Omnicell Inc (OMCL) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Omnicell Q2 Financial Results Conference Call. (Caller instructions) As a reminder, this conference is being recorded today, Thursday the 22nd of July, 2004. I’d now like to turn the conference over to Dennis Wolf. Please go ahead, sir.

Thank you, Steve. Good afternoon all. Dennis Wolf here, EVP 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 second fiscal quarter ’04 conference call.

You can find Omnicell’s Q2 financial results press release, as well as the financial and statistical information discussed on this call, in the Investor Relations section of our web site 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. This call will include forward-looking statements subject to risks, uncertainties, and other factors that could cause 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 “Management Discussion” and “Factors That May Effect Future Operating Results” in Omnicell’s annual report on Form 10-K filed with the SEC on March 8, 2004, as well as all 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 July 22nd and all forward-looking statements made on this call are made based on 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. I will then review with you the financial highlights for the second fiscal quarter, as well as Omnicell’s financial outlook for the remainder of FY04. 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 and thank you for joining us today.

Q2’04 was a very important quarter for the Company. As we reviewed with you last quarter, Omnicell’s business is changing. Our customers are demanding full end-to-end solutions and this has resulted in Omnicell becoming a significant player in pharmacy automation, augmenting our position as a leader in supply automation.

As a matter of fact, we believe our market share from pharmacy automation has increased by over 2 percentage points over the last couple of years. But this has not diminished our position in supply automation, which expanded to a total 35% or our total product bookings for the quarter.

In fact, our supply automation bookings were the highest in several quarters, so we believe that some of the issues we shared with you last quarter have been alleviated. We also believe that our end-to-end strategy has been very successful, resulting in large multi-quarter, multi-hospital deals and record revenues and bookings.

Revenue for Q2’04 was $29.2m and earnings per share stood at $0.09 per share, even after a onetime charge of about $200,000 for the restructuring of the sales organization during the quarter. We exceeded revenue and net earnings estimates for the quarter. So with our backlog increasing by $4.7m this quarter, our total backlog now stands at $46.4m, making us optimistic that we will reach our backlog goal of the mid-$50m range by the end of the year and consistent with our goal of expanding backlog to reduce inter-quarter operational issues.

We’re happy to report that our operational plan for Omnicell is working. That operational plan includes the following components:

* Expand backlog every quarter in order to minimize reliance on same-quarter bookings and revenue (also known as turns business). The backlog expansion during Q2 represented year-over-year growth of 42%, well above current market growth rates. Total backlog now stands at $46.4m. * Focus on new business to grow the enterprise but to continue to provide new solutions to current customers, thereby increasing Omnicell’s overall footprint. Our new business during the quarter was 20%. Now, while this is down from last quarter’s 40% level, it provides a better balance and alleviates same-quarter installation pressure.

While account expansion came primarily from pharmacy solutions, which represented about 65% of our bookings, an important component of our operational model is to balance our pharmacy business with supply solutions. The supply bookings during the quarter represented approximately 35% of total bookings, which is the best result for supply automation since before the first quarter of 2003.

We are also encouraged by the introduction and early success of OptiFlex, our new hybrid supply automation solution developed by our subsidiary [VCS]. While we do not expect supply automation growth rates to be more than 10% up, it is an important construct in our overall growth goals and a balanced mix of supply in the pharmacy business is important for our operational model.

We also added 21 new accounts during Q2. Our top 10 accounts represented about 32% of revenue, compared to about 36% a year ago. We believe that the continued success in large accounts is very important for Omnicell, because it’s a testament to our broadened product suite and the market acceptance of our end-to-end solutions.

In fact, most of our business, once again, came from accounts each larger than $500,000 per order. However, because our backlog has increased $8.3m in the first half of the year, some of the larger accounts that we closed a couple of quarters ago are now entering into their installation and revenue phases, thereby enabling us to continue to take on larger deals, while still meeting our operational needs.

Our new product line, which include Omnicell PharmacyCentral, SafetyPak, SafetyMed, and OptiFlex, represent about 11% of bookings for the first half of 2004 and continues to meet our goal of 10% to 15% for the full year. And while we are now seeing competitors join us in this marketplace, we believe that we have a leading edge position in these businesses.

