Omnicell Inc (OMCL) 2009 Q3 法說會逐字稿

Good afternoon. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Seim, you may begin your conference.

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

You can find our results on the Omnicell Third Quarter press release, posted in the Investor Relations section of our website at www.Omnicell.com. This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied.

For a more detailed description of the risks that impact these forward-looking statements, please refer to the information under the heading Risk Factors and under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations in the Omnicell Annual Report on Form 10-K filed with the 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 October 22nd, 2009 and all forward-looking statements made on this call are made 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.

And finally, this conference call is the property of Omnicell Incorporated, and any taping, other duplication or rebroadcasts without the express written consent of Omnicell Incorporated is prohibited.

During the call today, I'll start with an overview of the financial results for the quarter, followed by Randy, who will cover some of the quarter's business highlights, and I'll then discuss our guidance for 2009. After that, we'll open the call to your questions.

We're pleased with the financial results for the quarter. Revenue and profit exceeded expectations. Customers are embracing our new products. Several of our competitive wins from prior quarters are now in the installation cycle, and these customers are finding our product solutions have been a smart choice.

We saw a strong mix of international installations, and service margins were up. We added $20 million to our cash balance. Our accounts receivable day sales outstanding were down significantly, reversing a trend from prior quarters. Our backlog position remains in the targeted range of six to nine months of forward revenue. Backlog represents the time between when we receive a firm order from a 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 maintaining our backlog guidance for the end of 2009, although as always, our backlog can vary depending upon the timing when large deals book.

In the third quarter, 17% of our orders were from new customers, which is lower than historical norms and demonstrates the variability we can see in the timing of large orders from customers transitioning from competitive platforms or automating for the first time. Year to date, 35% of our orders have been from new customers, which is consistent with our history and is consistent with our forward-looking expectations.

In the third quarter, about 75% of the new customer orders were from green field accounts, and about a quarter came from competitive conversions. We expect our historical momentum to continue with competitive conversions, and we have a number of large deals in the final stages of the sales process that we anticipate closing in the next few months. We also expect to remain on track for international bookings to be approximately 5% of our orders in 2009.

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

Revenue for the third quarter of fiscal 2009 was $54 million, down $10.4 million or 16% year over year, but up 2% from the second quarter of 2009. The reduction year to year is consistent with the guidance we gave in January and we believe is a result of general economic conditions affecting hospital capital purchasing.

Net earnings after taxes were $0.9 million or $0.03 per share, which compares to net earnings of $2.9 million or $0.09 per share in Q3 2008. Our net earnings this quarter include the charge of $0.07 per share for stock compensation. Net earnings also include a tax provision of 40% in Q3 '09, offset by a one-time tax benefit of $250,000.

Now I'd like to cover our non-GAAP results. The only adjustments to GAAP results for this quarter is the exclusion of stock compensation expense. Stock compensation expense includes the estimated future values, employee stock options, restricted stocks and our employee stock purchase plan. Since stock compensation expense is a non-cash expense, we use financial statements internally that exclude stock compensation expense in order to measure some of our operating results. We use these adjusted statements in addition to GAAP financial statements, and we feel it is useful for investors to understand that non-cash stock compensation expenses 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 Q3 2009 non-GAAP net income was $3.3 million, or $0.10 per share, which met analysts' consensus. Our Q3 2009 non-GAAP net income was down $2.4 million, or $0.08 per share, year to year from Q3 2008 non-GAAP income of $5.7 million, or $0.18 per share, driven primarily by the reduction in revenue.

Our non-GAAP gross margins were down slightly sequentially to 51.2% from 51.7% in Q2 of 2009 due to a larger mix of international installations this quarter than in Q2 2009. International business carries a lower gross margin because our international distributors bear the cost of installation, support and most of the sales effort, but it contributes the same operating margin dollars that domestic business contributes.

During the third quarter, we also saw an increase in our service margins, which were up to 41.3% from 39.7% in Q2 '09 and up from 34.8% in Q3 2008. EBITDA, or earnings before interest, taxes, depreciation and amortization, was $5.6 million for the third quarter of 2009, which is down $3.6 million from the third quarter of 2008.

Our strong balance sheet became even stronger. Our cash and short-term investments grew to $146 million at the end of Q3 2009, an increase of $20 million from Q2. The cash increase included $14 million in benefits from operating assets and liabilities improvements, and $6 million of contribution from EBITDA in the quarter. Our inventories were $10 million, up $1 million from the second quarter of 2009.

