Omnicell Inc (OMCL) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Omnicell fourth quarter 2007 financial results conference call.

(OPERATOR INSTRUCTIONS)

This conference is being recorded today, Thursday, January 31, 2008.

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

Good afternoon, and welcome to the Omnicell 2007 fourth quarter results conference call. Joining me today is Randall Lipps, Omnicell President and CEO. You can find the results in the Omnicell fourth 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 Condition and 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 January 31, 2008, 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 and for the full year of 2007, followed by Randy, who will cover some of the quarter's business highlights. I will then discuss Omnicell's guidance for 2008. After that we'll open the call for your questions.

The fourth quarter of 2007 finished up a very strong year for Omnicell. We posted record revenues and record profits again. The results of our sales and operations in Q4 '07 met analysts' consensus expectations of $0.28 per share, including absorbing a modest net loss from our Rioux mobile cart product line acquired in December 2007. As we have said several times, capital equipment business can be lumpy, and this quarter we did see a decline in our product backlog of $3.6 million. Product order backlog now totals $137 million, which, including Rioux, is a little more than 2.5 quarters of forward-looking revenue.

The mobile cart business that we acquired in Q4 operates with virtually no backlog, which reduces the months of backlog metric for us about half a month. As we said before, our stated objective is to maintain backlog between six to nine months of forward revenue. Over the past several years we've changed our business model to operate from backlog, and this has allowed us to install on our customer schedule and to improve the installation experience. This has also allowed us some stability in our financial performance when capital equipment orders are lumpy, and Q4 was one of those quarters.

I'd like to note that we did not see any particular weakness or slowdown in any product line or customer segment in our business. A few customers experienced challenges in obtaining credit, which have since been overcome. We did see -- did not see any change in competitive pressures during the quarter, nor did we experience any degradation of pricing or other business terms during Q4.

We've seen a very strong start to Q1 '08, and we believe our momentum has not changed. In fact, momentum with corporate multihospital organizations continues to be strong. New customers accounted for 30% of our bookings in Q4, comprised of a combination of competitive conversions and greenfield accounts. Greenfield accounts are those customers installing automation for the first time. In Q4 about two-thirds of the new business mix came from competitive wins. The dollar value of those wins is very consistent with prior quarters.

We do anticipate backlog to continue to grow over time. Based on our pipeline for sales during 2008 and our revenue guidance, we expect product backlog at the end of 2008 to be in the range of $160 million to $170 million.

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. During Q4 we grew to 749 employees on the base business and added 57 employees in the Rioux acquisition, bringing our total regular staff to 806. This additional staff will help us in achieving our goal of providing the best customer experience in the healthcare industry. We expect to continue to grow our overall staffing by about 20% throughout 2008.

Now I'd like to discuss our fourth quarter financial performance. I will first discuss our financial performance in accordance with generally accepted accounting principles with year-to-year comparisons.

Revenue for the fourth quarter of fiscal 2007 was $57.9 million, up 34% year over year and up 5% from the third quarter of 2007. On a GAAP basis, gross margins were roughly flat quarter to quarter, at 53.5%, inclusive of stock compensation expense. This is down from 56% in Q4 of last year and is driven primarily by a shift of allocated expenses from OpEx to COGS, which had no effect on overall profitability.

Operating expenses were $25.3 million, including stock compensation expenses. Operating expenses increased $4.9 million, or 24%, from $20.4 million in Q4 2006. Growth in operating expenses is consistent with our practice over the last 24 months of growing our expenses at a slower rate than 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 totaling $7 million. Deferred tax assets are the future tax benefits of net operating loss carry forwards and other timing differences between cash and book taxes. We took a one-time partial release of the allowance against our deferred tax assets in our fiscal Q2 '07 also, which provided a $12.8 million profit benefit, or $0.39 per share, in that quarter. After releasing that allowance in Q2, we still had $13 million allowance remaining against our deferred tax assets, which we carried because of variability in our historical profit levels.

