Omnicell Inc (OMCL) 2004 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. And thank you or standing by. Welcome to the Omnicell fourth quarter financial results conference call. At this time all participants lines have been placed in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference please press the star followed by the zero and the conference coordinator will assist you. As a reminder this conference is being recorded Thursday, February 3rd of 2005. At this time I would like to turn the conference over to Dennis Wolf, Executive Vice President and CFO. Please go ahead, sir.

Thank you. Good afternoon. With me today is Randall Lipps. Thank you for joining us today for our fourth fiscal quarter 2004 conference call. You can find our 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 found 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 us is prohibited.

This call will include forward-looking statements subject to risks and 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 Affect Future Operating Results," and Omnicell's annual report on Form 10-K 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 February 3rd and all forward-looking statements made on this call are made based on our beliefs only as of this date. Future events or simply the passage of time may cause these beliefs to change.

Randy will now update you on the business, the highlights of the year and quarter, and the financial outlook for Q1 '05, which will include reducing guidance in order to meet our goal of reducing our turns business. I will then review with you the financial highlights for the fourth fiscal quarter and will then open the call up to your questions. I now turn the call over to Randy.

Thanks, Dennis. By most measures Omnicell had a very strong 2004. We believe that we ended 2004 with a market share of approximately 20 percent. We posted record revenue of 123.9 million, an expansion of 21 percent year-over-year, backlog expansion of 23 percent, and net income expansion of 45 percent. Experienced record contributions from our new product lines, and we believe that the strength of our solutions and our end-to-end strategy, which we initiated and instituted a year ago created this market share expansion. New customer bookings for this past quarter represented approximately 30 percent of total bookings, compared with 26 percent for the full-year. This increase, once again, demonstrates the strength of our expanded market position.

Our real challenge is not related to the market, our product or our place in that market, but rather predictability, which again surfaced in Q4. Our fourth fiscal quarter revenue of 34.2 million, while within the published range, missed revenue consensus of 35 million as one large deal was not completed until the first week of this quarter. Because of this revenue shortfall, as well as margin pressures that I will discuss in a moment, our EPS of $0.10 was short of consensus which was at $0.15 per share.

Our gross margin for the quarter was 54.2 percent, lower than expected. Part of the reason for the lower of gross margin is related to the revenue shortfall of about 800,000. But the majority of the decline can be attributed to several conditions that intensified in Q4, price compression due in large part to large competitive deals as increased -- an increased mix of lower margin product installations, as our new product lines became more successful, and increased inventory charges related to the build up and reduction of inventory. Each of these 3 conditions was magnified by our increased reliance on turns business.

For the last several quarters we had told you that we needed to reduce our turns business to run our business efficiently. Unfortunately, we have been enable to reduce our reliance on turns through increased backlog. In order to meet the revenue targets we set for ourselves for our turns business remained about the same in Q4 rather than down; accounting for approximately 20 percent of our total quarterly revenue. The nature of the turns business, that is finalizing the contracts, pushing the purchase order through the hospital bureaucracy, building the product and installing it for the customer, all in the same quarter, ends up putting a heavy load on our business. This creates efficiencies that can negatively impact many aspects of our business from bookings to manufacturing, inventory control to operations and service, and eventually impacting our expenses and GMs.

As our business experiences a transition from predominantly small to mid-size Greenfield accounts, to significantly larger hospital system accounts, and competitive swap-outs we are beginning to see market pressures to provide heavier discounts to secure this type of business. Added to that are increased reliance on turns business has also contributed to this price compression pressure as we push hard to finalize deals in time to install them in the same quarter. For the past 12 months we have been aggressively pursuing competitive swap-outs and large customer wins. As those accounts work their way through the backlog to be installed we continue to see the effects of those discounts on GMs, balanced, however, by what should be higher margin add-on business with our existing customer-base.

Secondly, another negative impact on our gross margin in Q4 was related to product mix. We continue to grow our new product line installations PharmacyCentral and SafetyPak, increasing the percentage of revenue they contribute to our overall business. These products have lowered margins -- have lower margins than our other base business. In Q4 new product revenues were not balanced by higher volumes of our very high margin products, as has been the case in prior quarters.

