Omnicell Inc (OMCL) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Omnicell second quarter 2006 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. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Thursday, July 20, 2006. I would now like to turn the conference over to Rob Seim, Chief Financial Officer. Please go ahead, sir.

Good afternoon. With me today is Randall Lipps, Omnicell's President and CEO. Thank you for joining us today for Omnicell's second quarter 2006 conference call. You can find Omnicell's second quarter results press release in the investor relations section of our website at www.Omnicell.com. This conference call is the property of Omnicell, Inc. and any taping, other duplication, or re-broadcast 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's Discussion and Analysis of Financial Condition and Results of Operations" and under the heading "Risk Factors" in Omnicell's Annual Report on Form 10-K filed with the SEC on March 16, 2006, as well as other filings with the SEC. Please be aware that you should not place undue reliance on any forward-looking statements made today.

The date of this conference call is July 20, 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 those beliefs to change.

For the call today, I will start with an overview of the financial results for the quarter followed by Randy, who will cover some of the quarter's business highlights. I will then discuss Omnicell's guidance for 2006. After that we will open the call to your questions. Now for our results.

The Q2 was an exceptionally strong quarter for Omnicell. Order rates for our products were robust across our customer base, including several orders from our largest customers. During the second quarter, the Company added $10 million to our product backlog. Our ending backlog now totals $87 million.

We enjoyed very strong order rates across all of our product lines and we're very happy about our customers' continued adoption of our solutions. Our 10 largest deals made up 33% of our bookings for the quarter. And we continue to enjoy success in attracting new customers to Omnicell; 42% of our bookings came from the combination of competitive conversions and customers installing automation for the first time, or accounts that we call "green field" accounts.

Our backlog provides excellent visibility to installations in Q3 2006 and Q4 2006, but several of the customers whose orders we received in Q2 have requested installation of our products in 2007. We are actively ramping up our operations team in order to schedule installations consistent with our customers' desired timing, and we continue to maintain the capability to perform installations on short notice should our customers need it.

Most of our customers, especially new customers, require longer, carefully-planned and carefully-executed installations, which is why many installations are scheduled several quarters into the future. The visibility we get from our backlog allows us to run our operations predictably and efficiently. It also gives us an opportunity to work with our larger customers well in advance to ensure installation slots and plan the rollouts across their network of hospitals.

he orders that drove our increase in backlog came during a typically strong quarter for Omnicell because a large number of hospitals have a June 30 fiscal year end. We do expect demands for our products to continue, but we don't expect our backlog to grow as materially during Q3.

Now, I would like to discuss our second quarter financial performance. Before I do, I would like to remind everyone, once again, on the call, that Omnicell adopted financial, our statement of Financial Accounting Standard 123, as a revised, in Q1 of 2006, which we will refer to as FAS 123R during the rest of the call. 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 pronouncement was applied prospectively, meaning there is no impact to periods prior to Q1 of 2006.

In our first implementation of FAS 123R during Q1, an outside service provider who maintains our stock option records experienced a software error that caused several stock option grants to be omitted from the stock compensation expense calculation. We have now revised the Q1 stock compensation expense calculation, which decreases our Q1 GAAP earnings by $451,000, from $1.2 million, or $0.04 per share, to $0.8 million or $0.03 per share. This revision will be filed in an amended Form 10-Q for the first fiscal quarter, and is fully discussed in our earnings press release today.

Also, as we said last quarter, we use financial statements internally that do not include stock-based compensation expense related to employee stock options and employee stock purchases in addition to GAAP financial statements. We feel it's useful for investors to understand the stock compensation expenses associated with the implementation of FAS 123R, and non-GAAP results excluding these expenses. In covering our results for the quarter, I will first discuss our GAAP performance, then I will discuss our non-GAAP financial performance without the effects of FAS 123R.

Revenue for the second quarter of fiscal 2006 was $36 million, up 26% year-over-year and up 6% from the first quarter of 2006. On a GAAP basis, gross margin of 55.1%, which included $168,000 associated with stock compensation expense was up 0.6 of a point from 54.5% last quarter. Operating expenses, which were $18.3 million and included $1.8 million of stock compensation expenses, increased $0.3 million from Q1 2006. Net earnings were $1.8 million, or $0.06 per share, which is an increase of $1 million, or $0.03 per share from last quarter.