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

Thanks, Rob, and thanks for being with us today. This quarter we completed international installations at some of the large accounts we announced in previous quarters. The Guy's and St. Thomas' Hospitals in London completed the third phase of their automated supply systems installation, and we have begun installing the first phase of medication automation. We completed our installation in Singapore's prestigious National University Hospital, and began installing at another large institution, Tan Tock Seng Hospital. We also made our first medication automation sale in Sweden to the very influential Karolinska Institute. Additionally, several of the large competitive conversions in the US began going live this quarter.

The marketplace has reacted favorably to our steady expansion of patient safety and workflow management solutions. We believe this demonstrates recognition that Omnicell is the only company that offers the next generation in automation and workflow management solutions. For example, our single-point technology allows for secure storage and traceability of 100% of the medications, unlike most systems that cover only 60% to 80% of medications in the nursing unit. This proprietary solution takes medication management safety and control to the next level of sophistication, something we call Level 3 Medication Safety.

We are continuing this trend with our next set of innovations. In the third quarter, we began shipping our latest version of software, Omnicell 14, and then first installs were live within two days. 14.0 gives our customers enhanced operating room and a suite of solutions, and introduces new proprietary Anywhere RN technology. Anywhere RN significantly enhances nursing workflow, allowing Omnicell systems to be managed from virtually any computer station in the hospital. We've received positive feedback from nurses using 14.0 who believe it improves patient safety and reduces medication errors.

During the third quarter, we also announced that Barnes-Jewish Hospital, the largest hospital in Missouri, and an institution consistently included in the top 25 of the US News and Report's honor roll of hospitals, standardized on our OptiFlex point of view supply system for the operating room and cath lab. Barnes-Jewish Hospital will be the first of the BJC health care system to install the OptiFlex solution. The 1,250-bed hospital was attracted to our advanced solutions, including the integration of physician preference items. OptiFlex enables physicians to quickly and efficiently access the medical devices they require for critical cases, while at the same time increasing charge capture rates and improving hospitals' revenue cycles. Barnes-Jewish Hospital has been an Omnicell customer for ten years and is a great example of how our current customers continue to expand the automation of their management systems with Omnicell.

Looking forward, I'm optimistic about our opportunities to partner with new and existing customers. We continue to see a cautious economic climate, but I've been encouraged to see several large sales moving forward. We believe that the health care portion of the federal stimulus package and the pending health care reform will increase the need for cost-effective solutions, sufficient workflows and improved safety, which we believe will drive greater adoption of our solutions.

We continue to maintain high levels of customer satisfaction and loyalty, and we believe our solutions are important components of safety in health care 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 more clarity about health care reform measures. But I'm confident that our solutions are smart choices for hospitals, and we will remain important elements of hospital safety and efficiency management.

Rob, for some guidance?

Thanks. The third quarter results allow us to confirm our expectations for the full year of 2009. We expect 2009 revenue to be between $208 million and $213 million, and we're now comfortable with the upper to middle end of that range. We expect $0.34 to $0.38 non-GAAP EPS, excluding stock comp expense and excluding the one-time restructuring charge we booked in Q1 2009. These profit expectations assume an expected tax rate of 40% on GAAP earnings in Q4 and no material change in interest rates.

We continue to expect backlog to be consistent with our guidance of $110 million at the end of 2009, depending upon the timing of several larger deals in our pipeline. It is still early to tell how the market will shape up in 2010, but we expect revenue to return to growth, probably in the single-digit range, as the economy recovers.

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

(Operator Instructions). Our first question will come from the line of Steven Crowley.

Good afternoon, gentlemen.

Hi, Steve.

A couple questions for you. In terms of the--there's been some banter about pricing environment out there for systems like the ones you sell. Can you give us a little commentary and color about the environment if there have been any changes and relative to historical environment?

Well, we really haven't seen any change to the historical environment. There's always price competition in the big deals, the conversions, the big new green field deals, but overall our product margins have stayed relatively consistent through time, and we see it kind of being about the same.

And in terms of those competitive conversions, if I heard you correctly in your prepared commentary, you spoke to a little bit of a quirk versus historical norm this quarter, but a return to more normal historical statistics as we move forward. Is that correct?

Yes. We have seen some of the business shift towards these larger deals as the economy continues to kind of go along at not a great improvement state. And with more of our business in those deals, it's just more of our business is subject to some timing risk. We see a very good pipeline of large transactions that are very late stage in the sales process, and we expect for the foreseeable future that we'll be in kind of a consistent amount of competitive conversions and new deals as we've seen in the past. But I do believe that we'll see fluctuations quarter to quarter as we always have. This has ranged anywhere from 17% that we saw this quarter to almost 50% of our business in any one quarter.

