Omnicell Inc (OMCL) 2008 Q3 法說會逐字稿

Good evening. My name is [Conscetta], and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell third quarter earnings release conference call.

(Operator Instructions)

Mr. Seim, you may begin your conference.

Thank you. Good afternoon and welcome to the Omnicell 2008 third quarter results conference call. Joining me today is Randall Lipps, Omnicell president and CEO.

You can find our 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 Discussion and Analysis of Financial Conditions and Results of Operations in the Omnicell annual report on Form 10-K filed with the SEC on March 14th, 2008, 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 23rd, 2008 and all forward-looking statements are made on this call based on the beliefs of Omnicell 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, Incorporated and any taping, other duplication or rebroadcast without the express written consent of Omnicell, Incorporated is prohibited.

During the call today, I will 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 our guidance for the remainder of 2008 and our initial guidance for 2009. After that, we'll open the call to your questions.

For the third quarter of 2008, we're happy to report that we experienced record bookings, posted record revenues, and that profits exceeded expectations. We saw strength in every product line, in every geography and in every size and type of hospital. Our U.S. government business was strong, as it traditionally is in the third quarter of the year, and we remain a leading provider of acute care automation to government healthcare facilities.

We also saw a good sales development in the UK, both in orders and in the sales pipeline, indicating that medication safety and supply automation are becoming increasingly important outside the United States. While this is a developing market for us and orders were still less than 4% of our business, we believe the international opportunities will be a good source of growth in the future.

We were pleased to see some larger deals that were delayed earlier in the year close during the quarter, driving an increase in orders from new customers to 45% of our total orders for the quarter. New customers are comprised of a combination of competitive conversions and greenfield accounts, or accounts installing automation for the first time. The split between greenfield and competitive conversions was about 50/50. The new customer volume was very broad-based, was not driven by any one particular new customer. Needless to say, we were pleased with the continued strength of our new business volume.

Omnicell solutions, such as our new SinglePointe feature, are finding high degrees of receptivity in the market and are helping to attract new customers. While the credit markets became challenging for some of our leasing partners during the quarter, we were able to shift our business to other leasing partners that are not as challenged by the current markets. Providing financing alternatives to our customers remains an important part of our business and one that we have so far been able to manage with no disruption to the sales process.

Our financial results for the third quarter met or exceeded consensus. Along with revenues slightly higher than expectations, our non-GAAP earnings were $0.18 per share, excluding stock compensation expenses, which is $0.02 per share above analysts' expectations. As a reminder, we are now fully taxed as compared to 2007 when we enjoyed a benefit from tax valuation allowances.

Our backlog continues to allow us stability in our financial performance, and we remain within our backlog objective of six to nine months. We continue to drive customer satisfaction through our high touch sales, service and installation processes, and we continue to complete installations on the customers' timetable. The expansion of our sales staff has been a success and we're pleased with the performance of our sales team during the quarter.

Our total employee headcount is now 845 full-time employees, a reduction of 35 from last quarter after completion of the closure of our South Carolina facility. We believe this staffing level is appropriate to maintain our customer satisfaction ratings and to continue new product development. We do not expect to expand headcount further until the economic environment has improved.

Now I'd like to discuss our third quarter financial performance. I'll first discuss our financial performance in accordance with Generally Accepted Accounting Principles with year-to-year comparisons.

Revenue for the third quarter of fiscal 2008 was $64.3 million, up 17% year-over-year, and up $1 million from the second quarter of 2008. On a GAAP basis, gross margins were roughly flat quarter-to-quarter at 50.9%. This is down from 54.1% in the third quarter of 2007 due to the dilutive effect of the acquisition of the Rioux Vision mobile cart business and costs incurred in the Elgin shutdown.

Operating expenses were $28.5 million, including stock compensation expenses, an increase of $4 million, or 16%, from $24.6 million in Q3 '07. Included in our results this quarter are the costs of the closure of our Elgin, South Carolina facility that was added during the Rioux Vision acquisition. We absorbed a one-time charge of $0.4 million for the shutdown, inclusive of operational savings that we realized during the quarter. We expect future savings of $1.3 million annually from this site closure.