Now I would like to cover our non-GAAP results excluding the stock compensation expense associated with FAS 123R. I will cover non-GAAP gross margins, operating expenses, and earnings per share. For each of these discussions, the only adjustment to GAAP results is the exclusion of stock compensation expense. I will be making year-to-year comparisons to the reported GAAP results of Q2 2005. A full reconciliation of our GAAP to non-GAAP results is included in our press release and will be posted on our website.

Let me start with gross margins. Non-GAAP gross margin for the second quarter 2006 was 55.6%, compared to gross margin of 56.9% reported for the second quarter of 2005. And up 0.4 of a point sequentially from non-GAAP gross margin for the first quarter of 2006 of 55.2%. We continue to enjoy the effects of efficiencies in our manufacturing and insulation activities that improved linearity has had on our cost structure over the past nine months.

We had a very good quarter in these areas and we plan to continue our focus on boosting productivity of our staff and identifying cost efficiencies as we optimize our business model. We have also begun phasing in the outsourcing of one of our major sub-assemblies, which will bring further product cost savings over time.

Our non-GAAP operating expenses were $16.5 million, up 1% from our 2005 second quarter operating expenses and up 3% from our Q1 2006 non-GAAP operating expenses. We have begun to invest in the continued growth of our business and you should expect us to continue to invest in sales, research and development, and infrastructure to assure we're able to capture all the market opportunities that are available. We have 532 staff on board now and we intend to hire another 10% over the next two quarters. Our non-GAAP net income was $3.7 million, or $0.13 per share, $0.02 above the analysts' consensus. This compares to reported earnings of $0.1 million, or $0.0 per share in the second quarter of last year.

Our Q2 2006 non-GAAP net income is up $0.8 million from $3 million non-GAAP income in Q1. On the balance sheet, cash and short-term investments were $43.8 million, an increase of $19.5 million from Q2 2005, and an increase of $9.9 million from Q1 2006; $4.2 million of our cash increase quarter-to-quarter was from business operations, and $5.7 million of our cash increase was a result of stock option exercises.

We continued a very strong rate of collections during Q2 that we started last quarter and the quality of our receivables has also continued to improve with aged accounts reducing as a percent of the total accounts receivable. Our DSO has improved from 79 to 77 days. We continued to ship against our backlog that is scheduled for installation in coming months and since we invoice upon shipment, our overall accounts receivable balance has grown from $29 million in Q1 to $30 million in Q2. Inventories of 14.5 million decreased from 16 million a year ago, inventories increased 2.3 million from Q1 2005, as we queued finished goods for Q3 shipments. With that, I will turn the call over to Randy to provide an update on the business.

Thanks, Rob. Thanks for being with us today. It's very nice to have Omnicell's products received so well in the marketplace. As Rob mentioned, we had record order rates demonstrating, again, the strength of our product line. We continue to operate our business in a linear fashion throughout each quarter, driving cost efficiency and customer satisfaction. We're demonstrating yet again that our business is predictable. Our new customer mix is strong again showing that high quality products and superior installation and support services win in the marketplace.

I would like to briefly recap for you some comments made by Omnicell customers regarding how Omnicell Solutions have helped their facilities improve patient safety, increase productivity and reduce costs. In early April, Doctor's Memorial Hospital in Bonifay, Florida cited Omnicell's reputation for excellent customer service and reported that its installation of OmniRx systems had made an immediate and profound impact on productivity.

Later that month, the University of Michigan Hospital in Ann Arbor, Michigan announced its deployment of our safety stock bar code verification software at almost 100 OmniRx systems throughout the hospital to help prevent medication stocking errors. At the beginning of May, Stormont-Vail Regional Health Center , a 586-bed tertiary medical center in Topeka, Kansas, reported that a multi-disciplinary team from the hospital had selected our medication dispensing systems and SecureVault controlled substance inventory management system, citing our unique guiding light technology as a key advantage of the Omnicell solutions.

In June, the Genesis Health System, headquartered in Davenport, Iowa, announced the installation of our medication dispensing systems with our Omni Dispenser single dose dispensing module and SecureVault at three of its Illinois hospitals. And in late June, Obleness Memorial Hospital in Athens, Ohio, issued the results of a study which concluded that our medication dispensing systems had more than paid for themselves by significantly improving patient charge capture and contributing favorably to the hospital's bottom line.

These customer testimonials underscore the reputation of Omnicell's products for quality, service, and innovative solutions. But more than anything else, they speak of the high customer satisfaction that we strive for in every customer installation. The kind of satisfaction level we believe distinguish us from our competitors. Once again, those satisfaction levels were substantiated by the recent results published by MD Buyline, an independent third-party market intelligence firm that collects user satisfaction data from approximately 3,200 hospitals.