We have aligned the sales organization to take advantage of the market expansion opportunities that we have, as well as to improve our overall coverage model. During the quarter we added 20 new sales reps, bringing our total sales headcount to 75. We also aligned the sales organization into supply and pharmacy units. Our intent is to increase market penetration in every product segment by focusing our selling expertise along those product lines.

We believe this allows us to more effectively launch our supply business’ hybrid model and react faster to business opportunities. All of our sales folks have now been trained and we’re really pleased with the team that we were able to acquire over the last 90 days. While our expenses are somewhat higher than our earlier plan, we believe it is an appropriate investment for the future.

I would like now to share with you additional highlights from Q2.

We continue to benefit from regulatory developments driving adoption of bar code technology to help prevent medicine error. Follow-up on the FDA’s final ruling on bar codes in February, which requires bar codes on most prescription drugs, in mid-April, the Joint Commission on Accreditation of Hospital Organizations, or JCAHO, announced that it’s proposed 2005 National Patient Safety Goals will include new requirements for hospitals to develop a plan to implement bar code technology by 2007.

Furthermore, in early June, JCAHO announced that starting this month it will begin disclosing to the public its accreditation of results and ratings on hospitals’ performance on the Commission’s National Patient Safety Goals, as well as other criteria.

At the ASHP 2004 Summer Meeting in mid-June there was a lot of interest in our MedGuard line of end-to-end solutions for the medication use process, which utilizes bar code technology throughout. Also at the show we announced WorkflowRx, a unique integration of Omnicell PharmacyCentral with SafetyPak. WorkflowRx enables complete pharmacy workflow integration, fulfilling virtually all of the inventory management and drug distribution need of the hospital central pharmacy.

We do not believe any other competitor or vendors provide this level of integration. In addition, we announced OmniLinkRx 3.0, a major upgrade of our physician order management system, which we believe gives us the most advanced product on the market.

I’d also like to highlight some recent major customer account wins. Ten days ago we announced that Vancouver Coastal Health, a large multi-hospital system in Vancouver, BC, has selected Omnicell over our competitors. Omnicell is the exclusive provider of medication dispensing systems for the 11-hospital group.

Yesterday we announced that we won a sole-source contract for both medication and supply automation with the Baylor Healthcare System, another 11-hospital system in Texas. As a result, Omnicell will replace one of our main competitor’s automation systems throughout the Baylor system.

As mentioned in the press release last week, Opelousas General Hospital, an advanced 180-bed facility in Opelousas, Louisiana, recently implemented our SafetyMed RN bar code medication administration solution and we’re pleased that it is making nurses’ jobs easier and helping ensure medication safety.

Two weeks ago, we announced that the market research firm NB Byline ranked Omnicell #1 in customer satisfaction for the first two quarters of 2004. This analysis compares Omnicell to its most direct competitors and we are very pleased with the results of this analysis. We have worked very hard to attain quality leadership.

We have also demonstrated quality leadership in our own organization, where earlier this month Omnicell was granted ISO 9001 registration certification by the ISO registrar NSAI. ISO is the International Organization for Standardization based in Geneva, a non-governmental network of the National Standards Institutes of 148 countries whose delegates preside over the standards.

In summary, we are very pleased with the results for the second fiscal quarter and continue to drive the Company based on our market share expansion model. We continue to be focused on growing the top line 20-25% per year and attaining a $200m revenue run rate sometime in 2006, sooner with the right acquisitions. Q2’04 was a very successful quarter for us. We dealt with several important operational issues and believe that we have made a great deal of progress.

I want to now turn to our multi-year revenue expansion plan. As we shared with you on previous calls, we do believe that growing our market share is the most important part of Omnicell’s model. Toward that that end, we’ve always considered growth through smart acquisitions, as seen by the most recent acquisition of the BCX Technology, APRS and SafetyMed.

We believe that there may be other opportunities open to us in the marketplace today that are accretive now or within short order and meet our objective of a 15-20% operating margin and growth rates in excess of 20%. Therefore we want to be in a position, when the time is right, to have the funding necessary to act on potential acquisitions.

Today we announced our intent to file with the SEC a shelf registration, which upon being declared affective by the SEC, will allow Omnicell to issue shares of common stock from time to time an aggregate amount of up to $100m. While we do not yet have plans for taking down the shelf, we believe it is important to the Company to have the potential to quickly raise capital when and if an opportunity arises. I do want to emphasize that this does not constitute an offer to sell or the solicitation of an offer to buy any securities.