Net earnings after taxes were $2.9 million, or $0.09 per share, which compares to $6.9 million, or $0.19 per share, in Q3 of 2007 when the effective tax rate was only 6%. In the current third quarter, our tax rate was 40.5% and our year-to-date effective tax rate is 42.5%. EBITDA, or earnings before interest, taxes, depreciation and amortization, was $9.2 million, up $0.1 million, or 1%, from the third quarter of 2007.

Now I'd like to cover our non-GAAP results. The only adjustment to non-GAAP -- or to GAAP results is the exclusion of stock compensation expenses. Stock compensation expense includes the estimated future value of employee stock options, restricted stock, and our 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's useful for investors to understand the non-cash stock compensation expenses. They are 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 Q3 '08 non-GAAP net income was $5.7 million, or $0.18 per share. As I mentioned earlier, exceeded analysts' consensus by $0.02 per share. Our Q3 2008 non-GAAP net income was down $4.1 million, or 42% year-to-year, from Q3 '07 non-GAAP income of $9.8 million. It was driven primarily by increases in the effective tax rates.

Our balance sheet remains strong. Our cash and short term investments were $125 million at the end of Q3 '08, a modest increase of $2 million from last quarter. Our days sales outstanding were 70, an increase of nine days. As we have seen in the past, there was a lower percentage of installations that were lease deals during Q3, driving longer collection cycles. Despite our use of cash and increased working capital, our other results of operations generated $9 million in cash flow, more than offsetting the increase in accounts receivable. And our inventories were $13.9 million, down $1.7 million from Q2 '08.

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

Thanks, Rob.

The number of customers that chose to move forward with Omnicell solutions during Q3 demonstrates that our solutions remain an important element in providing patient safety. While there was a delay in buying decisions for larger capital purchases in the first half of the year, we saw increased order rates for our products in the third quarter.

For instance, we saw good traction in our first full quarter of delivering our SinglePointe feature, which allows us up to 100% of medications to be available and managed at a single point of medication administration. Our solutions continue to differentiate us in the market, and our new customer and competitive conversion success this quarter shows that we continue to fare well in head-to-head competitive situations. '

Another exciting area of growth potential for Omnicell is in the operating room. There's a large opportunity to significantly improve safety and efficiency with our anesthesia workstation for medication control and with our OptiFlex cath lab and surgical services line of supply management systems. The increased interest in these solutions demonstrates the need for the safety our systems provide in every department of the hospital.

As Rob mentioned, we have also seen more activity from our international distributors, who have placed our systems at large hospital institutions in geographies that are just starting to embrace medication and supply automation. The Guy's and St. Thomas Hospital Trust in London, comprised of the largest hospitals in the UK, and King's College Hospital Trust, one of the most renowned teaching hospitals in the UK, recently announced the initiation of a joint project to automate the stocking and management of supplies and medications. Omnicell medication and supply systems are the cornerstone of a $10 million total inventory control project that includes an entirely new logistical management process.

We received initial orders in Q3, and we believe the portion of the budget to be spent on Omnicell solutions will be several million dollars over the next year. I'm encouraged by this and other emerging opportunities we have to improve the healthcare experience around the world.

Looking forward, we continue to see a pipeline that is robust, including excellent opportunities at large multi-hospital organizations. Our success through Q4 with these large deals will influence our revenue run rate in 2009. We believe we are positioned well competitively and we are optimistic about our ability to close these opportunities.

We are keeping an eye on the credit market and making sure we have leasing partners that can continue to support our customers, and we have the cash resources to support our customers' financing requirements, if necessary. We saw no additional effect on buying behavior from the economic conditions in Q3. But since our sales cycles are very long, it is too early to tell what effect, if any, the financial market events of the last month will have on our customers in Q4 and beyond.

We believe our solutions are important components of safety in healthcare today, essentially a standard of care that every patient will eventually receive. Regulatory agencies continue to impose increased safety requirements that drive broader adoption of medication management technology. We believe that the majority of the hospitals in the United States have only partially implemented these types of medication management solutions.

