Omnicell Inc (OMCL) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Theresa, and I will be your conference operator today. At this time I would like to welcome everyone to the Omnicell third quarter earnings call.

(OPERATOR INSTRUCTIONS)

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

Thank you. Good afternoon, and welcome to the Omnicell 2007 third quarter results conference call. I'll be covering our results today from our company headquarters in Mountain View, California, and joining me on the call today is Randall Lipps, Omnicell President and CEO, who is traveling on customer visits this week.

You can find the results in the Omnicell third quarter press release posted in the Investor Relations section of our website at www.omnicell.com.

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 Conditions for Results of Operations" in 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 October 18, 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. Finally, this conference call is the property of Omnicell, Inc., and any taping, other duplication or rebroadcast without the express written consent of Omnicell is prohibited.

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 and our initial guidance for 2008. After that we'll open the call to your questions.

I'm happy to report that our third quarter of 2007 resulted in record revenues and record profits. In fact, in the last two years, our quarterly revenues have increased 80% and our profits have increased more than fivefold. The results of our sales and operations in Q3 '07 exceeded analysts' expectations by $0.02 per share. Our product backlog grew by $9 million, with orders strong again in every segment of our business.

Product order backlog now totals $141 million. It's like last quarter, it's a little less than three calendar quarters of future revenue. Because the third quarter has historically been a seasonally weaker quarter for Omnicell, we are very pleased with the demand for our products. Business for both our medication and supply dispensing systems was strong. Momentum with corporate multihospital organizations continued. Orders from the federal government comprised a significant contribution, as they have been in the past third quarters.

New customers again accounted for a sizeable portion of our orders, with 33% of our bookings in Q3, 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. Our four-quarter rolling average of bookings from new accounts is 38% of our total orders.

Backlog was an important indicator for Omnicell as we changed our business back in 2005 and in 2006. Our backlog has now grown steadily for 10 consecutive quarters, and we anticipate it will continue to grow over time, consistent with our annual revenue growth.

We have been operating the Company with a backlog in the range of six to nine months for some time and feel comfortable that this is a good balance between providing the flexibility to meet customer requirements to operating the Company efficiently and predictably. We anticipate that we will continue to manage backlog in this range, but we do not believe that quarter-to-quarter change in backlog is a meaningful measure of our success or a forward-looking indicator that should be used to manage our business on a quarterly basis.

For this reason we will be phasing out reporting our backlog on a quarterly basis. Following next quarter, Q4 '07, we will report our backlog annually at our December year end. We will continue to keep you informed if we make a decision to manage backlog differently, or if there is a significant change in visibility to future revenues in backlog.

As in previous quarters we have continued to add customer installation and support staff to handle the growth in our sales to new customers, who typically require longer installation cycles, and to support our increased install base. Last quarter I reported on our goal to increase staff over the second half of 2007. I'm happy to report that we're on track. During Q3 we grew to 728 employees, and we anticipate adding another 40 to 50 employees during Q4 '07. This additional staff will help us in achieving our goal of providing the best customer experience in the healthcare industry.

So now I'd like to discuss our third 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 strong -- continued strong demand for our products and continued management of the business to higher profit levels.

Revenue for the third quarter of fiscal 2007 was $55.2 million, up 34% year over year, and up 6% from the second quarter of 2007. On GAAP basis, gross margins increased sequentially, to 54.1%, inclusive of stock compensation expense. This is down from 54.6% in Q3 of last year and is driven primarily by a shift of allocated expenses from OpEx to COGS, which had no effect on overall profitability.

I would like to point out that we are seeing continuous improvement in gross margins through the year, and as I've reported in previous quarters we've not seen any fundamental shifts in industry pricing practices.

Operating expenses were $24.6 million, including stock compensation expenses. Operating expenses increased $5 million, or 26%, from $19.6 million in Q3 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. It did not -- did include a one-time writeoff of a bad debt and an increase in the bad-debt provision, which together totaled half a million dollars.

Net earnings were $6.9 million, or $0.19 per share, in Q3 '07, up from $3.1 million or $0.11 per share in Q3 '06.

I'd also like to remind you that Omnicell took a one-time relief of the allowance against our deferred tax assets last quarter, our fiscal Q2, which provided a $13 million profit benefit, or $0.39 per share, so please keep that one-time benefit in mind when making quarter-to-quarter comparisons.