I’ll now turn the call back over to Dennis to review the financials as well as the outlook for FY04. Dennis?

Thanks, Randy.

As Randy discussed, we are very pleased with the progress that we made this past quarter. We have taken a number of steps to improve our operations and believe that they are beginning to take form.

Revenue for Q2 was $29.2m, up 16% year-over-year and up 5% sequentially. Backlog was up $4.7m sequentially and 42% year-over-year, with backlog ending fiscal Q2’04 at $46.4 million. We posted net income of $2.4m, an operating margin of $2.5m or 8%, and earnings per share of $0.09 on 27.7 million fully diluted shares.

Our OpEx for Q2 ‘04 was $15.2m, compared to $14.2m in Q1 ‘04. This increase was primarily due to the increase in overall headcount. As you know, we did accelerate our hiring plans for sales, and total headcount at quarter-end stood at 479, up 21 from the first fiscal quarter, all in the sales organization. In the OpEx number is about $200,000 for the sales restructure.

Our spending for SG&A during the quarter was $13.2m, up about $1.3m sequentially. The increase in SG&A is attributable to the hiring of sales personnel, as I said, tradeshow activity, and also consultants associated with Sarbanes-Oxley compliance.

R&D spending was $1.8m, down $529,000 from Q1‘04. R&D expense is down due to the capitalization of about $500,000 of software engineering expense associated with the completion of Omnicell 8000, the new release of our automation system software. This is a one-quarter expense reduction. R&D would have otherwise been flat quarter-over-quarter.

While we expect R&D expense to only increase by about 10% to 15% next year, the human resources dedicated to Omnicell will almost double through use of our outsourcing strategy, 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. In India, our total headcount stood at 29.

Turning to revenue and backlog, our second fiscal quarter 2004 results were as follows.

Again, Q2’04 revenue was $29.2m, up $1.4m sequentially, or 5%. Product revenue was $23.4 million, or up about 5%, and service and other revenue represented $5.8m, or up about 4%. Backlog increased by $4.7m sequentially and ended the quarter at $46.4m.

Turning now to margins and expenses for the second quarter, our Q2‘04 gross margin was 60.5%, up 86 basis points from Q1‘04. This significant improvement in gross margin was due to a favorable shift in product mix, as well as manufacturing efficiency.

During last quarter’s conference call, we estimated gross margins for the year to be in the 58% to 59% range. We believe that margins should be in the upper end of this range as we have seen an improvement in our product mix and bill of material cost reductions in production.

We had operating profit of $2.5m this quarter, up approximately $100,000 sequentially and representing an operating margin of 8%.

Net income per fully diluted share in Q2‘04 amounted to $0.09, compared to $0.08 last quarter, up $0.01, and this was after a restructure charge of about $200,000.

Total share count stood at 27.7 million. Share count this year is expected to range between 28.0 and 28.5 million.

The following are the balance sheet highlights.

Cash balances plus short-term investments were $36.30m at the end of the second fiscal quarter, essentially flat sequentially. While net income of $2.4m, depreciation and amortization of $900,000 and stock option proceeds of $500,000 represented total cash sources of about $4.0m, there were several uses this quarter, as well as stock option proceeds representing only a small portion of cash. As a matter of fact, cash sources from stock option proceeds this past quarter were down $4.0m from the first fiscal quarter of 2004.

Uses of cash this past quarter included an inventory increases of about $3m and capital additions of about $1.0m. The large inventory increase was primarily due to revenue growth prospects for the second half of 2004.

Our DSO this quarter was 44, flat with the previous quarter. We still expect to have a strong operating cash year in FY04 and would expect cash to expand by $9m to $12m for the full year and end the year in the range of $42m to 45m.

Our guidance for the remainder of 2004 and 2005 is as follows: Current Wall Street EPS estimates for the third quarter range from $0.13 to $0.15 and for the full year $0.45 to $0.51. While our gross margin has expanded, our operating expense is above previous guidance, primarily because we made the decision to accelerate the hiring of our sales force. This investment has already paid off, with backlog now at $46.4m and the supply business back on track.

However, it is an investment and therefore, while we are confident that we will be in the analysts’ range for 2004, we believe the full fiscal year EPS will be about $0.46 per share. Analyst consensus expectations for 2005 are about $155m in revenue and EPS of $0.75 per share. We are confident we will meet these expectations.