Our consistent profit growth has continued to indicate that a full reserve is no longer warranted. In Q4 we released the remaining allowance associated with net operating loss carry forwards. With this one-time adjustment, our net earnings after taxes are $14.5 million, or $0.40 per share, in Q4 '07. Included in this number is the tax benefit, which represents $0.19 per share. This release has been contemplated in our tax rate guidance for the past year and will not change our tax rate guidance for 2008. Our deferred tax assets are still available to offset cash tax payments through 2008.

For the full year of 2007, revenue was $213.1 million, up 38%, from $154.7 million in 2006. Gross margin was 53.2% in 2007, compared to 55.3% in 2006. Operating expenses were $94.8 million in 2007, up from $76.3 million in 2006. Net earnings were $43.5 million, which included $19.8 million benefit from release of allowances against deferred tax assets. 2006 net earnings were $10.4 million. 2007 earnings per share were $1.29, including $0.59 of tax benefit. 2006 earnings per share were $0.36 per share.

Now I'd like to cover our non-GAAP results, excluding stock compensation expenses and excluding the tax benefits in Q2 and Q4. 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 tax benefits.

Stock compensation expense includes estimated future value of employee stock options, restricted stock and our employee stock purchase plan. As 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. 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 fourth quarter of 2007 was 54.1%, compared to non-GAAP gross margin of 56.7% in the same quarter last year. The business trends are the same as I explained for GAAP gross margins, mainly driven by reallocation of costs from OpEx to Cost of Goods Sold. Our non-GAAP operating expenses were $22.9 million, up $4.2 million, or 23%, from our Q4 2006 non-GAAP operating expenses of $18.7 million, or driven mainly by head count growth.

In Q4 '07 non-GAAP net income was $10.3 million, or $0.28 per share, which met the analyst consensus. This did include a modest net loss from Rioux Vision. Our Q4 2007 non-GAAP net income was up $4.2 million, or 69%, year to year from Q4 2006 non-GAAP income of $6.1 million. This is an increase of $0.08 per share year to year.

For the full year 2007, non-GAAP gross margins were 53.9%, compared to 56% in 2006. Non-GAAP operating expenses were $85.4 million, up from $69.3 million in 2006. Non-GAAP net earnings were $34.5 million, or $1.02 per share. 2006 non-GAAP net earnings were $18.5 million, or $0.64 per share. 2007 was a very positive year, with growth in revenue and profit.

We have noticed that analysts who follow us deploy a variety of definitions of EBITDA. EBITDA, or earnings before interest, taxes, depreciation and amortization, excludes noncash expenses and focuses on operating results. We are conforming the definition of EBITDA as earnings that exclude all tax expenses and tax benefits, all interest expenses and interest income, all depreciation and amortization, including the exclusion of stock compensation amortization. The primary change in the definition we are deploying is the exclusion of interest income. EBITDA for Q4 '07 was $9.9 million, compared to $9.1 million in Q3 '07 and $6.9 million in Q4 2006. This is an increase of 9% sequentially and 44% from a year ago. For the full year of 2007, EBITDA was $34 million, a 55% growth.

Our cash and short-term investments were $170 million at the end of Q4 2007, a decrease of $6 million from the third quarter of 2007. During the quarter, we used $26 million in the purchase of Rioux Vision. This was offset by $2 million cash generated from stock option exercises and $18 million provided by the results of operations. In Q3 '07 we had a significant increase in day sale outstanding associated with a low mix of leases installed in the quarter. In Q4 our lease mix returned to more normal levels, and in addition we had a superb cash collection quarter, resulting in DSO of 61 days. The decreasing DSO is purely a result of cash collection efforts. Installations were very linear throughout Q4, and there was no reduction in installation rates during December.

Finally, our inventories were $13.7 million and included an increase associated with Rioux -- the Rioux acquisition of $1.7 million and a decrease in all other products of $0.7 million.

