Omnicell Inc (OMCL) 2009 Q2 法說會逐字稿

Good afternoon, my name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.

(Operator Instructions)

At this time, I would like to turn the call over to Rob Seim, CFO of Omnicell. Sir, you may begin.

Thank you, good afternoon, and welcome to the Omnicell 2009 Second Quarter Results Conference Call. Joining me today is Randall Lipps, Omnicell's Chairman, President and CEO.

You can find our results on the Omnicell Second 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 Result of Operations, in the Omnicell annual report on Form 10-K filed with SEC on February 24th, 2009.

Please be aware that you should not place undue reliance on any forward-looking statements made today. The date of this conference call is July 23rd, 2009 and all forward-looking statements made on this call are made based on the belief of Omnicell, as of this date only. Future events or simply the passage of time may cause these beliefs to change.

Finally, the conference call is the property of Omnicell Incorporated. And any taping, other duplication or rebroadcasts without the 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 2009. After that, we'll open the call to your questions.

We're happy to report that second quarter revenue, and profit, exceeded expectations. Cash flows were positive, margins were up for both product and service, and the organizational changes we implemented during January, are working well.

While hospital spending remained constrained, we did see an improved consistency in overall order rates. Our backlog position continues to be in the targeted range of six to nine months of forward revenue. Backlog represents the time between when we receive a firm order from our customer, and when the order is fully installed, which is the point where we recognize the revenue.

We maintain backlog levels consistent with our customers' desires for installation timing. And our backlog levels give us good visibility into the revenue volume for the next two quarters.

We are on track to achieve our backlog guidance for the end of 2009. And consistent with our guidance, we've maintained our headcount at a level similar to those we reported in Q1, with 752 regular employees on board.

New product announcements we made over the last year, and our ongoing focus on customer satisfaction, have kept our competitive positioning strong. In the second quarter, 36% of our orders came from new customers, which are comprised of a combination of competitive conversions, and green field accounts, or accounts installing automation for the first time. About two-thirds of these orders were competitive conversions. We also remain on track for international bookings to grow to be as high as 5% of our orders in 2009.

Consistent with last quarter, we were able to obtain financing for any creditworthy customers that needed credit, and were ready to place an order with us in the second quarter. But although we've been able to attain credit to complete orders, we have seen continued growth in our receivables balance. And day's sales outstanding increased to 118 days.

One of the main drivers of the receivables growth was the longer collections cycle from our new leasing partners, compared to what we experienced in 2008. Some of this is administrative in nature. And some of it is driven by more stringent requirements as a result of current economic conditions.

Our leasing partners are being more cautious in their requirements for more complete, up-to-date financial information, from our customers, and more extensive documentation, both of which are lengthening the processing time before we receive payment.

We've also experienced some distractions during the implementation of new accounting software that have taken time away from our collection efforts. But, we still expect our receivables to return to historic levels. We now expect DSOs will be in the 80 to 90-day range by year-end.

Now I'd like to discuss our second quarter financial performance. I'll first discuss our financial performance in accordance with generally accepted accounting principals with year-to-year comparisons.

Revenue for the second quarter of fiscal 2009 was $52.6 million, down $10.7 million or 17% year-over-year, but up 1% from the first quarter of 2009. The reduction year-to-year is consistent with the guidance we gave in January.

And we believe, as a result of general economic conditions affecting hospital capital purchasing. We further believe our continued new account wins demonstrate that our solutions are very competitively positioned.

Net profit after taxes was $0.9 million, or $0.03 per share, which compares to net earnings of $2.8 million or $0.08 per share in Q2 2008. Our net profit this quarter includes the charge of $0.07 per share for stock compensation.

Now I'd like to cover our non-GAAP results. The only adjustments to GAAP results are the exclusion of stock compensation expense, and the exclusion of a one-time restructuring charge incurred in Q1 2009.

Stock compensation expense includes the estimated future value of employee stock options, restricted stock, and our employee stock purchase plans. Since stock compensation expense is a non-cash expense, we use financial statements internally that exclude stock compensation expense, in order to major some of our operating results.

