Omnicell Inc (OMCL) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Omnicell third quarter 2005 financial results conference call. At this time, all participants are in a listen only mode. Following today's presentation instructions will be given for the question and answer session. If anyone should require operator assistance during the conference, please press the star key followed by the zero. As a reminder this conference is being recorded today, Thursday, October 20, 2005. I would now like to turn the conference over to Jim Judson, Chief Financial Officer. Please go ahead.

Thank you, Mary. 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, and thank you for joining us today for Omnicell's third quarter fiscal 2005 conference call.

You can find Omnicell's third quarter results Press Release in the investor relation's section of our Web site 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, 16, 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 October 20th, 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 with an update on the business. I will then update the financial outlook for the balance of 2005 and provide some preliminary guidance for 2006. After that we will open the call for your questions.

We are very pleased with our results for fiscal Q3, 2005. Order activity continued to strengthen from the fourth quarter of 2004 and the first quarter of 2005 as the disruption from the sales reorganization at the end of Q3 a year ago fades in the rearview mirror. During this past quarter the Company added another $8.2 million to our product backlog. The ending backlog totaled $62.1 million, which puts us at our stated target for backlog entering fiscal '06. This level of backlog is a growth of just over $15 million or 32% since fiscal 2004 year end and while our revenues are flat to down slightly year-to-date this growth in backlog equates to about 12 percentage points of revenue growth on a year-to-date basis that has been banked to improve operating efficiencies, predictability and the overall customer experience going forward.

Q3 order activity was strong in both medication and supply products and we saw for a second quarter in a row our emerging products making a substantial contribution. From a customer mix standpoint we continue to see a little over two-thirds of our bookings come from existing customers. That leaves about one-third of our bookings from new customers split roughly 50/50 between customers new automation products and competitive conversions, supporting our beliefs that we continue to gain market share.

Revenue for the third-quarter of fiscal 2005 was $30.7 million, down 6% year-over-year and up 7% sequentially. During the quarter we continued to focus on improved linearity in manufacturing, in our installation process and with our revenue recognition. Doing so is enabling us to operate the Company much more efficiently and we believe it will enable us to scale earnings as revenue grows in FY '06.

Our gross margin improved another 1.4 points from Q2 to Q3 finishing at 58.3%. Most of this improvement came in product margins with emerging products contributing about 1 point of the improvement and lower production costs accounting for the balance. I'll point out that our gross margins are now back in the historical range reported for fiscal 2003 and 2004.

Operating expenses increased just under $300,000 from the Q2 2005 results primarily due to variable compensation. Other than acquiring 30 employees for the opening of Omnicell India, which will have a positive impact on spending going forward, head count remained essentially flat from Q2 to Q3.

We are very pleased with the progress we have made in reducing our cost structure and intend to keep a tight grip on our discretionary spending going forward. We anticipate adding a few key personnel through Q4 as we begin to invest for 2006. The net result was a net income of 1.4 million, or $0.05 earnings per share for fiscal Q3 '05. As you know, this is up from a small profit of $66,000 in Q2 on a revenue increase of $2.1 million quarter-over-quarter. While we don't anticipate this kind of scale going forward, it does show that we are able to leverage our current expense base to improve our bottom line. We are very pleased with these results and feel we are well positioned to deliver a solid Q4.

On the balance sheet we increased cash and short-term investments by $3.5 million during Q3. This was primarily due to filling the installation pipeline with product for early Q4 revenue and improvements in our invoicing process. Our standard contract terms enable us to invoice customers upon shipment. For the last several quarters we have lagged well behind shipment. On lease transactions we were able to sell the leases to our partners and collect cash ahead of revenue recognition, so both cash and our deferred revenue grew. In the case of purchase transactions, the customers were invoiced causing deferred revenue and accounts receivable to both grow. Also contributing to the growth in accounts receivable was a shift in the mix of our business from predominantly leases to purchase transactions during the quarter. The net of all this was in increase in AR of $7.8 million and DSO by 18 days. While I'm pleased with the progress we've made in driving linearity in our build and installation processes and getting current with our invoicing, I'm disappointed with the impact it's had on our AR balances and the DSO and our inability to make headway reducing AR. It's an opportunity we have to further improve our cash position and it will get more focus in Q4. Other elements of the balance sheet showed improvement. Inventory moved down modestly and accounts payable dropped significantly. With that, I'll turn it over to Randy for an update on the business.