I'd like to now turn the call over to Randy to provide an update on the business.

Thanks, Rob, and thanks for joining us today.

In Q4 2007 Omnicell announced two significant product additions at the American Society of Health-System Pharmacists meeting, an industry-leading conference attracting more than 15,000 pharmacists. Enthusiasm and momentum for our solutions were demonstrated by a substantial growth in the number of private demonstrations we hosted for current and potential multihospital customers.

Our announcements at the meeting included SinglePointe, which is the industry's first medication management software that allows nursing and pharmacy staff to store, manage and track up to 100% of patients' medications in an automated point-of-use medication dispensing system. Today, medication dispensing systems typically stock drugs that represent about 80% of the medications used in an acute care facility. The addition of SinglePointe closes the remaining 20% gap. The SinglePointe software feature dynamically assigns medications to specific locations in the dispensing system on a patient-specific basis, including infrequently used medications, multiuse drugs and patients' drugs brought from home. With the SinglePointe solution, dangerous and inefficient manual process and work-arounds can be virtually eliminated.

Also at the conference in Q4 '07 we announced the acquisition of Rioux Vision and the addition of mobile cart technology to our product line. The Rioux cart technology, which includes medication control modules, integrates into the bedside point-of-care environment, enabling nurses to have easy access to patient records and automate record-keeping of the patient care process.

During 2008 Omnicell intends to integrate the mobile cart technology with our medication control software, including the SinglePointe solution, to create a medication management system that will seamlessly flow from the automated dispensing system to the mobile cart and eventually to the bedside. The addition of patient-specific medication managed software in a mobile cart will significantly extend the Omnicell product line and is intended to provide a hardware and software platform for up to 100% control of the medications to the patient's bedside. Integrated, they make a brand new product that does not exist in the marketplace today.

Our momentum in the marketplace continued from 2006 through all of 2007. During 2007 we added one new account on average every three days to the Omnicell family of customers. In the second half of 2007 we signed a record number of contracts with multihospital systems, including organizations such as the Jackson Health System in Miami, Florida; Adventist Health System West; the Tenet Healthcare Corporation; Methodist Le Bonheur Healthcare in Tennessee; Western North Carolina Health Network; and Hospital Partners of America. With these new contracts, these large customer organizations should provide new business for years to come.

Our customer base continues to be healthy, with nearly 85% of hospitals planning to expand services and facilities within the next two years. This is according to the recent 2007 Acute Care Market Report from the Health Industry Distributors Association. Also, INPUT, a provider of government procurement and market information, recently predicted that state and local government healthcare technology spending will reach $11 billion by 2012. That's up from $6.9 billion in 2007.

The trends we have seen and continue to see make me very optimistic about the future of Omnicell and the improvements we can make to patient safety and care. We have invested during 2007 to provide the best customer experience in healthcare. We've invested in bringing some of the industry's most advanced products to the market. And we go to great lengths to make sure that they work in each unique hospital environment. Our customers' success is our success.

We enter 2008 with a robust pipeline and a strong revenue growth plan. Two and a half quarters of product revenue in backlog give us visibility and stability. I'm very confident about our future at Omnicell.

Let me turn it back over to Rob.

Thanks, Randy.

So there are several changes that will affect our business results in 2008, all of which have been included in our previous guidance. I'd like to go over them here.

First, we will be more fully taxed during 2008, and we expect the effective tax rate on GAAP earnings to be 38%. Secondly, our financial results will include the effects of our recent acquisition of Rioux Vision. We expect the contribution from Rioux mobile cart technologies to be skewed to the latter part of the year, when we intend to deliver the first version of the cart integrated with Omnicell software.

We remain comfortable with our previous guidance of revenue growth to the level of $267 million to $273 million, including mobile carts, which is a 25 to 28% growth from 2007. As mentioned earlier, we expect product backlog to be between $160 million and $170 million at the end of 2008.