Finally, over the past several quarters our finished goods inventory has been growing as we built enough product to satisfy the various possible turn combinations of installation that might be achieved at the end of each quarter. In Q4 we made a concerted effort to reduce our finished goods inventory bringing it from 17.2 million down to 14.2 million. This heavy build up over time and subsequent reduction result, resulted in an additional inventory-related expense charges in Q4.

One area that we focused heavily on this year was backlog expansion, expansion at year-end stood at 46.9 million, up 23 percent over the last year. And while it is about 6 million less than we expected for year-end, we believe that this shortfall is largely due to end-of-year business pressures particularly from very large deals, some of which have already closed in January. As a matter of fact, during the fourth quarter we booked 1 deal larger than 1 million, which was down from 4 deals on average greater than 1 million during the other 3 quarters of 2004. However, to date in 2005 we have booked 3 greater than $1 million deals representing one of the best beginnings of a new year in our history.

Better than year of growth we experienced in 2004 we believe we are positioned at the start of 2005 with the most promising opportunities to continue to capture new, large accounts that this Company has ever experienced. As we reviewed with you the last couple of quarters Omnicell's business is changing. Increasingly our customers are demanding comprehensive end-to-end solutions and this has resulted in Omnicell involving into a significant player in the pharmacy automation. Augmenting our leadership position in supply automation. We believe we have the best products and the best technology installed and serviced by the best personnel in the industry.

So in 2005 I will focus our efforts in 3 areas: Continued market share expansion. We have in front of us a great ongoing opportunity to grow our market share with excellent products and services. We had some great wins in 2004, which helped propel us in 2005 to continue to take market share and expand our markets. Including Baylor Health Care Systems, 11 hospitals; Cook Children's Health Care System, Health Enterprise Cooperative, 17 hospitals; Overlake Hospital Medical Center, University Hospitals of Cleveland, Vancouver Coastal Health, 14 hospitals; and a long list of others.

And, of course, our new products were placed very effectively in order to help enter new accounts for the first time. These accounts represented not only significant revenues in 2004, but should bring additional revenues and earnings in 2005, 2006, and beyond. As I said our backlog has grown 23 percent year-over-year and we intend to grow backlog in 2005 by at least 10 to 15 million or more.

Backlog represents our future revenue, earnings, and growth and this is critical to running a smooth, efficient more predictable business. Our reputation for product and service excellence has been increasing steadily and customers want to do business with Omnicell and they want our products to solve their medication and supply chain issues.

Secondly, we will focus on operational efficiencies, reducing turns, and reducing operating cost structures. Reducing the turns same-quarter book, billed, and install transactions as I indicated earlier we have often discussed our need to reduce our turns reliance as a percentage of our total revenue. Because the turns business tends to create inefficiencies that negatively impact our business, too much reliance on turn deals accelerate schedules, and creates price and discounting pressures also requiring build up of inventory necessary to meet last minute demands. To run our business more efficiently and with superior and more predictable financial metrics, we believe we must limit our turns business. Therefore, starting in the first quarter of 2005 we intend to limit those turn deals that negatively impact our efficiency to under 15 percent of total revenue and instead allow those deals to increase the growth of our backlog.

In Q4 approximately 20 percent of our total revenue came from turns. To accomplish this on a faster timeline it requires us to reduce our revenue targets, but it is important to long-term success of the Company. We understand that the traditional metrics of measuring our success may be impacted by this decision as running our business efficiently, costs effectively, and with an I toward market share expansion will give it more ways than the acceleration of installations in a given quarter.

By reducing the turns business an additional focus on our operation needs we will be able to reduce our operating cost. In addition, in Q1 we will take -- we will be taking a charge of approximately 5 to $0.06 to reduce operating cost structure, mainly through head count reductions of approximately 7 percent. We need to take these reductions to deleverage the P&L that is so dependent on every dollar of revenue and margin. This action should help us reduce our operating expenses over the last 3 quarters of 2005 and help us to reach a better mix of expense against competitive or mix concerns we might have for margins.