Now I'd like to cover our non-GAAP results, excluding stock compensation expenses and when making any sequential comparisons excluding the one-time tax benefit in Q2. 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 the estimated future value of employee stock options, restricted stock and our employee stock purchase plan.

Since stock compensation expense is a noncash 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 for investors to understand the noncash stock compensation expenses. They are a component of our reported results. Full reconciliation of our GAAP to non-GAAP results is included in our press release and will be posted on our website.

Our non-GAAP gross margin for the third quarter of 2007 was 54.6%, compared to a non-GAAP gross margin of 55.4% in the same quarter last year. The business trends are the same, as I mentioned, for the GAAP gross margins, and are primarily driven by reallocation of costs from OpEx to cost of goods sold.

Our non-GAAP operating expenses were $22.1 million, up $4.2 million, or 23%, from our Q3 2006 non-GAAP operating expenses of $17.9 million, and driven mainly by head count growth.

Our Q3 '07 non-GAAP net income was $9.7 million, or $0.27 per share, $0.02 above analysts' consensus. Our Q3 2007 non-GAAP net income was up $4.5 million, or 88%, year to year, from Q3 2006 non-GAAP income of $5.2 million. This is an increase of $0.09 per share, year to year.

Last quarter I introduced an EBITDA measure. EBITDA, or earnings before interest, taxes, depreciation and amortization, excludes noncash expenses and focuses on operating results. EBITDA was $11.1 million in Q3 '07, compared to $8.9 million in Q2 '07 and $6.4 million in Q3 '06. This is an increase of 25% sequentially and 77% from a year ago.

Our cash and short-term investments were $176 million at the end of Q3 '07, an increase of $4 million from the second quarter of 2007, resulting primarily from stock option exercises. There was no change in cash from operations.

Last quarter we had a significant cash contribution from improvement in collections. It drove DSO down. This quarter, days sales outstanding increased from 67 to 77 days, primarily due to a substantial shift in the mix of our installations this quarter away from leased business. Leases typically have a faster collection cycle, as the payment stream is sold to third-party leasing companies. Since we install on the customer's schedule, we do not try to manage the mix of lease versus purchase business in any way. We don't expect this to be an indication of a trend. We just had several installations that were scheduled during the quarter with customers that had their own financing direct with financial institutions.

And, finally, our inventories of $12 million were down $2 million quarter to quarter.

I would like to now turn the call over to Randy to provide an update from the -- on the business. Randy?

Thanks, Rob.

I'm very pleased with the continued momentum of our business through the third quarter. That momentum is due to our focus on the customer. The most important thing to us is assuring our products and our services are making a positive impact for our customers, and helping those customers deliver safer care for their patients.

In the third quarter of 2007 we welcomed another group of new customers installing automation for the first time, or switching to our systems from competitors' products. During Q3, Omnicell completed beta installations of our new WorkflowRx central pharmacy automation solution with Hendricks Regional Health in Indiana and Chambersburg Hospital in Pennsylvania. Within the last week both hospitals joined Omnicell to announce how WorkflowRx is helping them to improve patient care while more efficiently managing their medications.

Omnicell also jointly announced a contract to automate Grant Regional Health Center, of Lancaster, Wisconsin, with medication dispensing systems and anesthesia workstations. The systems used at Grant will use barcode technologies to protect patients against medication errors and to allow nurses and other caregivers to work with improved efficiency.

We continue to build on the strength of our customer service. Our solutions help solve our customers' patient safety requirements, and our order rates continue to be robust. We've enjoyed success with new customers each quarter, and we continue to win repeat business with our existing customers who expand and upgrade their installations.

Since I founded the Company 15 years ago, we've had a sole focus to provide a differentiated customer experience, and we've met several milestones along the way. I'm pleased that yet another new milestone in our history was met when our company was included in the Standard & Poor's Cap 600 index in September.

Our customers' success is our success, and we remain dedicated to improving patient safety and care.

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

Okay, thanks, Randy.

The results of Q3 '07 demonstrate our continued growth momentum and profit improvement, again resulting in an increase in our expectations for this year. We previously gave guidance for 2007 of 32% to 34% revenue growth and $0.98 to $1 of earnings per share, excluding stock compensation charges. We are now increasing our guidance to grow revenue from 2006 by 36 to 37%.

Last quarter I said that we would continue to invest in new staff to assure that we are maintaining high customer service levels and that investment would slow our attainment of 15% operating margins until the middle of 2008. But we actually came very close to 15% operating margins in Q3 '07, but we expect to see some fluctuation between now and the middle of 2008, when we expect again to consistently deliver 15% operating margins, excluding stock compensation expense.

