Omnicell Inc (OMCL) 2007 Q2 法說會逐字稿

Good afternoon. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Second Quarter Earnings 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. Mr. Seim, you may begin your conference.

Thank you. Good afternoon, and welcome to Omnicell's 2007 Second Quarter Results Conference Call. With me today is Randall Lipps, Omnicell President and CEO.

You can find the Omnicell's second quarter 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 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 "Risk Factors" and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation," and the Omnicell Annual Report on Form 10-K filed with the SEC on March 23, 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 July 19, 2007, 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.

During 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'll then discuss Omnicell's guidance for the rest of 2007. After that, we will open the call to your questions. Now for the results.

In our second quarter of 2007, we had record bookings, record revenues and record profits. The results of our sales and operations exceeded analysts' expectations by $0.01 per share. Our product backlog grew by nearly $11 million, with orders strong again in every segment of our business. Product order backlog now totals $131 million which, like last quarter, is a little less than three calendar quarters of future installations.

Business for both our medication and our supply dispensing systems was strong, and we were pleased to continue our momentum of corporate multi-hospital organizations, several of which we announced over the past two quarters. New customers were again a sizeable portion of our orders, with 39% of our bookings in Q2 comprised of the combination of competitive conversions and Greenfield accounts. Greenfield accounts are those customers installing automation for the first time.

This quarter, about half of the new business mix came from competitive conversions. Over the past four rolling quarters, we have had 40% of our bookings from Greenfield and competitive conversion accounts.

As we've said before, we believe our backlog is a strong asset. Backlog has grown steadily for nine quarters, and we anticipate it will continue to grow over time. Backlog provides us excellent visibility into installations planned for the next two quarters, and we continue to add customers whose installation horizon is greater than six months from when we received their order. We intend to manage backlog to be six to nine months of forward-looking revenue.

With our backlog growing and demand for our products strong, we have continued to grow our staff, especially in the areas in installation and customer support. During Q2, our staff grew to 676 employees. And we anticipate that we will grow our staff by 75 to 100 people during the remainder of 2007.

As in previous quarters, 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 and provide the best vendor experience in the healthcare industry.

Now, I would like to discuss our second quarter financial performance. I will first discuss our financial performance in accordance with generally accepted accounting principles with year-to-year comparisons. Our financial results demonstrate continued strong demand for our products and continued management of the business to higher profit levels.

Revenue for the second quarter of fiscal 2007 was $51.8 million, up 43% year-over-year, up 8% from the first quarter of 2007, and substantially higher than analysts' expectations.

On a GAAP basis, gross margins were 52.8%, inclusive of stock compensation expense. This is down from 55.8% in Q2 of last year, and is driven primarily by a shift of allocated expenses from OpEx to COGS, which had no effect on overall profitability. Our product mix was also leaning a little more towards lower margin OEM products than during last year. We have not seen any fundamental shifts in industry pricing practices.

Operating expenses were $23.2 million, including stock compensation expenses. Operating expenses increased $4.8 million, or 26%, from $18.4 million in Q2 of 2006. The growth in operating expenses is consistent with our practice over the last 18 months of growing our expenses at a little more than half the rate of our revenue growth.

Net earnings includes a very large one-time benefit associated with a partial release of the reserve against our deferred tax assets, totally $12.8 million. Deferred tax assets are the future tax benefits of net operating loss carryforwards and other timing differences between cash and book taxes. We have carried a full reserve against our deferred tax assets in the past because of variability in our profitability. Our consistent profit growth indicates that a full reserve is no longer warranted.

With this one-time adjustment, our net earnings after taxes were $18.1 million in the quarter, or $0.55 per share. Included in this number is the one-time tax benefit which represents $0.39 per share. The release of this reserve does not change our forecasted tax rate for 2007 or 2008. And as expected, our deferred tax assets are still available to offset tax payments for several years. We expect our effective tax rate to be 5% to 7% in 2007, and 35% in 2008.

Now, I would like to cover our non-GAAP results, excluding stock compensation expenses and excluding the one-time tax benefit. 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 and the one-time tax benefit.

Stock compensation expenses include estimated future value of employee stock options, restricted stock and/or employee stock purchase plan. Since stock compensation expense is a non-cash expense, we use financial statements internally that exclude 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 is useful to investors to understand that non-cash stock compensation expenses -- they're a component of our reported results. A full reconciliation of our GAAP to non-GAAP results is included in our press release and will be posted to our website.

