Omnicell Inc (OMCL) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Omnicell third 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, October 19, 2006.

I would now like to turn the conference over to your speaker, Rob Seim, the CFO of Omnicell. Please go ahead.

Good afternoon. This is Rob Seim. With me today is Randall Lipps, Omnicell's President and CEO.

Thank you for joining us today for Omnicell's third quarter 2006 conference call. You can find Omnicell's third quarter results' press release in the "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 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 Conditions 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 October 19, 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 cover about some of the quarter's business highlights. I will then discuss Omnicell's guidance for the remainder of 2006 and for 2007. After that, we will open the call for your questions.

So now for our results. Q3 was a very strong quarter for Omnicell. We had record orders, record revenues, and profits were above the expectations.

Although we increased our installation capacity significantly during the third quarter, our order rates were so strong that we added 12 million to product backlog.

Orders from government customers were ahead of what we had forecasted. And we had more competitive conversions and larger competitive conversions than expected. Order backlog now totals 99 million.

Our increased staffing and our installation teams will ensure that we are continuing to focus on delivering product to these customer orders on their requested schedule.

Business for our supply systems continues to grow. Demand for our medication systems was very strong. And we are pleased to continue our momentum with corporate multi-hospital chains. Our 10 largest deals made up 39% of our bookings for the quarter.

And we continue to enjoy success in attracting new customers, with 44% of our bookings in Q3 coming from the combination of competitive conversions and greenfield accounts, which are those customers installing automations for the first time. Nearly three-quarters of these new accounts were competitive conversions and the remaining were greenfield.

Our backlog continues to provide excellent visibility to installations in the next two quarters. And we continue to add customers whose installation horizon is greater than six months from when we receive their orders.

As we indicated earlier, we've added staff to our operations team in order to schedule installation consistent with our customers' desired timing, and to maintain the capability to install on shorter notice when our customers need it. During Q3, we accelerated the pace of the installation as we saw the strength of the customer demands for our products.

We ended the quarter with 573 staff. We continue to staff to meet growing customer demands and in preparation for demand in 2007. We are now targeting to grow our staff to at least 600 by the end of 2006.

Our continued growth in new customers will require extensive planning, both by the hospital personnel and by our installation staff, typically means longer installation cycles. These longer installation cycles give us visibility to better manage our operations predictably and efficiently. It also gives us the opportunity to carefully plan with our customers to ensure high satisfaction. Our continued goal is to have the highest customer satisfaction in the healthcare industry.

Now, I'd like to discuss the third quarter financial performance. Consistent with previous quarters this year, I'd like to remind listeners on the call that Omnicell adopted statements of Financial Accounting Standard 123, as 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 was no impact to periods prior to Q1 of 2006.

Since stock compensation expense is a non-cash expense, we use financial statements internally that include -- excuse me, exclude stock based compensation expense in order to measure some of our operating results. In addition, stock compensation expenses are significant in 2006, but did not exist in our reported results in 2005 since the accounting change was applied prospectively.

Therefore, we use non-GAAP financial statements internally for budget measurements and year-to-year comparisons. We use these statements in addition to GAAP financial statements and we feel it is useful to 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 third quarter of fiscal 2006 was $40.9 million, up 33% year-over-year and up 14% from the second quarter of 2006.

On a GAAP basis, gross margin was 54.3%, which included $0.3 million associated with stock compensation expense. This was down 1.1 points from 55.4% last quarter.

Operating expenses were $19.6 million, and included $1.7 million of stock compensation expenses. Operating expenses increased $1.3 million from Q2 2006.

Net earnings were $2.8 million or $0.10 per share, an increase of $1 million or $0.04 per share from last quarter.

Now, I would like to cover our non-GAAP results. I will cover non-GAAP gross margins, operating expenses, and EPS. 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 Q3 2005. A full reconciliation of our GAAP to non-GAAP results is included in our press release and will be posted on our website.

I will start with gross margins. Non-GAAP gross margin for the third quarter of 2006 was 55.1% compared to gross margin of 58.3% reported for the third quarter of 2005. Third quarter non-GAAP gross margin was going sequentially from second-quarter non-GAAP gross margin of 56%.