We believe our high marks in customer satisfaction and new features, such as our SinglePointe solution, will drive higher rates of penetration in hospitals of every size over time. And of course, I'm very confident in the long range prospects for Omnicell.

Let me turn it back over to Rob for some guidance.

Thanks, Randy.

Our third quarter was strong in just about every respect, and we are reaffirming our previous revenue and profit guidance ranges for 2008. Our guidance for the rest of 2008 now incorporates better information on the mix of orders over the past six months and our customers' installation needs. We previously guided revenue to a range of 17% to 20% growth for all of 2008 over 2007. We now expect ourselves to fall in the middle of that range, at approximately 18% growth.

We have several orders in our installation schedule that are either tied to physical construction projects at our customers or they are large orders of automation or, as with our most recent orders, are new customers. And all of these types of customers generally require longer installation cycles. And this is influencing our expectations for revenue in Q4.

In terms of earnings, we continue to expect to be towards the high end of our previously guided range of $0.65 to $0.70 per share, non-GAAP, excluding stock compensation expense. We see a strong order pipeline with several larger purchases in process, but we do not yet know how the current economic conditions may affect the timing of those orders. So, consequently, we're now widening the range of expected yearend 2008 backlog to be between $125 million and $140 million.

For 2009, we believe it is possible that some capital equipment purchases and installations may be delayed until the current financial turmoil has settled, and the overall credit markets become more accessible. Therefore, for the first two quarters of 2009, we expect only modest revenue growth year-to-year, in the range of 5%. Regarding profitability, we are managing costs and expenses and we still expect to achieve 15% operating margins, excluding stock option expense, by the middle of 2009. And 15% operating margins equate to earnings growth from this year of between 15% and 20%.

We're not seeing a change in the competitive landscape, and we believe medication safety has only become a more important concern in healthcare. We expect industry growth to return to historical levels once the economic environment has improved, and our own growth rates to return to levels that we've seen in the past. We'll give more detailed guidance for 2009 as the economic conditions begin to stabilize.

Now, Operator, I'd like to open the call to questions.

(Operator Instructions)

Your first question comes from the line of Newton Juhng with BB&T Capital Markets.

Good afternoon, gentlemen. Rob, Randy, I was wondering if you could give us a little more detail on the UK contract. It looks like you're working with a distribution partner here. Can you just give us an idea as to how this going forward is going to impact your numbers, considering the size of the deal?

We do work through distributors on every other geography outside of the United States except Canada. And the distributor in the UK is a company called [Avontech], who's done a great job placing our systems in some of the most renowned hospital trusts in the UK. This particular orders come from two large trusts in London, the Guy's and the St. Thomas Trust, which are two hospitals, and the King's College Trust, which is a teaching hospital in London. And they're jointly implementing a fairly major project to automate medical and surgical supply inventories throughout their facilities.

It is a rollout of multiple hundreds of our units, and they actually announced -- in the UK, the hospitals announced that it was a project with a budget of 6 million pounds, or roughly $10 million. That's a total project cost. It includes everything they're doing in the project. We're kind of the cornerstone of it. And of course, it's that the end user prices, not the revenue that we would see selling to our distributor.

The trusts have not actually fully designed that system yet, so we're not precisely sure how much they're going to order. We did get the initial orders, and we do expect it, as Randy said, to be several million dollars of orders over the next year.

Okay. And in terms of the -- I guess the margin profile of that business, similar to what you see in the States?

So, our international pricing model is different than our U.S. pricing model because our distributors take on some of the responsibilities that we would normally take on in the United States. So gross margins will be lower, but they then provide service installation and the sales. And the bottom line margins, operating margins on the deals are about the same for us.

Okay. Okay, in terms of contribution there. Service gross margin was really light this quarter versus historical. And I was just wondering if -- especially during -- compared to what we were expecting. Can you just give us a little detail as to what was driving the contraction there?