Our non-GAAP gross margin for the second quarter of 2007 was 53.4%, compared to non-GAAP gross margin of 56.4% in the same quarter of last year. The business trends are the same, as I explained for GAAP gross margins, are mainly driven by a reallocation of costs from OpEx to cost to goods sold. Our non-GAAP operating expenses were $21 million, up $4.3 million or 26% from our Q2 '06 non-GAAP operating expenses of $16.7 million.

Our Q2 '07 non-GAAP net income was $7.8 million, or $0.24 per share, $0.01 above the analysts' consensus. Our Q2 2007 non-GAAP net income was up $3.8 million, or 95%, year-to-year from Q2 '06 non-GAAP income of $4 million. This is an increase of $0.10 per share year-to-year.

This quarter, I'd also like to formally introduce an EBITDA measure. EBITDA, or earnings before interest, taxes, depreciation and amortization, excludes non-cash expenses and focuses on operating results. Most of the analysts that follow us provide an EBITDA measure, and this measure may help investors compare our results as we become more fully taxed in 2008.

For comparison purposes, I'll now read our EBITDA history. In Q1 2006, EBITDA was $4.2 million. Q2 '06, $5.1 million. Q3 '06, $6.4 million. Q4 '06, $7.4 million. Q1 2007, $7.8 million. And Q2 2007, $8.9 million. Q2 2007 is up 75% from a year ago, again, a much faster growth rate than revenue.

During Q2, Omnicell completed a secondary public offering of our stock, in which we sold 4,485,000 shares of common stock, producing net proceeds to the company of $90 million. This offering was neutral to the earnings per share for the quarter, and is expected to be neutral to EPS for the rest of 2007.

Our cash and short-term investments were $172 million at the end of Q2 2007, an increase of $107 million from the first quarter of 2007. This includes the $90 million of proceeds from our secondary public offering. The other $17 million increase was comprised of $14 million from business operations and $3 million as a result of stock option exercises. A large portion of our cash increase was from a significant improvement in collections.

We continue to drive our accounts receivable day sales outstanding down, decreasing this quarter from 73 down to 67 days. Inventories of $14 million were down $2 million quarter-to-quarter.

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

Thanks, Rob. Thanks for joining us today.

In the second quarter of 2007, customer demand for Omnicell products again grew to a record level, with solid orders of our hospital automation solutions. I'm very proud of our team's record system installation performance, which produced record revenues. I'm excited about the number of new customers embracing our systems. Omnicell continues to deliver advanced products to improve patient safety.

During Q2, Berkshire Health Systems and Omnicell jointly announced a contract to automate Berkshire Western Massachusetts facilities for the first time. The project will help Berkshire continue a leading position in patient safety, and includes a wide range of Omnicell advance technology solutions, such as pharmacy storage and retrieval units, medication dispensing systems for medical and surgical floors, and physician-ordered management systems.

Also, during the quarter, key industry organizations, MD Buyline and Class Enterprises, continues to recognize Omnicell as the number one vendor in the industry. Once again, we received the highest overall user satisfaction rating from MD Buyline, while Class Enterprises awarded us the number one ranking for medication dispensing decentralized vendors.

I'm proud to be recognized, but we are not standing still. The proceeds from our secondary public offering give us the financial strength to continue to improve our product line, and to provide more complete and innovate solutions to our customers.

We continue to build on the strength of our products. We continue to keep our focus on solving the customer's patient safety requirements. Order rates continue to be robust. We're enjoying success with new customers each quarter, and we continue to win repeat business with our existing customers who expand and upgrade their installations.

We are committed to providing our customers the best vendor experience in healthcare. We're investing in our people, and our products, and our customers and, of course, in our future.

With that, I'll turn it back over to Rob for our guidance.

Thanks, Randy.

The results of Q2 '07 have once again set a new benchmark for us at Omnicell. We expect the record customer command we have experienced to produce increased revenues and earnings in the future. But, we'll also need to make sure we have the infrastructure to deliver the quality experience our customers expect.

As I mentioned earlier, we will be growing our staff substantially through the rest of the year. We plan to invest earlier than expected in additional training and infrastructure to support our new team members.

Over the past nine quarters, we have consistently gained profit leverage as we grew our business and made progress towards our goal of 15% operating margins. We expect to continue that progress. We also expect net earnings will be greater than previously thought. But, the additional investment in bringing on new staff will likely cause the achievement of 15% operating margins to occur in Q2 2008.

Meanwhile, our guidance for revenue and profit is up. We previously gave guidance for 2007 of 26% to 29% revenue growth and $0.91 to $0.94 earnings per share, excluding stock compensation charges. With the further growth of our backlog during Q2, we are now increasing our guidance to grow revenue from 2006 by 32% to 34%. We now expect earnings per share to be between $0.98 and $1, excluding stock compensation expense and excluding the one-time benefit from releasing the allowance on deferred tax assets booked this quarter.

