.

Thanks Dick.

Fred Toney.

MedCap Management. Good morning guys. Some follow-up questions, first on cash flow. If I back out the option exercise money that came in and the purchase of intellectual property, it looks like it was a -3.4 million for the quarter including the CAPEX. Can you give us some idea what you expect in Q2, 3 and 4, or the rest of '04 and in '05?

When I look at this, I'm trying to get to the same place where you are. We had EBITDA of 3 million and stock of 4.6. So there was 7.6 million in, and then when you back out the capital acquisitions of 1.4 million, IP of about 1.9 million and inventory of about 1.3 million, it gets you pretty much to a cash generation from operations being maybe breakeven, maybe 200K under. So your right, Fred, it was pretty much flushed through. We would think though that our cash generation -- we'll have some cash generation this year and that our overall cash number by end of year should be up 10 million to 15 million from the same period Q4, between 45 and 50 million.

Okay. If I look at your cash and your short-term investments, they went up by 2.7 million, not looking at EBITDA but looking at cash. So if I back out the proceeds from stock option exercises, that is 4.6 million I think you said?

Yes.

And 1.5 from an intellectual property.

Yes, then you're negative. That is absolutely right.

If I hear you correctly, the -3.4 for the first quarter minus those two items, that is not indicative of what you would expect to see in Q2, 3 and 4?

I don't think so. I don't think so. One of the things that we -- a couple of things that we have found during the quarter, our capital outlay was for moving to the new facility, that was about 1.4 million, 1.5 million. That should drop to less than a couple hundred this quarter. Our inventory of 1.3 million for the quarter was really a ramp up for new product.

You expect that to be flat?

We expect that to be flattish now. You should be able to pick up 2.5 percent or so. It may go up some, but 2.5 or so. It doesn't -- when you back out stock you're absolutely right, but I think that it is going to flip over and I think we should expect to see some new revenue improvements as the year progresses.

For '05, what kind of cash flow guidance would you give?

Let me take a look. It could be whatever. I mean right now we think if we end up in the 45-ish range or so this year, it should be somewhere between another expansion of 20 million on the bottom and 30 million on the top.

Okay. One of my questions was pretty well answered in terms of it sounds like you think you have plenty of service in install personnel. It is not an issue of you having difficulty installing, it is really customers and gating (ph) those larger installations. Am I reading that right?

Right.

In terms of service and installation folks, I think on the call a couple weeks ago you said it is about 90 and 90 for those people? Is that right?

Total group is 180, yes.

Do you expect that to change near term or throughout '04?

Just to grow very slightly but that is just with more install base. But very slightly.

In the guidance you gave 50-ish cents for '04 and 75 or better for '05. Is that a 5 percent tax rate in '04 and a 10 percent tax rate in '05 on that guidance?

Exactly.

Lastly, can you tell us how large the lease portfolio is at this point and how large your service backlog is?

Hold on. Service backlog stood at 13.1 million for Q1.

At the end of Q1?

Yes. The lease portfolio I would guess to be closer to 200 million now.

Great. Thanks.

Amy Hogan.

Heirloom Capital. I was wondering, just kind of a follow-up on to one of the prior questions regarding more the timing of these big deals. It sounds like kind of the earlier part of the implementation, the first or second quarter, doesn't seem to be as profitable as the later implementations. Am I correct on that assumption, the later phases and implementation?

Yes, you can generally produce more revenue on the later stages because at first you're just doing the initial setup of server and interfaces and those kinds of things and testing. So there's a lot of elapsed time with not a lot of revenue activity in the early stages of the install, particularly in large installs.

So actually early on you're kind of -- there is more a cost and less revenue and then later in the implementation it kind of shifts the other direction?

Yes, I would say that is a fair analysis.

Thank you.

Matt Teplitz.

Quaker Capital Management. Just a couple of questions, if I could. I just wanted to make sure I understood your comments about backlog, particularly in light of the fact that revenue essentially came in below expectations. Are you saying that you are pleased with your backlog even though revenue missed, or are you saying that backlog would have still been where it was even if you had hit the revenue numbers? I'm just trying to reconcile the two.

Sure Matt. One phenomenon that we see in the sector that we are in and that is that Q1 you usually don't have an expansion of backlog. It is usually flat to somewhat down. So, the fact that it was up $3.5, $4 million was a positive indicator for us.

I guess what I'm asking is, and this might have been in one of the sell side comments I think I read after the preannouncement, if you had made revenue numbers, for arguments sake, revenue would have come in at least a couple million higher here, wouldn't backlog have been less impressive or am I missing something there?

It depends upon whether it was a lease or not because that goes in and out of backlog. But you should assume that if we were to have hit the $29.5 million consensus point of a couple weeks ago, that we still would have been -- we still would have expanded our backlog by about $1.5 million, which we would have been pleased with anyway because in a typical Q1 you find that your flat to down in backlog.