Please remember, however, that the risks and uncertainties referred to earlier in our safe harbor are particularly relevant to this section as this portion pertains to forward-looking statements.

We would now like to answer any questions that you may have.

Thank you. (Caller Instructions.) Our first question comes from Sean McKenna. Please state your company name followed by your question.

Yeah, Merriman. Hey Dennis and Randy.

[inaudible response - microphone inaccessible]

That’s a pretty good backlog figure. Can you hear me okay?

Yes, Sean.

Yes.

My first question is do you expect, Dennis, on preferred gross profits -- I mean, on the balance sheet, if you look, it looks like it decreased from the last quarter and I kind of was under the impression that this item was being phased out in lieu of use of backlog. Can you explain that a little bit and if you actually expect that to increase again in Q3?

Sure. The deferred gross profit change over the quarter was completely attributable to some of the larger deals that take longer to install, primarily Lenox Hills. We would not expect that to be a trend. Our goal will still be to have somewhere between $7m and $10m in any quarter in deferred gross profit.

Okay. So you think that’ll tick down a couple of million?

It should probably tick down some in the quarter, but again, I think you should see a relative range for kind of 25% growth rates. I suspect that it’ll stay in the $8m to $10m, probably the base gross profit level for that account.

Okay, fantastic. Could you just highlight, briefly, how the mix of products you’re selling now appears to be or maybe you can attribute to the effect on average price per unit? So are you selling, in view that the average price per unit is going up, basically, because you’re selling more expensive boxes? Or could you just sort of provide color on that?

Sure. Our average deal was $171,000 for the quarter, so it was up this past quarter. It’s probably higher than it’s been for 6 quarters, I think, is what I remember looking at the math yesterday, so the deal sizes are larger deals. The mix, you didn’t ask that question, but the mix this past quarter, just as a reinforcement, was about 65% pharmacy and 35% supply.

In the last -- in Q2 or in Q1?

In Q2.

Okay. What about in Q1?

In Q1 it came down from about an 80-20 split.

Okay, so 80-20 in Q. And another question. I know you don’t report bookings, but could you describe the composition of bookings? In other words, is this coming mostly from new customers or is it from penetration of existing accounts?

It was a very satisfying quarter when it came to the mix and the kind of customers that we were able to attract. This past quarter, our new customers represented about 20% of our business, which is historically what we usually see. It was 40% last quarter, which caused a little bit of an issue, as you remember, in Q1.

What was particularly satisfying about the quarter, I think, is that the greater than million-dollar deals during the quarter were 7, which is up from 1 a year ago. So you know we’re starting to see larger deals and none of those deals are huge.

So, actually, if you looked at the top 10 deals, almost all of them are about million-dollar deals and they represented about 32% of the business. So the nice thing about the construct of the customer mix is that we have enough large deals to sustain us and enough smaller deals to support the quarters.

Great and just quickly a couple more. The service margin was down a bit sequentially and year-over-year. Any explanation for that?

Yeah. I don’t really have one.

Okay.

Just kind of noise level, really.

All right. Let’s just move on, then. The deals that were basically put on the table in Q1, are most of those coming through HPG or are those direct? Can you kind of break that out? I mean, or just -- ?

Now, most of them, they’re across the board. HPG is starting to become productive. But like I said, when you look at the construct of the top 10 deals, none of them are huge, so there’s no outlier that’s enabling us to show good bookings. It’s just really the formulation of a whole lot of deals and a whole lot of wins against competitors.

Okay and if you add one salesperson in a quarter, what is sort of the ramp time for that person, if they’re going to be successful to kind of become fully productive? Is it one quarter? Can we figure a one-quarter lag or what does that look like?

Well, generally it’s a two-quarter lag. I think, in this last quarter, we really have got people quickly in the organization and thank God we found some really high quality folks and I think we’re even surprised by the pipeline these folks are building. And they will have an impact, somewhat, in Q3 and of course in Q4 and full impact in ’05.

Okay, great. Thanks a lot, guys.

You’re welcome.

You bet.

Steve, next question.

Your next question comes from Ryan Stewart. Please state your company name followed by your question.

Hey, guys, Piper Jaffray. I was wondering if you could talk for a little bit about any color that you could provide relative to the Baylor displacement? Obviously this has been a long time Pixus customer.

