Omnicell Inc (OMCL) 2009 Q4 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 Fourth Quarter Earnings Conference Call. (Operator Instructions) Thank you. I would now like to turn the call over to Mr. Rob Seim, the CFO of Omnicell. Sir, you may begin your conference

Thank you. Good afternoon, and welcome to the Omnicell 2009 Fourth Quarter and Year-end Results Conference Call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO. You can find our results in the Omnicell Fourth Quarter and 2009 Year-end 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, as well as more recent reports filed with the SEC. Please be aware that you should not place undue reliance on any forward-looking statements made today.

The date of this conference call is January 28, 2010. 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. Finally, this conference call is the property of Omnicell Incorporated and any taping, other duplication, or rebroadcasts without the express written consent of Omnicell is prohibited.

So I'll start the overview of the financial results for the quarter and fiscal year today. Randy, who will give some of the quarter's business highlights. I'll then finish up with our guidance for 2010 and after that we'll open the call to your questions.

So the fourth quarter was a very good quarter for us, and a strong finish to our fiscal 2009. Revenue and profit both exceeded expectations. Order rates, particularly with large customers, came in strong as expected. We added $23 million to our cash balance and day sales outstanding ended at 71, down 29 and back to our normal level.

Our newest advanced medication and supply management solutions continued to drive increased customer interest. We're proud to have closed orders with some of the finest healthcare institutions in the United States and our volume of new orders met our expectations. The strong mix of large orders in the quarter drove our bookings from new and competitive conversion customers to 45% of our total orders in Q4. About three-fourths of those new orders are competitive conversions and one-fourth of the orders are from green field customers who have never installed automation before.

We saw our orders from new and competitive conversion customers fluctuate from quarter-to-quarter during 2009 and for the full year we received 38% of our orders from these new customers. This compares very consistently with 33% from new and competitive conversions in 2008 and forms a very steady trend of orders from new and competitive accounts. This has been between 33 and 40% for five years in a row.

As we expected, international business was over 5.0% of our orders in 2009, with new business in the UK, Singapore and Sweden helping to drive the growth outside the U.S.

Product backlog, which is the value of firm orders that are not yet fully installed, was $114 million, $4.0 million higher than our guidance of $110 million. We maintained backlog levels consistent with our customers' desires for installation timing and our backlog level will give us good visibility for revenue volume for the next two quarters.

Now I'd like to discuss our fourth quarter and full year 2009 financial performance. I'll first discuss our results in accordance with Generally Accepted Accounting Principles, followed by some pro forma measurements.

Revenue for the fourth quarter of fiscal 2009 was $54.7 million, down $7.3 million or 12% year-over-year, but up 1.0% from the third quarter of 2009. For fiscal 2009, revenue was $213.5 million, down $39 million or 15% from 2008. The reduction year-to-year is consistent with the guidance we gave a year ago and which we believe is a result of general economic conditions affecting hospital capital purchasing.

Net earnings after taxes were $0.6 million or $0.02 per share for Q4 2009, which compares to net earnings of $3.3 million, or $0.10 per share in Q4 2008. Net earnings for the full year of 2009 included a one-time charge for restructuring taken in Q1 2009 and stock compensation expense and they were $0.4 million or $0.01 per share. This compares with net earnings of $12.7 million or $0.38 per share in 2008.

Now I'd like to cover our non-GAAP results and the only adjustments to GAAP results are the exclusion of one-time restructuring charges, certain R&D tax credit adjustments and stock compensation expense. The one-time restructuring expense was incurred in Q1 of 2009 and totaled $1.5 million net of tax.

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

We use these adjustment statements in addition to GAAP financial statements and we feel it is useful for investors to understand the 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 to the website.