We are still on track to meet 15% operating margins on our core business in Q2 2008, but as we previously guided, the addition of Rioux acquisition will be dilutive in 2008. Including Rioux we expect to be at or near 13% operating margins in Q2. We expect to achieve 15% operating margins for the entire business in 2009, when Rioux becomes accretive to earnings. We are also reconfirming our guidance of $0.85 to $0.88 non-GAAP EPS during 2008. We expect the dilutive affect of Rioux to be the greatest in Q1. We expect revenues for Q1 of approximately $61 million and non-GAAP EPS of approximately $0.18 per share.

I'd like to now open the call to questions. Operator?

Thank you, sir.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Glenn Garmont. Please state your company name, followed by your question.

Hi, good evening. It's Broadpoint. Hey, just a question on the -- thanks for the detail and the color around the backlog, Rob. I was a little surprised that it was down sequentially just simply given that the fourth quarter is historically very strong from a new sales perspective. Can you provide us maybe a bit more detail? Did you have a cancellation? Or what do you think? I understand the business is lumpy. I guess I was expecting just a little bit more in the backlog. And then secondarily, with respect to your backlog guidance for the year, the $160 million to $170 million, can you walk through maybe sort of your process for coming up with that number?

Well, Glenn, yeah, as we stated before, our sales cycle is very long. It is very often that the sales cycle can be anywhere from six months to two years. And sometimes those deals close in a regular fashion and sometimes things slip. So what we see looking at our sales pipeline right now is that it looks as strong as it ever was. We're comfortable with the guidance that we gave last quarter about our growth going into 2008. Q4 we didn't have as many deals close as we would've needed to raise the backlog, but we're not really concerned about the long-term effect of that. Like I said, it's kind of lumpy.

As far as the backlog guidance for the end of 2008, as we said, we're going to be reporting backlog annually. We're going to give good flavor on where we see that coming in. We have some pretty good visibility not only on the customers that have already placed orders and are likely to order more, but new customers that are in the pipeline also. And since the deals do take quite a ways -- quite some time to close, we have a pretty good idea of business for some time to come. And so clearly we, every quarter, part of our process is to thoroughly examine what we've got in our pipeline and try to understand it as fast as possible so we can give guidance, and this quarter was no different. So once doing that, we are very comfortable with where we're going in the future.

Okay. Thanks for the comments, Rob.

Thank you. The next one comes from the line of Newton Juhng. Please state your company name, followed by your question.

Hi, how are you doing? It's Eugene, standing in for Newton. Rob, just a quick question, a little bit more on the backlog. Is it more because some deals perhaps pushed or did not close in Q4, or is it the fact that your head count growth is allowing you to recognize more revenue from the backlog?

Well, the head count growth that we've put in place allows us to continue to recognize revenue at kind of the growth rates that we were expecting. Q4 was a little bit higher revenue than we had guided to, but it was still pretty close to the range. Really, what happened during the quarter, like I said, the business is just kind of lumpy. You know, a lot of our deals -- it is capital equipment, and our deals are typically several hundred thousand dollars. A lot of the new deals can be multiple hundreds or multiple millions of dollars. So you see in the new business that we talk about each quarter that that kind of fluctuates within the range of 30 to 50%, and there'll be fluctuations in the overall order rates, too.

Okay, I see. And just one more follow-up, more of a modeling question, for stock-based comp, are you guys' expectations still about $2.5 million to $2.7 million and declining going forward?

I'm sorry. For what?

For stock-based comp.

Stock-based comp, yes. Yes, we've been running at about $2.7 million per quarter. So we're still kind of on the path of doing that until some of the amortization and older options burn off.

Great. Thanks for taking my call, guys.

Thank you. The next one comes from the line of Tom Gallucci. Please state your company name, followed by your question.

