Omnicell Inc (OMCL) 2007 Q1 法說會逐字稿

Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Q1 2007 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A session. [Operator Instructions.] Thank you.

I would now like to turn the call over to Mr. Rob Seim, CFO. Sir, you may begin your conference.

Thank you. Good morning. With me today is Randall Lipps, Omnicell's President and CEO. Thank you for joining us today, bright and early, for Omnicell's Q1 2007 conference call. You can find Omnicell's Q1 results press release in the Investor Relations section of our Web site at www.omnicell.com. This conference call is the property of Omnicell, Inc. Any taping, other duplication, or rebroadcast without the expressed 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 Operation" and under the heading "Risk Factors" and Omnicell's Annual Report on Form 10-K filed with the SEC on March 27, 2007, as well as more recent 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 April 24, 2007 and all forward-looking statements made on this call are made on Omnicell's beliefs as of this date only. Future events or simply the passage of time may cause these beliefs to change.

After the call today, I'll 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 the rest of 2007. And after that, we'll open the call to your questions. Now for the results.

Q1 was an exceptional quarter for us. We had very strong orders in the quarter that is, historically, our seasonally weakest. We had record revenues. We had profits that were substantially above expectations. Our product backlog grew by $6 million. We had a very, very strong end to our quarter, with orders again ahead of our internal forecast in every region, in hospitals of every size, and in every customer segment. Product order backlog now totals $121 million, which is a little less than 3 calendar quarters of future installations.

Business for our medication dispensing systems was very strong and we were pleased to continue our momentum of corporate multi-hospital organizations, several of which we announced over the last 90 days. Our success continues with large accounts as well. Our 10 larges deals made up 40% of our bookings for the quarter. And we continued our momentum with new customers, with 48% of our bookings in Q1 comprised of a combination of competitive conversions and greenfield accounts. Greenfield accounts are those customers installing automation for the first time.

This quarter, about two-thirds of the new business mix came from competitive conversions. There is some variability in the amount and mix of new business from quarter to quarter, but Q1 happened to be one of our strongest quarters from new business ever. For the past 4 quarters, we have had 41% of our bookings from greenfield and competitive conversion accounts, split approximately 50/50 between the 2 categories.

Our backlog provides an excellent visibility to installations in the next 2 quarters, and we continue to add customers whose installation horizon is greater than 6 months from when we received the order. Customer demand for our products has grown throughout 2006 and 2007 and we have added staff to our team during this period, in order to schedule installations consistent with our customer's desired timing.

During the second half of 2006, we ramped up staff substantially and we have now taken a pause to assimilate our new team members. During Q1, our staff grew by 14, from 626 at the end of 2006 to 640 at the end of March 2007. However, the strength of demand for our products dictates that we continue to add staff to service our customers through 2007. Currently, we anticipate that we will grow our staff by over 100 people during the remainder of 2007.

The new customers we are adding typically require extensive planning before our products can be installed, both by the hospital personnel and by our own installation staff, which typically means longer installation cycles. These longer cycles give us visibility to manage our operations predictably and efficiently. They also give us the opportunity to carefully plan installations with our customers to ensure high satisfaction. Our continued goal is to have the highest customer satisfaction in the health care industry.

Now, I would like to discuss our Q1 financial performance. I will first discuss our financial performance in accordance with generally accepted accounting principles with year-to-year comparisons. I'll then discuss our performance, excluding stock compensation expense. Stock compensation expense includes the estimated future value of employee stock options, restricted stock, and our employee stock purchase plan. The stock compensation expense is a non-cash expense. We use financial statements internally that excludes stock-based compensation expense in order to measure some of our operating results. We use these statements in addition to GAAP financial statements and we feel it's useful to investors to understand the non-cash stock compensation expenses that are components of our reported results.

In covering our results for the quarter, I will first discuss our GAAP performance and then I'll discuss our non-GAAP financial performance without stock compensation expenses.

