Omnicell Inc (OMCL) 2006 Q1 法說會逐字稿

Thank you for standing by ladies and gentlemen. Good afternoon and welcome to Omnicell's first quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Rob Seim,please go ahead, sir.

Thank you. Good afternoon this is Rob Seim, Chief Financial Officer of Omnicell. With me today is Randall Lipps, Omnicell's President and CEO. Thank you for joining us today for Omnicell's first quarter 2006 conference call. You can find Omnicell's first quarter results press release in our investor relations section of our website at www.omnicell.com.

This conference call is the property of Omnicell Incorporated, 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 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 analysis of financial condition and results of operations. And under the heading risk factors in Omnicell's annual report on form 10K filed with the SEC on March 16th, 2006, as well as other filings with the SEC.

Please be aware that you should not place undo reliance on any forward looking statements made today. The date of this conference call is April 20th, 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. For the call today I still start with an overview of the financial results for the quarter, followed by Randy who will talk about some of the quarters business highlights. I will then provide some updated guidance for 2006. And after that we'll open the call for your questions.

So now for the Q1 results. So Q1 was a very solid quarter for Omnicell. The quarter was the fourth quarter in a row that we've experienced a positive book-to-bill ratio, driving an increase in our backlog. During the first quarter the Company added another 7 million to our product backlog. Our ending backlog now totals 77 million. We're very happy with the order rate given the usual seasonal weakness of Q1. We continue to enjoy some large orders associated with our IDM wins announced in previous quarters and we also experienced a strong order rate across the rest of our customer base.

In addition we continue to add new accounts. 30% of our bookings were from competitive wins and customers installing automation for the first time or accounts that we call greenfield accounts. Like last quarter about half those bookings were from competitive wins and about half were greenfield.

The bulk of our backlog is scheduled for Q2 '06 and Q3 '06. But some of our customers have requested installation dates that are in later quarters. Our operations team works very closely with our customers to schedule installations on their desired timing. And we maintain a capability to perform installations on short notice. Most of our customers, especially the new customers, require a longer carefully planned and carefully executed installation. We feel our backlog level is appropriate for our market and it provides us with visibility to run our operations efficiently. It also gives us an opportunity to work with our larger customers well in advance to ensure installation slots and plan the rollout across their network. In Q1 our largest 10 deals made up greater than 40% of the bookings.

We're pleased with our order rates but we're also very pleased with the mix of our orders. Our booking rates are growing across our product lines. Year-to-year we saw strength in medication, supply, and central pharmacy products. And our new accounts are purchasing products from the whole spectrum of our product line. So entering 2006 we feel we have a very strong product line up and believe we are very well positioned to take advantage of the current market opportunity.

Now I'd like to discuss our first quarter financial performance but before I do I'd like to remind everyone that Omnicell has adopted financial accounting standard 123 revised this quarter. Which we'll refer to as FAS 123R during the rest of this call. It was adopted using the modified perspective method. Under this accounting standard the estimated future value of employee stock options and our employee stock purchase plan is treated as an expense. The accounting [pernouncment] is applied perspectively, meaning there is no impact to prior periods.

Internally, in addition to GAAP financial statements, we use financial statements that do not include stock based compensation expense related to employee stock options and employee stock purchases. And we feel it's useful to investors to understand the stock compensation expenses associated with the implementation of FAS 123R and nonGAAP results excluding these expenses. I will first discuss our GAAP performance then I will discuss our nonGAAP financial performance without the effects of FAS 123R.

Revenue for the first quarter of fiscal 2006 was $33.9 million, up 18% year-over-year and up 1% from the fourth quarter of 2005. On a GAAP basis gross margin was 54.4% and that included 269,000 associated with FAS 123R stock compensation expense. Operating expenses were 17.6 million including 1.5 million of stock compensation expenses. Net earnings were 1.1 million or $0.04 per share.

Now I'd like to cover our nonGAAP results excluding the stock compensation expense associated with FAS 123R. I will be making year-over-year comparisons to the reported nonGAAP results of Q1 2005, which excluded 3.2 million of one time charges. Full reconciliation of our GAAP to nonGAAP results is included in our press release.