Our Q4 2009 non-GAAP net income was $3.4 million, or $0.11 per share, which exceeded analyst consensus by $0.01 per share. Our Q4 2009 non-GAAP net income was down $2.1 million, or $0.06 per share, year-to-year from Q4 2008 non-GAAP income of $5.5 million or $0.17 per share, driven primarily by the reduction in revenue. Full year, non-GAAP net income was $12.1 million, or $0.38 per share, consistent with the high end of our guidance range.

EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, was $6.1 million for the fourth quarter of 2009 and $22.3 million for the full year 2009.

We continued to generate cash from our operations and drive down our receivables balance. Our cash and short-term investments grew to $169 million at the end of Q4, an increase of $23 million from Q3 2009 and an increase of $49 million for the full year. The Q4 cash increase included $17 million in benefits from operating assets and liability improvements and $6.0 million of contribution from EBITDA in the quarter.

As I mentioned earlier, day sales outstanding were 71 and we expect DSO to stay in the 70 to 80 day range. Our inventories were $10 million, consistent with the previous quarter.

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

Good afternoon and thanks for joining us today.

Over the past four consecutive years, Omnicell has installed a new customer, on average, every two business days and displaced a competitive installation every four business days. In 2009, we added some of the finest hospitals and healthcare systems in the world to our customer base and in the fourth quarter we received first orders from multiple marquee institutions across the United States.

Earlier in the quarter we announced that the Carolinas Health System, a 32-hospital organization with 6,000 beds in North and South Carolina, and the third-largest nonprofit public system in the nation, signed a contract and placed orders for 11 of their hospitals.

Later, we announced that CoxHealth, a top 100 integrated healthcare system in Springfield, Missouri, signed a contract and placed orders during the quarter. Cox plans to install a variety of our proprietary supply and medication management solutions, including SinglePointe and Anywhere RN.

New York Presbyterian, a marquee teaching institution that includes the Columbia University Medical Center and the Weill Cornell Medical Center in New York City, placed orders and began installing in the fourth quarter, moving their workflows to our SinglePointe solution. New York Presbyterian is a 2200-bed, five-hospital system that is consistently one of the top rated hospitals on U.S. News & Reports honor roll of hospitals.

This month we announced that FirstHealth, an integrated health system in North and South Carolina, also placed orders in Q4 that include our SinglePointe solution.

All of these orders were competitive conversions, driven by our proprietary industry-leading technology and industry reputation for customer partnerships. Customers were motivated to switch to a solutions provider that addresses the challenges of delivering medications and supplies in the complex hospital environment.

Our customers also continue to recognize the increasing value that Omnicell's solutions bring to their operations. In Q4, Massachusetts General, another U.S. News & World Reports honor roll hospital and a longtime Omnicell customer, began a migration from first- and second-generation systems to our third-generation SinglePointe system.

In addition, the ROI operational division of the Sisters of Mercy Health System, a 19-hospital integrated delivery network serving five states with 4,000 beds, signed an exclusive agreement for Omnicell's supply systems this month. ROI, which stands for "Resource Optimization and Innovation", is the procurement division for Sisters of Mercy. It is one of the healthcare industry's leading supply chain management organizations, with more than $670 million in contract purchasing volume and more than 1,400 members. We are proud that they view Omnicell's supply solutions as an integral part of their advancing cutting edge practices and healthcare supply chain management.

In addition to positive customer reaction to our steady expansion of patient safety and workflow management solutions, we've also been recognized consistently by third party organizations for our contributions to healthcare. At the American Society of Health System Pharmacists annual conference in December, Omnicell was awarded the "Best in Class Award for Automation Dispensing Systems" for the fourth consecutive year by KLAS, the prestigious third-party research firm that monitors the performance of healthcare vendors.

Our successes in the fourth quarter marked the completion of the long customer decision processes where our solutions were thoroughly tested against customer needs and competitive solutions. As we said in our third quarter 2009 call, we expected these large customers to close in Q4 and we think they are key indicators that the marketplace is beginning to emerge from the economic constraints that have caused customers to postpone capital equipment purchases over the last two years.