Now, I'd like to open the call to your questions. Operator, if you could take it.

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster.

Tom Gallucci, Merrill Lynch.

Good evening. Thanks for the overview. Obviously, a very strong quarter on the top line, while the backlog remains solid.

The last quarter, I think you talked about some longer-term and shorter-term installations coming a little bit ahead of schedule, which helped the revenue. So, we were a little more conservative this quarter. But, obviously, you blew through that, too.

And you gave a granularity on the call about top-line, but can you talk a little bit more about where the new sales are coming from, sort of what the sales pipeline looks like? Not necessarily the backlog, but the number of RFPs out there relative to a year or two ago. And just a little bit more from where this top-line of strength is coming from.

Well, the top-line strength in the orders that are coming in are coming from all facets of our business. As you know, our revenue -- our orders are primarily in the United States. We're coming -- strong orders from large hospitals, medium-size hospitals, small hospitals, from all the different pieces of our product line, supply, medication, central pharmacy. It's pretty much across the boards. So, I can't call out any specific area of the country, specific type hospital or specific piece of the business that's different from the rest.

The orders, clearly, are coming in -- that came in this quarter and came in first quarter are very strong, as you saw from the backlog growth, despite the fact that we increased our insulations and increased the revenue, or you can think of that as the portion of backlog that's being converted into revenue. We increased that dramatically. Despite that, the backlog has continued to grow.

So, when we see that happening through the quarter, we try to make sure that we're not letting the backlog get to a point that customers wait too long. And if we find there are some customers that are willing to do an installation sooner and we have the staff to do the installation, we'll go ahead and do that, and that drives the revenue up.

All right, thank you.

One final one. Obviously, a lot of cash on the balance sheet at this point. Can you give us any more insight into what we should be thinking about in terms of deployment of that cash flow?

Tom, this is Randy Lipps. I think, as we've said in the past, I think the cash does give us more opportunities to look at a larger group of potential corporate development projects. And we're just starting that process as we go through the opportunities in the marketplace, and it gives us the credibility to have the discussions with these individual opportunities.

So, we're just starting that process. We're going to be prudent with everything that we deploy. And we'll just have to see how the timing of that goes.

Good, a good quarter. Thank you.

You bet.

Glenn Garmont, First Albany Capital.

Thanks. Good afternoon, and a nice quarter, guys.

Rob, just a real quick question. On the gross margin, you talked about the reallocation of cost effecting the gross margin comparison year-over-year. But, can you talk about are you seeing an increased level of price competition as you go up against your competitors? Or the fact that you've signed a number of these larger multi-hospital and IDN deals in recent quarters, is that having an impact on your gross margins, as well?

No, not really. We had this reallocation of expense, as you might remember, last quarter. We kind of do this survey once a year, and figure out how our fixed costs, IT and benefits and things like that get allocated between the different lines in the T&L, and allocate them that way throughout the year.

As far as the overall market goes, as I actually said during the call, we're not really seeing any fundamental changes in the pricing structure of the industry. When we have a new customer, it's always a competitive situation. We may bid a little bit more aggressively, and so does our competition. But, other than that, it's pretty much the same as it's been.

Okay. And then, just to recap, I want to make sure I had this right. Your new earnings guidance for the year is based on a -- I'm sorry -- a 5% to 7% effective tax rate?

Right. And that's consistent with the tax rate we said before in the guidance.

Right, right, okay. And then, 35% in 2008. Okay, that's all I had. Thanks.

Yes.

Steven Crowley, Craig-Hallum Capital Group.

Good afternoon, gentlemen.

Hi, Steve.

Obviously, excellent performance.

You referenced the impact of a little stronger OEM mix this year on your gross profit margin. Obviously, given that their incremental revenues, even at a bit lower margin, looks like good business for you. Maybe you could just confirm what your plans are around that central pharmacy business and some of the OEM activities there? And whether or not you're bookings mix is also shifting a little bit towards that side of the equation, or whether it's not -- it's just an artifact of some success you had a year ago?

Yes, the pharmacy central equipment is a pretty long installation cycle. It is very large systems, and they're actually typically built into the pharmacy. I mean, like they're built into the wall. So, they take some time to install. And what we're seeing in this year is orders that we took last year.

As far as going forward, the central pharmacy is an important part of our business. We believe it's a part that's just starting to develop. Most of the pharmacies are not automated. We view it as a great opportunity. We have some great products there, the repackaging product and storage and retrieval carousel that are all hooked together with one piece of software, and a narcotics vault for the central pharmacy. And we're optimistic about that business and the growth of it.