Okay. Just qualitatively, because I'm still kind of getting the sense that in the end the miss was more kind of driven by turns business and leases than anything?

That's right.

One other question, just as I'm modeling, and again I'm trying to work with consensus here. This whole issue of tax rate, and I just want to make sure I understand this, is that an annual review you have with your auditors as to the -- I can't remember the exact words -- substantial likelihood of continued profitability and hence the booking of taxes? I realize on a cash basis you clearly won't pay until the NOLs are exhausted, but don't you have an annual review with your auditor where you sort of survey the continued likelihood of profitability?

Yes, absolutely true.

Assuming you're profitable all four quarters this year, at least two or three quarters last year, when you get to the end of this year and you have that conversation with the auditors, isn't there substantial likelihood that you would be expected to book taxes next year even if you're not really paying cash taxes?

No, I don't think so. Again we had said that are -- we just went through a thorough analysis with EY (ph) in December. We did an analysis particularly for California for R&D credits. It was a couple months' analysis, the most thorough one that we have done before. What we have come to determine is that for this year, our tax rate is roughly five percent, it could be a little lower than that. Next year, the top end of the tax rate, just to reiterate, the top end of the tax rate is probably 10 percent.

It could be even lower than that so the relative range could be 5 to 10 percent for tax rate. For 2006, we really cannot tell you. That is when what you're saying is probably going to be -- where we will see the impact on your conversation Matt, as far as when we become a taxpayer and the conversation we have with the auditors, will be more pronounced in the 2006 time frame. I don't know whether the tax rate will be 10 percent then or 20 percent, but it will probably be in that range. That is the best that we have right now with our understanding of our tax rates.

Okay. If I could, one other quick clarification. Your expectation of 10 to 15 million of cash flow this year, how much of that is essentially going to be derived from option exercise or how much of that is counting on real operating cash flow?

You know we typically don't know what to expect for the stock portion. We assume this year that the stock portion would be between $7 million and $10 million.

Lastly, if I could, this is more of a big picture or longer term question. I think given the longer-term operating margin goals that you're working toward, I think you have also said you don't expect further gross margin expansion. So can you walk me through how you get there?

Yes, the reason is the fact that we have moved to more pharmacy. We are still working on understanding how to exploit -- most of our experience has been with cabinet supplier, pharmacy cabinets, not end to end solutions. Now that we have them we think there will be a bit of a margin impact as we grow up the experience curve.

You are saying at the gross margin?

Yes.

Favorable or unfavorable?

Could you repeat?

Is that impact favorable or unfavorable of being end to end?

Long-term it is favorable. Short-term there is some work that we have to do. Now when you look at the overall expenses, I think that was your question, we still expect to grow our revenue at two times our expense growth.

Okay. Great. Thank you.

Matthew Buten.

Argus Partners. Hi guys. Maybe could you provide an update on the next quarter guidance? I don't know -- I didn't hear it you --.

What we had said on the call a week and a half ago, is it would be flat up by five present and it would be in the range of 8 cents to 10 cents a share. Subsequent to that, the consensus has come out at $28.8 million for this quarter, and 9 cents a share, and we agree with the guidance.

Okay. Maybe can you update us on how the RFPs and business is looking so far in the quarter?

Nothing out of the range that we wouldn't expect for the growth of our business. As I tried to iterate earlier I believe in answering one of the questions, the dynamics in our marketplace haven't changed in the last three quarters as far as the growth in the pharmacy business for us and the excitement we see in the end-to-end solution sets and how well those solutions sets are excepted in the marketplace. It's a change in the mix and the size but we feel very positive about the future.

As you look into this quarter, maybe can you comment on the visibility of the 28.8 million of consensus revenues and maybe what portion of your thoughts on kind of that revenue level, is going to come from the implementation of some of these large deals?

I think at this point, we are feeling pretty good with where we think we're going to end up, somewhere in the 28. It is really hard to say. We look at it day to day. We're watching this thing pretty closely but we are feeling confident.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). Martin Yokosawa.

Oberweis Asset Management. I think I missed what you just said. Did you say you concur with somewhere around 27.8 million in the second quarter?

Yes, that is where we are today.

Did you say something about earnings for the second quarter and for '04?

Earnings for this quarter, the consensus is at 9 cents and for the year it is 50 cents.

Do you think that is okay?

Yes.

Thanks.

Gentlemen, there are no further questions at this time. Please continue with any closing comments.

We want to thank you for joining us today. We will be taking a tour, as we always do at the end of every quarter in another weak or two, and if you have an interest please call us. Thank you all.

Ladies and gentlemen, this concludes the Omnicell first 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 1-800-405-2236 followed by access number by 776230. Once again we thank you for your participation. Have a great day and at this time you may disconnect.