Merrill Lynch. Good evening, everybody. Maybe just two quick questions. The first, just on the backlog, as you think about sort of that growth, it looks like you're expecting maybe 20% growth in the backlog from year to year, which I guess is similar to actually what it was from the end of '06 to the end of '07. When you go and you project that, you just talked about customers and potential new business, are you expecting a similar, I guess, percentage from competitive wins versus greenfield? Is there any difference to the mix that you might expect over time as either you mature or the industry matures a little bit? Or is it pretty steady in where the business is coming from, in your expectations?

Well, the pipeline that we can see kind of immediately over the next year looks like it's about the same mix of business. Certainly I would expect, as you said, as the industry matures over time there'll be fewer new customers that haven't installed automation. But the immediate pipeline looks like it's about the same mix.

Okay. And then just I guess two questions on acquisitions. One, you mentioned the bigger dilution earlier from the deal that you've done. So maybe can you just give us a little more granularity on sort of is there some cost cutting that happens, or is it just extra costs that diminish and then of course fails to kick in at some point? And then on the acquisition front generally, remind us again where you sort of stand on doing the next deal or how you might spend some of that cash that you still have.

Sure. Well, the Rioux cart business that we acquired is an existing business. They have over 200 customers. And it's a very interesting product with a lot of functionality for hospitals. But we are actually going to significantly expand that product, as we talked about, with the addition of our software, essentially creating a new product in the marketplace. When you add our software and all the medication control functionality that our software provides onto the cart, it becomes a combination hardware-software platform that garners higher margins and higher price. And what we expect is in the latter half of 2008 to have that product into the marketplace, and that's what will be driving higher revenues and start to move the business to be accretive.

As far as other acquisitions, well, we've just done one, and we're certainly going to take some time to make sure that that's fully integrated and working well inside the Company before we jump into another one. But we continue to run our normal process of assessing other technologies that exist in the marketplace. That's ongoing and hasn't stopped. And when the time is right and the technology's right we'll make moves.

Okay. Thank you.

Thank you. The next one comes from the line of Sean Wieland. Please state your company name, followed by your question.

Hi, it's Piper Jaffray. Can you comment on any changes you've seen in the competitive landscape, specifically with Cerner shipping some cabinets this past quarter and anything going on with Pyxis? Thanks.

Yes, at this most recent trade show -- well, let me just cover Pyxis. There were no new product announcements. And so we've seen no impact or change in sort of competitive landscape, which is where we compete mostly. And while we understand there's some Cerner activity, it has not impacted any of our business lines or sales pipeline to date, so it's pretty low on the radar.

So could you, in just a couple of minutes, articulate your competitive positioning against Cerner and your competitive positioning against Pyxis?

Well, I think the major difference is, is this is the only business we do, so we focus on delivering not only a great product but also a great product experience. There's a lot of risk that goes into implementing systems in hospitals, and we want to mitigate that risk. And so by focusing on this one area, sweet spot in hospitals as they want to address the medication issue, they want to put in systems that can easily be installed and be easily modified to meet their specific needs.

And so we think our system fits that profile the best, as well as -- you know, we've been competing with other companies like McKesson who has an automated box that goes onto their software systems, and we compete very well against them. In fact, I don't know the exact numbers, but I'm sure we're in more McKesson hospitals with their software than they are with their system, so, and we've competed very well against HIS companies that have offerings in this area.

Okay. Thank you very much.

Thank you. The next question comes from the line of Alan Fishman. Please state your company name, followed by your question.

Hi, it's Thomas Weisel Partners. I just had a quick question around the tax rate guidance. Since you're providing non-GAAP EPS guidance, would you please give us an idea of what the tax rate should be for a non-GAAP number?

Yes, well, the tax number -- the tax dollars that will be in the provision are the same for the GAAP and the non-GAAP. So a 38% GAAP tax rate for the non-GAAP number equates typically in the 30% range.

Okay. Thank you.