Yes, I did say last quarter that we were not expecting to invest more in our service organization as we had over the last year. And in fact, the spending in the organization was down quarter-to-quarter. What's driving the margin there is in the service line, besides pure maintenance service, there's also some other revenue, non-product revenue. Professional services, month-to-month income from leases that have expired and customer's just gone on month-to-month payments and so forth. Those other elements of that revenue line were down about $0.5 million, spending was down a little bit, and that's what caused the contraction of the margins.

Okay, excellent. And then I just wanted to ask Randy a quick question here. You know, your comments around the competitive environment and all -- we have been hearing that Pixus has been getting a little bit more customer friendly and we were just wondering if that has had -- have you seen any effect to your win rate for competitive displacements, or whether or not right now that hasn't been coming through in terms of your ability to pull people away from Pixus?

Well, I think our numbers speak for themselves, you know, [5%] conversation rate -- 45% of our business this quarter in the last 90 days were first-time customers to Omnicell. And even -- you've got to remember, customers that are greenfield, we're usually competing against very strong competitors that have a lot of things to offer. But we do think we have a unique approach to the marketplace, which is more than just good service.

It's really taking the long-term perspective of what our customers need and want, and delivering that in a way that builds a reputation for us. And that reputation doesn't go away because of what other people are doing in the short run.

I've been here doing this for 16 years. I'll be here another 16 years. And I think the people that buy from us understand what we're all about and what the company's all about.

Okay. Appreciate the comments there. Last question just on the status of your share buyback.

We did not buy back any shares during Q3, so we still have 25 million more authorized by the board. And we'll still make decisions on that as time goes on.

Okay, thank you.

And your next question come from the line of Steven Crowley with Craig-Hallum Capital.

Gentlemen.

Hey, Steve.

Congratulations on the good performance in Q3. You mentioned that you had a strong government business, I interpret VA business, quarter in Q3. Might you be able to give us a bit of a feel for, if not the specific contribution, the relative contribution? I think you've described last year's contribution from VA as pretty exceptional or extraordinary. Did you have a similar such experience this year or just a good quarter?

Yes, the U.S. government business is the -- predominantly the VA. It also includes the Department of Defense and the Indian Health Services. And Q3 is always strong for the U.S. government because of their fiscal yearend right at the beginning of October. So we did have an exceptionally strong year -- quarter last year that -- like we'd really never seen before. And this quarter, this Q3 for the government was again strong, but it was more consistent with previous years.

That's helpful. Now, in terms of the preliminary guidance that you provided for next year, you've said the first couple of quarters of the year, best guess is they'll feature 5%-ish type revenue growth. The implication is that there'll be some noticeable improvement in that growth rate when you move into the second half of the year. The math would seem to imply that a reasonable expectation for the whole year is probably between 5% and 10% revenue growth. Just the way the math would have to work to get you out of that range would be pretty dramatic. Is that a reasonable exercise that I'm going through?

Well, I guess we'll have to -- we feel we'll have to wait and see what happens with the economic conditions before we make a call in the second half of the year. Obviously, we all see what's going on in the news, and there's certainly a question mark about what that will do to buying patterns of all institutions. So that's why we're making a call in the first couple of quarters and we'll see how it goes.

And in terms of the key health of the customer metric or tell that you'll get from customers, do you typically garner some visibility on overall 2009 capital budgets down the stretch run of the year or early in the next year? And what is the key health of the customer factor that you're looking at? Is it accessibility of financing or is it investment portfolio or endowment portfolio income? I'm just trying to get a feel for the things to watch.

Well, of course it includes all of that. There is quite a few of our customers who are on 12-31 year-ends and they're generally doing their planning cycles either at the end of this year or the beginning of next year. We do get some visibility towards the end of Q1 of what their budgets are for the rest of the year. I think a lot of institutions are probably trying to figure out what the year will be for them and for the country and setting their budgets on that. And certainly influencing that will be their access to capital, their income from investments and their prioritization of what's most important to them to spend their dollars on in the year.

And one other topic and then I'll hop back in the queue is in terms of Rioux and your latest plans and timetable for the introduction of kind of fully integrated outfitted mobile cart. I think that's moved more towards middle of next year than early. Maybe you could just update us on that and what kind of variable that might represent in your model next year?