Thanks, Jim, and thank you for joining us today. I'd like to start by emphasizing how pleased I am with the results of the new business model we implemented coming out of Q1. By working with a sizable backlog we were able to work more closely with our customer to plan high quality installations on their schedules and thereby increase our ability to ensure that they are completed to the customers and our satisfaction. Our goal is to provide a great customer experience. We feel that our focus on automation products, the quality of our products and service coupled with a great customer experience can differentiate us from our competitors. At the same time, we are better able to plan out our quarter's workload and complete it in an efficient manner. We can see the results starting to slow to the bottom line this quarter as we grow revenue.

The continued strength in bookings we saw in Q3 has enabled us to achieve our year-end estimate for two quarters of product backlog of 60 million, one quarter ahead of schedule. We now have full visibility into our Q4 installations and Q1 '06 slots are filling up nicely. Having operated the last two quarters with backlog in excess of two quarters product revenue we now believe that this metric will stabilize somewhere close to two and a half quarters of product revenue. As we mentioned before, we're seeing some of our larger interest installations stretch out over several quarters. This is extending the time portions of the order that stay in backlog. We're finding that longer installation schedules work well for new customers and provide a better overall experience working with Omnicell, so we will continue to work at the customers' pace.

Remember our primary reason for building our backlog was to smooth out the peaks and valleys we expect to see in bookings from seasonal factors and the impact of larger deals we are now competing for. A second reason is to ensure we have a big enough pipeline of installations in progress that if a customer's schedule has to change we have other work in progress so that our revenue commitments are still achievable.

Moving on to some highlights of the third-quarter, there were several positive market developments. First, in August we announced that Tri Health, a Cincinnati based IDN and Sacred Heart Medical Center in Spokane, WA, a 623 bed hospital, had each purchased our Optiflex Point of View's Inventory Management System and as was the case with our June announcement that HDA had awarded us with an enterprise wide contract to install our Optiflex Open Supply Management System in 190 HDA healthcare facilities across the US, Optiflex continues to provide an entry point into new customer accounts, such as Tri Health and Sacred Heart.

Second, during Q1 we rolled out our V Sweep line of proactive remote monitoring solutions. Today about 130 Omnicell accounts are up and running on V Director, V Sweep's foundational level for connectivity and monitoring system performance. V Director enables proactive remote monitoring of customer systems and tracks key performance parameters in real time. With V Director our Omnicell technician receives automatic alerts when performance indicators are outside of normal ranges. Our service team can intervene, diagnose and quickly resolve issues preventing disruptions in service. What's special about V Director is that Omnicell is often able to resolve problems before the customer is even aware of an issue.

Third, we officially opened our subsidiary in India during Q3 and hired 30 engineers from our third-party partner we had worked with for the last year. We anticipate adding a significant number of employees to the staff in India over the next couple of quarters to fully staff the project that they are responsible for. There are currently 9 active development projects underway and an extensive QA team in place. We feel that this initiative gives us access to an excellent talent base and in conjunction with our domestic team will enable us to scale our R&D and service investments more efficiently for the foreseeable future.

And fourth, we continue to be in the running for larger deals with multi-hospital systems and integrated delivery networks. As we announced on September 22nd, Omnicell was recently awarded a five-year sole source contract by Catholic Healthcare West for point of use automation solutions, mainly our medication and supply dispensing cabinets. CHW has 40 hospitals across California, Arizona and Nevada and it's the eighth largest hospital system in the nations, as well as the largest non-for-profit hospital provider in California. Given the size of CHW system and the breadth of products covered, the CHW relationship has the potential to be the most significant customer relationship in the history of our Company.

This is representative of the types of agreements we are competing for from the many of the IDNs as they select their supplier of automation products. We feel we are very well positioned with our product line up, service reputation and our focus on these opportunities to win more than our fair share.

Going forward we continue to focus on maximizing the market opportunity in front of us and do our best to ensure great customer experiences dealing with Omnicell. We feel we can do this best by working closely with customers with set expectations and to deliver those expectations. Doing this in a planned way enables Omnicell to operate more efficiently and gives us the best opportunity to scale the Company and earnings in a predictable way. With that I'll turn it back over to Jim.

Thank you, Randy. Now for our guidance. Through the remainder of 2005 and into Q1 '06 the top priority will be to determine right balance between allowing backlog to grow to increase predictability and efficiency and continuing to be responsive to our customers. Because of the higher backlog we now expect to carry into '06 our full year revenue for 2005 will end the year several percentage points below 2004 levels. However, with the improvement we saw in gross margins in Q3 we believe we will now be at the upper end of the range of our prior EPS guidance of a couple of cents full year EPS on a pro forma basis.