In their most recent drug-dispensing systems report issued on July 1, 2006, MD Buyline rated Omnicell highest overall in user satisfaction ratings and the highest in each of the six specific categories they survey, covering system performance, installation and training, and customer support. We believe these ratings reflect the success of consistent and continuing efforts to make our installation experience the best in health care and to make our products easy to use and of the highest quality.

Also during the second quarter, Omnicell received M2M Magazine's 2006 Silver Valued Chain Award for service excellence in the health care industry awarded for the quality and success of our vDirector Remote Monitoring feature. The M2M Value Chain Awards recognize the vision and innovation of leading corporate adopters of M2M, or machine-to-machine technology. The M2M Value Chain Award recognizes the major challenges companies have overcome, as well as the opportunities and business values they have created through the deployment of M2M technology.

Omnicell's vDirector, which facilitates automated event reporting, connectivity and management of system uptime has been deployed in over 400 hospitals. Using vDirector, Omnicell monitors its customer's system performance in realtime and remotely diagnoses and repairs potential issues in their earliest stages.

At this time, I would also like to acknowledge another award presented during the quarter. It's my pleasure to congratulate Omnicell Board member Sara White for receiving the Harvey A.K. Whitney Lecture Award, the most prestigious award given in the field of health system pharmacy. The award was presented to Sara at the American Society of Health-System Pharmacists, or ASHP, 2006 summer meeting and honors an individual who has made an outstanding contribution to health care, health-system pharmacy practice. Congratulations, Sara.

During the ASHP summer meeting in Orlando, Omnicell also announced continued enhancements to our product line. Major upgrades to our OmniLinkRx physician order entry management system and SecureVault controlled substance inventory management system were unveiled, advancements which we believe placed us in a leadership position for both of these products.

In summing up the quarter, I would say the strength of our products has been paralleled by the strength of our business. Order rates have been robust for the last five quarters. We continue to enjoy orders from the major IDN wins we've announced previously in head-to-head competition for individual hospitals, or for long-term sole source awards. Customers are choosing Omnicell.

As can you see from the continued contribution from new accounts that we are winning, even hospitals that have deferred investing in automated products are now moving forward. We're investing in the future at Omnicell and I'm extremely excited about the health and prospects of the Company. With that, I would like to turn it back to Rob.

Thanks, Randy. Now, for our guidance. As we move into Q3 2006, our top priority continues to be working with our customers to understand their requirements and exceed them, whether it be in the installation experience, in product features, or in customer service. We are working closely with every customer to schedule their installations and roll out Omnicell products across their networks in accordance with their needs and schedules.

As we have said for the last several quarters, entering Q3 '06, we have full visibility to the installations we need to complete in the quarter to meet our customers' needs and achieve our revenue goals. We also have excellent visibility to Q4 installations. Our strong order rates allow us to increase our pace of installations to maintain equilibrium in our backlog.

We had previously guided to a 19% to 21% revenue growth year-to-year for 2006, and non-GAAP EPS, excluding stock compensation expense, in the $0.44 to $0.48 per share range. Now, we expect higher revenue and earnings. We now expect revenues to grow 22% to 24% year-over-year and non-GAAP profit to be between $0.52 and $0.55 per share, excluding expenses of stock options and the employee stock purchase plan associated with the adoption of FAS 123R. Now I'd like to open the conference call to questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Steven Halper with Thomas Weisel Partners. Please go ahead.

Hi, this is Julia Thiessen for Steve Halper. A couple of questions related to bookings, first off, if you could provide any color around the breakdown of the 42% between the "green field" and the competitive win and then also a booking question, if you could give some color on the Q3 bookings expectations about being a little bit lower?

Well, the breakdown between competitive wins and new accounts, or "green field" accounts this quarter was consistent with the breakdown as it has been in previous quarters, it's about half and half. We have seen that same kind of breakdown for some time. As far as guidance for Q3, what we were talking about is we really don't expect the backlog to grow as significantly as it did in this quarter.

Any particular commentary on that?

No, not really. In Q3, it's typically a seasonally weaker quarter. And as you saw, we took up our revenue guidance, so we'll be installing as much as that backlog as we can.

Okay, thank you.

Our next question comes from Glenn Garmont with First Albany Capital. Please go ahead.