We use these adjusted statements, in addition to GAAP financial statements. And we feel it's useful for investors to understand the non-cash stock compensation expenses that 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 on our website.

Our Q2 2009 non-GAAP net income was $3.3 million or $0.10 per share, which exceeded analysts' consensus by $0.02 per share. Our Q2 2009 non-GAAP net income was down $2.4 million, or $0.07 per share year-to-year from Q2 2008 non-GAAP income of $5.7 million, or $0.17 per share which was driven primarily by the reduction in revenue.

EBITDA or earnings before interest, taxes, depreciation, and amortization was $6.1 million for the second quarter of 2009, which is down $3.7 million in the second quarter of 2008.

Our balance sheet remains strong despite the increase in accounts receivable, I'd mentioned earlier. Our cash and short-term investments grew to $126 million at the end of Q2 2009, an increase of $7 million from last quarter. Our inventories were $10 million, down $1 million from Q1 2009. Now, I'd like to turn the call over to Randy to provide some updates on the business.

Thanks Rob, and thanks for joining us today. I am pleased, this quarter, with how the market has reacted to our steady expansion of patient safety and workflow management solutions.

From the introduction of SinglePointe last year, which allows automated management of up to 100% of the drug flow in hospitals, to enhancements of our operating rooms solutions, to our new integrated tissue tracking system, Omnicell has brought a stream of innovations to the market, that customers are embracing.

At the American Society of Healthcare Pharmacists show in June, we demonstrated two of our newest innovations. Anywhere RN, which is a significant labor saving product, that allows our systems to be managed from any work station in the hospital, was very positively received.

We also launched WorkflowRx Version 6 with enhanced intelligent order routing, which optimizes order processing in the central pharmacy.

I'd also like to welcome Vanderbilt University to our customer base. Vanderbilt is one of US News and World reports top ranked honor roll hospitals. We now count 15 of the top 21 hospitals on the honor roll as customers.

Looking forward, I'm optimistic about our opportunities to partner with new and existing customers. We continue to see a cautious economic environment, but I've been encouraged to see several large sales moving forward.

We believe the healthcare portion of the federal stimulus package, and the pending healthcare reform, will increase the need for efficient workflows and improved safety, which we believe will drive greater adoption of our solutions. We continue to maintain high levels of customer satisfaction. And we believe our solutions are important components of safety and healthcare today.

Regulatory agencies continue to impose increased safety requirements that drive broader adoption of medication management technology. We still believe that full recovery in the hospital market will slowly emerge, as economic conditions improve. And there is clarity around healthcare reform measures.

I am confident that our solutions will remain important elements of hospital safety and efficiency management. Now Rob, back to you for some guidance.

Thank you, so the second quarter results supports some improvement in our expectations for the full year of 2009. We had previously expected 2009 revenue to be between $200 million and $210 million. We now expect revenue to be at the higher end of that guidance, between $208 million and $213 million.

We previously expected $0.30 to $0.35 non-GAAP earnings per share, which excluded stock compensation expense and excluding the one-time restructuring charge we booked in Q1. Now we expect non-GAAP earnings per share between $0.34 and $0.38. These profit expectations assume an effective tax rate of 40% on GAAP earnings and no material changes in interest rates.

We continue to expect backlog to be at $110 million at the end of 2009. And we expect to operate through the year with backlog within our stated objectives of six to nine months of six to nine months of forward revenue. So, operator, I'd now like to open the call to questions. Operator?

(Operator Instructions). You do have a question from the line of Newton Juhng with BB&T Capital Markets.

Good afternoon, guys. I was wanting to start on the service gross margin. Obviously you saw a nice rebound there this quarter and if you just kind of walk me through what happened that helped make the number so much better off of the kind of trough we saw last quarter?

Well, Newton, we have been focusing a little bit on our service spending. I'll just remind everyone that we believe that service definitely is a differentiator for us. We focus a lot on the customer experience. And we want to make sure that our customers have the best service experience it can be. But we're a little bit more efficient in our spending rates on service, which helped the gross margins.