And if you can’t go into too much detail, one thing I was wondering is as the press release states that, over the next 3 years as the leases come up or the time it comes up, that that box would be shifted out and your solutions be put in. Is there an opportunity to front-end load some of the inventory management and supply solutions?

Yeah. Well, I think we’re actually starting with the supply solutions there and then we’re moving toward the pharmacy rollout in ’05 and I think that we’re trying to do a total replacement and pretty much 90% of the replacement in the next 18 months.

So, some this year, even and a fair amount in ’05 and I think we expect that it was a pretty broad range on that deal, but somewhere between $10m and $15m, maybe even more than that. I should mention that they are also already a user of our PharmacyCentral system.

So it’s a good example of how a customer that had a really great experience with one of our associate product groups and we were able to leverage that into an automation sale. It’s quite significant for the Company.

Okay, great, and were there other things, relative to Baylor, things relative to the other product supplier that had them, beyond the press release, that had them seeking a new end-to-end solution?

Well, we never really talk about our competitors and the positives and negatives on the reason for the solution sale, why we won, Ryan.

Right. Okay. That’s fair enough. And then relative to operational progress, I was wondering if you could just provide a little bit more color there, relative to getting the systems in, getting them implemented, relative to consulting, the efficiency of the consulting organization, process improvement, Six Sigma, that type of stuff, and just things that you have going on in your professional services group?

Yeah. I think that’s a great question. We have focused a lot of attention and over the course of the last 18 months, Dennis and Chris Drew, the new guy, have really built a quality team to really pick put quality number one. Not only in the product reliability area, but also in the way we install and how we install and we are just relentless in customer satisfaction.

So we call every customer during and after every installation process to ensure what kind of experience they have and we model those metrics very carefully. And some of the things we’ve also done is just reduce some of these costs in our system, on a total redesign on some of the key parts to get the cost out, improve reliability, serviceability, and we’ve moved very quickly to put in these programs in the last 12 months and they’re beginning to bear some nice fruit.

And even in the second half of this year we’ll be introducing additional product modifications, which will enhance our product margins, as well as the serviceability that will maintain our product margins. So, we’re really excited about the job these guys have done and ISO 9000 is just the implementation of the demand of a quality system that we’ll continue to do.

Sure. Great and just building off that, right now from an offshore perspective, you’ve got most of the folks working in R&D. Is there a sense or maybe it’s already begun to start leveraging those resources to accelerate implementations, given the global delivery model and the ability to, in essence, work 24x7, i.e., on system interfaces and basically user acceptance testing before the customer takes final acceptance of the solution?

Ryan, we’ve been really delighted, actually, with the efforts that we’ve been able to deploy. It’s enabled us to leverage -- a lot of our 8000 work was a testament to the good work that some of the folks in India were able to do for us, some more “routinized” things that needed to be dealt with.

We’re working with interface there as well, so I think we’re doing it right and we feel confident that they’re going to help to enable us to continue to leverage.

That’s great. Thanks so much, guys.

Thanks.

Thanks.

Our next question comes from Glenn Garmont. Please state your company name followed by your question.

Thanks, its First Albany Capital. Just with regard to the shelf, can you talk a little bit about the types of businesses that you would be looking to acquire? Obviously we’re not looking for anything specific, but where are the gaps in the product line today and just give us a sense for what types of things you’d be looking at.

So Glenn, you know it’s all about market share growth and what we think, we have a great opportunity now being -- in healthcare IT we’re now a sizable middle-sized company that is starting to attract the attention of others out there who could help us expand our product lines. Just like PharmacyCentral was an expansion, just like SafetyMed was an expansion, or BCX.

We’re looking for those kinds of deals that are accretive now or within 4 quarters that will provide for us self-consistent gross margins somewhere in the upper 50’s and an operating margin in the 15-20% range. It could be in the pharmacy. It could be on the nursing floor. It could be at the bedside. That’s the food chain and we’re looking for pockets of opportunities that are either extenders or just new innovations that can help.

Thanks. Thanks, that’s helpful, Dennis and just real quickly on the guidance. You’re taking the EPS down a couple of pennies. Are you sticking with the $125m top line?

Yeah, I think so. I think what you could assume is that our operating expenses are now running in the upper 15’s. Our margins are better by about 100 or so BP that we told you during the last quarter. So it probably has an impact, short-term, of a few cents and we don’t think an impact next year.

Okay, great, thanks.

Thank you, Glenn.