Thanks, good afternoon guys, and congrats on another strong quarter. I was just wondering if you could sort of break down the 10% anticipated growth in the head count between now and the end of the year? How much of that can we roughly assume to be sales versus R&D, and also related to R&D, came in a bit lower than we were modeling in the quarter. Is there anything behind that in terms of any sort of change in your capitalization policy or anything like that and finally, Rob, I'm sorry. I missed the operating cash flow number. Thanks.

Okay, so let me take all of your questions in order. As far as the head count increase, we are expanding our staff across the business as you might expect as we take up revenue expectations. We need more people to install, more people to support and we'll be investing in our infrastructure and we're also investing in R&D. As you know, we have been deploying a business model to grow some R&D staff in India and that has allowed us to keep R&D at manageable growth rates while still expanding the actual effort that we have. We do intend to invest in R&D. And then on the cash flow, so cash was up $10 million, $4.3 million of it was due to normal business operations and $5.7 million was associated with stock option exercises. Did I hit all of your questions?

And then just the actual, the reported R&D in the quarter, you know, just came in a bit low relative to, it was sequentially down and low relative to what we were modeling. I was wondering if there is anything behind that?

I don't think there is anything, anything particular there other than we, we did buy some prototype equipment last quarter which is kind of a one-time expense.

Okay. Got it. Thanks.

Thank you, our next question comes from Gene Mannheimer with Caris & Company. Please go ahead.

Thank you, very nice quarter, guys. Could you talk about the mix of purchases versus leases in the quarter, how does that compare to historical and is that where you want to be at this time?

Sure, I think you know we actively work with a couple of leasing companies. We try to sell leases very actively. The leases were 40% of the bookings in the quarter, which is pretty consistent with last quarter. That is an improvement over the second half of last year. The second half of last year it had dipped to about 30% of our business. So, we have more leasing activity going on now.

Okay, thanks, Rob. And with respect to the backlog, as it relates to Catholic Healthcare West, you talk about how much of the backlog is related to CHW and how much -- how many, perhaps how many hospitals you have implemented and how many remain over the next couple of years?

Well, we actually don't disclose the breakdown of our bookings or the backlog by any particular customer. Catholic Healthcare West and a few of the other larger hospital chains, or IDNs, continue to be a good part of our business and we expect it to be a good part of our business going forward.

And last question, the mix of pharmacy versus supply bookings in the quarter and how that compares historically?

This is Randy. That has been pretty much the same, roughly 80/20 percent breakdown, 80% pharmacy, 20% supply. We see that continuing on.

Okay, great, thanks, guys, good job.

Thank you, Gene.

And our next question is from Newton Juhng with BB&T Capital Markets. Please go ahead.

Thank you very much, great quarter, guys. Real quick, the 10 largest deals making up 33% of the bookings, last quarter that was up a little bit higher, are we seeing something where the trend may be more towards filling up some of these -- the smaller deals that will allow for you to recognize it a little quicker and not build up the backlog as much going forward?

You know, that -- the percentage of those deals, they're larger deals, really, just comes about due to what our customers want installed and as we continue to penetrate our existing customer accounts, you know, those deals are more add-on deals and tend to be a little bit smaller. I don't think there is really any particular trend there, but the smaller deals, of course, are easier to install quicker and with a little less planning.

Sure. Okay, and then one of the comments Randy made, just, I'm curious as to what you're seeing that is driving the hospitals to make more investments in automation that previously those hospitals were kind of a little reluctant to do so, just kind of an overarching market being there?

Yes, I think there is several things there. One is, in some regions of the country hospitals are doing very well, particularly in the South where you see demographic movements and business movements moving into less expensive areas. So you see a lot of hospital expansions, and, therefore, as those hospitals expand they tend to, obviously, place more orders and even smaller hospitals which, you know, you have a small town, with a small community hospital, suddenly as those demographics change they have to go to the hospital quite a bit because of people that are moving in are people that need a lot of healthcare support. That benefits us.

So you really see these late adopters who for years have been on the outside and that pressure is also coming from the regulatory environment, which wants to see consistent management of medications across the whole hospitals. And every type of disciplinary operating, whether it's the O.R., or the cath lab or just a general med/surg floor. So, hospitals finally have got money in their budgets to plan for those things and implement them and roll them out, and I think it's somewhat the same thing we've talked about the last few years. But hospitals, it takes them awhile to get around to actually placing orders and to address these issues and it's beginning to flow.

Okay, and, Randy, thanks for the comments.

Yes.

Thank you, our next question comes from [Sean Boyd] with West Coast Capital Management. Please go ahead.