In Q4 '07 we expect to continue to grow our staff in preparation for 2008, which will increase expenses. The holiday season in Q4 also shortens the time we have to perform installations, limiting the amount of revenue growth we can attain.

We now expect earnings per share to be at or slightly over the high end of our previous guidance, at $1 to $1.01, excluding stock compensation expense and excluding the one-time benefit from releasing the allowance on deferred tax assets booked in Q2 '07.

I'd also like to now give our guidance, our initial guidance, for 2008. We've enjoyed revenue growth that we believe is substantially faster than the industry growth rate for two years now. We have a clear order backlog and pipeline to continue very healthy growth. We expect revenues to continue to grow ahead of industry growth rates at between 21 and 23% during 2008. We expect EBITDA to grow 30 to 35% over 2007.

Based on the profit increases we have seen in 2007 and resulting increases in our expectations of profitability in 2008, we now expect our tax rate to be 38% next year, as we become fully taxed, compared to 5% in 2007, when we utilized net operating loss carryforwards to offset taxes.

After applying a 38% tax rate, earnings per share, excluding stock compensation expense, are estimated to be between $0.90 and $0.93 per share in 2008.

That concludes the prepared comments. I'd like to now open the call to your questions. Operator?

(OPERATOR INSTRUCTIONS)

Our first question comes from Steven Crowley, with Craig-Hallum Capital Group.

Good afternoon, gentlemen, another nice quarter.

Thank you, Steve.

I want to ask you a little bit, you pointed out the central pharmacy opportunity and some early successes there. Can you paint us a little picture of the size of that opportunity, the market penetration so far and the timeline that you think is realistic to -- for that segment to become significant?

Well, that's a pretty early market segment actually. There's not much of the industry that's penetrated. It's quite -- quite a bit less than 10% of the hospitals in the United States have central pharmacy automation equipment. We provide a nice line and a nice suite of products there for inventorying, controlling the assets, controlling narcotics and for repackaging and barcoding. We just completed a new version of the software that greatly enhances the workflow amongst those various solutions in the central pharmacy, and we've just announced it recently. We're very happy with that, and we're very happy with how the betas went for the customers that we talked about. Overall, that market, we believe, is somewhere in the range of $1 billion to $2 billion dollars, so it's a pretty good untapped opportunity.

Great. A similar line of questions, so maybe an update on your operating room/anesthesia workstations. I've seen them more and more in your press releases about customer orders and customer wins. There's also a landscape item that maybe you could address. Your competitor Pyxis has had some issues out in the field with the performance of their system. Could you bring us up to speed on kind of the landscape for that opportunity and how it's progressing?

Well, I think both Pyxis and ourselves are seeing more and more inclusion of the operating room in the medication automation that's taking place in various hospitals when they put in new systems. You know, the anesthesia workstations are a little bit different than the rest of the product line in that they not only serve the pharmacist and nurses, but sort of a constituency in doctors and have a number of features that are unique to the anesthesiologist operating in the -- or working in the operating room.

You know, those systems, as you mentioned, are a larger piece of our business, kind of a growing piece of our business, but that piece of the hospital is very unpenetrated, and we estimate that there is less than 2% of the operating rooms that are actually automated.

And you mentioned Pyxis announced a little bit of difficulty. I don't think that that's a -- anything really significant in the marketplace, and I hope, you know, they get through that just fine. We certainly wouldn't want anybody in any operating room to have any difficulty getting to the medications.

We find that more and more hospitals embracing that solution and we're -- we're happy with how that's going.

In terms of sizing that, do you have a thumbnail on the potential eventual size of that segment?

We think that that portion of the hospital market is about a million dollar market, generally one of these systems per operating room.

I think you probably meant a billion versus a million.

Yes, I'm sorry, but to enunciate clearly, it's a billion dollar market.

All right, much more attractive, then. I appreciate the update on these segments. I'll let some others get to the financial housekeeping questions and get back in the queue if necessary. Thanks so much. Congrats, again.

Our next question comes from Tom Gallucci, with Merrill Lynch.

Good evening, everyone. Thanks a lot for taking the questions.

I guess just first, last quarter you sort of had said that you were early in the process of figuring out what you might do with the cash on the balance sheet. Wondering if you can first offer an update, sort of, on your thought process there.