We do still continue to enjoy the effects of efficiencies in our manufacturing and installation activities that improved linearity has had on our cost structure over the past nine months.

Margins were down sequentially due to an end-of-life inventory obsolescence and a final buyout of residuals from a leasing partner.

Our non-GAAP operating expenses were $17.9 million, up 8% from our 2005 third quarter operating expenses, and also up 7% from our Q2 2006 non-GAAP operating expenses.

As commented last quarter, we are investing in continued growth in our business and you should expect us to continue to invest in sales, research, development, and infrastructure to help ensure we are able to capture the market opportunity that is available.

Our non-GAAP net income was $4.9 million or $0.17 per share, $0.02 above the analysts' consensus. This compares to reported earnings of $1.4 million or $0.05 per share in the third quarter of 2005.

Our Q3 2006 non-GAAP net income was up $1.1 million from non-GAAP income in Q2. On the balance sheet, cash and short-term investments were $50.1 million, an increase of $14.3 million from Q3 '05 and an increase of $6.3 million from Q2 '06.

$1.5 million of our quarter-to-quarter cash increase was from business operations; $4.8 million of our cash increase was the result of stock option exercises. We had record cash collections during the quarter and our DSO improved from 77 to 74 days.

We continue to ship against our scheduled backlog and since we invoiced upon product shipments, our overall accounts receivable balance has grown from $30 million in Q2 to $32.7 million in Q3.

Inventories of $21.9 million increased $7 million from a year ago. Inventories increased $7.4 million from Q2 '06.

Our customers often prefer not to schedule installations during the holiday period. So we scheduled installations as early as possible in Q4 to meet their needs. In anticipation of earlier than normal installations in Q4, our factory had a higher than normal amount of finished goods and inventory-in-process at the end of Q3.

Inventory also increased as a result of a last-time purchase on servers and processors, which will ensure continuity of supply. You should expect inventory levels to drop next quarter because we'll ship the inventory that we haven’t processed at the end of Q3, because we will have used some of the last-time purchases of components, and because we will transfer most of our inventory of one of our major subassemblies to a subcontract supplier as we continue our manufacturing outsource strategy.

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

Thanks, Rob. And thanks for joining us today.

Demand in the marketplace for Omnicell's products continues to grow. As Rob mentioned, we had record revenues, and for the second quarter in a row 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.

Our new customer mix is strong again, and in the most recent MD Buyline survey, our customers again gave Omnicell the highest satisfaction ratings of any automation vendor.

But amongst our success so far this year I’m reminded by some of the regrettable incidents we have seen in recent months of how products such as the ones Omnicell deploys can contribute significantly to patient safety.

The Institute of Medicine reported -- recently reported an estimate that 1.5 million Americans are injured each year by medication administration errors. Feature-rich automated medication dispensing systems are the best way for hospitals to safeguard against inevitable human error.

Our systems offer checks and balances to help hospitals avoid medication errors, including safety stock, our barcode system, which can be used in both stocking and dispensing to provide [redundant] checks for medication accuracy. Our user interface is friendly, time efficient, and it's been designed specifically for the clinical use.

I founded Omnicell on the premise that we could help hospitals improve their operations through automation. And it is my commitment to continue bringing solutions to the market that help prevent the type of tragedies we saw in the industry in the last month.

Consistent with this commitment, in August, Omnicell launched a new professional services organization, ProServ 1, focused on providing post-implementation services to our customers that will help them fully utilize the features of our products.

We recognize that personnel turnover and time demands make it difficult for many hospitals to gain all the advantages that our systems can provide. Our unique ProServ 1 program of professional services helps customers maximize their investment in our automation solutions. ProServ 1 offerings include consulting, reporting, benchmarking, database, and operational services.

Also in August, we released OptiFlex 8.0, our versatile supply management system for hospital medical/surgical supplies in the nursing units and specialty areas such as the cath lab and surgical services.

OptiFlex 8.0 includes many new inventory management cost-tracking and usability enhancements. With these we believe our OptiFlex solution set provides both the breadth and the best depths of any supply automation solution on the market today.

At both the beginning and the end of the quarter, Omnicell received awards for operational excellence and innovation from leading technology and manufacturing publications. In July, "M2M Magazine" presented the 2006 Silver Value Chain Award to Omnicell for service excellence in the healthcare industry.