Actually, it's Westcliff Capital Management. Good afternoon.

Hi.

Congratulations, it's great to see this kind of execution. A couple of quick things here. On the backlog, can you remind us as to when exactly the Company sort of started booking backlog to such a great degree and shifted the strategy. And where I'm going is we have 61% year-over-year growth, is that, what I would call clean comparison now, and sort of looking at that growth in the backlog to be indicative what have you're seeing in the pipeline?

It was about a year ago, five quarters ago, the Company put a conscious strategy in place to grow the backlog and operate out of the backlog to make sure we were installing on our customers' schedules, so, I think it's a pretty clean comparison.

Okay. Great. And can you give us a feel for maybe penetration among your current customer base or even overall market, kind of what the "green field" opportunity is there to add on to that, to get a feel for how long we can see this kind of, you know, year-over-year growth in bookings and backlog?

Well, the penetration of the overall market is a little different, depending on which pieces you're looking at. We think in the pharmacy automation in the hospital wards is about 40% penetrated in the supply automation, it's 20%, 25% penetrated and in areas like the central pharmacy and the anaesthesia work station for the operating rooms, those are barely penetrated at all. Actually, our investor presentation, which is available on our website, has a graph that shows what we think the penetration is in each of the market areas.

Okay, great. Thank you. The -- another thing on the opening comments, you indicated several Q2 orders are designed with '07 installation. Given the way your bookings are so far in advance that makes sense to me. Was that surprising to you all or were you looking for bookings, you know, installation ahead of that or further out or is that right in line with what you expected?

No, it's not surprising to us. In fact, especially as I mentioned with the new customers, they tend to have a more carefully-planned installation. The installations tend to be bigger or competitive swap out, they tend to be bigger. So they take more planning and take more effort on the hospital's part. So, at this point, it's very easy for them to schedule their installations out three or four quarters away.

Okay, great -- great. Just a last thing, in terms of the 10% increase in head count in the next few quarters, you made the comment about expanding R&D in India. Can we sort of expect a similar increase to your operating expense dollars on a quarterly rate, or are you adding resources here at a lower rate, so we won't see the same percentage increase on the dollars, the operating expense dollars?

Yes, my comment about India was that we have grown that office from kind of its start, its inception, to its current status over the last year, and that's why our R&D expenses weren't going up as rapidly as the R&D head count had been going up.

Okay, that's to date?

That's to date. At this point, we're investing in R&D across all of our sites and we do have sites here and in California, in Tennessee and Texas and in India.

Okay. So, just to follow that up, going forward. I know in the past, I think, you all had targeted a 15% operating margin. Is that still where you're trying to take the Company or is that a different target at this point?

We are still targeting a 15% operating margin for next year and we have an interim goal of 10% operating margin for this year, which we just about hit this quarter.

Right, great. Thank you so much.

You bet.

Thank you, our next question comes from Sean McMahon from Kennedy Capital Management. Please go ahead.

My question is a derivative of Julie's earlier on, you talk about demand is strong, but kind of backlog's weaker, and for a third Q, do you expect this to re-ramp in the fourth quarter next year, and then if you can give me any comments, you know, if that's negative, are there any new competitive products that are out there that you might be worried about?

Let me try to explain this because it's very important. It's not, our order rates are not slowing down so much as we are raising our installation rates because we, we at some point have to get, as Rob mentioned in the call, our backlog has to get more to an equilibrium because we won't be able to meet customers' demand if we keep growing backlog at the rate we've been growing it over last couple of quarters. We have to, customers demand that we install it. So we're lifting our installation rate which offsets the amount of backlog growth that you would expect, I believe $10 million in backlog is an all-time record. So what we said about Q3 was we didn't think it would be as large as our most recent quarter because, one, we need to raise our installation rates to keep continuing to satisfy our customers and the Q3, because of the summer time, generally is not as strong a quarter. It's just not as strong as a quarter as the Q2 or maybe a Q4. So I wouldn't, you know, it's not a slow down of the business is what I guess we were saying.

Yes.

Does that make sense?

Yes, why not -- I guess is it extremely expensive to hire more installers? I mean why not try to grow that part and fulfill all the demand that you have out there?

