Omnicell Inc (OMCL) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Omnicell second-quarter 2005 financial results conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday, July 21st, 2005. At this time, I would like to turn the conference over to Mr. Jim Judson, Chief Financial Officer. Please, go ahead, sir.

Thank you, Matt. Good afternoon, everyone. This is Jim Judson, the interim Chief Financial Officer of Omnicell. With me today is Randy Lipps, Omnicell's President and CEO. Thank you for joining us today for Omnicell's second-quarter fiscal 2005 conference call. You can find Omnicell's second-quarter results press release in the investor relations section of our website at www.omnicell.com. This conference call is the property of Omnicell, Inc. 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 affect future operating results" in Omnicell's annual report on Form 10-K filed with the SEC on March 16th, 2005, 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 July 21st, 2005, and all forward-looking statements made on this call are made based on Omnicell's beliefs as of this date only. Future events or simply the passage of time may cause these beliefs to change.

For today's call I will start with an overview of the financial results for the quarter followed by Randy who will provide you an update on the business. I will then update the financial outlook for the balance of 2005. And then after that we will open the call for your questions.

We are pleased with our results for fiscal Q2, 2005. Especially given some of the changes we were implementing. Order activity strengthened dramatically from the last two quarters as the changes from the sales reorganization at the end of Q3, 2004 began to show solid results. During Q2, the Company added a record $8.5 million to our product backlog. The ending backlog totaled $53.9 million, which is also a record. This is a great first step toward building backlog to our stated goal of having two quarters of product revenue in backlog, which we believe equates to 60 million exiting 2005.

Embedded in this performance was a nice rebound in our supply automation products to greater than 30% of our quarter's bookings. Revenue for the second quarter of fiscal 2005 was $28.6 million, down 2% year-over-year and flat sequentially. We achieved this without chasing any turns business. Throughout our company we have made it a policy not to pursue turns and have taken away any incentives to do it. During the quarter, we had much better linearity in manufacturing, in our installation process and with our revenue recognition. We intend to continue to improve this going forward. Eliminating the quest for turns clearly enabled us to operate more efficiently and cost effectively. Our gross margin improved three points between Q1 and Q2 to 56.9%, if you exclude the one-time charge in Q1. Most of this improvement was due to eliminating overhead costs associated with turns and non-linearity and tightening discretionary spending across the Company.

Operating expenses declined by $1.8 million from the pro forma Q1 2005 results to Q2, 2005. Combine this with the overhead savings in our cost of sales of approximately $900,000 and we reduced total spending by $2.7 million from Q1 to Q2. The major items behind this were reductions in employee compensation costs, temporary and contract or head count, travel, freight, meetings, supplies and audit fees. We are very pleased with the progress we have made in reducing our cost structure and intend to keep a tight grip on discretionary spending going forward and would anticipate adding only a few key personnel through Q3. The results of these efforts left us with a small net income of $66,000 for fiscal Q2 and positioned us very well to achieve at least break-even EPS on a pro forma basis for full year 2005.

On the balance sheet we increased cash by $1.7 million during Q2. This was primarily driven by a decrease in some of our long-term notes receivables. These tend to be government customers or poor credit customers where we hold the leases on our books and invoice monthly until we find a third party who will finance the leases. Other elements of the balance sheet were essentially unchanged except for inventories, which grew by about a half a million dollars as we ratcheted down Q2 revenue expectations after Q1 and were unable to defer some material receipts.

Accounts payable and accrued liabilities were unchanged in aggregate, and accounts receivable balances and DSO were constant at 22 million and 71 days. DSO has remained high because, in part, our current contractual relationships do not enable us to bill in the same phased approach that we used to install many of the larger deals where the installation can stretch over multiple quarters. We are able to recognize revenue on a completed phases of the installation but not able to sell off the lease and collect cash until all phases of the transaction is complete. We are remedying this on incoming orders where customers are amenable but we cannot change existing contracts as we work through the backlog for orders already accepted. I'd expect to see DSO come down below 50 days over the next several quarters.

With that, I'll turn it over to Randy to provide an update on the business.

Thanks, Jim, and thanks for joining us today. I'd like to start by emphasizing how pleased I am with the increased bookings activity we saw in Q2 that enabled us to hit a record backlog. This past quarter, and the rest of fiscal '05 for that matter, is about building backlog and implementing the business practice changes to enable us to operate as efficiently and predictably as possible. Q4, 2004 and Q1, 2005 were very difficult quarters, but we are becoming a better company as a result. As our employees see the benefits of the initial changes we have made, they have become more receptive and more excited about driving further changes. I am really pleased with the great job our folks have done this last quarter.