Then in September, "Start-IT Magazine," a monthly publication for manufacturing executives, presented a 2006 technology and business award to our company. Both of these awards were for vDirector, Omnicell's foundational level product for remote high-speed system connectivity, which enables direct reporting of key parameters from Omnicell systems to Omnicell’s technical support center.

With vDirector, Omnicell technicians receive automated alerts when performance indicators are outside normal ranges, allowing to intervene, diagnose, and resolve problems before a customer is even aware of an issue.

In summing up the quarter, I would say Omnicell is building on the strength of our products for the future. Order rates have been robust for the last 18 months. We continue to enjoy orders from the major IDN wins we’ve announced previously and we’re winning new IDNs. We also continue to win repeat business with our existing customers who expand and upgrade their installations.

We are committed to providing our customers with the best vendor experience in the healthcare. We’re investing in our people, in our products, and in the future at Omnicell. With that, I’ll turn it back over to Rob.

Thank you, Randy. Now for our guidance.

As we’ve said throughout the year, entering Q4 ’06, we have full visibility to the installations we need to complete in the quarter to meet our customers' needs, and to achieve our revenue goals. We also have excellent visibility to Q1 ’07 installations.

Our strong order rates have allowed us to increase our pace of installation during the last 3 months and we expect that pace to continue for growing our staff, increasing our investment in new product development.

We previously guided to a 22 to 24% revenue growth year-to-year for 2006 and non-GAAP EPS, excluding stock compensation expense in the $0.52 to $0.55 per share range.

In light of record Q3 revenues and with the holiday season constraining the time available to complete installations, we expect Q4 revenue to grow very modestly; in the range of 1 to 3% sequentially.

We expect non-GAAP profits for Q4 ’06 to be flat with Q3 ’06, making our expected annual non-GAAP profit to be in the range of $0.56 to $0.57 per share, excluding stock option expenses.

I’d also like to give our initial guidance for 2007. We expect revenues to increase from 2006 by 17 to 20%. We expect non-GAAP profit to be in the range of $0.71 to $0.75 per share, excluding expenses of stock options and assuming a 10% effective tax rate for the year.

Operator, I’d like to now open the call for questions.

Thank you. Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [OPERATOR INSTRUCTIONS].

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

Thanks. Good afternoon. Just a couple of questions. I guess on the ’07 guidance, the 17 to 20% topline growth, that sort of assumes -- I mean, you’re going to bring on, looks like another 27 people -- 25 to 30 people; presumably most of them will be in the field doing installations. So that revenue growth estimate contemplates really no further additions to staff in the field.

Glenn, we’ll be adding staff to install the revenue as it's needed through the year. So 17 to 20% growth will require us to add staff throughout the year.

Okay, so add above the 600 target by the end of this year?

Yes, I would assume so. Generally we grow our staff about 10% a year. And 20% topline growth -- we won’t be growing our staff 20%, but you would expect that we would grow our staff at about half that rate.

Okay. And then, drilling down -- obviously very strong bookings. Drilling down a little bit, are you seeing anything different with respect to either the size of the institution that you’re selling to or the specific products that they are looking for? Have you noticed any change over the course of the last couple of quarters?

No, we are seeing strength across our product lines. We continue to win business both from multi-chains -- from multi-hospital chains and from community hospitals. We're kind of covering the range. It's a little bit geographically dependent and we're doing well in all geographies.

Okay, that's great. Thanks, Rob.

Our next question comes from Gene Mannheimer with Caris & Company. Please go ahead with your question.

Thank you. Great quarter and nice outlook, guys.

Thanks.

My question relates to gross margin. As you pointed out, it declined a little bit. You explained that in -- at least in part to a buyout of residuals to a licensing partner. My question relates to discounting. You indicated a good proportion of competitive displacements. To what extent was perhaps discounting a factor in the gross margin decline? Thank you.

Discounting was not a factor in this quarter's gross margin decline. The gross margin decline was all associated with the buyout of the purchase residuals and an inventory obsolescence write-down that we took on some our older product lines.