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

Hi. Roth Capital Partners. Good quarter, guys.

Thank you.

Hey, Gene.

A few questions, a little bit more on the Baylor deal. Do you intend to automate all 11 hospitals there?

Yes.

So total deal value is something in excess of $15m over 5 years?

Yes. I would shorten the term on that a little bit, like a couple years probably. Yes.

Okay, great. You used to publish a metric, revenue per customer, and stated your goal was to bring that up to about $200,000. Could you talk about what it’s looked like for the latest quarter?

Yeah. Actually, what our goal was, Gene, was to get to -- that’s our base business and for that annuity stream that we talked about, is to get to those top 600 accounts that really are -- we’re doing like $75,000 per year. We wanted to get that to $150,000 within the next few years.

I’m guessing, because we haven’t done the math yet and I could relate differently to you, if I’m wrong. But I think it’s probably about $105-110,000 right now per.

Okay. Thank you for that clarification. And Randy, correct me if I’m wrong, but I was under the impression recently that JCAHO has elected to drop their proposal for mandatory bar coding at the bedside and if that’s the case, do you see that impacting SafetyMed sales?

We haven’t heard that. That would be new to us. We think JCAHO is just as determined as we had heard in their call on it just a few weeks ago.

Okay. Thanks, guys.

Uh-huh.

Okay.

Our next question comes from Fred Toney. Please state your company name followed by your question.

MedCap Management. Hi guys.

Hey, how’s it going, Toney?

Good. Randy, two follow-ups, one for you and one for Dennis. In terms of the sales force restructuring, can you tell us when that was completed during the second quarter and how much impact do you think that had on you during the second quarter in terms of holding you back from what you might have done? Was it late in the quarter, early in the quarter? Shall we see a much bigger benefit in the third quarter or is really a couple quarters out?

Well, most of these folks came on by mid-quarter, but then it probably took a good month that we train. So they really didn’t have a big impact this quarter. I think the impression that I’ve gotten from the folks and seeing the kinds of pipelines they’re building has been very impressive. So most of that has been taking place over the last 30-45 days, which obviously didn’t impact this last quarter that much, so.

And I guess a follow-up to that, in terms of backlog, which is up nicely. If you looked back up the whole sales funnel with the new folks onboard, do you see that kind of increase throughout the whole channel of the backlog or of the whole pipeline funnel for sales? Not what might be in backlog, but the categories right before that.

Yeah, I think so and I think that we’re still committed to our range of mid-$50m on the backlog itself and we are quite pleased with our investment in the sales and in the return and the coverage and the new focus that they have. We really feel like it was the right decision to make and even the short-term guidance change, the investment in the sales will pay off, particularly if, I mean, [inaudible].

And what are total numbers now for pharmacy sales and supply sales at the end of the quarter?

You mean the mix?

In terms of actual numbers of people.

Oh, numbers of people. We have about 13 people in supply.

And how many in pharmacy?

Probably another -- you know it’s hard to tell, because some is in emerging products.

It’s about 2/3 pharmacy, 1/3 supply.

Yeah. Yeah.

Okay. What’s the total sales force number?

There were 75. There are about 12 people who are in management, 60 to 63 people.

Okay, so 75, 12 of which are in management and the rest are actually bag-carrying salespeople?

Yeah.

2/3 pharmacy, 1/3 supply.

Yes. That’s essentially right. Yeah.

And have you -- I know you just said mid-$50m target. It seems as though your backlog is a little ahead of where you thought it might be at the middle of the year here. Did you -- what was the latest number you gave on backlog goal by the end of the year and what is it now?

Yeah. We had said that we wanted to be up $15-20m over last year, which would put us in the $54m to $58m range.

And you’re reiterating that now?

We are.

Okay and are you right on line with where you expected to be at this point or are you ahead of that?

We are right on line. Half of it was done in the first half of the year.

Doesn’t the backlog typically build faster in the second half of the year?

You know sometimes it does. It’s really hard to call on a quarter to quarter basis, because the sized of the deals and the dimensions of the kind of customers we’re bringing in are different. So [inaudible] --

But there is some seasonality, right?

There’s some seasonality, but there are also quarters where you get Baylor and there are quarters when you get other larger [inaudible - due to cross talk].

Right, which could skew the mix.

Yeah.

Okay, great. Thanks, guys.

Thanks, Fred.

Yeah, good questions. Thanks, Fred.