We also have some fluctuations in our service revenue, which I pointed out before, which mostly has to do with rental charges as customers come off of leases and you get the rental over time and if they come off the service contracts, you may have one-time material charges associated with service.

Those tend to fluctuate a bit quarter to quarter. We did have a few of those during the quarter, which bumped up this service revenue. And I continue to expect those to fluctuate. So I think we'll see some fluctuations in the service margins similar to the fluctuations in the revenue, but for the quarter we had quite a bit of improvement there and we're happy with the results.

Got you. So kind of going forward, in the year, we shouldn't necessarily expect this level to be replicated?

Well, we're definitely continuing to work on the service margins. And as I said before, I do expect them to improve over the long term. I just do expect there to be some fluctuation quarter to quarter.

Got you. Got you. Rob, one of the other things that I wanted to bring up, obviously in your prepared remarks, talking about the DSOs going up. Not really the direction we were hoping for here. But I have to ask the question, are we seeing any hospitals pushing out payments here?

Or is it just strictly on the -- your partner side, with the issues that you mentioned on the call, one. And then, two, how much control can you exert on your partners to get paid more timely?

Well, we transitioned to all new partners in the latter half of 2008 and the beginning of this year. And to some extent this is working out the paperwork flow, the administrative relationship with those partners.

We're learning how to do that, but at the same time, I think where we're seeing the economic conditions affect us is with those partners themselves, to the extent that they're funded by other external banks. They have gotten increasingly more stringent requirements on the paperwork, the current information on hospital financial conditions and they've passed those on to us, which has made it a little bit harder to get the funding completed.

Now as we work out those relationships and just what the requirements are, we see that we get paid on a very regular time period, just like we did last year. So in that, we're still seeing some transition effects, but in the back of it, certainly the economic conditions are pushing it.

As far as our customers that purchase from us, we really don't have any customers that are excessively aged in their receivables anymore than in the past. We haven't seen a dramatic change there.

We have been, at times, late in our invoicing. As I mentioned, the transition to our new accounting system has affected us a lot in Q1, did affect us a little bit in Q2 also. So we're working through those issues. And that's why we feel relatively confident that we can get the DSOs back down to where we were operating in the past.

Okay. Very helpful on the clarity. I'll jump back in the queue. Thanks, Rob.

Your next question comes from the line of Steven Crowley with Craig-Hallum Capital.

Good afternoon, gentlemen.

Hi Steve.

Hey, Steve.

A question for your share. Obviously the business has become a bit firmer for you or a bit more predictable and that's reflected in you tweaking guidance for the income statement for the business this year a bit north.

Now, in terms of the implications of you maintaining your guidance for backlog to be roughly flat with a year ago, and your desire to continue to use that backlog to kind of fuel the velocity of the company for the forward six to nine months, I assume that by definition that means that the first half of 2010 is going look a whole lot like the second half of 2009. Or is there another variable in the equation?

No, there really isn't any other variables in the equation. The -- we don't expect orders to be cancelled, if that's what you're implying. We haven't seen orders being cancelled. In fact, mostly when a customer places an order with us, it's generally never cancelled. So those are really firm orders by the time we count them in our backlog.

What's in front of us is still highly dependent on margin deals closing. And as we said in the past, those are the deals under the current economic conditions, hospital spending conditions, those are the deals that are most prone to be easily pushed out. We have a very good pipeline of those deals and we closed several large deals in this last quarter.

But there's still quite a bit of uncertainty about just how fast customers will finish off their buying processes and make those firm orders with us. And so we're not ready to make any changes in our backlog guidance at this point in time.

The revenue changes that we made in our guidance, as you said, they're upward changes. They're not huge upward changes and they're well within the planning parameters we have around the order rates for the rest of the year.

The essence of my question was more around trying to calibrate the growth that's possible for you next year. If you start the year with roughly, with the same backlog as you started this year. And you're going to run the business the same way. It really makes the ultimate growth rate next year -- if you close the year as you now anticipate, in the current revenue range that you guided for, with the current backlog range, your growth rate next year will really be dictated by your orders in the first half of the year next year.