There -- we expected there would be price pressure in the industry just like there is in old technology but we really haven’t seen any gross margin decline because of pricing declines and discounting.

Excellent. And given that, and given some of the efficiencies you are seeing in manufacturing and outsourcing, do you have any thoughts about where you think gross margin can grow to? Could it approach the historical levels of what we saw a couple of years ago, at 60% or so?

Well, as we say every quarter, we don’t give specific guidance on gross margin and the other lines to the P&L, the expense line to the P&L.

The only thing I'd point out is I think gross margins have been relatively steady with the exception that, if you recall, at the beginning of the year, we had some change in where the charging took place of some of our operations team, which was about a 300-basis-points movement from expense in the -- to gross margin, reducing gross margin.

Otherwise, other than that change, it's been relatively consistent historically.

Okay. Thank you, Rob.

Our next question comes from Steven Halper with Thomas Weisel Partners. Please go ahead.

Hi. I guess we are moving in to the ASHP show in December. Could you provide some sort of overview in terms of what you're going to be showing there that's new?

Well, I think, generally the ASHP show is a great platform to introduce new products or to expand the products. And we will definitely have some of those and I think that most of the product lines and enhancements we have have to do with more efficiency, more patient safety, and particularly, ways for current customers who have our current systems to deploy them in a more advanced way. And so an easy upgrade path that will enable them to get more benefit from the system with an easy upgrade path and then just an extension of the equipment they already have.

We are obviously, Steve, getting a little more real estate out there and we want to be able monetize that. And I think it's important for our customers who initially deployed our base systems to continue to deploy the more advanced system and more feature set. So we want to continue to offer those.

Right. The -- Randy, if you'd just spend a little time assessing the competitive environment. Cardinal was showing off the MedStation 3500, which I guess enhances the 3000. Is that product out there yet?

I personally haven’t seen it yet and I think that Cardinal, as we are, are always about trying to bring our customers to the next level. But I don’t think that anything significant has happened in the marketplace this quarter or from last quarter as we've been able to continue to grow our business for the current customers as well as greenfield accounts, and as well as competitive conversions. So this -- [inaudible] I think it's pretty much been a steady state.

Okay. And then, just on the financials with the Q4 earnings guidance, you said they were going to be flat. I'm assuming you meant flat sequentially.

Yes, flat sequentially.

Okay. Thank you.

Our next question comes from Newton Juhng with BB&T Capital Markets. Please go ahead.

Good afternoon, guys, impressive quarter. I would like to ask you a little about the backlog and the nice $12 million growth that you saw in that this quarter.

You've talked in the past about trying to reach an equilibrium state. Are we seeing that with what you are expecting to pull out for 2007 that this is something we could be seeing so that's why you didn't really give a backlog growth number or anything like that?

Well, when we say that we want to get an equilibrium state, as long as business is growing that means that the backlog number in total will grow. We seek to keep an equilibrium state of about 2-1/2 quarters of backlog on the -- plus a little bit in some quarters and minus a little bit in other quarters.

The backlog is in a great position for next year and we will plan to try to keep in that state. Otherwise, if it's significantly higher, our customers would be dissatisfied on their available installation schedules and we won't allow that.

Sure. Okay, and then one other follow-up here. I'm curious about -- I guess you call it the flexibility of you guys to rapidly deploy an implementation team. And what I'm getting at here is you've talked in the past about how the deals with the larger hospitals take more planning, hence you're getting more predictability in the revenue.

But let's say for whatever reason that timeline does push for -- on the customer's end, can you take that implementation team and get them started up on another project rather expeditiously? So what I'm really getting at is do you have customers in your backlog that are chomping at the bit to get their systems installed in the hospital, you can actually move up in implementation timing to kind of offset any of those pushing of timings for other customers?

Yes, we always have customers that come into the order queue each quarter that need a quick installation. And typically we can accommodate them. The only issue that might come about is for a brand-new customer, a huge installation comes along and wants to move extremely fast. But typically they are the ones who need all the additional planning and they are the ones that actually want to push out the installation.

Got you.

And on the other side of that customers sometimes come and say they want to push things off, it's relatively easy to move other customers forward. So there is a lot of flexibility in the installation pipe just because it's very large.