While large customers have begun to purchase, the smaller hospitals are still operating under stricter financial constraints and we continue to see sales to these customers lower than what we have seen in previous years. We believe the market will return to growth in 2010 and longer-term, we believe industry growth will return to historical norms.

We believe the timing and pace of this growth to return will depend on many factors, including improvement in unemployment rates, clarity on healthcare reform and increased returns on hospital investment portfolios.

We're proud of our track record of bringing what we believe are the safest and most efficient solutions to hospital institutions of every size and type. We believe that as economic conditions continue to improve and hospitals begin to expand their capital budgets, we are well positioned to solve their safety and workflow efficiency needs.

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

Thanks, Randy.

So the return to growth Randy mentions includes the large customer wins we saw in Q4 2009 and the healthy pipeline of more new account business in 2010. We expect our historical trend of new business to continue with good opportunities in the United States and in the emerging international market.

We have continuously grown our market share while maintaining the loyalty of existing customers. In fact, we've won over 20 new customers for every customer we've lost over the last two years. We don't expect a change in this trend.

We do expect the larger sales opportunities to continue representing a significant portion of bookings, which will cause the percentage of our orders from new and competitive conversion customers to fluctuate from quarter-to-quarter. To a large extent, the rate of our revenue growth recovery in 2010 will depend on how much caution remains in the buying patterns of existing customers, U.S. government and smaller new customers.

Overall, we expect our booking rates to grow between 5.0% and 10% during 2010. But, since our customers take between a month and 12 months to complete installations, we don't expect all of that order growth to become revenue in 2010. Part of the order growth will remain in our ending backlog and we expect backlog at the end of 2010 to be between $118 million and $125 million, up between 4.0% and 10%.

We expect 2010 revenue to be between $218 million and $225 million, up 2.0% to 5.0%. And we expect non-GAAP earnings between $0.40 and $0.45 per share, excluding stock compensation expense, which is growth between 5.0% and 18%. And these profit expectations assume an effective tax rate of 40% on GAAP earnings and no material change in the interest rates.

In addition, many of the orders we took in Q4 are not scheduled for installation right away, so we expect Q1 2010 revenues to be between $52 million and $54 million.

Operator, now I'd like to open the call to questions from people on the phone.

Yes sir. (Operator Instructions) Steven Crowley, Craig-Hallum Capital Group

Good afternoon, gentlemen.

Good afternoon.

Hey, Steve.

A couple questions for you. You clearly talked about an environment that's improving here that seems to be reflected in a little better year-end backlog than you had guided to.

In terms of the velocity of how you consume that backlog, is there a phenomenon out there that's discernable as to how customers are accepting delivery in general? I know you just talked about the first quarter, but with increased confidence and more purchasing, is the velocity of your backlog changing at all? Do you think it is likely to change?

No and you know, even during the economic slowdown we really didn't see a big change in how fast customers would be installing. We have the same sort of dynamics that we've had in the past. Large and new customers take longer to install, generally. Smaller customers and existing customers who are adding on take less time to install and we haven't seen a big change in that.

We do have quite a few, as Randy went through and as we've announced, quite a few new customers and quite a few of those are large and so they have to go through some planning cycles before their installations take place.

Now, in terms of the competitive landscape, the number of wins, the prestigiousness of the customers in those wins, some of the metrics you gave us seem to answer the questions that have been circulating about your ongoing ability to be successful gaining market share and winning customers. The other concern that's been circulating - and I just want to be up-front with it, because it's something I'm dealing with - is the question about whether pricing is changing in those deals. What can you tell us about that?

Well, the large deals, those types of customers always command the best prices, but overall, we have not seen deterioration in our margin on our new bookings. We do see some mix change amongst our products and a little bit more mix of international business and as you know, the international gross margin is less because our distributors carry some of the costs that we would normally carry. So we charge less to the international distributors. But (inaudible - multiple speakers) --.