The changes we made in the sales organization back in Q3 and Q4 of 2004 did create discontinuities with our customer base, especially those buying our supply products. I am very pleased that we are starting to see some of the benefits of making those hard choices. We saw a record level of orders in Q2 and made substantial progress towards our year-end goal of 60 million plus, a backlog entering 2006. We saw the demand for our supply products rebound nicely after two slow quarters and significant orders for our merging business products as regulators put more and more pressure on hospitals to better control medications end to end. In fact, most of the increase in bookings between Q1 and Q2 came in these product areas.

We also saw some significant results from our corporate sales team which was put in place to respond to the growing number of IDNs issuing RFPs for automation products. We announced earlier our agreement with HDA to provide them with OptiFlex products. This agreement is an enterprise-wide software license to install our OptiFlex med/surg system in their 190 hospitals across the United States. In addition to its initial value, it provides a great opportunity for us to sell our other OptiFlex product modules and supply automation products to complement the med/surg systems, as well as an entree into the accounts to sell the rest of our product line.

I'm also pleased to announce that we have recently signed a five-year sole source agreement for pharmacy and supply automation with the entire Partners Health Care system which includes 13 hospitals located in the northeast. The Partners system hospital list includes: Massachusetts General and the Brigham located in Boston. These agreements are representative of the types of agreements we expect to see awarded from many of the major IDNs as they select their supplier of automation products. We feel we are very well positioned with our product lineup and our focus on these opportunities to win more than our fair share. As we said in our Q1 call, we see a unique opportunity to increase market share in competitive situations such as these. In fact, we had a number of -- we had a record number of contract wins in Q2 that were competitive swap-outs.

Some other points of interest, regulatory compliance continues to be a major driver for the demand of our products. At the AORN show in April, we introduced our anesthesia tabletop system, the medications only version of our innovative anesthesia workstation. The product broadens our product line and provides for a very attractive offering as the regulatory requirements push hospitals to address controls of medications used in this area.

In mid-June, we announced the most extensive implementation of our MedGuard suite to date. By Jefferson Anderson Regional Medical Center in Meridian, Mississippi. Jefferson Anderson has implemented Omnicell Pharmacy Central, OmniRx medication dispensing cabinets, and OmniLinkRX, as well as SafetyMed RN, our bedside bar code medication administration solution. This implementation enables them to fully automate the medication use process from the central pharmacy to the patient's bedside.

With that I'll turn it back over to Jim to update us on guidance for 2005.

Thanks, Randy. Through the remainder of 2005, a top priority will be building our backlog to two quarters of product revenue exiting the year. As we said last quarter, we believe this is a backlog of at least $60 million. This will enable us to operate as efficiently as possible and gain predictability. We saw in Q2 the kind of costs we are able to take out of the P&L by managing our business in a linear manner. And installing our products at the customers' pace. We believe that this will provide a better customer experience, enable us to better compete for market share by lowering our cost structure, and deliver better long-term value to our shareholders.

For the full year we are sticking to our prior guidance of full-year revenue approximating the level of 2004. Until we have visibility to two quarters of backlog, that is installable within that window, we will not raise our revenue outlook unless it is driven by customer requests. While we feel good about the demand and backlog growth we saw in Q2, we realize that our business is tied to the decision processes in our customers. With some of the large awards that are in the pipeline, planning for when they will turn to a PO is very unpredictable. The only thing we know for sure is that we will see the spikes and troughs and can't get too excited about either. At that revenue level we believe we will be able -- we believe we will be able to break even to possibly earning a couple of cents on a pro forma basis for the full year. I want to emphasize that our P&L is very sensitive to individual transactions as the size of our deals grow. With our revenue recognition policy being tied to installation and sign-off by the customer, individual installations lapsing a couple of weeks can have a material impact on EPS in a quarter.

In summary, we are very pleased with the increase in orders we saw in Q2. Our pipeline of deals remain strong and we continue to win business and add to our customer base. The level of backlog we carry into Q3 positions us very well to meet our Q3 goals, as well as positioning -- as well as positioning installations for early Q4. We have our cost structure under control and will be judicious in adding costs going forward. And we expect to be able to show sequential revenue and EPS growth in the coming quarters.

We will now open the call to your questions. Matt, please start the polling.

Absolutely, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Newton Juhng. Please state your company name followed by your question.