Yes, Steven, it's Randy Lipps. We're on track to release that Q3, beginning of Q3, and we feel very confident that it's going to be a very not only popular product, but one that will really fill the gap, particularly in the mobility of controlling drugs between a stationary unit and all the way to the bedside. And so it's been getting good reception in the marketplace from people we've presented it to, and it fits a very important need. So soon as our next 14.0 release is done and at the end of Q2, we'll begin shipping in Q3.

Thanks for taking my questions. I'll hop back in the queue.

And your next question comes from the line of Tom Gallucci with Merrill Lynch.

Thank you very much. Just a couple of quick ones here. One point of clarification, I guess. In the '09 guidance of 15% to 20%, is that net income or is that EPS? And I guess along with that, how you're factoring buybacks into your expectations for next year?

That's earnings per share excluding stock compensation expense, and that's not factoring in any more buyback at this point. We'll adjust as we actually execute on buybacks.

Okay. And you mentioned the DSO number up a bit, obviously due to some mix, as you talked about in the past. Can you maybe give a little bit more granularity there? If there's any way to sort of put it in better perspective in terms of some detail, the amount of business with the least deals versus not. Are you seeing any lengthening of correction cycles in the non-lease deals, or is it purely just a mix of one versus the other?

It's pretty much the mix of one versus the other. You'll notice over the last few quarters we've had some fluctuation, kind of from the low 60s to the high 60s, and that's predominantly driven by the mix of leases versus non-leases that are installed during the quarter. Not the order rates, but actually what's installed, and because that's when the lease starts and that's when the collection takes place on the lease.

All right, but -- okay. So there's -- but there's nothing behind that other than just the mix, no lengthening of time to collect or anything?

Yes, it has -- that particular metric really doesn't have anything to do with the economic conditions right now. In fact, our quality of the accounts receivable, the aging of the accounts receivable is still very good, pretty consistent with where it was last quarter.

Okay, good. Thank you. I should have just asked that right off the bat. And then I guess just as a final thing, not to beat a dead horse in terms of the economy, but with the tweaking of the backlog expectation, is that just sort of prudence relative to what you're seeing out there or are there specific projects that you know about right now that you sort of thought were going to happen but have been delayed? Just wondering how much granularity or how much visibility you have on that versus just sort of pruning back expectations conservatively.

Well, it's more of the latter. We've still got a great pipeline. We really haven't seen anything drop out of the pipeline that we were expecting for the quarter. But we're just kind of mindful of what happened last year, and we definitely saw some decisions just get delayed. And so I'm -- and we're all just trying to be prudent, realize everything that we're seeing in the newspapers and every day is going to have some effect. And we're just uncertain what the effect will be.

It appears that customers are still very interested in our products. They're absolutely interested in the safety and meeting regulatory concerns that our products and our solutions bring. But we would expect some of the larger deals -- and there are quite a few larger deals in the pipeline -- some of the larger deals are going to be somehow affected by this.

Okay, thanks for the color.

And your next question comes from the line of Sean Wieland with Piper Jaffray.

Hi. Thanks. I guess I'm still a little bit confused. With record bookings and strong pipeline and six to nine months of revenue in backlog, I would think that the first half of '09 would be stronger, unless you thought for some reason that customers were going to delay taking -- delay the shipment of the product. So can you help me reconcile those?

Well, sure. The first half of next year's revenue is comprised of the orders from Q2, Q3 and Q4 of this year predominantly. Q2 wasn't as strong as we would have liked it to be. We saw some improvements, but it certainly wasn't strong. Q3 was very strong. Q4 is a bit of a question mark in front of us. We see great pipeline, big orders, but a little bit of concern what the economy's going to do to it.

So overall, that makes for a mix of projects that isn't going to -- we don't believe is going to drive revenue to be a big growth number for the first half of next year.

The other aspect of this is the orders that we just took in Q3 were, as we said, a lot of the orders were new customers. And they take quite a long time to install, and a lot of those installations won't even start until Q2. And so, while it was a big order quarter, we expect those to be in backlog for quite a while.