Is your operating margin on that business relatively consistent?

The rest of the business is relatively consistent.

No, I mean on that international business that carries lower gross margin. Those distributors are doing more of the work below the gross profit line. So does it shake out as being relatively normal operating margin business for you, if we could look at it that way?

I'm sorry, I didn't hear your whole question the first time. Yes. The bottom line margin on international business is about the same as the rest of our business, but yes, it just hits our P&L a different way, because the distributors do installation and a lot of the service themselves and a lot of the selling.

Okay, last question from me, I'll hop back in the queue. In terms of your pipeline, you talked about it being healthy. Can you give us a flavor for other characteristics or other features of that pipeline? Is it skewed towards international? Is it still skewed towards large customers or are you seeing more small stuff start to populate the pipeline? Thanks for taking my questions.

The pipeline in our business in general has shifted last year more towards the large customers. We think the smaller community hospitals are more hard hit by the economic conditions, but we do see a little bit of a rebound with those customers in our pipeline.

Newton Juhng, BB&T Capital Markets

Thanks very much, obviously very good to see the marketplace improving. Wanted to ask you a quick question on the Carolinas deal. Obviously you've gained -- you had a foothold with CMC Northeast and you've expanded that quite a bit. Can you talk to us a little bit about the process of how you were able to break into that system? Because I knew that most of them were running Pyxis. And then, beyond that, what your plan is for the rest of the hospitals in that system in terms of trying to go after them?

Yes, Newton, this is Randy. As many of the IDNs that we're able to win, it starts with an initial account that has a great Omnicell experience and that happened in this case.

We had one hospital that selected us early on in the process sort of a test case to see how Omnicell responded into the marketplace and then before they would consider changing the whole system out. And through that one experience or a smaller number of hospitals and through our technology that we offered, we they made us -- they felt comfortable moving their entire group to us.

And as many of our large customers are, when they switch to us, they probably have some immediate needs and then they have some of the hospitals or have different terms on their leases, or when their technology might age off. And so, as that usually takes two or three years before all the hospitals in the group finally move over to our technology, just to make financial sense for both them and us as we convert the entire group over to one standard. And so I think we're about half way through with this group and over the next two or three years we'll complete that transaction totally to an Omnicell hospital.

And Randy, in terms of those leases with other vendors, are you still in the game of maybe towards the end of those leases willing to buy them out in order to try and get them onto the system, your systems that much faster?

Well, it just makes -- each hospital is sort of an individual situation and sometimes they just might have 20 systems and they might have two with leases and the rest are pretty much out. So generally it's not a large -- it's not every single system is at the same level of lease, so we will take some of the leases and buy those out as an additional discount, one-time up-front. But generally the decision is made based on technology and then hospitals, these larger groups have a three-four-year plan really to rollout the total conversion, because they know they just can't switch it all at once.

Got you. And then, Rob, in your comments you mentioned industry growth rates, hoping that it will return to historical norms. Could you just remind us of what you see as the industry growth rate historically and kind of give us an idea where that number is again?

Well, historically, the industry has been growing in kind of the 10% to 15% range. 2006 and 2007 the industry grew a bit faster than that. We were actually growing pretty consistently in the 20% range. We believe with our advanced solutions that we should be able to get back to where the industry was growing and maybe a little faster.

Got you and look forward to that. Thanks.

Glenn Garmont, ThinkEquity LLC

Thanks, good afternoon, just a couple of questions. I guess, Rob, first on your -- my sort of standard question here on the cash balance. I mean, just remind us what your priorities are there and can we expect maybe you to deploy that cash, or some of that cash, in 2010, either on buybacks or maybe give us a sense for what you're seeing on the acquisition front?

Yes, well we certainly have, as we've said before, staffed an M&A team here in Omnicell and we are actively assessing acquisitions. We do carry the cash balance to be competitive in the acquisition marketplace.