That's helpful. I certainly noticed that you made some nice progress with getting receivables down and DSO back towards the ranges you talked about in earlier quarters. Do you still anticipate that you can get back in the 80-to 90-day range in the not-too-distant future?

Yes, we do. Our year-end forecast for DSOs is in the 80-to 90-day range. We haven't seen a lot of customers that are unwilling to pay or unable to pay because of the economic conditions. Hospitals always pay slow, but they do tend to pay. We believe that the overall transitions that we've had with our leasing partners, we've got that working out of the system and we think we'll get back to historical ranges, and we're still on the same path as we talked about last quarter.

And one last question from me. In terms of international, you had some encouraging things in developments this year. I think you talked about still on path for 5% of orders to be international. How should we think about next year or the next couple of years, and what kind of percentage international could be of your order book? Thanks for taking my questions.

We're very encouraged about the international business and the awareness of medication safety that's developing outside the United States, but it is a long tender process in almost all of these geographies, and it tends to be anywhere from a year to two years to get through that process, and then there's the installation process afterwards. So we expect it to grow. We're optimistic about it. But it will take time for it to develop.

Thanks again.

Our next question will come from the line of Glenn Garmont.

Thanks. Good afternoon. Just a couple of questions, Rob. First with respect to the guidance. Reaffirming the full year implies a decent range for Q4. Does that just speak to some of these larger deals and the uncertainty in terms of when they might close? And then I guess also related to guidance, historically you've given us a bit more forward-year guidance on your third quarter calls. Should we expect a bit more maybe with your fourth quarter earnings at this point, or are you thinking about maybe doing a separate release and call for your 2010 outlook? And then finally on the cash flow, I was just wondering, cash continues to build nicely. If you could update us there in terms of when we might see you deploy some of that cash? Thanks.

So we'll give full guidance for 2010 during our fourth quarter call. We have in the past years at times we've given guidance on the full year at this point, and other times we've given our full guidance in January. With the economic conditions being what they have been and the recovery appearing to have started but unemployment still being high, there's still a lot of cautiousness among our customers with their capital purchases, and we'd like to see how that pans out in the fourth quarter. We do have, Glenn, as you mentioned and I had said in the call, several larger deals late stage in the sales process. And it's always a little difficult to tell exactly when those are going to complete and going to close. As you know, we don't do anything particularly special to try to make deals close earlier. We try to work with customers on their timetable and let them happen as natural as possible, and that's what we're doing now also. So we expect them to close in the next few months, and we expect them to be in the fourth quarter. But they could easily happen in January, February. And as far as cash goes, we did have quite a large pickup in cash as we brought down the receivables balance. The collections engine was working well. I think we've got our relationships worked out and understand the process with our leasing partners now, and that's working. It's not easy, I wouldn't say, but it is working. And we do expect cash to continue to increase. As you know, I mentioned before, we've got a business development team that is examining a pipeline of potential acquisitions at any point in time, and when we get to the point where we've got a great product line to add in and augment our existing product lines, we'll be moving on that.

That's great. Thanks, Rob.

Our next question will come from the line of Newton Juhng.

Good afternoon, gentlemen. This is Eugene actually standing in for Newton. I have two quick questions. Q3 tends to be a seasonally stronger quarter for your government business. Can you just share with us how much contribution you had from that side of the business?

Yes. The government business was not as strong this quarter as it had been in prior years. Obviously, it's contingent upon where the government prioritizes their budget. We see a lot of opportunity in the government hospitals. We're talking federal government, VA hospitals, Indian health, Department of Defense. Still a lot of opportunities. Still a lot of penetration to take place in that area. But this particular Q3 was weaker than it has been in prior years.

Great. And the last one, this is on a DSO issue. I know you guys conceptually came down, but do you guys actually put out a number for the DSOs this quarter?

The DSOs are 100. They're down from 118 last quarter.

Great. Thanks for the questions, guys.

And our next question will come from the line of Leo Carpio.

Gentlemen, can you hear me?

Hi, Leo.

Hi, Leo.

Hi. Good afternoon. Yes, I have a couple of quick questions. First regarding the 2010 guidance, you indicated it was single digits. Could you provide any more color if that's mid single digits or high single digits? And then the second question is regarding the hospital capital spending environment. How do you see it now versus let's say six months ago in terms of are hospitals--the mid-sized hospitals particularly, are they opening up their purse strings and looking at your systems, or are they still constrained and looking at the economy and the unemployment rates?