Revenue for the first quarter of fiscal 2007 was $48.2 million, up 41% year over year, up 12% from the fourth quarter of 2006, and substantially higher than analyst expectations. Omnicell recognizes revenue upon installation. And although we have most of the installation schedule established at the beginning of each quarter, there can still be some variability in the actual results. In Q1 '07, we saw upside variability from 3 sources, causing our revenue to be higher than expected. First, larger, longer-term installation projects completed ahead of schedule, driving more revenue into the quarter. Second, we performed some short lead time customer installations to accommodate customer needs that were in addition to our forecast. And third, our lease renewal business, which does not generally require a hardware installation, has a high degree of variability and a number of renewals closed right at the end of the quarter. Since bookings came in strong and customer demand for our installation was strong also, we had the opportunity to install more than originally anticipated, driving revenue up from the previous quarter.

On a GAAP basis, gross margins were 52.4%, inclusive of $.4 million associated with stock compensation expense. This compares to 56% last quarter and 54.6% in Q1 of last year. Several factors adversely affected our gross margins this quarter. First, and most significantly, we had a 180 basis point decline in overall gross margin quarter to quarter from the mix of our revenue that we installed. Our mix of product installations was more weighted towards lower margin OEM products and upgrades this quarter than it was in Q4.

Our OEM products, which are mainly in our central pharmacy product line, carry margins that are 20 to 25 margin points lower than our products manufactured in our own factories. Secondly, margins were affected by a higher-than-normal mix of international business that is sold through distributors, which decreased margins by 30 basis points. Sales through distributors tend to carry a lower gross margin, which is offset by less selling, installation, and distribution expenses. Finally, there were changes in our spending that degraded margins. And these changes had opposite effects on service and product margins.

Most of the changes in spending were caused by our annual reassessment of the allocation of shared costs between various departments. Since our installation and customer support departments grew substantially to support our 40% year-over-year revenue growth, those departments are now a larger part of the Company. Those departments are now being allocated more of the shared costs. This reallocation reduced margin overall by 140 basis points and is directly offset in operating expenses. The reallocation does not represent a decline in the overall profitability of the Company. You will see the greatest effect of this reallocation in the customer support department. Because we had been focusing headcount growth there to assure we are providing the very best customer support that we can. In fact, the headcount in customer support has actually grown faster than service revenue. The margins are down in service from the reallocation and from spending growth.

For product margins, the opposite has occurred. The manufacturing and installation headcount has increased, but not as fast as revenue for products. The decrease in product margins caused by the reallocation is more than offset by spending efficiencies. These efficiencies also partly offset the mix and international margin degradation that I mentioned first, causing a smaller decline in product margins.

But to recap, margins declined 180 basis points due to product mix, 30 basis points due to international distributor margins, and 140 basis points due to a cost shift from OpEx that affected service margins greatly and product margins slightly. But despite the overall decline in product margins, I'd like to point out that we did not see a degradation in the margins on sales of our primary product line of medication and supply automation systems.

Operating expenses were $21.7 million, including stock compensation expenses. Operating expenses increased $1.4 million from $20.4 million in Q4 of 2006, and increased $3.8 million from $17.9 million in Q1 of 2006. Our quarter-to-quarter increase was driven by our staff that joined us during Q4 '06 and now are onboard for the full quarter of Q1. Spending was also up due to a one-time increase in professional accounting fees associated with the lease accounting error we reported in late March.

Net earnings were $4 million, or $0.13 per share, as compared to $4.1 million, or $0.14 per share last quarter. Earnings were up, as compared to Q1 '06, by $2.9 million, or $0.10 per share, from $1 million, or $0.04 per share.

Now, I would like to cover our non-GAAP results, excluding stock compensation expenses. I'll 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. A full reconciliation of our GAAP to non-GAAP results is included in our press release and will be posted on our Web site.