Our next question comes from Louis Corrigan. Please state your company name followed by your question.

Kingsford Capital. I had a couple of questions. The backlog number is a 12-month revenue target number. Is that right?

It’s what we can deploy within the next 12 months.

Okay and so a deal like Baylor, part of that goes into the backlog and part of it goes into something is beyond that?

That’s correct.

How much of the deal -- how much was Baylor as part of the additional backlog this quarter?

Yeah. We don’t announced deal-by-deal, but it was a very small proportion.

Okay. I had another question about the balance sheet. It looked like the accrued liabilities were down quite a bit sequentially. Was there a reason for that?

Yeah. So, Louis, the largest proportion were customer deposits.

Okay.

Basically payments in Q1 that went down this quarter.

Okay and I guess the way that I’m looking at this and maybe I’m not using the right numbers, but the supply figure was quite good in the quarter. It looked like maybe the sales of pharmacy was actually down sequentially. Is that right and is there something going on there?

It went down a couple million. I think we had just an unprecedented quarter, last quarter, where the mix of pharmacy was slightly in excess of 80%. It makes it harder for us to do our actual deployment, because some of those deals take longer.

So I would say that when you look at it quarter-on-quarter, just like Fred was saying a minute ago, things could be kind of lumpy, the same holds true of the mix of pharmacy versus supply business.

Is it right to model out maybe a 70-30 split between them, kind of [inaudible] --?

Yes, that feels about right.

Okay and one final question. The R&D explanation for why that was down in the quarter, I think I just missed that.

So we capitalized a completed project, which was a major project for the Company, which was Omnicell 8000 and it was put on to the balance sheet, those expenses and they’ll be amortized.

Okay, great. Thanks very much.

You’re quite welcome.

Our next question comes from Matthew Bouton [ph]. Please state your company name followed by your question.

Argus Partners. Also congratulations on a nice quarter.

Thanks.

Maybe can you describe the level of turns business this quarter?

The turns business was somewhat a little bit less than the previous quarter.

Can you quantify it?

No.

A push in revenue or anything?

No. We really don’t want to do that.

Okay. Thank you.

Uh-huh.

We have a question from Vivian Wall. Please state your company name followed by your question.

Federated Kaufman Funds. Nice quarter, guys. Just one question on the leasing environment. I’m wondering if you’ve renegotiated your deal yet with GE?

No. We are in the process of working with GE as well as others. Uh-huh.

Okay and then, as far as the hospitals are concerned, is the mix between leasing versus outright purchases changing?

Yeah. [When the assets] achieve capital, we have some shift more toward purchase options, slightly, and where it was more of a 50-55 mix for us it’s actually hit 45 in the last quarter, I think. So there has been some shift away.

Okay. Thank you.

Thanks, Vivian.

Uh-huh. Thanks, Vivian.

And we have a follow-up question from Gene Mannheimer. Please go ahead.

Hi, a quick follow-up question. In determining projections for ’05, are you still assuming a 10% tax rate there?

Yeah.

Okay. Thanks, Dennis.

Uh-huh. Steve, are there any other questions?

Yes. We have a question from Fred Toney. Please state your company name followed your question.

Hey Fred.

MedCap again - one last question. How big is the lease portfolio at this point, guys?

That, I’m sure, is in excess of 200, but I don’t know the exact number anymore.

Significantly in excess of 200?

Yeah. You know, probably low 200, 225, is my guess, but I don’t know for sure. I could get back to you. Somewhere between 200 and 220, probably.

And I don’t know if you can get very specific, but in terms of renewals, don’t you have a lot of deals coming up that are going to be rolling over on either their 3-year or 5-year anniversary?

Yeah. We have a good amount of that.

Do you know how much in the next 12 months will anniversary? Is it 30% of that portfolio or is it something --?

It’s probably closer to 20%.

Okay and they’re all 5-year deals, so it’s not outside the norm?

No it’s not.

Okay. Is there a bubble working it’s way through that portfolio in terms of renewals?

It’s really not as consistent, if you go back 5 years and kind of look at the rental deals done 5 years ago where the revenue, annually, has been pretty much sort of a linear event.

Okay and then --

And you know it increases slightly every quarter.

Okay and then in terms of the renewals that you’re doing, are you getting the same gross margin on those deals or is it substantially a higher gross margin?

They’re about the same.

So, in the 59-60% range?