Well, there's nothing to announce yet. We are moving down that process, and we're happy with how we're moving along, but we don't have anything to announce at this point.

All right. Is there any sort of high-level time frame that we should be thinking about, or are you just sort of going to take it as it comes?

Yes, nothing's really changed from the time that we raised the funds towards the middle of Q2. We said at that time that we anticipate extending our product line through acquisition within a year, and we're still working to that timetable.

Okay, and then just one details question. I think, Rob, you mentioned, and I wasn't sure if I caught it right, you had a one-time writeoff of bad debt and an increase in the provision. Was that about $500,000 in the quarter, you said?

Correct.

Okay, so what's that, that's about a penny or so that's in that $0.27 number?

Yes, a little bit more than a penny. Yes, we had one customer, actually a non-hospital customer, that had a pretty significant change in their business model and ended up not being able to go forward with it, and so that ended up being a bad debt writeoff. And then the general increase in accounts receivable, of course there's a general provision that's associated with that that's a percentage accounts receivable, and so that increase in accounts receivable drove up that provision.

Okay. Okay, perfect. And then, I guess, just sort of a big picture question, too, just to final -- to end up here. You've talked a little bit about international in the past. It's been a sort of a developing market. We've heard a little bit more, I guess, out of Pyxis there lately in terms of what they think can happen. I'm just wondering what your high-level thoughts on that marketplace is, too.

Well, that marketplace is still very early, and, as I've said in the past, we've seen some successes in kind of isolated geographies, particularly -- particular countries that have become more aware of patient safety issues around medication control. Yes, we operate through -- except for Canada we operate through a system of distributors in those countries at this point in time. We are aware of all the deals that are going on, and we have a fairly substantial share of those -- those deals as they happen.

As that market develops, or as any international geography develops, we will move more and more to providing solutions for that particular geography and putting our customer support activity there. In Canada we go -- we actually go direct with installation, support and sales because it's a little bit bigger market now.

Okay. Well thank you very much for the color.

Our next question comes from Newton Juhng, with BB&T.

Thanks for taking my call, guys. A couple quick questions here. One is just, you know, with the removal of backlog guidance on a quarterly basis, I'm wondering if you're going to be providing any other type of operating metrics that might help us to view your business a little more accurately. I understand the backlog might not be the best indicator for you, but at the same time, considering the staffing-up that you're doing and the plans to implement more, you would be looking for how much of that is coming from the backlog versus being done with new business. So any operating metrics that you might be able to give us that would help us out on that front?

Yes, you know, our selling cycle is so long, and it's so easy for a few deals to fall from one quarter to another quarter, or come in early, that quarterly fluctuations of a few million in backlog just really aren't meaningful now that we're operating with $140 million dollars of backlog.

What we will -- we will get a visibility on how the business is doing with the annual number, and I think kind of looking at it on an annual basis is an appropriate measure for us. If it's moved, it really, to affect revenue within a year, the backlog has to move almost tens of millions of dollars, and so looking at it over a longer period of time is more appropriate.

We will continue to give indicators of where we're at. If we're changing our viewpoint of holding between the six to nine months or if there's any dramatic change in a short period of time, we'll certainly talk about that. We will continue to talk about our head count, and we will certainly continue to give the guidance on revenue and profit on a go-forward basis, and I think that's probably the most important thing.

Okay, Rob. And then just, you know, with you pushing towards that higher end of that six to nine month in the backlog, you know, would you say you're comfortable being towards the lower end of that range in the future? Or is it really kind of somewhat irrelevant to you at this point?

Well, it's kind of driven by the customer's need. So as we do these competitive conversions and new customers, they just take longer to get the product installed after they place the order. They want to plan the installation, they've got construction, they've got a lot of different things that have to go on. They want to make sure their interfaces all work, and so forth.

You know, if the shift of our customers moved to a greater percentage of current customers that are doing add-on business, we would probably be comfortable with the backlog being at the lower end of the range. But right now we're continuing, as I reported, continuing to add new customers every quarter that kind of require that longer installation cycle, and so the backlog pretty naturally falls to the higher end of the range.

I see, so it depends on the mix that you have in the backlog. But with what you have right now, the upper end is good.

Yes, it really does. But, yes, any of them really six to nine months is kind of the right range. That's what we've found so far.

Okay. And then just lastly here on the DSOs moving. The operating, at least I know that it kind of comes and goes, but I'm just trying to get an idea for, and I think the last quarter it was down, this quarter it's up considerably, what's your ideal range to be in, at this point?