We hadn't planned to give fiscal 2006 guidance until our Q4 call, but having reached our stated goal for backlog one quarter early we feel compelled to provide some guidance. Therefore, as Randy indicated earlier we believe that our backlog will continue to expand based on our experience the last two quarters. We are raising our assumption for quarters of product revenue and backlog from two quarters to two and a half quarters. At this level of backlog we believe that we can grow revenue in 2006 between 16 and 18%. At this level of revenue we feel we can generate EPS in the mid to high $0.30 range for the full year.

In summary, we are very pleased with increase in orders, backlog, gross margin and the spending controls we see in Q3. Our pipeline of deals remains strong and we continue to grow in our installed base and add new customers. The level of backlog we carry into Q4 positions us very well to meet our Q4 goals but presents us with a challenge of balancing revenue and growth in backlog one quarter quicker than we anticipated, a nice problem to have, as Randy says. We will now open the call for your questions.

[Operator Instructions] Our first question comes from Glenn Garmont. Please state your company name followed by your question.

Thanks. Good afternoon. I'm with First Albany Capital. Congrats guys on the continued progress. A couple of quick questions. Jim, with the movement, the mix shift between purchases and leases, do you think that the DSOs have peaked here? And secondarily, what percent of quarterly bookings was the anesthesia workstation product? I know last we chatted a couple weeks ago you guys were very excited about the market opportunity there. And then finally, the backlog growth that you reported in the quarter, is there any one single customer that maybe represents a disproportionate share of that backlog? I'm just trying to understand how recent contracts like HCA or maybe even Catholic Healthcare West, although it may be a bit early, but how those contracts are flowing into backlog at this point. Thanks.

I'll start with the DSO question. God, I hope it's peaked, Glenn. So one of the things we're seeing is that we're signing some of these larger deals with some of the larger hospitals that are well capitalized. That seems to be the reason that the mix has shifted towards purchase versus lease, so I think that it will have a little bit of an impact on us going forward in terms of DSO as the purchase component-- if the purchase component remains high, but a lot of the increase this quarter was driven by filling that pipeline and invoicing customers and especially the purchase customers before revenue recognition, so we hope to make really good progress in Q4 in pulling that DSO and the overall AR balance down.

On the product sort of detail around quarterly bookings, we don't want to get into specific numbers there. We still believe that the anesthesia workstation is a real growth opportunity for us and that it will be a very good product for us as it's adopted going forward. It's in the very early stages of adoption, but we don't want to break out a specific number for you there. In terms of the backlog growth, I wouldn't say that there was any individual hospital that was contributing a greater share to the backlog than what we traditionally see. I don't know, Randy, if you've got anything you wanted to add?

Yes. We did find that Catholic Healthcare West sealed a bid, so we did start see some initial sales from some of their hospitals hit the backlog but it's just the beginning for that group.

Okay, that's helpful. Thanks, guys.

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

Hi, Caris & Company. Congrats on a great quarter guys. My questions have to do with just a little more on this Catholic Healthcare West. Are you able to quantify for us, Randy or Jim, what that may mean to the Company in terms of contract values over the five-year period?

Well, it is pretty much a broad range. Being exclusive is a real positive, but there aren't necessarily purchase guarantees, but I think they do have an intent to want to standardize on all their hospitals with our product, which I think is good. You know that in hospitals and depending on their size it varied from as small as a half a million in a hospital up to a million and a half sort of on average on product and sometimes even larger than that on some of the larger hospitals, so it is a significant opportunity with 40 hospitals there.

And just to confirm, this is for both med and supply, correct?

Absolutely, yes.

And to what degree are the Catholic Healthcare West hospitals penetrated with Bedside Solutions or Central Pharmacy Solutions?

Pretty light.

Okay, so you have an opportunity there as well I would presume?

Absolutely, yes.

Great and can you characterize the split between medication-- or pharmacy bookings versus supply bookings in the quarter?

I think we-- I thought we had a note in there, but supply was in the range that we would hope it would be in in terms of about 30%, plus or minus.

Okay.

It was another strong quarter for our supply.

Okay, great and then final question on the lease purchase mix. You say it was driven by some larger hospital deals. Was that at the request of the hospital or was that driven by you in favor of purchases?

We would always prefer a lease so that we had the opportunity to renew and the residual. No, this was the hospital is just looking at how they wanted to finance it and deciding to purchase.