Piper Jaffray. Good afternoon, Jim and Randy. First question on the gross margin, it was significantly above where I was expecting it to come in. Looking forward, is 56.9% or somewhere in that range something that you think is sustainable?

Newton, this is Jim. We're not going to give specific guidance on the gross margin going forward, but I think if you -- if you sort of do the math with the two quarters of actual and what we've given you, in terms of the top revenue number and the sort of range of EPS on the bottom line, yes, it has to stay somewhere in that range.

Okay. And then on the top line, the product revenue trended a little lower again this quarter. Are we expecting, I gather, a rebound in the back half of the year, or specifically third quarter, to kind of get at the -- the guided number that you're talking about now? Am I correct in that assumption?

We expect to see revenue growth Q2 to Q3, yes.

Okay. Great. Thank you.

Thank you, sir. Our next question comes from Gene Mannheimer. Please state your company name followed by your question.

Hi, Gene Mannheimer, Caris & Company. Nice quarter, Randy and Jim. A couple of questions. Randy, you mentioned that you didn't have to chase turns business in the quarter. Could you quantify as a percentage of revenue what the turns were?

Well, we -- what we look at is whether we actually had to induce customers to take equipment or pay incentives (ph) and we did none of that in Q2. So it's not even a measurement. We go into to a quarter fully scheduled for revenue (ph), and things just go in and out. And the only kinds of turns that we do anymore, and the only ones we've done, are those that are -- are just customer requests and things that are actually more economical for us to do in the current quarter. So percentage of turns, even in this quarter and even going forward, aren't really relevant because they're not the kinds of turns that -- that were causing the bad behaviors we had in the past. So, we don't -- the measurement -- because we're not doing turns, it's not even a measurement, we're really even following.

Gene, we're going to be very focused on linearity going forward. Our linearity this past quarter was very good. We're going to continue to push on it and get as linear as we can. By doing that, it allows us to plan things out, to do them in a very cost-effective manner. We don't end up flying people all over the place at the last minute, and it just has a huge impact on the cost structure you saw this last quarter with gross margin and op expense.

Thank you. The HCA deal, can you quantify that in terms of the potential revenue opportunity and over how many years we might see that?

Well, the HCA opportunity is an initial opportunity that allows us to get into all of the hospitals with our base med/surg software platform, and we're very pleased with that. And initial revenues from that are -- are material but not -- not as large as maybe one would think. What we really look forward to is the additional add-on business once everyone has our base product. We then can plug in on the platform and get going forward. So it is an entry-level enterprise-wide solution set that is just at the base level and then allows us to go into other areas of the hospital from just the base unit. So we're very happy about it and I think it will produce good future earnings for the Company, not only in the near future but in the 2005 and -- and 2006.

Did you see any HCA revenue in the quarter?

No.

Okay.

Well, not from that contract, maybe from the -- from the pharmacy side.

Okay. And on the Partners' announcement, congratulations on that. Can you just tell us whether Mass General, Brigham, some of the other Partners' facilities are existing customers or did you displace another vendor.

Most of those groups are existing customers, but they have our Legacy systems installed. And so there actually is about seven, eight years old. So they went through a process of looking at our latest technology and other technologies in the marketplace and we are very pleased that they once again signed up with us. So, it's not necessarily all new hospitals for us, but there -- it's almost like a new customer because they're going to do a massive replacement of all their systems that they have because almost all the hospitals there have the Legacy systems from the SureMed days.

Okay. Great. And then final question for Jim. Can you give us the D & A figure for the quarter?

I don't know what it is off the top of my head. I believe we're running around $400,000, but I just don't have that in front of me, Gene.

Okay, no problem. Thanks again.

Thanks, Gene.

THE OPERATOR: Thank you. Sir. Our next question comes from Fred Toney. Please state your company name followed by your question.

MedCap Management. Hi, Randy, how are you doing.

Hi, Fred, how you doing?

Great. Just with regard to the revenues, and I guess it's a little bit disappointing that didn't see some growth in the revenues Q1 to Q2, and just given what's going on competitively in what we continue to hear about issues that Pyxis may have been having. Can you tell us competitively what the current picture is and -- and what -- what you have seen in Q2 and what you think you'll see in the second half of the year?

Yes, I think, first of all, Fred, I think what we are really focused on is building backlog, and over $8.5 million in backlog is a record quarter for us, and our goal -- stated goal was to break even this quarter and make sure our expenses and costs were in line to leverage that going forward. And it was also within guidance. Our goal was more about building backlog, and that's what the theme is this year, is to get to the 60 million and obviously we're within -- under 7 million of reaching that $60 million goal by the end of the year.