Well, hospitals are kind of notorious for paying well but paying slow. We are trying to manage it in the 60-day range. Now, that being said, the mix of customers that want to install is the mix of customers that want to install. And if they're primarily purchase business that tends to pay a little bit slower than the leased business that we sell off to third parties, that's kind of just the way it's going to be.

Like I said, I don't anticipate that this is going to be a trend, or that this quarter is a trend, but we definitely just had a mix of business that was just almost all purchase business, and so, yes, they just didn't pay -- pay quickly. I expect that we should be able to get into the 60-day range.

Okay. Well, thanks for your comments, and nice quarter.

Thanks.

Our next question comes from Glenn Garmont, with Broadpoint Capital.

Thanks. Good afternoon. Rob, just looking at your product gross margin came in at higher than we were expecting, is there anything in there with respect to mix? Or what do you think is -- what's behind that?

Not much due to mix this quarter. We pretty much had a similar mix that we had last quarter, but we are continuing to gain some efficiency in our manufacturing model, and that's what's helping there. We continued to invest in service, and you can see that in the service gross margins. We absolutely want to make sure as all these new customers are coming on that we're -- got the help desk staffed up and so forth, and the support desk staffed up. But otherwise it's really just a continuing efficiency in the manufacturing model here as we grow.

Okay. And then secondarily, it looks like you're going to end the year with, I guess, around 775 employees, give or take. Your '08 guidance, does that contemplate a lot of additional hiring next year? Or what's the plan look like?

Yes, we expect that we'll be hiring, not quite at the rate that we hired this year, but we'll likely be hiring at least another 100 people next year.

Okay. And that's in the [90 to 90%].

Yes.

Okay, great. Thank you.

Our next question comes from Len Podolsky, with Piper Jaffray.

Thanks. Congratulations on another great quarter. Are customers talking at all about a change in the inspection policy that the Joint Commission is going to implement in '08 whereby they're not going to be doing inspections on cycle, they're actually going to be doing them off-cycle, and is that driving purchasing decisions at all at this point?

Yes, I think, Len, that in the past, where JCO did their -- every three years did sort of a planned review, hospitals would typically go in to buy our systems to make sure the timing of that was such that our systems were installed, up and running before the review. Now that JCO has moved to unannounced reviews, people in hospitals are planning these installs quicker, because they've got to -- they don't know when the actual reviews are going to be done, and so that's certainly a factor, I think, in the decisionmaking of putting our systems into place and reaching the regulatory requirements that the pharmacists are looking particularly to meet as the drugs flow through our systems. It's a good question.

I guess, you know, for (inaudible) specifically, what they said is that they're going to start doing them kind of in that 18 to 36 month time period, and that's a material change from what it was before. So are customers responding to the change yet?

I think so. And I think the customers were actually -- have been responding to the change and will continue to respond to it. I don't -- even though I think usually they pass these -- talk about these changes before they actually happen, and so it gets kind of into the marketplace ahead of time. And so I think we've already started to see that, and I think we'll continue to see that.

Great. And then one more for Rob. I guess with automation revenue being at a record level this quarter, services revenue seemed a little bit light. Can you talk about that a little bit more and provide a little bit more detail?

Well, it's kind of similar to what's happened in other quarters. We do have some fluctuation in the services revenue based on who's renewing and how many people are on time and material. Last quarter we had some catch-up in revenues, revenues we hadn't recognized in previous quarters because we don't recognize them until they're paid for, and that spiked up the revenues a bit more than the normal growth rate, and then we just had the opposite happen this quarter.

I expect that that will continue through the future. Our revenue recognition policy is pretty conservative in this respect, and so if somebody isn't paying up front or on ongoing basis, we don't recognize it until we get the check in hand.

Okay. That makes sense. Thanks very much.

Our next question comes from Steve Halper, with Thomas Weisel.

Hi. My question has to do with the backlog that you'll be giving us once a year now. Was it your experience that maybe customers were, you're kind of thinking about at the end of the quarter about what you needed to get to, to a certain number, or are you thinking other things, in terms of basically providing the financial community with less information as opposed to more?

Well, I'm actually not quite certain what you meant by the first part of your question with customers.

Yes, I mean, obviously we all calculate what we think bookings will be in the quarter based on the backlog, and is it your sense that maybe customers might be holding you up at the end of a quarter because they know what analysts are thinking about in terms of bookings per quarter?

