Omnicell Inc (OMCL) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Omnicell fourth 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, Monday, January 30, 2006. I would now like to turn the conference over to Jim Judson, interim chief financial officer. Please go ahead, sir.

Thank you, Mary. Good afternoon, everyone, this is Jim Judson, 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 fourth quarter and full-year fiscal 2005 conference call.

You can find Omnicell's fourth 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 or 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 the 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 January 30, 2006, 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.

On the call today, I will start with an overview of the financial results for the question and full year followed by Randy, who will talk about some of the quarter's business highlights. I will then provide some updated guidance for 2006. After that, we'll open the call up for your questions.

Q4 is now the third quarter in a row where we have seen record activity in the positive book to bill driving in increase in our backlog. During the fourth quarter the company added another $8 million to our product backlog. Our ending backlog now totals $70 million, which is a growth of $23 million, or 48 percent in fiscal year 2004 year-end. A contributor to our backlog growth has been some large orders from our IDN wins.

We are working very closely with these customers to schedule their installations out over the next several quarters, with many of them well underway. These customers will provide a solid base for our revenue stream for the next several quarters. Our top 10 deals made up greater than 40 percent of our bookings in Q4. These larger deals enable our installation teams to be very efficient in planning out their schedules and completing the projects.

Q4 orders were strong in both medication and supply products, with most of the upside versus our internal expectations coming from the medication product line.

From a customer mix standpoint, we had a very strong quarter with 48 percent of bookings dollars coming from new customers and competitive conversions. This is a little higher than the recent mix and was driven by a couple of factors. First, we saw another strong quarter of competitive conversions with a little over 20 percent of orders coming from customers switching to Omnicell.

Second, we also had a higher proportion of orders from greenfield accounts -- accounts that have no automation products currently. Over 20 percent of orders came from greenfield accounts in Q4. When we see this level of business from hospitals that have waited so long to invest in automation products finally make the move, we believe it is an indicator of the type of pressure hospitals are under to address the medication use process and a recognition of the benefits our products can provide.

In addition to competitive conversion and greenfield accounts, this quarter we saw our central pharmacy products make inroads into a couple of competitive accounts, opening the door for the customer to become familiar with our full product line of products and services.

Entering FY06, we are very pleased with our product lineup and believe we are very well positioned to take advantage of the current market opportunity.

Revenue for the fourth quarter of fiscal 2005 was $33.5 million, down 2 percent year-over-year but up 9 percent sequentially. On a full-year basis, revenue of $121.5 million was down 2 percent versus fiscal 2004. Despite the decrease in revenue, the business was strong, especially in the second half of the year as reflected by the $23 million growth in backlog year-over-year. Allowing the backlog to grow and working at the customer's pace is reaping benefits for both our customers and Omnicell. The customer is getting a much superior working experience with Omnicell and a much smoother deployment of product. Omnicell is becoming a much more efficient and predictable organization.

During this fourth quarter, we saw our gross margins decline 3.1 points to 55.2 percent. This was primarily due to the mix of product, which we installed in Q4 and, to a lesser extent, to some lower-margin competitive wins.

First, our emerging products, primarily central pharmacy, had a big quarter for completing installation but at a lower than our average gross margins. This alone drove a 1.2 point drop in gross margins.

Secondly, we saw our lease-renewal business decline as a percent of revenue when compared to prior quarters. This contributed to an additional half-point drop in overall margins. While both of these factors put downward pressure on margins, they were both positive events.

The emerging business products are continuing to show good momentum and broaden our revenue base, and when we are not under pressure to renew leases quicker to meet revenue goals, we are able to renew leases on more favorable terms to Omnicell at a later date.

The third mix component that contributed to margin erosion had no overall impact on the P&L, as it was just a push between operating expenses and product costs. We charge field operations expenses to cost of sales based upon a per-frame installed. In Q4 the number of frames installed was up significantly, leading to a greater percent of field operations costs being absorbed in cost of sales. This drove an additional 0.8 point decline in overall gross margin and an equal reduction in operating expense.

The remaining 0.6 erosion in gross margin was due to margin compression in the cabinet business driven by some competitive wins. For the full year, pro forma gross margin, excluding the one-time write-off of $1.1 million of Sure-Med inventory in Q1, finished the year at 56 percent, down 2 points from 2004. The decline reflects the significantly lower margins incurred on the competitive swap out that the company installed in the first half of last year, and two of the same phenomena mentioned above for Q4. More than a 20-percent decline in lease renewal revenues year-over-year and over 60-percent growth in the emerging products revenues versus 2004.