In addition, I've already restructured the Senior Management Organization to obtain focus; most notably we consolidated all major operational functions under Chris Drew, EVP of Operations. Chris is now responsible for engineering, field operations, manufacturing, quality and service. We believe that this operational integration will serve the Company well as it continues to grow. In addition, we will add a dedicated VP of Manufacturing to the organization to build in more focus to help leverage material and operational cost productions.

Lastly, predictability. This has been one area that has been disappointing and we will work to change going forward. As I've have indicated our Company overall performed well in 2004 with revenues up 21 percent and net income up 45 percent, yet we have not met Wall Street expectations in 2 of the 4 quarters in 2004. Therefore, I'm targeting the Company to a much more predictable model in 2005. Here the focus is on growing backlog over revenues and on improving our operational efficiencies over short-term earnings. Over our 2005 plan is about positioning ourselves for future growth and earnings with more market share, higher backlog, lean and efficient operations, and more predictability.

Turning to our guidance, and please remember that the risk and uncertainties referred to earlier in our Safe Harbor statement are particularly relevant to this section as this portion pertains to forward-looking statements. This continues to be a very good market place and Omnicell continues to enjoy market share gains. Previously we forecasted our revenue would grow by 15-plus percent in 2005 and backlog would grow by at least 25 percent. While we continue to believe that the long-term growth of this Company should be approximately 15 percent, we are taking steps to reduce our turns and build backlog more quickly. Which means for growing near-term revenue growth during that build up. Part of the reason for our OpEx reduction efforts is to better manage the fluctuations that we will experience as we continue to work on improving the Company operational model as we manage, as well as manage any price and mix changes that might continue to impact the Company's gross margin.

For Q1 '05 we are currently expecting revenues to be approximately 29 to 30 million, and earnings of a few cents per share before restructuring charges of about 5 to $0.06 per share. Our backlog was down in Q4 with some large deals slipping into Q1 '05. We believe backlog will be back on a growth path in Q1 '05. We've had an ultimate goal of increasing backlog over the course of 2005 by at least 25 percent. We will want to review this forecast on a quarterly basis and give you guidance as we roll through each quarter. We believe that in this market with our priorities set on growing backlog and increasing operational efficiency we would expect to increase our revenue on average a couple of million per quarter and resulting EPS expansion of a couple of cents per quarter. As I said most upside in the revenue potential will initially go into backlog rather than same-quarter turns to continue to build on our predictability model. And again as we build and analyze that backlog we intend to provide more detailed guidance based on a determination of predictable revenue going forward. I will now turn the call back to Dennis for some financials.

Thanks, Randy. Revenue for Q4 '04 was 34.02 -- $34.2 million, up 20 percent year-over-year and 4 percent sequentially. Year-end backlog stood at 46.9 million, down 2.8 million sequentially, but up 23 percent from a year-ago. We posted net income of $2.6 million, and an operating margin of $2.4 million of 7 percent, and EPS of $0.10 on 27.5 million fully diluted shares.

For the full-year our revenue was 123.9 up 21 percent over the previous FY and our net income was up 45 percent from the previous year. Our OpEx for Q4 '04 was 16.1 million, compared to 15.8 million in Q3 '04. And this increase was due mainly to Sarbanes-Oxley compliance requirements. For the full-year our OpEx was 61.4 million, up 16 percent. Our spending for SG&A during the quarter was $13.7 million.

Turning to revenue, our fourth fiscal quarter 2004 results were as follows -- Q4 '04 revenue again was 34.2 million, up 1.4 million or 4 percent sequentially. Product revenue was 28.5 million, up 6 percent sequentially. And service and other revenue was down about 5.7 million, down about 5 percent sequentially. For the full FY, our revenue was 123.9 million, up 21.8 million, or 21 percent year-over-year. This growth rate of 21 percent we believe to be more than 2 times the market.