Great. And you referenced some statistics on where headcount is coming out of the second quarter. Could you just refresh my memory on where it was at the beginning of the year, and where it was at the end of the first quarter?

We started the year with 626 staff on board. In Q1, it was 640. And Q2 is 676.

Okay. So, you're really telegraphing a continuation, a rather steady increase in headcount over the balance of the year.

That's right.

And--.

--In fact, we're actually telegraphing that we've taken up our targets for how many people we would hire through the year.

Oh, okay. But, you've been adding about -- I guess in the last quarter here, you added 36. And I believe you said 75 over the balance of the year?

Seventy-five to 100.

Seventy-five to 100. Now, these people, they're costs -- or this investment, I should say, is it spread pretty much across the board, or should we expect it to show up in a particular category or two more heavily?

It's more weighted towards cost to goods sold because our installation and our customer support staff pretty much have to grow one-for-one with the growth of our revenue and the growth of our installed base. And those people, for the most part, charge into cost to goods sold.

And one more question. In terms of some other initiative new product area updates, our impression is that you had a nice batch of success in the anesthesia monitoring area, and maybe you could update us a little bit there.

And also, update us on your bedside strategy, and when that might blossom as a bigger part of our conference call discussion.

Well, the anesthesia monitoring, I believe you're talking about the anesthesia work station, which is a medication control.

Excuse me, anesthesia work station.

Yes, yes. There are medication control units for the operating room, and that's -- we're very pleased with how that's going. It's a great system, and it seems to be accepted well.

And the bedside market is still pretty embryonic. We have a software product there. And actually, I think you guys saw it at a last tradeshow, the last couple of tradeshows. We have demonstrated a new version of that software that's very focused on just the medication control. It actually runs off a common database with our other medication control systems.

That's something that we're working on. We haven't made it generally available in the marketplace yet. But, obviously, we've been demonstrating it, and it's in our future.

Great. Thanks for answering my questions. Congrats on the quarter.

Thanks.

Thanks, Steve.

Steve Halper, Thomas Weisel Partners.

Hi. If you take out the tax benefit in the quarter, what would have the effective tax rate then that you would have reported? Because it looks even unusually lower than what it would have been.

It was 5%.

5%, okay. And that was just a touch lower than what you've been reporting, correct?

That's right, just a little bit.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS). Newton Juhng, BB&T Capital Markets.

How are you, guys? This is Eugene standing in for Newton.

Just if I could piggyback off of Glenn's question on the reallocation of expenses to the COGS line. We saw service gross margins decline for the third consecutive quarter, and I was wondering if you could kind of give us a perspective on maybe a range where you could expect that to track?

Service gross margins declined in the first quarter primarily because of the reallocation. But, also, we have been putting more emphasis on adding staff in service. As we ship more and more products, our installed base just becomes bigger and bigger out there, so there's more to service.

We also, this quarter, took a one-time action to stock up our spares warehouse. We keep spares around the country, but our primary depo is outside of Chicago. And we just found that on occasion a customer might have something that failed on a product, and we wouldn't have the part there. And we wanted to make sure that we had -- are as responsive to the customer as possible. So, we took an opportunity to stock that up. That drove the margin down a little bit this quarter.

Otherwise, you really -- there wouldn't have been any change in the margin. Actually, it probably would have improved a little bit.

Great. That's really helpful. And just a few more follow-ups. On the inventory, it was down sequentially a couple of million. Is that something you could see going forward, or do you see that track up?

That -- we have been -- that's all in raw material, and we have been on a pretty steady path to outsource some of our components, as we talked about before. Management of the inventory is -- the outsourcing is part of the strategy there to help manage the inventory and help reduce it. And we're also just doing a more efficient job in the pipeline inventory.

Okay. And the last one, if I may, on the DSOs, the strong collections, we saw DSOs below the 70 to 80-day range. Is this something that we could see going forward, or do you see this track up, as well?

Well, I would hope that we can keep it in the 60-day range, but we had just a phenomenal collections quarter. And pragmatically, I know you can't always have a collections quarter quite like this. So, we're striving, as I said before, to try to get our DSOs into the 60-day range, and keep them there. This is the first time we dipped there. I'll just say, well, that's our goal.

Um-hmm.

I don't know if we can actually keep it there, though. Hospitals don't exactly take quickly.

Okay. And one more, if I can, on the stock-based compensation. That was also a little bit lighter than the previous quarter by about 200,000. Is this a pretty good run rate to you going forward?