No, I don't think so. I don't think customers are taking any action differently based on financial impact to the Company. There certainly was a period of time, a transition period that we went through, when customers would try to hold their orders to an end of a quarter to get a better price, and when we changed our business model in 2005 we essentially stopped the discounting at the end of the quarter and it took a while for that learned behavior to go away. But -- and some customers still try it, but we don't, we just don't discount at the end of the quarter, and so there really isn't much behavior around that.

This is more around, when we were changing the business model, we were letting backlog grow pretty substantially, and the revenues were flat growth in 2005, and the flat growth wasn't really indicating what was happening in the demand structure, and so reporting backlog, I think, was pretty important during that point in time.

Now it's much less important to us and how we operate and really should be less important to investors in how we operate, too. And long term, over the course of multiple quarters, more of our selling cycle, it's probably an important thing to know, and that's why we think reporting it once a year is a good thing to do. But the quarterly fluctuations really aren't something that drives us to operate the business any differently and shouldn't really drive investors to think of us any differently.

Right, but if it doesn't affect the client relationship and it doesn't affect how you run the business, then why didn't you give us the number? So, again, I don't think I'm going to get an answer to the question, but generally we like to get more info, not less info, so, again, you don't have to answer that question.

Okay. Thanks, Steve.

Our last question comes from Matt Teplitz, with Quaker Capital Management.

Thanks, gentlemen. Very nice quarter. Two quick questions. One, just curious, what would you characterize as the industry level of growth, given that you're, I guess, your belief you're growing faster.

Yes, so all of our competitors, as you probably know, are pieces of much larger corporations, and so it's kind of (inaudible).

(Inaudible) I can't figure it out.

Yes, it's kind of hard to get a viewpoint on that. What we do, probably the only thing anybody can do, is just go back to our competitors' financial statements going back several years and see what they say about growth. It appears to us that the industry is growing somewhere, has been growing somewhere in the 10 to 15% range. I know that Cardinal gave some information about the division that Pyxis is in in their last public statement which was a little bit higher than that. That was the whole segment of the business, of which Pyxis is just a piece.

So the best that we can tell, we think it's somewhere in the range of 10 to 15%.

Okay, which is probably what I would have guessed, but that sounds about right. And then one other question. I know at least here we model more on a GAAP basis. So as I'm trying to put together an '08 model, if I take your '08 EPS, how much stock comp expense has effectively been added back to get to that number?

Yes, so we've been operating with between $2.5 million and $2.7 million of stock comp expense. We anticipate that that's going to continue in that range and kind of declining a little bit over time.

Okay. And that's -- and just so I'm straight on the math, and that's the pre-tax number, the 2.5 to 2.7?

Yes, it is.

Okay, and so I would tax (inaudible) the same 38% rate?

Yes.

Okay, and I guess --

Sorry, I always have to think about this a little bit when it comes to stock comp expense. It's a little bit unusual in its treatment.

Okay, but that would be -- you think it would probably just -- it would be treated like the other expenses for --

(Inaudible).

Okay. And just one more question just related to that, because is there any thought about, I guess, slowing the rate of option grant in order to bring that expense down?

We have actually slowed the rate of option grant, as most companies have done, and we've kind of restructured our stock compensation with the use of restricted stock also. Yes, but frankly, the way that calculation works, as the stock price is going up each share has a higher expense level, and so we're ending up with pretty much the same amount of stock comp expense.

Okay. But the stock comp expense you're reporting includes restricted grants as well as options, correct?

Oh, yes, definitely, and the employee stock purchase plan.

Okay. Is there a point at which you guys would feel more comfortable just sort of reporting and being judged on a GAAP basis given year-over-year comparability of the expense?

We're kind of looking to how the world is viewing public companies and we still see a lot of measurements on the non-GAAP basis without stock comp expense, and that's why we provide it.

Okay, that's fair. I see both. I'm just, we're trying to here internally use just that, but we certainly see both. Thank you.

Okay.

There are no further questions at this time.

Okay. Randy, do you want to finish up the call?

Sure. I'd like to just summarize the call by reiterating that our financial performance comes as a result of our ability to deliver a differentiated customer experience and product solution. This week, all this week, I'm at customer sites, because I like to come out here and see firsthand how our products are performing and how they're impacting customers and patients. And I'm very confident we can continue to deliver the medication management and supply solutions that customers really want to buy, and help them solve their problems. So that's it for this time, and we'll see you next time.

This concludes today's conference call. You may now disconnect.