The central pharmacy products carry lower margins than the core cabinet products because of the higher OEM component.

Operating expenses were unchanged from Q3 to Q4. Total spending was up just over 200,000 from quarter-to-quarter due to higher compensation costs associated with the increase in revenue, but as mentioned previously, a higher number of frames installed during the quarter led to more favorable absorption of our field operations organization shifting more spending to cost of sales. This enabled operating expenses to remain flat quarter-to-quarter.

For the full year, operating expenses, excluding one-time charges of $2.1 million, grew 10 percent year-over-year. We were able to take our expense run rate from just over $18 million in Q1 to just over $16 million by Q4. We are very proud of this accomplishment. It leaves us very well positioned entering '06 and able to invest in the business as revenue growth resumes in Q1 '06.

One anomaly we saw in Q4 was the small credit in our tax provision for income taxes as we trued up the accrual for the full year. We had expected to incur the 2 percent alternative minimum tax liability on taxable income. Because of the decrease in our deferred revenue accounts tied to the shift in our customer mix from lease to purchase, we ended up having a small loss for tax purposes as well as GAAP and did not have any federal tax liability for the full year as a result.

The net result of the above translated to an operating income of $1.9 million, an operating margin of 5.7 percent, and net income of $2.2 million and $0.08 earnings per share for fiscal Q4 2005. For the full year, GAAP losses totaled $2.1 million, or an $0.08 per-share loss. Pro forma net income, excluding the $2.1 million reduction in force and the $1.1 million Sure-Med end-of-life charges from Q1, totaled $1.1 million, and pro forma earnings per share was $0.04.

On the balance sheet, cash and short-term investments declined by $2 million during Q4 and by $1.1 million from Q4 a year ago. But we made good progress collecting many of our aged receivables. Our efforts to significantly reduce the overall AR balance were thwarted by the ongoing shift in our customers from leased purchases. As an example of the type of shift we have seen, between Q3 and Q4, collections from our primary leasing partner dropped from $16 million to $7 million in Q4, primarily against current order shipments. To make up for this loss of easy cash collections, we had to increase collections from purchase customers.

The net result was that our AR balance declined only $700,000 to $29.5 million from Q3 2005 levels and increased $7.5 million from Q4 2004. Because of the higher revenue in Q4, our DSO declined by eight days from 82 days in Q3 2005. This is not the improvement we had hoped for, but the progress we made in the aged receivables and weathering the shift from lease to purchases positions us well for collections, going forward.

Inventories of $13.8 million showed improvement, declining $1.1 million from Q3 to Q4. Inventories also declined 800K from a year ago on higher frames output in Q4 showing progress in our days of supply of inventory, another benefit of linearity.

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

Thanks, Jim, and thanks for joining us today. For now, the third quarter in a row, I can say I'm very pleased with our results and the benefits we're seeing from changing our business model. Operating our business in a linear fashion throughout the quarter continues to drive benefits to Omnicell, our shareholders, and our customers.

We are showing that our business can be predictable. We are showing we can deliver high-quality products and superior installation and support services to our customers, and we are showing we can win in the marketplace with the growth in new customers and backlog. Our product offerings have remained strong and gotten stronger with our recent announcements, and our customers have remained loyal. We have made some hard choices in late 2004 and early 2005 that created disruption and caused us to stumble. But we're a better company having change our business model, refocused on the customer, adding depth in the management team, and positioned the company for very good growth, going forward.

Let me take a few minutes to comment on some of the recent news regarding personnel moves at the company. I am very pleased that Jim Judson has been appointed to our board of directors and will continue to work with our staff and myself to move the company forward as the vice president of corporate development. Jim has been very influential in changing our business model over the last nine months and will continue to focus on driving business process improvements and working with the staff to tune our corporate strategy and to enable us to move to the next level.

The other advantage we get with Jim staying with the company is a smooth transition in the CFO role. We've taken our time and found an excellent CFO in Rob Seim. Rob brings an excellent blend of both depth and breadth of financial and leadership experience and large established companies and fast-growing environments and in startups.

In addition to Rob, we have added three senior executives to the management team. Brian Rodli joins us as chief strategy officer. Brian is very familiar with the company and our markets. As a consultant, Brian led the company research project for us, as many of you have heard me refer to over the last year. It brings a passion for understanding the customer requirements, market dynamics, and leveraging data to make better decisions.