Turning now to margins and expenses for the fourth quarter. Our Q4 '04 gross margin was 54.2 percent, down 410 basis points sequentially. We had an operating profit of 2.4 million this quarter, representing an operating margin of 7 percent. Net income per fully diluted share in Q4 '04 amounted to $0.10, compared to $0.12 last quarter, and, again, total share count stood at 27.5 million fully diluted shares.

The following are the balance sheet highlights at its comparison of Q3 versus Q4. Cash balances plus short-term investments were 30.6 million, down 2 million sequentially. While net income of 2.6 million, depreciation and amortization of 1.2 million, and inventory decreases of 3 million represented total cash sources of about $6.8 million, there were several uses this quarter. Uses of cash included accounts receivable increases of about 5 million, reduction of current liabilities of 1.8 million, and capital additions of about 700,000.

Our DSO this quarter was 59 days. This increase in DSO was due to the lowered rates of leasing this past quarter, which represented only about a third of total bookings. As a matter of fact, most of the reduction in sources of cash this quarter was due to the lower proportion of leases versus purchases and the shared number of deals that closed towards the end of the quarter. I'd like to hand it back to Randy for our closing comments.

I just wanted to summarize that I am pleased with our improved competitive position and resulting prospects for sales growth and market share expansion. At the same time I'm firmly committed to substantially improving our efficiency and predictability. In support of that effort we are forecasting only limited revenue growth to minimize turns and improve efficiency and predictability. The underlying gains in bookings and market share will be more substantially reflected in the backlog results. We will now open it up for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Our first question comes from Steve Halper. Please state your company affiliation followed by your question.

This is George Hill sitting in for Steve Halper. Can you give us a little color on the impact of pricing during the quarter and what you are seeing the pricing environment look like and talk about which components of revenue growth or volume growth versus the difference in the pricing environment?

Sure. I would like to break pricing down into 3 components, one would be sort of the Greenfield accounts, people purchasing systems for the first time. And there we've seen sort of our traditional pricing. When we get into competitive large accounts, particularly swap-outs, you do see price compression as we try to gain market share. And then finally, sort of our existing add-on business pricing should be higher with as we continue to grow the business. Last quarter about 70 percent was from existing customers. But with the turns what happens is we end up discounting that more in order to get it into the same quarter and therefore impacts our margin negatively.

Okay. How about volume? From a -- I mean, quarter-over -- year-over-year on the quarter how many more boxes have you sold?

Our backlog is up over 25 percent year-over-year. And our pipeline is considerably larger than it was a year ago.

Okay. I will hop back into the queue.

Our next question will come from Gene Mannheimer. Please state your company affiliation followed by your question.

Hi, Roth Capital Partners. Hi Randy and Dennis.

Hey, Gene.

A couple of questions. Let's take the backlog. You mentioned the large deal that was deferred to the first week of January. Had that deal closed in Q4 what would have the backlog looked like?

That deal that I referred to in the first week was really responding to revenue and so that would have put us around, right at consensus on the revenue number. As far as other deals closing in the quarter that impacted backlog we would have been, if the deals had closed, we would have been at probably what we were expecting to close the year out at, which was above 50 million.

Okay. And can you characterize the lag between contract signing and shipment of product? Is that being stretched out versus say last quarter and versus last year?

I think that we are starting as we look down the pipeline, we are beginning to see that stabilize, particularly with the new guidance we have given where we are starting to build up a heavy schedule of Q2 product out of the backlog, which means that as we move through the year this year turns will be reduced. So I think what I feel like is that in 2005 we will sort of get this large pipeline loaded from our backlog into our slot plan and give us better predictability. I think our folks are very efficient at moving forward. We didn't have anything in Q4 that wasn't installed because we didn't have people or places or product installed. It was timing of customers.

Okay. You mentioned approximate 7 percent head count reduction. Can you talk about where those -- where that would take place across the organization?

Well, as we move forward obviously our revenues are going to be down so the numbers of people that we need to manage the operations will be impacted. And across the organization, but I think we are going to focus on maintaining our service levels, our sales, and other areas of the Company. We are also continuing to look at using our India Resource Center more effectively in 2005.