Our non-GAAP gross margin for the first quarter 2007 was 53.2%, compared to non-GAAP gross margin of 56.7% reported for the fourth quarter of 2006. Fourth quarter non-GAAP gross margin was down from Q1 '06, non-GAAP gross margin of 55% -- 55.5%. Our non-GAAP operating expenses were $19.5 million, up $.8 million from our fourth quarter 2006 operating expenses, and also up $3.4 million from our Q1 2006 non-GAAP operating expenses.

As I commented earlier, we did not grow headcount materially during Q1 '07, but we did have the full quarter of expenses associated with people who joined us partway through Q4. Through the rest of 2007, we will be investing in the continued growth of our business and you should expect us to continue to invest in sales, R&D, and infrastructure, to help ensure that we are able to capture the market opportunity that is available to us.

Our Q1 '07 non-GAAP net income was $6.6 million, or $0.22 per share, $0.04 above the analyst's consensus. This compares to Q4 '06 non-GAAP net income of $6.1 million, or $0.20 per share. Our Q1 2007 non-GAAP net income was up $3.4 million year-to-year from Q1 2006 non-GAAP income of $2.1 million, or an increase of $0.11 per share year to year. We continue to gain leverage as we grow our business and I'm very happy with the progress we're making towards our goal, 15% operating margin.

On the balance sheet, cash and short-term investments are $65 million, an increase of $4 million in Q4 '06, and an increase of $31 million from Q1 '06. $1 million of our quarter-to-quarter cash increase was from business operations, and $3 million was the result of stock option exercises.

AR increased from $36 to $38 million. We did increase shipments in anticipation of Q2 installation. The collections were very high and average DSO decreased from 79 to 73 days. Inventories of $16 million were roughly flat quarter to quarter and up $4 million from a year ago.

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

Thanks, Rob, and good morning.

In the first quarter of 2007, customers have again voted for Omnicell products with solid orders of our hospital automation solutions. As Rob mentioned, our orders were unseasonably strong and our teams installed record revenues. Our new systems, based on Version 11 software, began shipping, delivering a wide range of new and enhanced patient safety features, and I'm excited about the number of new customers embracing our system. For instance, we recently announced that our OmniRx systems were chosen by the Greenville Hospital System, an integrated health care network on 5 campuses in South Carolina that included community hospitals and a long-term acute care hospital, housing 1,100 beds in total. The installation is a competitive replacement at all 5 Greenville campuses. Greenville made an independent selection of our medication systems after having already been a long time customer of Omnicell supply systems.

In April, we announced that HIMA, a major Caribbean medical care system with 4 hospitals and 2 freestanding surgery centers in Puerto Rico have signed an agreement for 124 OmniRx medication use and OptiFlex supply and management systems. The physician preference card system feature of our OmniFlex, the only one of its kind, was a key differentiating feature influencing the decision at HIMA. The preference card system maintains physician preferences by procedure and by doctor, allowing for the management of supplies and surgery suites, cath labs, and medical surgical units. Nurses utilize the system in preparation of a procedure and on the fly during a procedure to record supply usage.

Also included in the deal are other key Omnicell patient safety systems, including SafetyPak, which packages medications in single dose units with an identifying bar code; SecureVault, used to store and manage narcotics; and OmniLinkRx, used to manage physical prescription order workflow. A fifth hospital will be included in the deal in the near future.

In March, we announced the Coastal Carolina's Health Alliance, or CCHA, a non-profit cooperative of 11 hospitals serving more than 1 million people in North and South Carolina, partnered with us for medication use technology. So far, 3 CCHA member hospitals have installed OmniRx systems.

And also in March, we announced that Margaret Mary Community Hospital, a rural critical access hospital in Batesville, Indiana, decided to install OmniRx medication systems and anesthesia workstations to automate their medication use process. The decision came after a 2-year process of careful research. Although a small hospital, Margaret Mary is just one of many institutions that have demonstrated the opportunity that exists for Omnicell with customers of any size. Margaret Mary will be an end-to-end installation for Omnicell.