Yes, it will.

Okay. Now, Randy, your comments that were encouraging about seeing some progress with several large deals; are those deals that are still in the pipeline moving towards closure? Or do those reference the deals that Rob just mentioned, which closed during the quarter?

Well, they -- it's a reference to both in general. I think we saw some closing this quarter. And we see some more in the future and we hope that will close, but we can't count them until they're closed and really next year, particularly the first half of 2010, really has a lot to do with what we do close in the next six months. So that's -- we'll just have to see what those results are.

Fantastic. Thanks very much for taking my questions.

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

Hi. Thanks. So just in follow-up to the last question, how do you characterize the capital spending environment of hospitals? This past quarter versus the first quarter versus a year ago at this time, do you think the low watermark is behind us? Are we still at the low watermark? Just trying to put the meat on that bone for us?

Yes, I think generally we're starting to see some improvements. I think it's definitely going to be a slow thaw. The larger academic institutions, like the ones we've announced over the last two quarters, certainly seem to be moving forward. Maybe with a little less concern than they had in the beginning of the year and the end of last year.

The rest of the marketplace is still trying to make sure that they've got adequate cash flows and that they meet their targets for profitability. And there are still concerns about unemployment rates.

Now the unemployment rates have been kind of hovering at the same level over the last quarter. That gives people some comfort that they're not increasing substantially, but they haven't gone down substantially yet.

And as we've said in the past, we think that once those unemployment rates start declining, that's a good economic indicator for hospitals and we'll probably see some of the buying patterns start to change.

Okay. So that's helpful. I want to go back to the DSOs. I would have thought that the paperwork would be done before the contracts were signed. And so just help me understand what's going on there? I guess I still don't understand that.

Yes, there is a long period of time between when the contracts are signed and when we actually ship and install the products, which is our backlog cycle. And -- of six to nine months. And even if it's the same funding partner that put in place the paperwork requirements for a hospital at the time that the contract is signed, that's all firm and done.

By the time we actually get to installing the product, there may be some additional requirements that they now have to meet and are passing on to us and our customers. And that's what's really changing during the quarter.

And what specifically, what kind of additional requirements would there be, that they'd have to come back to you with?

The most frequently needed requirements are updated financial statements and another credit review with -- we haven't seen any customers lose funding, so to speak, or haven't had any issue getting financing for a customer. We still have to go through that cycle.

There's a few other requirements that they -- we've seen come through just in authority to do the transaction and requirements like that.

So how have the cash flows for the month of July been? I mean, is that a -- can you give us any glimmer of hope on that?

Well, we haven't finished the month of July and we don't report interim.

Okay. All right. So what -- really what gives you the confidence that the DSOs are going to trend back down from these levels?

Well, Sean, I do think that we are figuring out to work with the leasing partners and I do think that there's probably not a whole lot more requirements that could be put onto these transactions. So I think we're getting to the point where we're seeing the maximum level of issues and we're learning how to work through those.

And I think as we get through all that, we'll be able to get the -- these deals funded more quickly. And in addition, we haven't really seen, as I mentioned, the customers that we are calling on directly for collections. We really haven't seen them consciously pushing out their billings, their payment cycles to us, very much.

So if I saw those customers pushing out their cycles several months and our aging getting into a really poor position, then I would say economic conditions are -- have deteriorated and we can't expect these DSOs to improve. But I haven't really seen that.

Okay. Great. Thanks for taking the questions.

Your next question comes from the line of Glenn Garmont with ThinkEquity.

Thanks. Good afternoon. Just a couple of quick questions. I guess, first, as I think about sort of hospital CapEx priorities, Rob and Randy, has there been any change following, obviously, the signing of the stimulus bill and hospitals at least the interest in clinical software seems to be at a heightened level.

Has that caused any sort of a change in how hospitals are looking at the medication dispensing? Just in terms of their priorities. Has that changed meaningfully? And then, Rob, can you just remind us what you're thinking in terms of your uses of cash?