Okay. Thank you.

Thank you, sir. Our next question comes from Ryan Stewart. Please state your company affiliation followed by your question.

It's Ryan Stewart, Piper Jaffray. How are you guys doing?

Good Ryan. How are you?

Doing well, thanks. I apologize if you've gone through a bit of this, Randy and Dennis, I just had to jump off at one point. But first, just from a perspective of, this elongation dynamic that we had, in the third quarter and kind of building off the last question. Can you talk a bit in sort of finite details about why I should not be thinking '06 is going to be a mirror image of '05 relative to product receipt? I think you guys at some point have changed some of your contracting mechanisms to smooth things out a little bit more. But if you could just talk to that dynamic and, again, if you've gone through that I apologize.

Well, I think what we've been doing, particularly this year, and planned to do even more next year, in 2005 and what we've done in 2004, as we have built a very large base of nice customer hospital groups. And we think that, and most of the orders in these hospital groups have only been initial orders. So we see additional add-on orders coming from these groups not only in 2005, but particularly in 2006. And that's what we wanted do, continue -- we are very well-positioned in the market place. We are seen as a great alternative in the market place in the pharmacy systems automation market. And as we move forward it's going to be continued growth and add-on sales with higher margin to these customers because we won't be doing the turns business.

Right, but you have changed the way -- to what extent have you changed the way that you're contracting with these hospitals?

Well, I think the key is that --

It sounded like more percent of completion-type dynamics? Just sounded like something, in prior discussions with Dennis that you've kind of looked to -- you changed it in a way that's going to potentially smooth things.

I think from a contract perspective we've already smoothed them, Ryan. We had a couple of Greenfield accounts that we are -- our first largest accounts that were kind of a struggle because we had to wait for certain pieces of the work to be completed before it was recognizable. But in contracts work we never have an occasion now that that dilemma exists. So I think that's behind us.

Okay. And I guess just one follow-up would be, and again I apologize if you've gone through this, but with the guidance here to what extent, if you could just talk a little bit of the process of kind of looking at this guidance, testing it and retesting it and kind of clearly have a level of comfort with it. But could you just talk through the process in coming to now what this new guidance is, just given the fact that it's the fourth sequential time we've touched guidance?

Well, predictability is probably job one for me right now and we spent a lot of time taking hard looks at this. The number one issue with predictability has been the turns business. So we've really built our business off of going forward; off of reducing the turns business as being the key indicator. And I'm sure that's something we will talk about as we go forward in the quarters and beyond. And that's building backlog. So we don't see the market dynamics changing. We are just not putting as much through the revenue line until our backlog gets up to 55 million to 60 million where we need it to be so that we can run an efficient, smooth operation without the pressure of these turns businesses.

Right. And could one sort of assume that there is a height -- not to say that there wasn't this level of rigor in prior quarters, but a heightened level of rigor, perhaps more Board involvement in blessing guidance for '05, just given the recent erratic activity we've had with guidance, which has obviously had a major impact on the stock? What I'm getting at is I'm just trying to get as comfortable as I can with the '05 number.

We are comfortable with this plan and particularly what we've stated about as we move forward. I want to make sure you understand, Q4 and Q1 is [indiscernible] and we are going to move forward on a very conservative plan moving forward and the key indicator is that that plan is working -- will be the backlog and the reduction, steep reduction in the turns as we move forward.

So do you think we still have a milestone out there that we are, waiting on to get a sense of '05 being totally achievable? I don't mean to use that word, I'm just trying to get a sense of -- it sounds like there is still a milestone out there to get a good sense for the '05 number. Is that -- am I thinking about that wrong?

We are comfortable. We are comfortable with the guidance that we've given and I think as we get to Q1 we will talk about the backlog extension and the reduction of turns.

What we found to be the case, Ryan, is that the real problem that we've had in predictability over the course of the year has been dependency on turns business. And the need to expand backlog. We have now mandated that we need to enforce not only a rigor, but an expectation that that turns business, which we want to be in the 10 to 15 percent range does not go above that. And we've built our revenue expectations and our backlog expectations against that imperative.