Let me start with gross margins. Excluding the $269,000 charge associated with stock compensation expense that was applied to COGS, our nonGAAP gross margins for the first quarter 2006 was 55.2%. Up from nonGAAP gross margin of 53.8% reported for the first quarter of 2005 and that excluded the one time write off of SureMed excess inventory totaling 1.1 million. NonGAAP gross margin for the first quarter of 2006 was flat to Q4 '05. And also the reported gross margins are flat quarter-to-quarter. There are some significant offsetting variances that I'd like to discuss.

First there has been a shift of expenses from the operating expense line to the cost of goods sold line of our income statement. This has occurred because the transition to [lieniarity] of installations has allowed our operations team to focus most of their time on post sales installation and less time on presales activities. Correspondingly our service staff is spending more of its time directly involved in supporting our maintenance contracts. We reassess the efforts spent on installation activities annually and adjust our departmental charging accordingly. This assessment together with a more refined system of direct charging has decreased gross margin by 3 points overall from Q4 '05.

This direct charging effects service margins to a greater extent than product margins. I'd like to point out that this change is directly offset by a decrease in operating expenses. It does not represent an increase in our overall spending levels nor is it a decrease in our overall profit. However the direct charging method that we're now utilizing should give us less variability in our gross margins going forward.

Now offsetting the margin decrease associated with this direct charging change are fundamental improvements in our gross margins. First our product material margins have improved slightly through our focus on material cost improvements. We've seen improvements from our vendor sourcing strategy and we look forward to more cost reductions in this area. Our efforts at establishing installation [lieniarity] in our business within each quarter and installing on our customer's schedule have provided additional costs efficiencies in manufacturing overheads, in [rework] costs, in scrap, in inventory losses, installation materials and shipping charges. And all that together improved gross margin 3 points this quarter. And we had a very good quarter in these areas and we plan to continue our focus on maintaining the cost efficiencies that we've attained thus far.

Our nonGAAP operating expenses excluding FAS 123R were 16.2 million, down 11% from our 2005 first quarter nonGAAP operating expenses, which excluded 2.1 million of one-time charges. NonGAAP operating expenses are down .4 million from Q4 '05. And as I mentioned quarter-to-quarter there was a shift of operating expenses to cost of goods sold associated with the direct charging of our operations installation activity, and that totaled 1.1 million. This shift was partially offset by severance costs, higher than normal accounting fees, and prototype expenses, totally 7--.7 million.

Our nonGAAP net income excluding stock based compensation expense associated with FAS 123R was 2.9 million, or $0.10 per share. And that's $0.02 above the analysts consensus. This compares with nonGAAP loss of 2.6 million or a loss of $0.10 per share in first quarter of last year excluding 3.2 million of one-time charges. Q1 2006 nonGAAP net income is up from 2.2 million or $0.08 per share in Q4 '05.

On the balance sheet cash and short term investments are 33.9 million, an increase of 4.3 million from Q4 '05 and an increase of 7.6 million from Q1 a year ago. I'm very happy with the improved rate of collections that we made during the quarter and the quality of the receivables has also improved, with aged accounts sharply down. Our DSO has improved from 81 to 79 days. The past quarter shift from leasing to purchase customers, and shipments against our backlog for their queueing for installation have kept the overall accounts receivables balance roughly flat at 30-- 29 million. Inventories of 12.2 million showed improvement, declining 1.6 million from Q4 '05 to Q1 '06. Inventories also declined 3.1 million from year ago level primarily due to the efficiencies of [lieniarity] and better visibility to material requirements. With that I'll turn it over to Randy to provide an update on the business.

Thanks, Rob. And thanks for joining us today. Well I'm very pleased with our results this quarter. Growing backlog again in our seasonally weakest quarter shows the strength of our product line in the marketplace. Operating our business in a linear fashion throughout the quarter continues to drive benefits to Omnicell, our shareholders and our customers. We are demonstrating yet again that our business can be predictable. And with the strength of our new customers, we're showing that high quality products and superior installation and support services win in the marketplace.