Okay. And then the VA contracts, does the VA on average, do they take their shipment faster or slower than average?

Slower.

Slower. So would the VA shipments possibly be pushed into second half of next year?

Some could. I mean, some of those are new installations, they're new customers to us, and they would certainly fall in the category of what I was just describing.

Okay. And is there a -- is there a metric out there that you use or a combination of metrics to gauge your customers' ability to access the credit markets?

Well, each customer has their own personality, and we know our customers pretty well individually, and we have a pretty good idea of their capability of accessing the credit markets. We do credit checks on our customers ourselves, obviously, but we're also pretty in tune with how they plan to pay for their purchases. So, yes, we're definitely -- we're watching those and understanding them as best as we can.

Okay. And last question, Randy, you've been doing this for a little while. I think I asked the same question on Q1. How does this environment compare to the, I think you said the 16 years that you've been doing this. I mean, is this -- how does this environment compare, the purchasing environment?

Well, I don't know. It's really a little bit surreal, because you go out and see hospitals, and sometimes you're talking to even last week's COOs and CFOs, and it felt like it was a [temporal] environment and they could eventually access capital markets with -- a lot of them are looking at bonds for major projects. So they didn't look too panicked, but you know, I don't know exactly how they would know that or not.

I think as far as the lease financing, accessing the lease financing for our products, I think that's a lot smaller problem or not much of a problem unless the financial markets just seize up for a very long time. There seems to be a lot of capital dollars out there willing to work with us, to work with -- at reasonable rates -- to get financing for our customers.

So I think it's really more on the larger grand scale, where somebody's trying to build a new 200-bed tower, about when those major projects get started because you generally need bond money to go out and get those. And some of our purchases are obviously tied to those kinds of projects and when they complete and when they have the funds to move forward.

But I don't -- I think in general, I felt like hospitals are getting paid these days. They're getting the cash flow from the government or from payers sort of readily, and it's just a matter about how much capital dollars they have to spend.

And I think it's a lot different than Q1, where people were not quite sure where they should go get their shorter-term capital dollars met by, because the interest rate was falling so quickly.

And here it's more about the longer term big access to capital, I think, that most people have concerns about, not sort of the individual purchases, smaller purchases they might have with us. But it could impact us. We don't know for sure.

Okay. Would it be fair to ask on average what percent -- by what percent your customers have cut their '09 CapEx budget by? Or give us a range?

What they've cut it by?

Yes.

Most -- what I hear mostly is people are putting in a few accounts and not very many have just said, well, we're going to freeze capital for 45 days or delay capital. And you don't hear people just saying, okay, we're not going to spend any money.

So I think it's hard choices, and I think a lot of hospitals are sitting around kind of waiting to see before they actually make the decisions on actually cutting the list and just see what happens in the marketplace.

And so, I think there's a lot of wait and see, which still obviously gives us a little concern about are we on the wait-and-see list or are we the go-ahead list. And we may not know about a lot of those situations until December, so it's a little bit tough to call.

All right, thank you very much.

Thanks, Sean.

And your next questions come from the line of Leo Carpio with Caris & Co.

Sorry to beat up a dead horse here in terms of the credit crunch. Was there any particular hospital segment that was weak or had expressed more concern to you regarding this? Was it the midsized hospitals, the large, academics? Trying to get a sense of who's feeling the pressure the most.

Well, the answer is no, there's not a particular segment. But actually, as Randy said, we wouldn't really indicate that there are very many hospitals saying anything about it. It's a -- the term he used is it's a little surreal. Clearly, there is some contraction in the credit markets, but most of our customers really haven't seen it yet. I think that's probably part of the nature of there being a very long selling cycle with our type of solutions, and the people that are making the buying decisions have the money appropriated and it's approved and they're going to move forward. It's the buying decisions out in probably Q1 and beyond that would see some effect.

Okay. And in terms of the competitive environment regarding Pixus, have they been using their parent's balance sheet? Is Cardinal Health helping them out this quarter, like they may have done in the beginning part of the year?

Well, I think they'll always do that in selected cases. We've typically been able to compete very well with our leasing partners. So if that tends to happen, it's not really an issue.