In summing up, I'd say that the momentum continues at Omnicell. We're continuing to build on the strength of our products. We're continuing to keep our focus on solving the customer's patient safety requirements. Order rates have been robust. We're enjoying success with new customers every quarter and we continue to win repeat business with our existing customers to expand and upgrade their installations. We're committed to providing our customers the best vendor experience in health care. Investing in our people, in our products, and in the future.

Turn it back over to you, Rob.

Okay, thanks, Randy.

The results of Q1 has set a new benchmark for us at Omnicell. Happy to report that the strength of our business makes us confident that we can sustain this momentum through the year. As I mentioned earlier, we will be growing our staff substantially through the rest of the year, maintain our customer focus, maintain our quality, maintain our controls, as we continue to grow.

We're ramping up our pace of installations in 2007. We previously gave guidance for 2007 of 21 to 24% revenue growth, and guidance of $0.82 to $0.85 earnings per share, excluding stock compensation charges. With the further growth of our backlog during Q1, we are now increasing our goal to grow revenue from 2006 by 26 to 29%. We expect earnings per share to be between $0.91 and $0.94, excluding stock compensation expense.

As I mentioned before, we are at the point where some of our net operating loss carry-forwards may be limited at the end of the year for tax purposes. We've been analyzing these carry-forwards and other tax credits and we are now assuming an effective tax rate of 7% for 2007.

That concludes the dialogue on the business. At this point, I'd now like to open the call to your questions.

[Operator Instructions.] Glenn Garmont, First Albany Capital

Nice quarter. Just two quick questions. There looks like there was a sequential increase in, at least a percent of bookings, coming from competitive swap-outs. Is there anything -- was that just sort of -- was that just kind of the way it worked out? Is there anything to that in terms of competitors either stumbling or doing anything differently that maybe you're well positioned to take advantage of?

And then, my follow-up is the Greenville account looks like a good win in which you already had a presence on the supply side. As you think about your customer list, is there -- it may be characterized the size of the footprint that still exists of customers that are today using the Omnicell supply product that may be potential medication use customers down the road?

Well, I'll take the first part of your question and I'll let Randy answer the second part of your question.

So, as far as the competitive swap-outs, I think overall we're doing very well on the competitive swap-outs. We've very pleased with our success and our ability to take business from competitors in these head-to-head competitions. As I said in this -- when we were going through the call here, there is some variability in this quarter to quarter. Those competitive swap-outs and new business, typically it represents somewhere between 50 to 25 accounts each quarter, and at times they may -- we may have several of them close in a quarter and at times they may slip into the next quarter, so we see some variability. But, overall, we really don't see any change. We're doing well against our competitors and we're very pleased with our success there.

I think it's probably good to look at the overall competitive swap-outs and new business over the rolling 4 quarters. As I mentioned, 41% of our business from new customers over the last 4 quarters and we're very happy with that.

Yes, and to your second question, Glenn. As you know from Omnicell's history, we've lost very few accounts. So, yes, the accounts that we secured in the early days of the business, a lot of those were supply systems only. And I think that's roughly around 25% of the accounts that we have today are supply only. And so that represents a couple hundred accounts, I suppose, where we would have the opportunity to continue to expand our business in.

Okay, that's helpful. Thanks for the comments, guys.

Len Podolsky, Piper Jaffray

Congratulations on a great quarter. Just curious, what was responsible for the stock compensation being up a little bit higher than our estimates and what we can expect for the rest of the year?

Well, we typically do refreshes on stock grants, our new stock grants, to existing employees at the beginning of the year. And so we did those grants. Our stock price has been doing well, so the grants have had some comp expense associated with it, a little bit higher than previous grants. But those grants come into the expense flow. They'll be amortized over time. As the year progresses, older grants that have been amortizing will hit a point where they are fully amortized and the stock expense will actually come down as we get into the latter half of the year. Those older grants from earlier years start dropping off pretty fast.