Right.

Obviously, to get to our revenue goal being equal to last year or in that range, we're going to have increased revenues as we move forward. On the competitive front, this was, as I said, a record number of competitive swaps. I won't say how many, but again, we're continuing to, what we feel, gain market share in the marketplace and for now competitive -- and most of all of these new accounts that we signed up were the competitive accounts or new Greenfield accounts, have gone into our backlog and most of them are being scheduled for the later quarters, are being scheduled out in Q4 so that again we can maintain predictable and forecastable revenue and earnings as we go forward.

Do you think you can maintain the -- the number -- the same rate of swaps you've had from competitive wins in the second half of the year? And what kind of response have you seen with the number of wins you've had from take-aways?

I think we're comfortable with the number of competitive, it meets our expectation, it has grown somewhat. And I think we've actually gotten a lot better at it. I think the first few that we did, they weren't as financially as attractive as we've been able to make the last ones, in fact. We feel really good about the competitive swaps we made and the kinds of margins we're getting out of them because they tend to support our margin goals. And -- and we don't see anything in the -- by the second half of the year that has changed that or we think there will be any slowdown in that at this point.

Okay. Thanks.

Thanks, Fred.

Thank you, sir. Our next question comes from Gene Weber. Please state your company name followed by your question.

Weber Capital Management. Congratulations, Randy and Jim.

Yes.

Jim, a quick question. Could you just clarify again when you talked about DSOs, you said you've got a plan, I think you said in terms of changing the contracts to get the DSOs down to the 50-day range. Could you just repeat that again, please?

Sure. Let me just try and say it maybe a different way. Most of the agreements that we have in place today were put in place assuming that they were relatively small transactions that we'd install them, we'd invoice the customer and be able to collect short term, either directly from the customer or from the leasing company. The way those deals are structured, they are basically structured as sort of an intact transaction. To the extent that those transactions are growing and stretching over more than one period, we're not able to sell that whole transaction to the leasing company as an individual transaction and to collect cash.

So, although we're able to recognize revenue from doing partial installations and getting the customers to sign off on the work that has been done, we're not able to sell it off to the leasing company and collect cash until the whole transaction is completed. So, we're working with customers to change the way that's structured so they're set up as either multiple agreements or have phases associated with them that we get the paperwork signed by the customer upfront that allows us to sell those off to the leasing company in pieces.

So what you've got to do is understand what the leasing company requires to get this interim cash payment and then write your -- negotiate your contracts with your customers accordingly?

Yes. And we understand what we need from the leasing companies. It's more -- having that conversation upfront with the customer about breaking the transaction into smaller bite-sized pieces.

Okay. Good. That's helpful. Thank you.

Thank you, sir. Once again, ladies and gentlemen, if you have a question, please press the star followed by the one on your touch-tone telephone. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our next question . Our next question comes from (inaudible) Ramachristian(ph). Please state your company name followed by your question.

The company's (Core Fund)ph Management and just a couple questions. One's on backlog. What is typically the timing between backlog and revenue recognition? I understand that future POs are difficult to time but historically what -- what's the best way to think about timing?

So, we accept sort of our definition of what can go into backlog is an order that can be installed within 12 months and take revenue on it. So, potentially, there's as much as a 12 -- 12 month delay from booking to revenue recognition. In general, it tends to be probably three to five months, I would say, worst case. So it's -- the time -- there's generally a lead time associated after we take the order of sitting down with a customer, going through a detailed discussion of what the installation will involve, how they're going to want the equipment configured. How they're going to plan on using the equipment. It may vary depending on how much equipment they are installing and how many products they are installing at the same time. But it's generally several months before you get started.

Okay. Also, is there any more risk of inventory obsolescence associated with that discontinuation in going forward?

No, I don't believe so. We've gone through that with the auditors, they're very comfortable with it.

Okay. And I missed -- did you -- did you give a specific revenue number for next quarter or for the rest of the year?

We --

Guidance?

We said full year would be similar to last year. So, essentially, flat or very close to flat revenue year-over-year.

Okay. Got it. Great. Thanks.

Thank you, sir. Ladies and gentlemen, there are no further questions. Please continue. I'm sorry, Mr. Judson, please continue, sir.

If there are no more questions, we're done.

Thanks for joining us today.

Thank you.

Thank you, Matt.