Great. And then one last question, just on the DSOs, they keep coming down. I know the historical levels were in kind of the lower 70s a year ago or so. Are we looking at something that will continue moving, tracking down or going forward to get to that kind of level?

Well, that's certainly our objective. I don't think we've hit a point yet where we don't think that we can continue improving on our collectability. And hospitals typically pay slow and so it's kind of a squeaky-wheel thing, the more you bug them, the quicker they pay and we are continuing to bug them more.

Great. Thanks, guys.

Our next question comes from Len Podolsky with Piper Jaffray. Please go ahead.

Thanks. I think Newton addressed most of my questions. But I have a quick one. What can we expect of the tax rate going into Q4, because I think it was a bit higher than what we were modeling in this quarter?

Yes, our effective tax rate that we booked in Q4 was at 10%. And that's what I gave guidance for in 2007 too, and that's what you should use.

Okay.

What's happening there -- of course the tax books are a little bit different than the GAAP reporting books. And in the tax books you pay taxes on your increases in deferred revenue, as if it was actually booked in the yearend. And as our business is growing --

Yes.

-- faster than we thought, our deferred revenue is also growing as we are shipping out for installations. And so you get more tax liability on top of essentially the same revenue. And that’s why the tax rate is up a bit.

Yes, I saw that nice pop in deferred revenue. And I’m sorry if I missed this, any comments on stock-based compensation going forward?

So historically we’ve been at the 1.9 to 2 [every] quarter. We’re still amortizing off the stock estimates that were done for options in earlier years. And we'll still be amortizing those going forward. I wouldn’t expect any real big change in that in the near future.

Okay. Thank you.

Our next question comes from Sean McMahon with Kennedy Capital Management. Please go ahead.

[Nice to be on the] the call guys. Just two questions to kind of piggyback off that last caller, if we're -- when we start to look in '08, do you guys look to kind of be like a 35% tax rate? Or can you give me some kind of -- can you give -- I know you don’t have a crystal ball, but can you guide me, I mean, if you go -- kind of the be at a more normalized tax rate or are you still going to be at 10%?

Yes, our net operating loss carryforwards will cover through most of 2007. In 2008 it -- they just happen to effectively run out as we transition to 2008. So we'll be a more normal taxpayer in 2008.

You think that’s 35 or 40%?

Yes, it's probably in the 35% range.

Okay. And backlog grew nicely, I was just wondering if you can give me any color on the deal flow out there right now for the products. Can you kind of give me like the total dollars that you kind of are seeing that people want or --?

Well, I would just say that the deals are -- there's just lot of more transactions. Everybody is -- I think as the tide rises there is more transactions to be done both with current customers and new customers on -- and I think the market is seeing a little bit of both.

People are spending money on patient safety, and so while you may have had our automation systems for the last three years, you don’t have the latest or greatest features. And so you want to upgrade those as well as you want to be able to expand those across your hospital to implement it consistently all the way across.

So we are seeing growth, I think, in all areas, frankly, as Rob had said early. It's not sort of a single one area kind of a deal.

Is there like an RFP process?

No -- obviously some of the hospitals do do RFPs, the bigger ones or groups, but not all.

I mean, are you seeing like a doubling in RFPs? I mean, can you just kind of give me some color on -- is it -- are you seeing it slow here or is it -- I mean, obviously the quarter is great, but just kind of as you look on into '07 what are you seeing today?

Yes, I don’t see the transactions slowing down at all.

Okay. Okay, thank you.

Our next question is a follow-up from Gene Mannheimer with Caris & Company. Please go ahead.

Yes, actually that question was answered. Thank you.

[OPERATOR INSTRUCTIONS] Management, at this time there are no further questions. I would like to turn it back over to you for any concluding remarks.

Well, thank you for joining us for the earnings call. I have no further remarks. Randy?

See you next time.

Bye-bye.

Thank you. Ladies and gentleman, this concludes the teleconference. If you would like to listen to a replay of today's conference please dial 1-800-405-2236 and entering a passcode of 11068325 followed by the pound.

Once again, if you would like to listen to a replay of today's conference, please dial 1-800-405-2236 and entering a passcode of 11068325 followed by the pound.

Thank you for participating. You may now disconnect.