We have also added Rick Owen as our vice president of manufacturing. Rick brings a great depth and breadth of experience in companies both big and small and has excellent leadership skills. Rick's initial focus is on developing a comprehensive manufacturing strategy and driving product costs which should enable to compete more aggressively. Rick has excellent experience in the area from his time at Cisco. I'm confident Rick will take Omnicell to the next level in our product cost, quality, and delivery.

The most recent addition to the team is Peter Fisher as our vice president of engineering. You'll see a press release of Peter in a few days. Peter has over 20 years of product development experience in Silicon Valley at HP, Pinnacle Systems, and Abbott Technology. Peter led innovative teams and cutting-edge systems designs and development of mission-critical applications. The systems achieved 99.99 percent up time, making him an excellent fit to lead the development of our mission-critical solutions. Peter is well trained in quality design processes and will excellent leadership to our product development process.

All of these additions have been done with a common theme of bringing in executives with experience to take the company to the next level. I see our company as being very well positioned to take advantage of a long-term growth cycle in our market, and I believe I've brought in a group of seasoned executives that can supplement the current team to take advantage of the opportunity in front of us.

Speaking of opportunities, let me say a few words about our most recent major idea and win. In late December we announced a sole-source contract with the Advocate Health Network of hospitals in Chicago. Advocate is a group of 10 large hospitals with approximately 3,500 beds in their network, a little over half the number of beds served in the Catholic Healthcare West contract we announced in Q3. Similar to Catholic Healthcare West, the contract is a five-year, sole-course agreement for point-of-use automation solutions, mainly our medication and supply-dispensing cabinets. Prior to this award, Omnicell had limited penetration in the account, so we're very pleased with this competitive win.

In early December at the ASHP Midyear Clinical Meeting in Las Vegas, we issued some significant new product and service announcements including the unveiling of our new Point-to-Point medication safety solutions, integrating our medication dispensing cabinets and our bedside medication administration system. Point-to-Point is a unique integration by Omnicell that adds six new medication safety checks and enhances nursing workflow.

In addition, we introduced Omnicell 10.0, the latest release of our medication system software, which gives our customers important new tools for improving management of medication use process. A large portion of this release was targeted to the unique requirements of the operating room and our Anesthesia Workstation. In this product, we believe we have the best solution on the marketplace to address the needs of this segment. The timing is also right, as regulators are turning up the heat on hospitals to assert control over this key area in the medication use process.

I would also like to highlight two announcements we made in late October and mid-November. We shared our two hospitals, Hendricks Regional Health in Danville, Indiana, and the University of Illinois Medical Center at Chicago, and both installed a number of our MedGuard solutions, providing improved safety and enhancing efficiency in both the central pharmacy and nursing units. These two hospitals reflect the increasing market acceptance of our integrated end-to-end approach to improving the medication use process.

Last quarter I mentioned our vSuite line of proactive remote monitoring solutions. During Q4 we also doubled the number of hospitals that are up and running on vDirector, vSuite's foundational level for connectivity and monitoring system performance to approximately 200 hospitals. This is another example of change in our business that is a win-win for both Omnicell and our customers. Just to remind you, vDirector enables proactive remote monitoring of customer systems, attracts key performance parameters in real time. With vDirector, an Omnicell technician receives an automatic alert when performance indicators are outside of normal range. Our service team can intervene, diagnose, and quickly resolve issues preventing disruptions in service.

What's special about vDirector is that Omnicell is often able to resolve problem before the customer is even aware of an issue. We are finding that tool enables us to resolve issues quicker when they occur in a much more productive manner.

Lastly, I'd like to comment on the overall strength of the business and the success we've had during 2005 and positioning the company for 2006 and beyond. As we have seen with the strength in orders from the last three quarters and the major IDN wins we announced, demand for our products is strong and in head-to-head competition for these long-term sole-source awards, hospitals are choosing Omnicell. Our product offerings have never been more robust and better positioned competitively.

As you can see from the numbers of greenfield accounts we are winning, even hospitals that have deferred investing in automation products, are now moving forward. It's rare when we lose our own accounts, or we're taking share with these major IDN awards and our fair share of greenfield accounts as well. I am very pleased with our competitive position.