Our product offerings have remained strong and we are gaining customer momentum with our recent announcements. Let me take a few minutes to comment on some of the recent news regarding personnel moves at the Company. I'm very pleased that Renee Luhr has accepted the position of Vice President of Sales. Renee steps into this position after leading Omnicell's corporate sales team for the past three years bringing the firsthand customer experience a person only gets while managing deals such as Catholic Health Care West and Advocate Health Care. Renee brings over 20 years of experience in health care sales to the position and we look forward to Renee's leadership and perspective in quarters to come.

Back filling Renee's position in corporate sales and reporting to her is Gary Robinson who has been with Omnicell for 11 years and most recently was our VP of International Sales. Like Renee, Gary brings continuity of experience with Omnicell. I'd also like to take a moment to thank Gary Wright for his more than 10 years of service to Omnicell and for his contributions in establishing our international business and growing our domestic sales organization. He's a tribute to his leadership and team building that we have the bench strength inside Omnicell to fill both the VP of sales position and the corporate sales position.

Gary made a great impact to the development of our Company and we wish him all the best in his new endeavors. As part of Gary Wrights transition of responsibilities, marketing will report to [inaudible] and Rodli, our Chief Strategy Officer. These changes as well as the executive appointments we announced last quarter have been done with a common theme of bringing in executives with experience to manage continued growth in our Company. I see Omnicell as being very well positioned to take advantage of a long term growth cycle in our markets. And I believe I've brought in from both internal and external sources a group of seasoned executives that will fully take advantage of the opportunity in front of us.

Speaking of opportunities, let me say a few words about a number of positive market developments that took place during the quarter. First in January we were pleased to announce that Novation, one of the largest group purchasing organizations in the US had awarded a three year contract to Omnicell. This announcement was particularly significant because Omnicell was the only company awarded a contract for its entire automation products portfolio.

Second, in mid-February we issued press releases on the positive experiences of two of our customers who are using some of our most advanced solutions. Jeff Anderson Regional Medical Center, a hospital in Meridian, Mississippi shared our unique point-to-point medication safety solution, the integration of our OmniRX medication systems and SafetyMed RN bedside system has really benefited nurses. Also the university of Maryland Medical Center reported that our anesthesia workstation has significantly improved bill inaccuracy and work flow in that facility's 31 operating rooms.

And third, last month Overlake Hospital Medical Center in Bellevue, Washington, announced that it had selected and is implementing our SafetyMed RN bedside solution. This announcement was especially significant because of Overlake's status as a leading, high tech hospital. And the [inaudible] and comprehensive nature of Overlake's evaluation process involving representatives from pharmacy, nursing and information systems. I think all of these customer wins underscore the reputation for quality and ease of installation that Omnicell's products carry.

And that reputation is substantiated even further by the recent results published by MD Buyline. MD Buyline is an independent third party Marketed Intelligence Firm that collects user satisfaction data for approximately 3200 hospitals. In their most recent report published April 1st 2006 Omnicell had the highest user satisfaction ratings overall and the highest rating in all of the six specific categories surveyed by MD Buyline covering system performance, installation and training, and customer support. Omnicell's high ratings are no surprise because we're focused on making our installation experience the best in the health care industry and we focus on making our products easy to use.

We have a great list of product features like Omni Dispenser our unique single dose dispensing module. Our Guiding Light technology. Our Touch & Go Biometric Fingerprint Reading security feature. Our flexibility in our report writing, our clinical pharmacology drug information database integration, and our V Suite Proactive Remote Monitoring Service. All of these differentiate us in a substantial way and the MD Buyline report is evidence that customers recognize these product features as well as our service and installation teams focus on customer satisfaction.

And finally, let me just comment about the overall strength of the business as we complete our first quarter of 2006. As we've seen with the strength in orders from the last four quarters, as a major IDM wins we've announced, demand for our products is strong and in head-to-head competition from these long term soul source awards, hospitals are choosing Omnicell. Our product offerings have never been more robust and better positions--better positioned competitively.