We want to grow, we want to bring our backlog and our operating model to the optimal equilibrium. That's what we're doing in the next couple quarters is bringing that equilibrium, ideally you'd want backlog to be, to take as much out as you put in every quarter as you grow the business would be sort of at total equilibrium. I'm not saying we're getting to that point. But we need to close the gap between the growth in backlog by raising our installation rates, and that's why we're going to hire an additional 10% of the people, a 10% to try to meet that demand, so that we don't get to a situation -- because we're not in a situation -- but we don't want to get to the situation where the backlog is growing 10 million but we can't install it in the customer's timeframe, so --

Okay, and then any new competitive front, anything on that? Can you elaborate?

Not much has changed on the competitive front. We haven't seen any new competitors or changes in, really, hospital win deals out there, I think there is a lot of the band, both in "green field" and accounts, that are trying to move to the next technology, as well as people trying to expand.

Okay, thank you guys.

Thank you.

Thank you, our next question is a follow up from Eugene Mannheimer with Caris & Company. Please go ahead.

Yes, thanks, Rob, when do you expect to start paying federal taxes?

We have net operating losses that will carry us through this year and our last forecast was that they would carry us through most of 2007 also.

Okay. Thank you.

Thank you, our next question is from [Louis Cordigan] with [Kingsburg Capital], please go ahead.

Hi, Rob, I've got a question about the prepaid expenses on the balance sheet. I think I've asked you about this before. They were up quite a bit sequentially and I thought that they were tied to deferred commissions on bookings. And given the bookings this quarter were in line with the growth seen last quarter, just in dollars, I guess I'm puzzled why that line is up so much?

Okay, so that line has a couple of elements. One element is deferred commissions. And it really relates not so much to the bookings but to the backlog growth. So our sales people are paid a portion of their commissions when an item is booked. We don't recognize the revenue, though, on that item until it installs and so we, we defer that payment essentially. We make the payment but we hold it on the balance as a prepaid. As the backlog grows, that means that there are more items that have been ordered that have not been installed at a customer, therefore, there is more commissions that are in a prepaid condition.

So, in a sense that number is tracking not the bookings, but the overall growth in the backlog because the commissions are being deferred over say a 16-month period and then those are still there and the next quarter, you have another 16 months of bookings laying on top of that.

Well, the commissions are in a prepaid status until the revenue is booked. So, if an item is booked, an order is booked today and installed seven months later, that is when the prepaid would come off the balance sheet. Yes, it does track the growth in bookings. Or, excuse me, the growth in backlog.

Right.

So assuming that the backlog is still up sequentially in the third quarter, but not as aggressively as this past quarter, we would still expect to see the prepaid line go up a little bit, probably next quarter, as well.

Yes, you would.

Okay, good, thank you.

Now the other element, just to fully answer the question that is in that line is any in-house leases. The current portion of any in-house leases that we're carrying on the books, and those were also up in the quarter.

Can you break out the leases versus the prepaid commissions?

The leases were about two thirds of the increase.

Okay. Thank you.

Thank you, our next question comes from Sean Boyd with Westcliff Capital Management. Please go ahead.

Just one followup, away from the quarter for a second here. Back in January, you all announced that Jim Judson was coming on the Board and was taking on the role of corporate development. Just curious, anything on that related to M&A opportunities, or even away from Jim entirely, is the Company see anything kind of potential opportunities out there on acquisitions?

Well, we want to be, you know, the Company's being opportunistic, but I don't think we feel like there's anything we need to fill in the gap in our product line. But we are looking and we're trying to be opportunistic, and you know, we have seen some divestitures, of some automation lines from McKesson, I believe it was, and so there might be continued to be those opportunities out there. You know, we're focused on our business, which is doing well and we want to continue to grow it and take all the opportunity we have before us without getting distracted unless there is a really good viable opportunity for us to get into.

Understood. Just for perspective here, how big are those opportunities? I mean these companies are what in annual sales? Just a range.

Well, I don't know. It's hard to say. There are not a lot of big ones, I would say. I guess that's the best way to look at it. But, you know, there certainly is a company smaller than us.

Yes. Okay. Thank you.

All right.

Thank you. [OPERATOR INSTRUCTIONS] One moment for the next question. It looks like we have no further questions at this time. I would like to turn the conference back to management for any concluding comments, Please go ahead.

Thanks, that concludes the conference call for today. I will remind everyone to look at our website for our earnings announcement and look for our filings with the SEC in the future.

Thanks.

Thank you, and ladies and gentlemen, that does conclude the Omnicell second quarter 2006 financial results conference. If you would like to listen to a replay of today's conference, you may dial 303-590-3000, or 1-800-405-2236 and use passcode 11064055 to access the conference. Thank you again for your participation and you may now disconnect.