Okay, that's helpful. And then, going forward, I mean, it's great to see that you guys maintained the margins on your core product. In terms of the revenue mix going forward, can you give us a sense as to how that's going to turn between your core, the products that you manufacture in-house and then the OEM, just so we can kind of look at the gross margin going forward as well?

Well, that's kind of a higher mix of installation than those central pharmacy type products over the last quarter that we have had in the recent past. We're still having success with those products and we're still going to have several of those being installed in the future. Probably not quite as high a mix as we had this quarter. And we're kind of encouraged by the international mix also. The international market is pretty nascent and just getting going. We had a couple of good wins that we installed in the quarter and we're actually hoping that that continues, which will cause kind of just a fundamental shift in how our expenses are booked, but we would like to get more international business of course.

Is there a regulatory change that's responsible for that or is it that the international market is just looking at what's going on in the U.S. and saying that they have to automate their prescription workflow as well?

Yes. It's more of the latter. I think the international market is just lagging the U.S. by probably about 10 years. And so the thoughts of medication safety and controlling it through systems like ours are just starting to take hold.

Okay, thanks very much. Congratulations again.

Gene Mannheimer, Caris & Company

Congrats on a great quarter. Question on gross margin. The reallocation of services margin, is that one-time or expected to continue, Rob?

That will continue. But we do these assessments annually, rather than going through the effort to reassess the allocations of our shared costs, [like these] facilities benefit from this sort of thing. We do it manually and so we have a little bit of a staff function if there has been any material mix shift in our headcount between one department and another. So that's going to continue through the rest of the year.

Now, we are -- we did staff up early in the customer support area. As I mentioned, that staffing growth was actually faster than the revenue growth. We're putting a lot of systems out in the market. Revenue continues to grow in several competitive swaps and we just want to make sure that the help desk and the field support people have enough staff and enough expertise to service the customers well. And so we put some emphasis in staffing there.

Okay, thank you. And what -- you mentioned a 7% effective tax for '07. Do you expect to be a full tax payer in 2008?

Yes, but we still have a few NOLs that are available to us next year. We're anticipating 35% in 2008.

Okay. And on your financials, I noticed that despite the increase in the backlog, which is impressive, it looks like deferred gross profit actually decline quarter to quarter. Is that because your rate of installations was higher in Q1 or are the two not necessarily linked?

The rate of installations was higher and you saw that in the revenue. And as I said, we kind of had a good surge right at the end of the quarter. And so we just had less product that had been built and shipped that was leading in the customer offices to be installed, in the hospitals to be installed.

Okay.

So the backlog is up, but the larger percent of it hasn't been shipped yet.

Okay. And just real quick, in terms of your backlog, can you talk about what percent of that is multi-hospital corporate nature versus, say, standalone independents? And thanks for taking the questions.

Wow, that's a pretty detailed question. Actually, I can't give you that answer. One, because I don't have it right here with me, but I don't think we ever really go into that kind of detail with the backlog.

Newton Juhng, BB&T Capital Markets

Question on installation and obviously this quarter being -- and you talked about a little bit of the upside coming from the faster installs. Is that a situation where you're seeing some improved efficiency or is it just strictly from a headcount perspective you're able to get things done on a -- a little faster?

We are seeing some efficiency. Now, this has a variability quarter to quarter also because some of our customers actually self install and they'll sign a self install letter. So we had a little bit more self installs. We can get a little bit more done. I would say our guys worked very, very hard during Q1. And in Q1, we didn't staff as much as probably we'd even like, as I said, the staff only grew by 14. So we will definitely be adding installation staff through the rest of the year.

Okay. So we'll have to layer in that additional cost. Great. And then, just on the international business, I was wondering if you could give us some idea. Is this in particular regions that you're seeing the kind of demand coming from or is it a little bit more widespread?

Well, this quarter, it was only a couple of percent of the revenue. International business has been so small; it was even a little bit of an increase kind of effect. But we sell our products in Europe. We sell our products in the Middle East, Latin America. We have a distributor in Japan. So we do market our products around the world. And from quarter to quarter, we see the orders in varying countries. We've had a lot of success in some unexpected places, like Spain and Chile, where they are just a little more in tune to patient safety at this point.