Okay, thanks again.

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

Hi, Peninsula Capital. Great job, Jim and Randy, on achieving the backlog ahead of schedule. I was wondering if you guys could just comment on what's going in with Pyxis in the marketplace and maybe share with us a success story or a customer win that you guys have been able to achieve?

Well, sure. Well, I think its just in general the marketplace is trying to answer the question of how to have the medication use process in particular be more safe and so whether it's our product or a competitor's product there's demand for people to upgrade their systems to the safest, best solutions possible but I think obviously the best example here is Catholic Healthcare West, which I believe at least two-thirds of their hospitals have our competitor's product and so being able to take out the incumbent in that significant area is really important to us and I think they looked at all aspects of what we have. We had a couple of hospitals that did have our products. The extremely positive experience they had dealing with our Company there helped us to gain a foothold in the account and compete for the business.

Excellent and then are your sales guys getting a lot more at bats? Obviously, with what's going on with Pyxis, I mean are they getting in front of a lot of customers that maybe they maybe haven't had the opportunity in the past?

Well, I think it's not as much Pyxis. It's just that IDNs have either had automation for one or two five-year segments and they're looking to see what else is out there certainly and last year with Baylor, people heard about that first initial large IDN sale that we took. And I think as we've been able to post more of these up it's generated more momentum in the marketplace to at least bring us in and talk head to head and just see what we have to offer and what kind of experience they could get with our Company.

Thanks, gentlemen.

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

Cadall Capital [ph], just a quick question. Can you define for me what constitutes backlog, so what has to happen for one of these relationships to produce an order that increases your backlog number?

So backlog is consisting of orders that we have accepted from customers, hard PO. They have a contract signed with us and sort of the criteria, whether it is included as part of backlog or not is if it's deliverable and installable within a year. Most of the orders we receive the customer is looking for relatively near term, in the next quarter or two, installation. There's a few that may stretch out longer than that, but generally the customer is looking for the equipment relatively soon.

Okay and so that would mean that some of the large relationships you've been talking about today would not yet be included in backlog?

I think, as Randy said, we've started to take a few orders from CHW so that one in particular, yes, we've taken a few orders, but--

But generally a lot more to go, so it wouldn't be recognized in backlog until we actually had received the actual purchase commitment and contract paperwork associated with the transaction.

Great, thank you very much.

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

Weber Capital Management. Congratulations, Randy and Jim. On the backlog question again and maybe I just wasn't listening closely enough, but you've taken up the backlog target from two quarters of product revenue to two and a half quarters of product revenue based on your experience recently and that experience relates to the time it takes for that backlog to turn into revenue. Is that what it is? Is that because the customer requests it and because you're doing it in a more orderly fashion that process, the installation process has lengthened it a bit? Is that it?

Yes. That's it and also I would also just say that it's well with-- it's still within meeting the customer's expectation and that's the most important point. We felt like we were at the point that if the next order we took we couldn't meet their expectation on install, well we wouldn't move it out to two and a half. But we're finding that with some of the very large orders sometimes there's constructions of buildings that have to be completed and so a portion of the order might be pushed out beyond two quarters, therefore, leaving a slot for some additional backlog to fall in for the next 180 days in the next order you get, so it's really more of a being able to get more visibility because our customers are fine with us continuing to manage the backlog and the way we're doing it.

The thing I would add to it Gene is that about a third of our business is new customers to Omnicell and with a new customer it's just a longer cycle to go through. If you think about the products we're selling, there's quite a bit of work flow practices and modifying those practices associated with doing the installs, so it just takes time to work with the customer to make sure that when we install it, it's installed and operational the way they want to use it. It's configured the way they want to use it. There's training involved, so most of those new customers generally want to go at a reasonably slow pace unless there is a JACO [ph] audit, or something like that, that they're trying to respond to. We're trying to go as much as possible at the customer's pace, to take their time. If it requires spreading the installation out over a longer period of time, so they get a floor up and operational and can get comfortable with how the systems operate, we're doing that. . We want to provide them with the best experience we can, especially as a new customer, but also with our older customers to really go at their pace and try to be as responsive as we can to their needs.

Got it and is it fair to imply that two and a half quarters of backlog means that your average time from putting the order into backlog to recognizing it in revenue is seven and a half months?

I think the distinction you should make there-- yes, if you do the straight numbers.

Yes.

