Omnicell Inc (OMCL) 2010 Q1 法說會逐字稿

Good afternoon. My name is Trinity and I'll be your conference Operator today. At this time I would like to welcome everyone to the Omnicell First Quarter earnings call.

(Operator Instructions)

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

Thanks, good afternoon, and welcome to the Omnicell 2010 First Quarter results conference call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO. You can find the results in the Omnicell First 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 24, 2010, 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 April 26, 2010, 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.

Finally this Conference Call is the property of Omnicell Incorporated and any taping, other duplication or rebroadcast without the written consent of Omnicell is prohibited.

I'll start the call today with an overview of the financial results for the quarter, followed by Randy who will cover some of the quarters business highlights. I'll then discuss our guidance for 2010 and after that we'll open the call to your questions.

Results for the first fiscal quarter of 2010 met our expectations and we're on track to our previously stated annual guidance. Our pipeline is strong and we added $11 million to our cash balance. We've begun many of the large-order installations we announced last quarter and those are going smoothly. Orders for Q1 were in line to maintain our year-end 2010 backlog guidance of $118 million to $125 million.

Of our orders in Q1, 26% were from competitive conversions and from greenfield customers, or customers who have never installed automation before. About two-thirds of those orders were from competitive conversions. The percentage of our business from new and competitive conversion customers fluctuates from quarter to quarter, but we believe new and competitive conversion orders will be within our historical annual range of 33% to 40% of our business for the full year of 2010.

Revenue for the first quarter of fiscal 2010 was $54.2 million down 1% from the fourth quarter of 2009 and up 4% from the first quarter of a year ago. Net earnings after taxes were $1 million or $0.03 per share for Q1 2010. This compares to a net loss of $1.9 million or a loss of $0.06 per share in Q1 2009, which included one-time restructuring charges totaling $1.5 million net of tax.

Now I'd like to cover our non-GAAP results. The only adjustment to GAAP results are the exclusion of the one-time restructuring charges in Q1 2009 and 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. And since stock compensation expense is a non-cash expense, we use financial statements internally that excludes 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'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 Q1 2010 non-GAAP net income was $3.1 million or $0.09 per share, up $1 million or $0.02 per share year-to-year from Q1 2009 non-GAAP income of $2.1 million or $0.07 per share. EBITDA, or earnings before interest, taxes, depreciation, and amortization, was $5.8 million for the first quarter of 2010, up $1.3 million or 30% year to year.

We continue to generate cash from our operations and drive down our receivables balance. Our cash and short-term investments grew to $181 million at the end of Q1 2010, an increase of $11 million from Q4 2009. The Q1 cash increase was driven by $7 million of contributions from operations and $4 million from stock option exercises of stock purchases under our employee stock purchase plan. The cash generated from operations includes $1 million of reductions in accounts receivable.

Day Sales Outstanding were 68, down 1 day from last quarter, and our inventories were $10 million consistent with the previous quarter. Now I'd like to turn the call over to Randy to provide an update on the business.

Good afternoon. We're pleased with our results this quarter and I'm happy to see our new solutions continuing to be adopted in the marketplace.

Since our November launch, we've made the first installations of our Anywhere RN software that allows management of our remote dispensing systems from virtually any workstation in the hospital. As with SinglePointe, we are seeing higher customer satisfaction and additional orders. SinglePointe is our proprietary software solution that allows up to 100% of patient medications to be securely stored, managed, and tracked by our automation systems, reducing the inefficiency and safety issues associated with misplaced medications.

Earlier in the quarter we announced that FirstHealth, an integrated health system in North and South Carolina, placed orders in Q4 that included our SinglePointe solution. We announced New York Presbyterian, a 2200 bed hospital system in New York City, signed a sole source contract with us and is implementing SinglePointe.

These marquee institutions are finding the benefits of the enhanced workflows SinglePointe brings to their operations, getting all the drugs close to the patient and reducing the time nurses spend trying to track down missing doses as well as reducing the risk of medication errors. ROI, a leading supply chain management organization, and an operating division of the Sisters of Mercy Health System signed an exclusive agreement for Omnicell supply systems in January.

Sisters of Mercy is a 19-hospital integrated delivery network serving 5 states with 4000 beds, which has been a long time Omnicell medication dispensing system customer. Their previous experiences with Omnicell medication management systems influence their choice to also move their nationally recognized supply systems to our solutions.

All three of these health systems are now in their implementation phases and already seeing the benefits of our products including increased efficiency and increased patient safety. Our solutions continue to gain acceptance worldwide as we are actively expanding our international footprint. I attended a presentation of a study by the Grenoble University Hospital in France at the European Association of Hospital Pharmacists Meeting last month showing that our solutions helped them reduce medication errors by 34% while significantly increasing personnel efficiency by freeing up nursing and pharmacy hours. They reported a significant improvement in nursing satisfaction and decreased annual drug costs by 51% on average per nursing ward.

This message is spreading to other EU nations as we have sold and installed more equipment in the UK and Spain in Q1. It's hard to tell how fast the international market will grow, but we think it could be up to 20% of our business in the next 5 years.