So, the way the stock-based compensation works is you calculate the future value of the stock when it's issued, or when the option is granted. And then, you amortize that number over the course of the life of the option, or over the effective life of the option. For us, it's about five years.

We had more expensive stock comp associated with each share earlier in the history of the Company because there was a lot of volatility in the company, and that's a key factor in the calculation. Those options are starting to bleed off, the amortization is -- they're becoming fully amortized. And so, as they bleed off, the stock comp expense comes down.

We do grant options to our existing employees. And when we grant options, that drives it up a little bit. But, you'll see those older options bleeding off over time.

I see, great. Thank you very much, guys. A great quarter.

Thank you.

Gene Mannheimer, Caris & Company.

Thanks, guys. A great quarter and outlook.

With respect to the sales organization, you mentioned you've ramped up over the last several quarters. Do you feel you have the proper sales coverage at this time to meet the increase in orders, or do you still expect to invest there? Thanks.

Well, I think, Gene, for 2008, for sure, we will begin to continue to expand our sales force. We have kept it pretty consistent over the last couple of years, but we find ourselves at the point where we really need to take the sales force up in a controlled manner. But, for 2008, we'll begin to employ probably another 10%, 15% increase in sales folks.

Okay, good deal. And Randy, maybe you can just update us, any changes in the competitive landscape beyond the usual suspects? Thanks.

No, I think the order rates continue to be robust. I think we're positioned well in the marketplace. And we've got a lot of momentum. So, I think that should continue.

Okay. And with respect to the recent offering, you now have over $5 a share in cash, can you tell us how that's being invested in what sort of securities? And what -- maybe update us on the acquisition strategy, what -- if you're coming closer to identifying any good opportunities. Thanks.

Well, we've got a bit of an inverted market right now. So, we're getting fairly robust rates of return in very short-term securities, and that's where we've got it, or in general money market accounts.

And then, what was the second part of your question?

Just in terms of updating us on -- maybe anymore color with respect to your acquisition strategy, and what type of opportunities may be out there.

Well, as we said, as we did the secondary, we raised the secondary for purposes of a future expansion of our product line, either through licensing or through acquisition, or internal investment.

As Randy said earlier, we're taking a look at the different technologies that are available on the marketplace, and may be good technologies to add on to our product line. We're looking to, as we said, expand our product line deeper, and make ourselves more valuable to our existing customer sets. And there's a lot of avenues to do that.

Okay. And then, it's good to see you're reporting an EBITDA number now. Do you happen to know what D&A was in the quarter? Thanks for taking the question.

Depreciation amortization is generally a little bit less than $1 million. We're not a very capital-intensive company, so it's not a real big number.

Okay, great. Thank you.

Sean Wieland, Piper Jaffray.

Hi, thanks for taking the question. My question is on the headcount growth. If I'm doing my math right, your forecast now is about 25 -- you're going to be adding between 25 and 50 more people by the end of the year than you were planning on. Is that due to a better sales forecast, or is that due to helping your customers get live on their products faster?

Well, it's -- I'm not sure what you mean by better sales forecast, but--.

--A better pipeline.

Well, we just don't see anything really slowing down. As you saw by the backlog, the numbers that we talk about, the backlog went up more than our revenue growth rate in Q1 and in Q2, and it did all through last year, also. We're not seeing any slow downs of that momentum.

And so, we've just got to make sure that we've got all the people on board to be able to do everything regarding our customer. It's presales, installation and post-sale support. It's pretty much across the board.

Okay. All right, good. And do you have an OpEx number that you might be able to help us out with in our models, given the increased number of people?

Yes, we still don't give any forecast specifically on OpEx or gross margin.

I mean, could we -- is it a -- or would it be a -- just to kind of forecast out the operating expense growth, would it be fair to use the increase in people you have as a kind of a benchmark for that?

Yes, well, as I said earlier, the people are probably a little more heavily weighted into cost--.

--Okay--.

--Because they're -- installation and customer support people are pretty much on a one-for-one basis with revenue growth.

Okay. And then, one final question. Last quarter, we were talking about the international market being a growing opportunity for you. Is there any update there this quarter? Do you still see that as a growth opportunity?

The international market is definitely still a growth opportunity, and it's definitely still very embryonic. And so, we have most of our sales going through distributors, but we have a couple of people specifically dedicated to working the international market in development. And we see a lot of, kind of future opportunity there. But, it's still a very small piece of our bookings and our revenue.

Okay. Well, thank you very much.

Thanks, Sean.

And at this time, there are no other questions. Do you have any closing remarks?

No. Thank you for all joining the call.

Ladies and gentlemen, this does conclude today's Omnicell conference call. You may now disconnect.