Okay. And then looking to 2009, since they're being spun off, does that give you some sort of hope or optimism that that competitive pressure from them may ease up a bit?

Well, I think the spinout of that unit of Cardinal will cause some short-term disruption, but I expect they'll overcome that pretty quickly. Our products, our solutions compete very well and our overall delivery to the marketplace competes very well. And we expect it to continue to compete very well as we come out with new and improved solutions. So I think the spinout will be an event, and we will continue to find that our products are accepted and desired in the marketplace at a good rate.

Okay, thanks.

And your next questions come from the line of Steven Halper with Thomas Weisel Partners.

Relative to your leasing partners, it sounded like you were able to find other leasing partners. What has happened on the implied discount rates on those -- on those leases, and is that having any material impact on your profitability?

Well, not a material impact yet. I think it takes a little bit of time for pricing changes to thread through the environment. We have had a lot of opportunity with existing leasing partners that we already had and new leasing partners there. It just turns out that there are many leasing companies that operate predominantly in the healthcare space. Hospitals do pay. They often pay late, but they almost always do pay. So they're a good risk.

And those leasing partners probably can charge us a little bit more so they have great results, and consequently they have access to funds and continue to have access to funds. And that's why we're fairly confident that if some of our leasing partners are in some sort of economic difficulty, we'll be able to shift to other ones and continue to provide the resources to our customers.

I wouldn't -- at this point, we're not signaling that there is any margin degradation due to pricing changes, and we'll see how that goes.

And then finally, when you -- just to clarify on the earnings growth next year, the -- you talked about 5% growth on the top line for the first half, but what your -- just to clarify, you talked about 15% to 20% growth in adjusted earnings. That's for the full year, correct?

Right.

Okay, thank you.

And your next question comes from the line of Gary Schwab with Valley Forge Capital.

Yes, hi. Good afternoon. Just one quick question on the new regs on preventable medication errors. Are you seeing any indication for quotes? Has that changed at all? Has that increased at all because of this new regulation?

Well, I think that's really just another one of multiple inputs that drive a pharmacist to want to make sure that they've got the safest environment possible. The thing that drives people the most is just trying to prevent the errors themselves, regardless of the reimbursement structure. No one wants someone to come in the hospital and get sicker because of a medication error.

There are the joint commission audits, there's the CMS regulations that all drive buying behaviors. And as more and more of these things come about and more and more reports about medication errors and more events like the Dennis Quaid event with his twins, those things just kind of all pool together and drive more desire for medication automation.

But you haven't seen any real change in quotes, asking for indications for quotes on your equipment because of that?

No, there's nothing specifically tied to that reg.

Okay, thank you.

And your next questions come from the line of Steven Crowley with Craig-Hallum Capital.

Guys, just one follow-up question. Rob, you mentioned that the orders that you've been able to garner so far, that in large part the funds are appropriated. My question really related to whether or not there are dollars that have already been allocated and circled for your projects, or whether or not if a Q1 '09 install, the jump-off for funds still has to happen. Is there a general answer or is there a variety of situations?

Well, generally what we see is that the person who's got the buying decision in the hospital makes sure that the funds are allocated before they go down the whole process, because it's such a lengthy process to make the decision and then go through the installation cycle. So if we've got the purchase order and the contracts signed, the hospital has committed the funds. And we don't put anything in backlog until we have the purchase order. We still see very little drop-off from the backlog on an ongoing basis.

Okay, so availability of funds going forward really is going to dictate whether you can get a bunch of deals that are in process all the way to closure?

Correct.

Thanks again.

This concludes our Q&A session. I would now like to turn the call over to Randy Lipps.

Yes, I'd like to summarize the call by reiterating that our business is doing well, with record bookings, revenue in the quarter as well. We're profitable and cash flow positive. We're managing our expenses and making sure our leasing partners are working closely with us to fund deals. And the market for medication management, driven by regulatory safety requirements, continues to drive adoption of our solutions.

Thanks for joining us today.

This concludes today's Omnicell third quarter earnings release conference call. You may now disconnect.