In 2005, we've made some dramatic changes to the way we are running the company. We redoubled our efforts to focus on the customer experience of dealing with Omnicell, making it our highest priority. We allowed our backlog to grow at the expense of current period revenues to enable us to operate more efficiently, and we've rounded out the management team to provide depth to take us to the next level.

I am very pleased with the health of the company as we enter the new year. With that, I'll turn it back over to Jim.

Thank you, Randy. Now for our guidance -- as we move in into Q1 '06, our top priority is working with our customers to understand their requirements and schedule installations that are responsive to their timing, as Randy has said. The major IDNs we have won in the last several quarters have contributed to our growth in backlog. We are working closely with them to schedule these installations out over several quarters. These installations will provide a solid base of business for a number of quarters, going forward.

As we have said for the last three quarters, entering the current quarter, we had full visibility to the installations we need to complete in Q1 '06 to achieve our revenue goals. We also have excellent visibility to Q2 installations. At this point in Q1, despite the increased backlog, we still have installation slots available in Q2 for several million dollars of new orders for customers who need a quick installation. It's our goal to maintain this flexibility to meet customer requirements for quick installations.

We are cognizant that historically Q1 has been a seasonally soft quarter for orders, which has been problematic in the past. This is why we have elected to build backlog, to smooth out peaks and valleys and incoming orders without impacting revenue growth. For Q1 2006 we expect that financial results will look very similar to Q4 2005 with slightly higher expenses associated with some of the key hires we have announced and returned to a more normal tax provision.

For the full year, we believe that our guidance from last quarter's call for fiscal 2006 is still valid. We expect revenues to grow 16 percent to 18 percent year-over-year, though we are now comfortable at the higher end of that range. As we said last quarter, we expect EPS in the mid- to high-$0.30 range. This would be prior to implementing FAS 123R. We'll now open the call for your questions. Mary, if you would go ahead.

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

Thanks, First Albany Capital. Just a real quick question, Jim, on the backlog. You've got a little over two-and-a-half quarters' worth of product sales in the backlog at this point. I was just wondering, you know, is this sort of where it peaks or could the backlog still trend higher, and you still get product installed in a reasonable amount of time? And then I'm assuming it's the linearity in the model that's causing the anticipated Q1 results to be sort of similar to Q4 so we're not seeing that seasonal weakness. Can you speak to -- will there be any type of seasonality in 2006 now that that is, you know, no0rmal? Or is it expected to be a normal revenue year? Thanks.

I guess, on the question of seasonality, since I just touched on that in the guidance, one of the reasons we built the backlog is to be able to smooth the revenue growth and not be dependent upon orders coming in at the last minute to make the quarter. So it remains to be seen just whether Q1, from an order standpoint, will be a seasonally slow quarter or not, but we are positioned at this point to make our revenue numbers without having a real strong Q1 bookings quarter. So, yes, I think from a revenue and P&L standpoint, we've removed a lot of the seasonality with the new business model.

On the quarters of backlog, yes, we are bumping up against the guidance we put out other last quarter as to where we thought backlog could grow to. We think that it will stabilize somewhere here around two-and-a-half quarters, and I guess the other thing I would just say is that -- remind you we are going at the customers' pace, and at this point we're not getting a lot of pressure to move faster. As I said, we do have a couple of million dollars of slots in Q2. The other point I would make is that, as we said in the call, a lot of our business is from new customers -- 48 percent from new customers in Q4, and the installations with new customers tend to stretch out over a little bit longer period of time, and we want to make sure that we do them very well, and the customer get a great experience working with Omnicell. So that's part of what allowed us to stretch out the installations a little bit as well.

Okay, that's great, thanks, Jim.

Your next question comes from Sean Wieland, please state your company name followed by your question.

Hi, guys, Piper Jaffray. Given the higher mix of new customers in the quarter, can you talk about macro-level drivers for both greenfield accounts as well as customer conversions? Has anything changed recently or what do you see in there to drive that business?

I think there is. It's continual pressure on the hospitals to answer the questions about medication use process and having a total solution that answers their problems. And because of that, I think we're seeing, sort of, three things. One is all the greenfield accounts have to do something about it finally. You know, in competition we're seeing hospitals trying to pick a single vendor to work with because they want to integrate these systems more closely with the rest of their operations. Finally, people who have had these systems for two or three years --two or three -- sorry -- longer than two or three years, have purchased them for the last 10 years now want to upgrade to the next level. So you sort of have those three things working together. That gives us a lot of opportunity to grow the business by.