Sure, Glenn. Let me take the first question. Patient safety and quality are still very high and I would say in a C-suite level, they're probably number 2, number 3 and number 1 obviously is their financial condition, which is driven by bond ratings and cash on hand. And revenue rates and expenses.

So I think customers still have us very high on the list. They know they need to meet regulatory requirements in order to make their facilities compliant with the multitude of regulations requiring these products.

But as we see the stimulus bill, as we see the healthcare reform, we think that even though you -- there's not direct funding for our product, per se, or we're not even quite clear on exactly what there is funding for, but we know that hospitals want to automate the entire process of medication management and supply chain management because it is important to record all these transactions in the electronic world in order to manage them properly and get the greatest amount of efficiencies.

So I really would say that nobody -- we don't see orders being cancelled or pulled back. Our pipeline is very large. The largest it's ever been. We just see orders being delays.

So everybody realizes, eventually, we need the equipment. They need to deploy it. They need to deploy to more areas of the hospital. And they will. And it's just a matter of their financial condition and when we come around on the list.

But we're very high on the list and I don't think that's changed. And until there's more clarity on how the stimulus money or the reform bill really impacts clinical systems spending, I don't we see hospitals saying no, we're not going to spend money on you. We're going to spend it all on pure HIT or the electronic medical record.

Okay. That's helpful. And then just in terms of potential uses of your cash going forward?

Glenn, kind of dovetailing in with what Randy just said, we do think that the hospital environment is very interested in improving the work flow and efficiencies and we do see opportunities adjacent to our product lines to expand the offering we have to improve those work flows and increase the efficiencies and save some money for the hospitals. And so we predominantly maintain the cash balance to be competitive in the acquisition marketplace.

Would an acquisition -- could that be something that's more software focused, Rob?

Oh, definitely. The value of our products, although it is a hardware appliance unit that we ship, the value is all in the software. It's where all the work flow efficiencies reside. And so we have some software-only products that we sell with our existing products and in our existing product lines. And we definitely would be interested and are always looking at software solutions.

Okay. Very helpful. Thanks, guys.

Your next question comes from the line of Gene Mannheimer with Auriga .

Hey, good afternoon, guys. Nice quarter. Two questions. First, Randy, certainly encouraged to hear your comment on some large sales moving forward in the quarter. Can you give us a little color on the composition of those deals -- i.e. do they tend to be the academics, large IDMs and competitive conversions? Thank you.

Great. Well, I think, again, it's probably in all areas. Some of them currently are customers, some are competitive conversions. And in one case I can think of, it's related to a construction project, whether they were going to delay the construction project or go ahead and go through with it this year or next year.

And that's a very good example of how a hospital says well eventually we're going to buy the equipment because the new facility's going to open. Are we going to continue to have the facility open this year or are we going to wait until next year?

They decided to go ahead and push forward with equipment this year and that's a decision that could have been easily delayed until next year. So you can see how these big deals are sometimes difficult to call because the hospitals themselves aren't exactly sure when they want to purchase those.

And I'd say most of them are like that. Is this the time to replace or is this the time to upgrade or should we wait 6 months, 9 months or next year, depending on their individual situation.

And I just think, as time goes by, hospitals can get a better feel for the cash flows and what the economy is truly doing. Because they're mostly lagging in the impact and I think as that becomes more clear, particularly the larger institutions have more confidence in what they want to do now as opposed to, particularly a couple of quarters ago, they didn't want to do anything until they really understood the impact of the economy.

Okay. Sounds good, Randy. And then secondly, I know in the past, you don't break out orders by product line. But I'm trying to get a feel for how much of your bookings comes from the core cabinet business versus some of the peripheral or ancillary products that you've introduced over the last couple of years? Are you able to help us out with that?

Well, you know that the bulk of our business continues to be the medication dispensing systems. We have seen some growth in the operating room environment, both with the anesthesia systems and with the supply systems for the operating environment. Our OptiFlex product line, and in particular, in the operating room, the cath lab, those have been good.

We've also seen some growth in the central pharmacy products that we brought to market and then refreshed about 18 months ago. But the bulk of the business continues to be in the automated dispensing systems.