Okay. Great. And then just -- I apologize for taking so much time, one last quick question. On the M&A front you've typically added to your product line through tuck unders and in the past we talked at different levels of such larger acquisitions. Do you think that that's kind of off the table for '05 or until you get more of a recovery here?

Yes, absolutely. We are dead focused on expanding our market share, making sure we are predictable and reducing our operating expenses.

Organic market share, not tuck unders and looking for more deals in the near-term?

Absolutely.

Okay. Thanks. Thanks a lot guys.

Thanks Ryan.

Thank you, sir. Our next question will be our final question for the conference and it comes from Fred Toney. Please state your company affiliation followed by your question.

MedCap Management. Good afternoon guys.

Hi, Fred.

I guess a couple of questions. I'm just trying to understand first of all if the profitability that you're expecting for the first quarter -- first of all I want to make sure I heard you correctly. Did you say it's a few pennies before charges of 5 to $0.06 you're expecting?

That's correct, Fred.

Okay. And what's this -- what's the biggest significant impact there excluding the charges? And I guess that ducktails with another one of my questions about GM assumptions going forward. Should we be looking closer to what you did in the fourth quarter than what you had been expecting historically?

So as I said Q4 to Q1 is the trough. We are moving revenue down substantially from where we were in -- by 4 to 5 million. And so our margin is going to be slightly up in -- we believe it's going to be slightly up in Q1. But not a whole lot. But we are really re-adjusting ourselves to get ready for Q2 and Q3 and Q4 going forward.

And then from Q1's new revenue, you are looking for 1 million or 2 a quarter sequentially from there?

Yes.

And sort of a slow growth from a few cents?

Slow growth and revenue and a couple of million in revenue growth and a couple of cents in earnings. We want to be a growing, profitable company as we come out of this trough. That's very important to me.

So a couple of cents a quarter on top of what Q1 would be expected to be?

Yes.

Okay. And then in terms of the balance sheet items, where should we expect -- obviously you explained that the receivables impact from the difficulties, as well as the inventory impact, where should we expect that to level out, say, a quarter or two out?

It would probably be, I would think -- sorry, are you asking about the DSO or receivables?

Either way, but the receivables in subject to sales agreement.

Yes, I think cash is going to be flat. We would expect receivables to come down some. DSOs we do expect because of this last quarter was very low in lease, it should improve from there. So it should be in the low to mid-50s again, DSO.

So is the fourth quarter receivable abnormally high?

Yes, I think so. It is.

Okay. And then lastly on -- what, if anything, have you done with the sales force in terms of how they are going to be selling products or how they are getting paid?

Well, of course we did flip the sales force earlier last year and they were sharing territories and the full bifurcation started, some in fourth quarter, and fully in the beginning of this year. But we've had a very good sales plan that we put out in place and a very good reception from the sales force on that plan. We've had no one leave the Company and they are going to do well next year.

So the restructuring from a few quarters back, is that still basically going to remain the same as post restructuring?

Yes.

Okay. And so how many salespeople would you expect to have on each side supply and pharmacy?

Well, we have about 75 people involved totally in sales of about one-third squad, two-thirds [indiscernible].

And you don't expect any other cuts to come from there?

Not significantly, no.

Okay. All right. Thanks a lot.

Thanks Fred.

Thank you, sir. Gentleman, at this time we have no additional questions. If you would like to make any further statements at this time, please do so.

Well, thank you for your call and we will see you next time.

Thank you, Management. Ladies and gentlemen, at this time we will conclude Omnicell's fourth quarter financial results conference call. We thank you for your participation on the presentation. If would you like to listen to a replay of the conference please do so by dialing 1(800)405-2236. You may also dial 303-590-3100. You'll need to enter an access code of 11022199.

Once again, ladies and gentleman, if you would like to listen to a replay of today's conference please dial 1-800-405-2236. You may also dial 303-590-3000. You'll need to enter an access code of 11022199. We thank you for your participation on the conference call. At this time we will conclude and we thank you for your participation.