And as you can see from the continued contribution from greenfield accounts we're winning, even hospitals that have deferred investment in automation products are now moving forward. It's rare when we lose one of our accounts and we believe we are gaining market share. I'm very pleased with our competitive position and we're not stopping here. We are going to continue to focus our efforts on maximizing the quality of the customer experience in dealing with Omnicell making it our highest priority. And we plan to invest in customer facing staff to continue to improve the customer experience.

With Renee Luhr's appointment we've rounded out the Management team to provide the depth we need to continue to make operational improvements and grow our business. And we continue to be the only company in the marketplace focused exclusively on medication and supply chain automation. I'm extremely excited about the health and the future of our Company. With that, let me turn it back over to Rob. Rob?

Thank you, Randy. And now for our guidance. As we move into Q2 '06 our top priority continues to be working with our customers to understand their requirements and exceed them. whether it be in the installation experience and product features or in customer service. The major IDMs we've won in the last several quarters have contributed to our growth in backlog. We're working closely with them to schedule their installations, and roll out Omnicell's products across their networks. And these installations will continue to provide a solid base of business for a number of quarters going forward.

As we've said for the last several quarters entering Q2 '06 we had full visibility of the installations that we need to complete in the quarter to achieve our revenue goals. We also have excellent visibility to Q3 installations. And we manage our installation [repurchases] to provide the capability to install new orders for customers who need a quick installation. It's our goal to maintain the flexibility to meet our customers requirements. We did enjoy improved operating margins beyond our previous guidance for Q1 due to a slower spending ramp than anticipated and efficiencies that we gained from [lieniarity]. But as Randy mentioned we do plan to invest in our staff to assure we continue to meet the customer's needs.

For Q2 '06 we expect 3 to 4% revenue growth sequentially. For the full year we had previously guided to a 16 to 18% revenue growth year-to-year and nonGAAP EPS excluding stock compensation expense in the mid to high $0.30 range. Now we expect higher revenue and higher earnings. We now expect revenues to grow 19 to 21% year-over-year and nonGAAP profit to be 44 to $0.48 per share, excluding expenses of stock options and the employee stock purchase plan associated with the adoption of FAS 123R. With that, we'll open up the discussion to your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Glenn Garmont has first question, please respond with your company name followed by your question.

Thanks, good afternoon. First Albany Capital. Just real quick. A great looking quarter. Backlog, guys, stands at about three times--almost three quarters worth of product revenue. Just thinking about that on a go forward basis have we sort of, modeling this out going forward, have we seen the peak? How much larger can the backlog get with respect to in relation to product revenues? Thanks.

Thanks, Glen. I think the key is that we're really focused on the customer experience. And a little misleading about backlog, is you can just kind of add it up and say oh well that's three quarters of backlog, but as we stated in the call we've got the next couple of quarters schedule out and then after that we've got the next two quarters schedule out with some of that backlog. So it doesn't--didn't all stack up end-to-end. And so kind of based on that schedule is the reasons then that we changed the guidance and look forward to that. So again, our customer satisfaction is the most important thing here. And if it's -- and if our customers want to go fast we figure out how to do it but we want to have a quality experience. So we're comfortable with where we are today.

Okay, great. Thanks, Randy.

You bet.

Alright thank you. Eugene Mannheimer is next please state your company name followed by your question.

Thank you. Caris & Company. Terrific job, guys, and that's some great guidance too. What-- my first question relates to the Novation statement you made, Randy. Can you talk a little bit about how many hospitals are in that opportunity and of those, how many currently are using automation?

I don't know the specifics on Novation. But the key for that win was, because we've had a Novation agreement before, is that our full line of products we've-- I think if you curtail it to each one individually in a group it's about six or seven. We won every one of those, whether it's supply chain, medication systems or bedside, we won all of those which is really a testament to the unique nature of the product sets that we offer.