Okay. And then lastly, related to that, with the Vanderbilt win this quarter, can you comment, and forgive me if you've already said it, but is this an existing customer that expanded with supply? Or was it a displacement? Or new business? Thanks.

That's a new customer for operating room supply systems.

Great. Thank you.

Your next question comes from the line of Leo Carpio with Caris Company.

Hello. Can you hear me, gentlemen?

Yes, we can hear you, Leo.

Sure, Leo.

Okay. Yes. Quickly, regarding -- my question is regarding the competitive environment. Has it changed in the last few months? I mean, has [Pixos] become more aggressive or McKesson in this environment? And also are there any large deals pending out there for bid?

Well, I'd say the competitive market has been relatively the same over the last year or several quarters. And I think with all large deals of any type, they are very competitive and they will always be very competitive.

But it hasn't impacted our ability to win new deals and position ourselves to win. And so -- but it is a competitive market and I think both our competitors are -- have strong offerings and the -- and we need to continue to innovate and make sure we're making a difference in the marketplace as we bring our products to market. And there are always big deals out there. What can I say?

Okay. And then I guess there's no impact expected with the upcoming spin-off of CareFusion in a few weeks, in terms of competition?

Well, I think we -- we're always planning for our competition to get better. I think CareFusion spinning off probably allows them to focus more on some of the core businesses and then -- but we are -- we're continuing to innovate and plan for that differentiation as they come out and hit the market. And they'll have a transition period there and hopefully we can gain a few opportunities for ourselves.

But I think we always plan on competition getting stronger, not weaker. And we always position ourselves to continue to outpace them.

Okay. And then last question. Did you provide an operating cash flow number for this quarter?

We did not provide the -- any cash flow information. The total cash flow for the quarter was $7 million positive for the quarter. There was almost no cash flow from stock exercises during the quarter. Lots of puts and takes in that. A lot of working capital puts and takes. Obviously we're profitable. EBITDA was $6 million. We had the offset in the accounts receivable. And then pretty much all the other areas of working capital were positive.

Okay. Thanks.

Your next question comes from the line of Steven Halper with Thomas Weisel.

Just to follow-up on the competitive environment, in light of the fact that your largest competitor is going through this transition. Were there any major changes in their behavior? We actually noticed that they basically did not have a presence at the summer ASH P-show. Any other things that you're picking up there?

I think that they -- no, I wouldn't say that there haven't been any major notices. I mean, they're always going to show up at the big deals and competitive places and I mean that's where you really move the needle in this business. And I think the key for us is, again, we've got to keep our innovation and our customer service at the highest levels to be in a competitive market and we're continuing to do that with -- just with our Anywhere RN and our single-VoIP products that we recently announced.

So how did the summer pharmacy show go for you? Recognizing that attendance is not always great at that summer show?

Well, I think it actually was sort of a boomerang effect; because we were probably one of the largest presenters there. As people spent a lot of time with us and it really allowed us to explain some of our new innovation and announce the Anywhere RN, which was very positively received because it is such a work-flow, cost-saving product. As well as the Workflow RX product, the intelligent order routing. That's really a cost reduction opportunity for the hospital with their inventories and a reduction in their cost of order processing.

So both of these new product announcements play right into the hands of reducing costs and improving safety in hospitals. And so those are the kinds of things that we know customers want and they're significant differentiations from what anybody is offering in the marketplace, that it makes people consider moving from a competitive product to ours or new customers for the first time being more willing to go with Omnicell.

Great. Thanks.

You bet.

We have no further questions at this time. At this time, I would like to turn the call back over to the presenters.

Thanks, Kelly. I'd like to just summarize and reiterate, we believe we, as I said, we continue innovating and focus on the customer satisfaction, it continues to make a significant differentiation for us, not over -- not only in the last years, but over the long run. And we remain optimistic about our solutions and the need for medication and work flow management at the hospitals.

And we think that there is strong demand ahead of us and we've got the company and the products and the people to make it happen. Thanks for joining us today.

This does conclude today's conference. You may now disconnect.