Steven Crowley, Craig-Hallum Capital Group

Obviously, I'll chime in, great quarter from a product revenue and bookings standpoint. A couple of questions. I just want to clarify, on the service gross margin side, you've given us a lot of color as to items that impacted overall gross margins. But I think what I'm hearing about the service gross margin is that that's the area you staffed up early, so there is some opportunity for you to leverage some of the support staff investment you've already made. So I guess what I'm asking here, are we going to see that margin march up over the course of the year, the service gross margin?

We did staff up early and there is probably a little bit leverage there, but I think the way to think of this is we're growing product margins, or product revenue, very fast and we grew revenue $5 million quarter to quarter. When you look at the mix of that, it's all product. The service revenue just won't grow as fast because, of course, there is a large install base out there that makes up that service revenue already. And when you add systems to that, it just doesn't grow as fast as a quarter-to-quarter product.

When we staffed up in service, we staffed up faster than the revenue was growing. And so we added costs, which made margins decline. And then on top of that, we had the reallocation of expenses, the departments that have more headcount, and so that [threw] more expense in the services.

Makes sense. I just wanted to make sure I had it calibrated correctly. Now, in terms of that exceptional product growth you've been experiencing, are you seeing a particular capability resonating with the new accounts or competitive accounts that you're winning? What kind of color can you give us on why you're winning as much as you're winning these days?

Well, I guess you're asking why we're having success with the customers.

More specifically, is it that additional layers of patient's safety that you're bringing that are resonating or is it a whole host of things?

It's the overall Omnicell package that people seem to be buying. So our products have a great set of features. We've got the most robust bar coding safety checks on products. We've got a nice kind of end-to-end suite of products to handle the distribution of medication through the hospital. And Omnicell brings kind of a unique package in a vendor. We're the only pure play doing this. We're not distracted by any other product lines or any other businesses. And we've got a -- being a kind of a smaller company in the market, we have an extreme customer focus and try to make sure that the customers are very, very well served. And so it's an overall package that the customer will buy. And they look at all of these things when they are going through the assessment process and that's why the bill cycle is so long.

Excellent. One final question from me. Rob, could you just update me, or update us, on the timing for your 15% operating margin goal?

Our goal is to exit the year at 15% operating margin. That does not mean that it will be 15% operating margins for the entire year on average, it's just get there by the end of the year.

Great. Well, it certainly looks like some of the trends should play to your capability there. Thanks for the time.

[Operator Instructions.] Steve Halper, Thomas Weisel Partners

Relative to the international growth that you saw in the quarter, if that continues to progress, is that an area where you would start to invest in to build infrastructure so you could go direct, as opposed to using distributors?

Well, right now we have partnerships with distributors in all international geographies. And the business isn't big enough for us to warrant a lot of direct investment. We have 2 people in Europe that handle the international distributors there and around the world. The only non-U.S. geography that we are direct in is Canada. If business really took off, we would certainly assess the best way to get to the customers. But I'm always cognizant that when you're operating in a foreign country the best thing is to have somebody who really knows that country handling your product.

Is there any change -- is there any difference in the competitive landscape internationally?

No. We haven't noticed any.

No, no. I mean are the competitors the same that you see in the U.S.?

Well, yes, the competitors are the same, with the exception of one company in Belgium that operates just there.

Is it just in Belgium or is it throughout Europe?

Just in Belgium.

Okay, great.

[Alan Fishman], Thomas Weisel Partners

That was my question. Thanks.

And there are no other questions at this time.

Okay. Well, if there are no further questions, then that concludes the call for this morning. Thank you all for joining us before the market opened here. We kind of rearranged this call to accommodate some scheduling conflicts. So appreciate your attendance.

See you next time.

This concludes today's conference call. Thank you for your participation. You many now disconnect.