Yeah.

Okay, great. Thanks.

You’re would, Fred.

Our next question comes from Matt Teplitz. Please state your company name followed by your question.

Quaker Capital. Likewise, nice quarter. Just a few questions I wanted to clarify. Did you give guidance for Q3? I heard the $0.46 number of the year. Did you give a specific Q3 number?

It’s probably the lower end of the range. The range is at $0.13 to $0.15.

Okay and following up on the prior question about renewals, I think when you preannounced last quarter one of the areas cited of weakness was, I guess, you weren’t seeing the level of renewals or you didn’t close them quite on time?

Yeah. We were fine on renewals this quarter.

Okay. Can you clarify the comment on gross margin, because I mean, part of what I like about your business and what sort of doesn’t make sense is one of the beauties of renewal, of course, is why wouldn’t the gross margin be materially higher than the corporate average?

At times they are. It’s depending upon each deal.

Uh-huh.

The whole mix. So some of them are, some of them aren’t, some of them have contracts that have larger -- that have living contracts to them that are longer, as far as pricing is concerned.

Okay and then I guess there was the other comment with chief capital, you’re seeing more, I guess, essentially, buyouts or purchases as opposed to leases. Where do you think rates have to go before that trend ends or is that really -- is that a problem [inaudible]?

I think it’s probably -- your guess is as good as mine on that one.

Okay and then one last question and I know I asked about this last quarter or on the preannouncement and I still don’t quite understand this. On the issue of the tax rate, given your sustained profitability for any number of quarters now -- I understand that you won’t pay a cash tax in ’05, but how would you not book a normal tax rate, given the number of quarters of sustained profitability? In your discussion with the accountants, why wouldn’t they expect profitability to be maintained?

You know, tax planning is really construction of many quarters. I think that we would be close to normal tax rates some time in ’06, but we first have to get through federal NOL’s, which are currently at about $50m, in California NOL's, which are currently at about $5m.

Yeah. Oh, I know that on a cash basis, for sure.

Yeah.

I just -- my sense is --

Well, no, but all of that is brought into the actual calculation.

Okay. Well, thank you.

Uh-huh. You’re welcome, Matt.

Our next question is a follow-up from Ryan Stewart. Please go ahead.

Hey guys, Piper Jaffray, just a quick follow-up. As you’re seeing the product shift here moving more towards pharmacy and I just had a question on customer dynamics. As we’re seeing Vancouver and Baylor and we’ve seen other large IDN signed. When you look at the pipeline, are you seeing more of a makeup of IDN versus stand-alone or small delivery systems?

Well, I think that we are seeing hospitals, whether in groups or individuals, trying to make a corporate decision on how to address medicine safety and many times, because our systems are more peripheral in nature, the layover current legacy systems, we are the perfect solutions to that, whether you’re an IDN or an individual hospital.

And so, I think that every hospital, at the individual level and particularly at the IDN level, is wrestling with medicine safety, regulations, and as we mentioned in the conference call script - and I’ve even had a hospital’s administrator mention it to me - that they’re concerned about JCAHO publishing their results publicly. And so they want to get ahead of the game, if you will, on patient safety and the medicine use process.

And so it’s easy to have a dialog with everybody in the industry and obviously we’re going to focus on the bigger deals where we can and IDN’s are certainly engaged in that thought process, so your assumption is right.

Okay, so in thinking about the new 20 or so sales folks, 20 salespeople that have come on and the pipelines their building, it’s not sort of out of the ordinary to think about the fact that they’re clearly targeting IDN’s, because we’re seeing more enterprise buying. And potentially, we could even see larger pharmacy deal size as we look out into ’05?

Well, I think you’ll continue to see the trend of IDN’s making decisions and us being involved in them. But, you know we did answer a geographic coverage issue. It’s hard to have good just coverage if you don’t have enough folks running around. You know there are hospitals everywhere there are people in the U.S., which is everywhere.

Sure.

So it’s good to have the coverage as well. So, I think we wanted to make sure we had coverage and focus on product line.

Great. Thanks a lot, guys.

You bet.

Thank you.

There are no further questions, gentlemen. Do you have any closing comments?

Thank you for participating.

Thanks, everybody, and we’ll see you next quarter.

Ladies and gentlemen, this concludes the Omnicell Q2 Financial Result conference call. Thank you for participation today. You may now disconnect.

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