Thank you. The next question comes from the line of Steve Crowley. Please state your company name, followed by your question.

Hey, guys. This is Greg in for Steve from Craig-Hallum. A couple quick questions. Rob, you mentioned part of the bookings for this quarter may have been challenged by some customers that had a difficult time obtaining credit. And can we get a little more color on that? It sounds like it's been resolved, but I guess why were there problems, and how was it exactly resolved, and what do you see going forward in that respect?

Well, Greg, you know, every quarter there is individual customers that have some credit challenges. Nothing really different about that. Most hospitals are in pretty good shape financially, but some have some challenges. Usually it works itself out in one way or another. We find someone who's willing to finance the hospital, or they find someone who's willing to finance the hospital. I'm kind of careful not to say that we've seen anything materially different from other quarters.

We did have a couple isolated instances that spilled over the quarter boundary for Q4, where the deals didn't get done because of credit. But I wouldn't say that the overall credit crunch has caused us any big material problems, or our customers seem to have big material problems. But of course we all know that there is a credit crunch in the environment. You see that by looking at the newspaper every day. So right now it's isolated instances and not really any different than previous quarters.

Okay. Great. Thanks for the color on that. And then regarding SinglePointe, I know customers were pretty fired up about that at the ASHP show. Has that been rolled out yet? And what do you guys think that means for you from a financial standpoint going forward?

SinglePointe is a feature that we did roll out at the hospital pharmacists' show in December, and we'll be shipping it in the summer. It is contemplated in our forecast. We believe it's a feature that'll be very attractive to a lot of customers and will continue to help us have a competitive differentiation against our other competitors. It is figured into our forecast at this point. I think it's a great evolution for us, something that we have and others don't have, and we're really looking forward to it being a part of the product set.

One of the things that makes us most excited about it, it really makes our systems even safer for the hospitals. It really, we think, makes our systems the safest on the market, in addition to the other safety features we have. And that's -- everything we can do to help with patient safety is just great news.

Okay, great. I'll hop back in queue.

Thank you. And we have time for one last question. The last question comes from the line of Leo Carpio. Please state your company name, followed by your question.

Hi, it's Leo Carpio from Caris & Company. My question is regarding acquisitions. Did I hear that -- it sounds like you're going to be taking a pause from acquisitions? And besides the pause, are you still looking at the same possible target that you mentioned in the past in terms of the three other areas that you've been focused on? Thanks.

Well, I don't know if we're taking a pause, but I think we've been pretty calculated in how we've been working through the acquisition process since we did our secondary public offering in May of last year. Once we got to that point, we knew where all the acquisition potential technologies were. We went about a process of assessing them. Rioux seemed to be the best fit, something that was natural to go with our SinglePointe software announcement, a natural to extend our platform. That's why we went there first. We're absorbing that company now. We definitely want to make sure that we don't take our eye off the ball with all the rest of our business while we are bringing Rioux into Omnicell, and we're doing that right now. But the rest of our process hasn't slowed down or stopped. We continue to assess the other technologies, and, like I said, when we come across one that's the right fit for us, I don't think we'll really hesitate to bring that into the Company.

Okay. Well, thanks. That's all my questions.

Thank you. Ladies and gentlemen, that does conclude our question-and-answer session today. I will now turn it back over to Mr. Lipps for closing remarks.

Well, I'd like to summarize the call by reiterating that our financial performance really comes as a result of our ability to deliver a differentiated customer experience and product solution. Expect continued growth momentum for our business in 2008, and I'm very confident we can continue to deliver the medication and supply management solutions that our customers really want. Thanks for joining us today.

Thank you. Ladies and gentlemen, that does conclude our conference for today. If you'd like to listen to a replay of this call, please dial 303-590-3000, or 800-405-2236. Enter the passcode 11107657. Once again, the number is 303-590-3000, or 800-405-2236. Enter the passcode 11107657. Thank you for your participation. You may now disconnect.