So I would say that there is a continual -- even moreso, I would say, than at the beginning of the year, 2005 and the end of 2005, I think we're seeing more opportunities than we've ever seen.

Okay. So as far as you know, there's nothing specific with respect to, maybe, JACO or any other accreditation?

Well, I think we've been talking about JACO and those groups for a while, but it takes a while for these institutions to actually put things in motion for funds. So I think it is sort of delayed reaction to the hospitals finally getting around to moving forward with these kinds of products and making decisions they need to to move forward.

Okay, and given where your pipeline is today, do you think that bookings mix can stay somewhat similar to Q4, or is that going to revert more towards 30 percent of new business?

You mean new business?

Well, meaning is your bookings mix going to stay as high as it was this past quarter? I'm sorry -- weighted higher towards --

I think it might be weighted a little higher than historical 30 percent, but I don't know if it's going to continue at 48 percent -- probably somewhere in between.

Okay, and just one quick question on the Q1 guidance -- so you said it's going to look similar to Q4. Does that mean that it looks similar on the top line and bottom line with a little bit of mix going on between opex and cost of goods sold?

I would say so, yes. I think that with things like new benefits rates kicking in; we've just hired some people that Randy talked about. We'll see the spending creep up a little bit, but I would expect the top line to be very similar.

Okay, great, thank you very much.

Your next question comes from Steve Halper. Please state your company name followed by your question.

Hi, Thomas Weisel Partners. My question is on the gross margin in the quarter. I guess you talked about some sort of re-allocation of costs going into the cost of goods sold, and I wonder if you could just elaborate on that. What kind of costs, what kind of resources were deployed and in light of that, we noticed that your R&D expense on the income statement was below that of a year ago, so we wanted to know if that had anything to do with the swap -- so just a little bit more detail on this trade-off.

Sure. The R&D being lower had nothing to do with the swap. I suspect that that's some timing issues with some software capitalization and that type of thing with the 10.0 release. I don't think it changed materially.

On the push between op expense and gross margin, what we do there is, we charge a per-frame installed amount for the field installation teams to cost of sales with the rest of it staying in operating expense for sales support kind of activities. And what we saw this quarter was the mix of frames that we sold was higher. So just the raw frame count -- we count all frames equally, so whether it's a one-cell or a three-cell, it all gets the same cost allocation. So the total number of frames that ship and got installed was just a little bit higher this quarter than historically.

So your cost for sales support activity was lower as a result? I'm just trying to find out where it came from.

It's the cost of --

The offset that you talk about.

Yes, so our total spending went up about $200,000. Had the cost that got allocated above the line of cost of sales been equal with Q3, we would have seen operating expense go up a couple of hundred thousand dollars. Instead of operating expense going up, the allocation up to cost of sales increased. So it was just a push between operating expense and cost of sales.

Okay. And, finally, what tax rate should we be using for 2007?

Pre-123-R, I would say that -- I would expect something around 4 percent to 5 percent.

Okay. And when will you start expensing options?

Well, we've got to do it in Q1.

In Q1, okay. So the guidance that you reiterated, that excludes the options?

Yes, it does.

Okay, thanks.

Thanks, Steve.

Your next question comes from Mike Bosman. Please state your company name followed by your question.

Peninsula Capital -- great quarter, gentlemen. I'd like to start off by just asking how is the streamline of the installation going? Work with your vendors, where you're having more up-front assembly done? Is that having an impact on the gross margins to this point?

I think we're -- every quarter we're institutionalizing a new set. Rick Owens just came on board the last month, so I think he's got one or two new pieces of his new model every quarter as we go forward this year. So we don't have all of the pieces that we'd like to have in place. We'd like to, obviously, get our vendors more in line with our production and help us get to a really lean manufacturing process by the end of the year, and we think it will take us that long to get there.

He asked about installation.

Oh, sorry, installation. Well, I can tell you about --

Either way.

But I think, as well, on the installation process, I think we are seeing productivity, especially with the IDNs, as we go in and set up expectations of what we ought to be doing, what kinds of tasks they ought to be doing, and as we go forward, I think we'll see even more productivity as our company gets to doing installations this way. We've done a significantly better job in improving the whole process in the company, and I'd say we're about 70-percent there and have another 30 percent to go over the next 12 months.

Great, and then can you comment on the greenfield accounts? Twenty percent revenue seems like a pretty large number. Are these single-product installations or are these sites doing multiple products at once or can you just comment on that?