And it allows us to go to our Novation accounts and say, look, after the careful study of this group, we're the only ones that really can meet all your needs in these areas. Novation I believe is the first or second largest group purchasing organization in the country with I believe close to 1800 hospitals. But we don't typically give the exact breakdown of how many we have and how many we don't.

Okay. And did you say that's an exclusive?

That is not an exclusive. The only key there was that we were able to win all six segments that we had products in. We won all six. And we were the only vendor to win in all of these segments that were offered by this contract.

Got you. Okay. And in the backlog number 77 million, can you break out for us what --how much of that is CHW and Advocate?

We don't break out and give details in the backlogs. We--the CHW and Avocate were large deals for us and there's still installations going forward associated with them.

So is it fair to think about it as maybe three, four, five years down the road they'll continue to be part of backlog?

Well --

I think the key is that they have placed some orders and we're in the process of installing them. They have more orders to place. It isn't just a one or two quarter phenomenon. It's going to be stretched out over several quarters and then there's additional orders after that. Some hospitals, they're not even lined up for 18 months or more to get the product just because of some of the timing issues-- These large IDMs don't -- they do get stretched out over several quarters and years.

Okay, thanks. And final question, could you talk about the ratio of purchases versus leases during the quarter and how that stacks up historically?

Well, here again, we haven't broken down our revenues through the quarter and that are our-- our lease business continues to be strong. And these are big capital equipment purchases. Most customers are looking to lease it in some way.

Okay, thank you Rob, thank you Randy.

Thanks, Eugene.

Thank you sir. Mr. Lynn [Padulsky], please state your company name followed by your question.

Hi, this is Lynn [Padulsky] with Piper, filling in for [Sean Wiland]. Just a couple of broad questions. First congratulations on a great quarter and the guidance. But could you give us more detail on what's going on with Advocate and Catholic Health Care West. Are you penetrating further into those IDM's and how that's going?

Just to follow on Eugene's question, those are full source agreements, Catholic Health Care West has around 40 hospitals and about 7,000 beds. I believe Advocate Health Care is around 10,000 -- I'm sorry 3500 beds about ten hospitals. And we are progressing through those initial installs and mostly some of the larger institutions as they were geared up to go. But we're just starting the installation process. We haven't exhausted initial orders. But as I said, they'll be stretched out over the next few quarters.

Okay, and then regarding the greenfield accounts, who are you typically going up against?

Well, our typical competitors, which I think we've stated before, would be [inaudible].

Have you seen any changes in that respect, I guess is what I'm trying to get at?

No.

Okay, alright thanks.

Alright thank you sir. [Julian Allen], you have the next question, please state your company name followed by your question.

Hi guys, good afternoon. [Julian Allen], [Canal Capital]. I have three quick questions. The first on an accounting issue. Your other [inaudible] accounts on the balance sheet increased from 8.8 million at December 31 to about 13 million. Could you tell us what's in that number?

Sure. There are a number of the leases that we keep in house, mostly leases associated with government institutions. And during the quarter we consummated several of those leases and so they -- the long-term portion of them shows up on the balance sheet in that category.

So you don't sell those off to a third party?

We do not.

Okay. Second question, from a higher level strategic perspective, do you have a sense of how penetrated the target markets are with respect to Automation solutions?

I think there's been several surveys on that and I believe we've commented in the past that about 60% of the hospitals at least have some type of automation. It may even be higher than that, 70--- But generally it can only be just one unit. And that goes for our accounts and our competitive accounts. We see more penetration at the larger institutions. Medium size probably only about half penetrated and really small accounts are even less than that.

So there's quite a bit of upside in just the green accounts that are left out there because of the pressure on the regulatory environment to get a control on medication use process. And there's probably, probably even more significant to that is there's a lot of penetration. Most of our accounts that we already own today are only about a third to 40% penetrated. So they could easily double in size than what they have today.

The other thing is generally the technology kind of moves at least every five years. Most people upgrade or rotate out technology so you've got sort of people buying for the second and third time. You've got new accounts buying for the first time. And we have competitive swaps. So when you add all those three together they add up to a nice growth story for us.