The distinction I would make is that we-- a lot of what the customer cares about when they give us an order is when they can get started. There isn't as much pressure on when is the installation totally complete and every cabinet I've ordered installed, so it's not like it's taken a full seven and a half months to get the customer up and operational and starting to use the equipment, but in terms of the absolute math you're doing, yes you could make that assumption that when we get to two and a half quarters of backlog it would cycle every seven and a half months.

Yes, roughly. Okay I understand and I kind of view this all as positive because you guys are doing it in a much more methodical manner than you had in the past for sure, so congrats on that.

Our next question comes from Trey Nickerson. Please state your company name followed by your question.

Hi guys, Mustang Investment Group. Just a question regarding Jim's interim CFO title, wondering if you can comment on the status of that, if that's going to change, if there's a search going on or what the story is there?

There's no new information there. I'm not going anywhere any time soon and it's working very well at this point, so nothing to announce.

Okay, thanks.

[Operator Instructions] Our next question is a follow up from Gene Mannheimer. Please go ahead.

Thank you and that was my question, so it's been answered. Thank you.

Our next question comes from Bob Fontana. Please state your company name followed by your question.

Morgan Crossroads Fund. Jim, can you talk about cash flow in the quarter, both from operations and free cash flow?

I would say only to the extent that what I talked about in the script. We generated $3.5 million worth of cash in the quarter. It was primarily, if you looked at the total billings we did during the quarter they were up substantially, as was our deferred revenue on the balance sheet. There were no financing activities that went on during the quarter, so it's a pretty clean $3.5 million cash generation.

Okay, do you guys disclose the number of contract wins in the quarter?

No, we don't talk about that.

No. Question about-- if memory serves me correctly, I recall you guys doing some efforts in China for either I think it was for some assembly and some manufacturing. Can you give an update on that?

Sure, that's moving along nicely. I thing we said two quarters ago that we were starting to see some of the components flow from our sourcing in China. We have started to move into a few sub assemblies, some of the drawers being delivered in initial quantities, so it's moving along nicely. You're starting to see some of the cost savings there flow through and that's part of what's improving the gross margins in the last two quarters.

Okay, thank you very much.

Our next question comes form Alex Jones. Please state your company name followed by your question.

Hi guys, Catalyst Investment Management. My question-- I'm trying to figure out the mix shift from leasing to buying and I was wondering if you could give us some more details on what more, or I should say an increase in your mix towards buying means for the balance sheet as well as for your outlook going forward?

Yes. I mean I don't know that we have-- just on the outlook going forward. It's a customer specific kind of choice, so I don't know that we have a lot of insight as to how that might trend going forward, but historically the percent of customers that have wanted to lease has run between 60 and 70% of our business. This past quarter it pretty much flip-flopped in the opposite direction.

What's driving that?

Well, as I've said I think that what we've seen is that we've had a number of large accounts, hospitals that are very well capitalized that have made a chance to purchase versus lease. Now, whether they're getting better terms somewhere else to finance the equipment or what's behind it, I don't know.

Okay. Randy, when we last met you mentioned that there was-- you were seeing some strength from some government initiatives, specifically the VA. Is there- can you give us an update on that?

Well, I think the VA system has been a sort of leader in the whole patient safety arena and I think they certainly are a big driver of their own purchases, the VA systems, the DODs and the like and without any specifics I think the government was another strong purchaser of equipment this quarter as they continue to want to make sure their hospitals are automated and move as quickly to the electronic record as possible, so there really being pioneers and they like our technology and they seem to be relatively well funded these days, so it's been a real bright spot for us.

Great and then just last question, I think you mentioned this earlier but I was wondering if you could just give us a little more detail on it? Your gross margin improvement, some of it was due to the work you're doing in China and some of it was due to what you called emerging products, which I believe is has a high software component. Can you give us some more detail on that and is this something could probably expand a little further in the next few quarters?

Yes, so when we talk about the emerging products its Pharmacy Central. It's Secure Vault. It is Optiflex, which is very high software content, so it's good to have those products beginning to pick up and contribute to the business. In terms of going forward, we don't give margin guidance. The thing I pointed out in the narrative of the script was that we are now at, sort of the historical range of the Company in the last couple years of 58%, plus or minus a little bit in both '03 and '04, so I wouldn't count on a lot of upside if that's what your thinking but it's good solid margin at this point.

Yes that makes sense. Thanks, guys.

[Operator Instructions] Okay, gentlemen, there are no further questions. I'll turn the call back over to you for any closing comments you may have.

I don't think we have any closing comments. Thanks you everybody for joining us today and--

See you next time.

Talk to you later.

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