We have also tried to make sure that we've got ourselves covered if there's any problems with leasing partners or if we have to take leases in-house. We haven't had to do that and we don't think we're going to need to do that, but there's kind of a safety measure there, but our primary focus is to utilize the cash through acquisition and we are active.

Okay and then secondarily, with respect to your 2010 guidance. It sounds like you're, I guess, anticipating some -- it sounds like you're, I guess, anticipating some gradual improvement in the economy and in the sort of buying patterns of hospitals. But can you give us a sense, I mean, if -- does unemployment have to change meaningfully?

I mean, is there something that needs to happen relative to the state of the economy currently for you to hit those numbers? I guess what I'm trying to get at is if we do start to see some improvement maybe in the back half of the year, is that potential upside relative to what you've baked into this forecast?

Well, certainly, as Randy mentioned in the prepared comments, there are some factors that make the marketplace more favorable for us and probably any other capital equipment provider. In healthcare, having the unemployment rates reduce and more people insured is a good thing for healthcare providers and will help their cash flows. Some return in investment income will certainly help them. So those general economic changes would probably improve our business.

Okay. That's helpful. Thanks.

Sean Wieland; Piper Jaffray & Co.

Hi, thanks. It's Sean Wieland. So, with respect to hospital CapEx spending, do you think we're out of the woods?

No. I don't think we're out of the woods, Sean. In fact, as we said, the smaller hospitals are still pretty constrained. I think that it's probably going to be a gradual return to more normalcy. In addition to the couple things I just mentioned in the last question, more clarity on healthcare reform will certainly help the situation. So there's quite a few things that could still improve substantially and I don't think that hospitals are back to normal by any stretch.

Okay. So where do your P.O.s stack up in the priority list of your customers?

Well, we've found that our prioritization on the capital list tends to be pretty good, tends to be pretty high. As I've said before, if they're doing any physical expansion - brick and mortar - or if they're implementing a very large IT system, they're going to continue with those and those get the highest priority. But we tend to be right behind it and very high on the patient safety list.

The thing that is, of course, slowed down decision-making processes is just hospitals reprioritizing that list or taking a look at it, stopping all capital purchases while they decide what they are going to spend on. And usually, when that process is done, we're still on the list.

Okay and I'll squeeze one more in. Why was R&D down sequentially?

Consistent with accounting guidelines, we do take some portions of our R&D spending and capitalize them, put them on the balance sheet and amortize them over the revenue stream. It generally is that portions when spent on R&D, when we're past technological feasibility of our software and we're in some sort of test with our customers, and that can make the R&D fluctuate a little bit. Gross spending was pretty consistent.

Did you give that number? I can probably back into it. But what is that number, the gross number?

Capitalized software, the amount of R&D that we capitalize from any quarter ranges anywhere from nothing to it can be up to $1.0 million in a quarter.

Okay. All right. Thank you.

Gene Mannheimer, Auriga USA.

Thank you and congrats on a good quarter. I guess two things and this is, I guess, asking confirmation of an earlier question. But if we look at the gross margin it took a slight hit there and I'm just wondering, is that the result of greater discounting relative to competitive swap-outs, more from international sales or a combination of those?

It's none from the greater discounting and it's all from product mix and the international mix.

Okay, okay, Rob, good. And then with respect to some of the deals you've been announcing, certainly very impressive institutions, good magnitude. My sense is that these deals have been worked, so to speak, for a long time and I'm wondering if there are deals of similar magnitude in the pipeline today that could have the benefit of closing in the next couple of quarters? Potentially providing upside to your outlook? Or, put another way, does your current guidance make assumptions for any of these significant IDN wins? Thank you.

Well, Gene, as you know, we've had some pretty significant IDN wins just about every quarter for the last four-to-five years and you're right. They do take a long time to close. The sales cycle on those can range and can easily be a year to two years. We do, when we look at our forward-looking pipeline, make assessments on those type of transactions that are in the pipeline.