Well, I think there's a multitude of -- it could be several different products, but probably the majority are our main core product lines, but we are seeing some greenfield accounts where people are doing automation down at the pharmacy -- Pharmacy Central and pharmacy packaging product is the first move. But, you know, a lot of these hospitals have just -- for either financial reasons or for process reasons have not improved with automation in the past, and I think it's really difficult to meet the JACO regulations, which are coming out pretty tough.

The other thing to remember is JACO could put a regulation in today that would focus hospitals on improving things, but JACO actually only reviews a hospital every three years. So depending on the timing of your JACO inspection that you have, it may drive the process a little bit differently. And so I think JACO started about two years on this bandwagon of medication use process and focus, and we're starting to see JACO get through just about all these hospitals that need to have something in place.

Jim, do you have the cash flow from operations number for the quarter?

I don't have it right here in front of me, no.

That's fine, I'll get that offline. Thanks, gentlemen.

Thank you.

Your next question comes from Shawn Boyd. Please state your company name followed by your question.

The company name is Westcliff Capital Management. Good job, gentlemen.

Hi, Shawn.

On the issues on the gross margin side, I just wanted to touch on that. I know you've already answered a couple of questions here, but, Jim, the first thing you mentioned was lower margin product, lower margin wins in the bookings that then came into the revenue line as these were installed. Are there enough of that lower-margin business still in the bookings such that we are going to see the gross margin at this level again or even lower, or are we able to expect it's sequentially up from here?

I don't tend to give specific guidance on the gross margin, but let me see if I can at least point you in the right direction. So, yes, most of our Central Pharmacy products are OEM products. So they tend to come with a much higher material cost component than the cabinets that we build ourselves.

To the extent that those products are being successful in the marketplace and becoming a significant portion of the overall revenue, it will put downward pressure on the margins. So this quarter we did have a significant amount of revenue from those products, and we have a good, healthy backlog on those products as well, and, as I mentioned, some of those products have actually opened up the doors into competitive accounts for us. So, yes, they will provide some downward pressure. I don't know that it will be downward pressure from where we are currently, because I don't think the mix will increase significantly from where it was this last quarter. But it's very healthy for the business, overall, because it broadens our product line and gives us more to sell in to customers and, as we saw this quarter, an entrée into these competitive accounts that we otherwise wouldn't get into.

And kind of longer term, is the company still targeting a 59 percent, 60 percent gross margin at 15 percent operating margin level?

I don't know that we've thrown a margin -- a long-term margin target out there, but we have said that we'd like to get to a 15-percent operating income. I don't see us getting there this next year. I would hope that by the end of the year we get to double digits.

And the only other thing was just on the DSOs -- refresh my memory -- did you say that was down -- down, like, seven, eight days?

It was down eight days to 82.

Okay, great, thank you.

Thanks, Shawn.

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

Hi, good afternoon -- Cannell Capital. Can you comment on the acquisition priorities, if any, that you may have, which seem embedded in some of the personnel changes that you've announced in the last quarter? Thanks.

I think that we're always opportunistic. I think we feel like the company is running well. We want to constantly look, particularly as we get out of the later years, how we want to continue to grow the business and service our customers. They want to buy products and solutions from us primarily because of the great job we do, so I think we're constantly on the look for those that may make sense. In the past, we've been fairly prudent and very -- a high bit of discretion in getting into any of these, and as well as we haven't used a lot of capital to acquire them. So I think we're always thinking about them, but I wouldn't say that it's the highest thing on our docket at this moment.

Other questions, Mary?

Our next question comes from James Lane. Please state your company name followed by your question.

It's NorthStar Investment Management. I think the question is for Jim Judson. You mentioned a couple of times about the company becoming more customer-focused in 2005. I was just wondering if you could maybe review areas where the company turned up expenses and customer service, you know, maybe at the sacrifice of short-term earnings. Because it did seem like you emphasized that a few times in your prepared remarks, and then I just have a follow-on comment.

I think we've talked about it over the last couple of quarters -- the focus that we're trying to bring to the whole customer experience and working with Omnicell. I'd say that the place where we've made the most impact in the last couple of quarters here is just around the installation process and really working with the customer and make sure that we fully understand what they're hoping to accomplish by implementing the systems, you know, making sure we understand the interfaces and the integration that we need with other applications they may have working and just really make sure that it's done very well and the customer is able to hit the ground running; that they fully understand what's involved with using these systems and maintaining them, going forward. So that's kind of the customer focus area that we're particularly focused on.