Leo, this is Randy. I think it's really hard to tell what exactly is going on. I think most people would affirm that we're off the bottom and we're slightly improving every quarter, but how rapidly that changes next year is really hard to call. But I do see our pipeline continues to expand. It's just the timing on when triggers are going to be pulled to release capital in hospitals is a very individual kind of thing. And so we're cautiously optimistic, but I think for now the most we can see is single digits until things improve, and I think it will be a slow rebound.

And then in terms of the tax benefit you saw this quarter, what was the event?

We had analysis done on the deductibility of meals, company meals, which is a pretty mundane thing, but there's different amounts of deductions that can be taken, depending upon the type of meal. And found opportunity where we had taken overly conservative positions in the past.

Okay. Thank you.

Our next question will come from the line of--excuse me. (Operator Instructions). And our next question will come from the line of Gene Mannheimer.

-- taking the questions. Just a couple. First of all, pleased to hear that you mention there's some large deals that are in late stages. Can you tell us what level, I guess, of confidence you have that those will close? For example, are you the vendor of choice and in contract negotiations, or are you in the finals? Just how should we think about that going forward? Thanks.

Gene, you can never call something completely closed until it's finalized and the order is booked, but we're very confident in these particular deals because they are late stage in the process, and as you know the sales cycle for these larger deals can take up to two years. So both the customers and us have quite a lot invested in the process at this point.

Okay, very good. And with respect to the gross margin on the product line, it looks to be down about 100 basis points year to date over the prior year. I think you mentioned or attributed that to some lower margin in international. Was there any trend toward more hardware this year due to Pharmacy Central or other events that could be attributing to the slightly lower margin?

No. It is actually driven by the international mix being up. We installed, as Randy said, most of the deals in London now at the three hospitals there, and we installed or are installing two hospitals in Singapore, which were all fairly large transactions and affect that mix. The Pharmacy Central product line does carry an overall lower gross margin because it's OEMs, but it's not materially affecting the margins of the company this year.

Good deal. And last thing, in terms of the sales organization, are there any changes in head count materially? And do you feel that you have the right coverage at this time to capture all the opportunities in the marketplace? Thank you.

We have kept our sales force at relatively the same head count with the same management structure and the same coverage structure. Those are long-term relationships that we don't like to disturb. We like to foster and grow them. Like any company, we have some turnover. We have I think four or five sales positions open right now in the sales team in various parts of the country, but that's nothing unusual.

Thank you.

(Operator Instructions). And we do have one more question from the line of Steven Crowley.

Follow-up question for you, Rob. We talked about the significant increase in cash position. In terms of interest income, it was a pretty low number this quarter. Was that anomalous at all? And how should we think about the kind of interest income you're able to generate on that big cash position?

We have our investments in the safest places right now, and the interest rates are pretty darn small, so we're not getting much return on our cash balance at all compared to where we were a year ago or a year and a half ago. We did have some foreign exchange, a little bit of negative impact from foreign exchange, with a couple deals in Canada that affected that line, and you're seeing that in that other income interest income line. So that's causing it to be a little bit lower than in the past. But overall, we're seeing the same low interest rates that pretty much everyone else is seeing on their investments.

It would appear if we normalize that number, it should be closer to the numbers you've been generating the last couple of quarters, maybe $200,000 a quarter, or is there something flawed in that thinking?

Yes, that's right.

Okay. Thanks for taking the follow-up.

And our next question will come from the line of Steve Halper.

Yes, hi. Just a follow-up on the last question. If you look at your cash balance, it's obviously pretty significant. Randy, what's the thought to looking at some additional share repurchase at this point?

We think a better use of cash is to look for business development and opportunities to add to our platform, and that's what we have. We've added to our staff over the last year a really top-notch BD team. And we're looking for the right opportunities to add on to our platform to expand and bring good products and technology to our customers, but we're going to be patient and get the right ones. We don't have anything in the slot right now, but we think that's the best use of cash right now.

So by definition, would you be open to buying a smaller company and taking on some near-term dilution? Because that's probably the logical path.

I don't like to do that, but sometimes that's the only choice you're given. But if it makes a lot of sense. It would have to make a lot of sense for the company and make a lot of leverage that we could use with our marketplace. We certainly would look at those pretty hard.

Great. Thanks.

At this time, we have no further questions. Mr. Lipps, do you have any closing remarks?

Yes. I know the times are tough, but we remain profitable, cash flow positive. And we continue to invest in our great platform. It brings great solutions to our customers. We're going to stay on that path. We will not be in this economic situation forever, we don't believe, and as the macroeconomics change, we stand ready and prepared to continue our growth. Thanks for joining us today.

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