Third question. Can you comment on any thoughts you may have with respect to acquisitions? What, if you were to pursue acquisitions, what capabilities or regions would you be looking to cover?

I think for the most part acquisitions is something that we would focus on things that would plug and play off of our platforms. I think we do have some new segments that we're working on within the Company, acquisitions that we've made over the past year that we want to continue to work on. I think those are sort of the primary focus at this point. But there were opportunistic accretive acquisitions out there that made sense that plugs off of our platforms, we would certainly look at those.

Okay, thank you. And my last question, is could you comment again at a high level how far are you in plans to outsource production to third parties or, indeed, to Asia?

We have outsourced some of our component production to Asia. We're constantly revisiting our sourcing strategies. So at this point, we've completed the component fees and that's where we stand.

Is that still, fair to say that's still a work in process?

I'd say that's true.

Okay, great. Thanks very much.

Thank you, [Sean Boyd] has the next question. Please state your company name followed by your question.

Hi, [Sean Boyd] from Westcliff. Congratulations gentlemen.

Thank you.

Couple questions. I came, the call was fading in and out. If you could, can you go back and just give me the product and service gross margins without [Proforma] for the options expense?

The total amount that hit the gross margin line from the option expense was 269,000.

Right.

I don't have right in front of me the split between product and service so I'll have to get back to you with that.

Okay. So going back to your point in terms of the flip flop in expenses, that went from operating expenses and the cost of goods sold can you go through that one more time?

Sure.

I apologize I just, I lost the call temporarily.

No problem, and the net of the situation is this, we had previously charged all of our installation expense and our service expenses into OpEx. And then we reallocated back in the cost based on a rate and that rate was based on units of production. What we've changed is we've gone to a more direct charging method.

And then in addition to that, we found in our annual assessment that more of our installation team's activity and our service team's activity is involved in post sales activity as opposed to presales activity. That's directly related to us getting out of the "turn business." Operating more out of backlog. And so more of their expense, although their expense is fairly much of the same, more of their expense is going into the COGS line and less is going into the OpEx line.

I see. So in terms of the margin going forward on the service side, are we thinking about a lower -- a low 60s gross margin on that at this point then? Where does that settle us out then in terms of a go forward basis?

Well we actually don't give guidance on our gross margins, overall or on a segment basis between sales--or product and service. I think the effect that you saw this quarter from this particular change is going to be a fairly consistent effect going forward.

Alright, okay. And just in terms of the new guidance, what kind of tax rate and share accounting are you setting for the full year?

So we are using 4% tax rate and we don't expect significant changes in the share account going through the year.

Okay. Great. Thank you.

Alright, thank you. [Mike Bossman] please state your company name followed by your question.

Hi, with Peninsula Capital. Great job on the quarter guys. Just one quick question, most of them have been answered. Have you guys seen any trash in or have you rubbed up against [Surners] new pharmacy product that they unveiled?

We haven't seen anything in the marketplace yet. We haven't had any bids against them.

Okay. Everything else has been answered. Great job on the quarter guys.

Thank you.

Alright thank you Mike. We have a follow-up from Glenn Garmont. Please go ahead.

Last quarter the gross margin was negatively impacted by the pharmacy central the OEM product issue. Was there any such mix issue this time around?

There was no mix issue. There's really no change quarter-to-quarter due to mix. We always have shifts of course in our one product versus another. But overall there was no margin issue due to mix.

Okay, thanks Rob.

[OPERATOR INSTRUCTIONS] Gentlemen there do not appear to be any further questions at this time. Please continue with any closing comments.

I think that concludes the call for us. Thank you for joining us and good afternoon.

Okay, ladies and gentlemen, this concludes today's Omnicell first quarter 2006 financial results conference call. We do thank you for your participation. If you would like to listen to a replay of today's conference in its entirety, you may do so by dialing (303)-590-3000 or 1-800-405-2236 using the access code 11057927. Those numbers again (303)590-3000 or 1-800405-2236, using the access code 11057927.