The other thing I would say is that by taking our time and doing these right, we don't waste the resources or our install team flying in, material not being there, customer changing their mind, you know, once they find out what they've ordered and the configuration, how it's going to work, the whole thing. So we're saving a lot of money flying people around, travel costs, freight costs, from expediting material around, and that's where the cost savings are coming from, to a large extent. So it's both discretionary kind of spending associated with the installs as well as people time.

I'm wondering if we, as a company, in '05 spent money on learning more about the marketplace that in '06 and '07 we should start to benefit from more operating leverage as a result of making those expenditures in '05. Or do we just keep reinvesting what otherwise could be excess earnings? I'm just wondering if, at some point, we start to see more operating leverage overall.

Well, and I think that in order for us to get to double-digit operating income percent by a Q4 timeframe, we've got to get some leverage out of the P&L, especially if there's any kind of margin pressure from some of these IDN wins. So I would expect that we're going to continue to invest in the business, but that we ought to get some good leverage with the fixed costs that we have in place.

Okay, thank you.

Your next question comes from Gene Manheimer. Please state your company name followed by your question.

Hi, Caris & Company -- nice quarter, guys. Forgive me if you've already talked about this, but could you comment on the turns business this quarter and what percent of revenues that was?

Well, I can hardly remember what a turn is. We didn't have any turns where we had to ship product in and to try to meet revenue goals. The only kinds of product that we're shipping same-quarter orders is where it meets customer demand or requirements, and so we've had none of those that did require customer demand, and sometimes we get a customer who really needs to have something in because of operational issues. So the model to work linear is working. Our management team is incented to ensure that approximately by the end of the second month of the quarter, approximately two-thirds of the business is done. So we're really focused on that because we know it drives efficiencies, it means we don't have to run overtime, and a lot of these benefits, I think we'll start to see flow through more easily even in 2006.

Great, thank you, Randy.

Thanks, Gene.

Thanks, Gene.

Thank you, one moment, please. Our next question comes from Richard Close. Please state your company name followed by your question.

Yes, Richard Close from Jefferies & Company. I just wanted to go back to the bookings number -- I think you did talk about the new customers being about 20 percent of orders, and the conversions being 20 percent as well. Did you talk at all about -- or could you give us a little bit of guidance -- or -- forethought with respect to what you expect conversions versus new orders, going forward, or greenfields, going forward, the percentage breakdown?

I think that's a little tough to call, but I would say that we have roughly seen a profile that's been about 50-50 for the last three or four quarters. My guess is that it's going to continue to be that. Our sales force is incented to do both, and I think that historically the last couple of quarters, as I think I recall, around 30 percent. We actually went up to 48 percent with new customers, and I think it's going to be definitely greater than 40 -- greater than 30 percent, and maybe not as high as 48 percent, but definitely closer to 40 percent. We're continuing to grow the business outside of our customer base.

And then with respect to, I guess, concentration in terms of bookings, I think you mentioned about 40 percent -- or the top 10 deals accounted for 40 percent. Would that be a sort of ballpark figure, going forward, as well -- similar metric?

I don't know, that's a tough one to judge. I'd say that 40 percent in the top 10 orders is higher than we've seen historically, but we tend to see larger orders especially out of these very large IDNs.

It just depends on the timing in some of these initial IDN orders, I think. It's a little hard to call on the timing.

Okay. But would you characterize, if you're adding these larger deals, that these larger deals are coming in at lower margin?

I would say that there are -- -any time that a large organization like this goes through an RFP process, I mean, they're looking to get a better deal than the typical deal on the street. So, yes, by default, I would say there's going to be slightly lower margins from these large IDNs than you would get from the one-off deals.

Okay. Thank you very much, I appreciate it, congratulations.

Thank you.

Thank you.

Thank you. Management, there are no further questions. I'll turn the call back to you for any closing comments you may have.

Okay. I didn't have any closing comments, but I would just like to let everybody know that Randy and I will be back in our offices after we complete the call here if there are any follow-on questions. And thank you very much for attending.

Thank you. Ladies and gentlemen, that does conclude today's teleconference. If you would like to listen to a replay of today's conference, you may dial in at 303-590-3000, or 1-800-405-2236 followed by the access code of 11050912 and then followed by the pound sign. Once again, those numbers are 303-590-3000, or 1-800-405-2236 followed by the access code of 11050912 and then followed by the pound sign.