Our pipeline looks very similar to how it did in the past, in terms of the fact that there are several of those large deals in the pipeline, maybe even a little bit stronger mix of them. And we do make an assessment on how many that we think we'll close, so they're contemplated in our forecast.

To the extent that they all close, we don't normally win them all, but if we did that would be great and probably have some upside and to the extent that they don't all close there can be some risk.

Makes sense. Thank you.

Leo Carpio, Caris & Co.

Good evening, gentlemen. I have a couple of quick questions, first one regarding the hospital capital spending environment. Sounds like you're looking for a gradual improvement throughout 2010 and besides the unemployment rate, what other factors are you thinking are going to help you to improve that outlook?

Well, Leo, I think that there is some easing in the fears that unemployment was going to increase and the payor mix was going to continue to change. I think hospitals have also taken some cost cutting measures that they really haven't taken in other economic downturns to help them control their spending rates and got them back to some operating income situations that are more favorable, allowing them to spend some money on capital. Unemployment hasn't continued to go up. That's good for us. But we're kind of waiting on any substantive improvements, but when those happen I think hospitals will feel more and more comfortable.

And the regarding the small hospital market, is it a matter of just simply the unemployment rate or is it also credit markets that are pressuring them or the uncertainty over healthcare reform? Or was it a mix of all of the above?

Yes, certainly all of the above, but also community-based hospitals more predominantly have endowments producing some income for them, or had in the past, and those endowments really haven't been producing much income. So, as the economy improves, I'm sure interest rates will go up and they'll start seeing some returns on those also.

Okay. All right, well thank you.

Steve Halper, Thomas Weisel Partners

Yes, hi. On those larger deals that you signed, is there any sort of shift between outright purchase and leasing? And then, just kind of generally across the whole customer base, has there been any change in trend between purchase and lease?

Yes, Steve, the larger customers tend to be a little bit richer in resources and tend to actually purchase more frequently than the smaller or community-based hospitals do. So, as our mix has shifted a little bit more towards larger customers, we've seen a little bit higher purchase base and a little less lease base. That fluctuates quarter-to-quarter, of course, but I think it's more oriented to the type of customer and less oriented to anything else.

Right, right, right. Great, thanks.

Steven Crowley, Craig-Hallum Capital Group

Hey guys, just two quick follow-ups that are more on the accounting detail stuff. Rob, interest income in the quarter was again a bit below what we anticipated. We had talked last quarter that interest income would have been about $200,000 in Q3, but there were some other expense items that hit the interest income line. Did that happen again with the $91,000 number in the fourth quarter? Or was that just a function of terrible interest rates?

It's certainly a function of terrible interest rates. I think that's a good description of where we are in the marketplace. But we do have our investments in the safest type of vehicles. Capital preservation is certainly high on our investment policy. We're not gaining very good interest rates, certainly, through that process and neither is anyone else in the market.

So what should we think about in terms of the kind of interest rate to work against that big cash balance?

Yes, our interest is between 20 and 30 basis points right now.

And last question. In terms of your CapEx plans for 2010, what can you tell us about that? Thanks again for taking my questions.

We are not in a very capital-intensive business ourselves. We did, in the end of 2008 and in 2009 we made investments in our own IT systems, upgraded them pretty substantially. Those are predominantly behind us. Maintenance and IT is about the only thing that we spend, a little bit of fit-out of facilities. So you can think of our capital expense typically in the range of about $4.0 million, $5.0 million a year.

Mr. Lipps, do you have any closing remarks?

Yes, thank you. We've had some very big wins this quarter that show the value we bring to hospital workflows and patient safety. Our existing customers remain loyal to our solutions and our pipeline contains many more opportunities. We've exceeded our financial expectations and we're well positioned for 2010 and beyond. Really appreciate you all being on the call today. Thank you.

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