Another measurement of our success in providing solutions that our customers value is the continuing recognition by third party organizations such as KLAS, the prestigious research firm that monitors the performance of healthcare technology manufacturers. This past week, we learned that KLAS honored Omni Link Rx system with an award as category leader among medication order management systems. This follows the recent KLAS category leader award won by our Omni Rx Medication Dispensing System for the forth year in a row in the category of decentralized medication dispensing. These recognitions are especially gratifying because Clasp bases its awards on actual customer satisfaction and feedback.

Omnicell is also partnering to bring their latest technology to our customers. At the 2010 HEMS Annual Conference, we demonstrated emerging partnerships by showing some of our products in the Intel booth and co-marketing our virtual server offering with VMware. We also previewed the integrated medication work flow benefits of our new mobile medication management systems. We believe technology continues to differentiate our solutions and we continue to be a trusted partner and expert advisor in delivering technology innovation.

In the marketplace, we continue to see a cautious but improving capital spending environment at our hospital customers. We continue to see large customers purchasing more frequently. While the smaller hospitals are still operating under stricter financial constraints, we're seeing some improvement in their demand but still not at the levels we have seen in previous years. To ensure that all hospitals know about the patient safety features and cost savings potential of our systems, we have begun a new branding campaign across multiple forms of media, increased awareness of Omnicell among hospital decision makers. You'll see some of our new look and feel in the trade and business press and on our recently redesigned and more informative website.

As I said last quarter, we believe the market will return to growth in 2010 and longer term we're confident that industry growth will return to historical norms. We believe healthcare reform will have a positive long term effect on our industry as hospitals must focus on improving their efficiency and their quality of their outcomes. We believe that timing and pace of this return to growth will depend on many factors including improvement in unemployment rates and an increased return on hospital investment portfolios.

We're proud of our track record of bringing what we consider 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 work flow efficiency needs. I'll turn it back over to Rob for some guidance.

Thanks, Randy. The results of the First Quarter 2010 allow us to reconfirm our guidance for the rest of the year. Overall, we expect our booking rates to grow between 5% and 10% during 2010, but since our customers take 1 to 12 months to complete installations, we don't expect all of the 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 4% to 10%. We expect 2010 revenue to be between $218 million and $225 million. Up 2% to 5% and we expect non-GAAP earnings excluding stock compensation expense between $0.40 and $0.45 per share, which is up 5% to 18%. These profit expectations assume an effective tax rate of 40% on GAAP earnings and no material change in interest rates. Operator, I'd now like to open the call to questions.

(Operator Instructions)

Your first question is from Steven Crowley.

Good afternoon.

Hi, Steve.

A couple questions for you. First of all, in terms of your comments about many of the larger installations at new customers taking shape as anticipated, I trust that should bode well for some sequential increase in product revenue. Is that the right way for us to interpret that commentary?

Yes and I think that's consistent with the guidance that we've given. We did, as we announced in Q4 and the beginning of Q1, take quite a few big orders from several different marquee institutions and those installations have started. And most of those institutions have their installations scheduled over time as there's many hospitals, but we've got them all planned out and worked out with those customers and they've already begun.

So it sounds like those schedules have been pretty firm versus slippage on the installation targets?

Those schedules are pretty firm.

Okay, in terms of the margin profile, gross margin profile of products and services, the variation from our model was products were a bit stronger and services were a little bit weaker. Is there anything notable in those relatively minor variations that are worth talking about?

On products, we had a pretty strong mix during the quarter. We can be affected up and down a little bit on product margins, but we've been fairly consistent in the 52% to 54% range on product margins over time. Service margins can be affected by we mentioned before just the timing of customers that are on month to month, charges for their services, and also just the timing of spare parts usage and our ability to use refurbished parts as opposed to new parts.

Okay and then one final question and I'll hop in the queue. On international, in terms of the landscape there competitively, sounds like you continue to have some success but could you help us understand if there is a sizeable difference in the competitive landscape there, what kind of market share you're tracking, just paint a little picture? Thanks for taking my questions.

Well the primary competitor internationally is CareFusion just as it is in the United States. The international market, I think as we've mentioned before, is really just beginning. There's very few hospitals, there are very few hospitals that have adopted medication control systems such as ours. The ones that have adopted, though, are finding quite a few benefits from them and we certainly expect there to be a greater adoption curve going forward.

Great. Thanks for taking my questions.

Your next question is from Newton Juhng.

Thank you very much. Hi, guys. I did want to ask you, just with your comments on the small community marketplace customers, can you give us an idea where I guess they're at at this point in terms of, are they kicking tires and would like to sign but just don't have the ability to do so right now, or is it a situation where you're still trying to get in their minds to show what you can do and the benefits that you can bring them? I'm just trying to get a gauge for where you'd see the general customers at right now.

Well, Newton, this is Randy. I think what we've seen is a return somewhat from the lows of 2009 from the smaller market but it hasn't returned to the levels of 2008 or 2007, so, we're seeing that as a positive, we're seeing large orders continuing to come in at a more frequent rate as we said in the call. So, it's good to see sort of the base level of business and some of the smaller hospitals who had bigger constraint models actually beginning to purchase, but some are still sitting on the sidelines. So, they are all not back in the game yet, but it's good to see the positive nature of the small market.

And Randy, remind me again, what's the underpenetration of that marketplace? How much do you have left to go that's completely Greenfield in that smaller community hospital marketplace if you were to guess?

It's still quite a few but most people don't realize it's probably 800 hospitals, which is a lot of hospitals, even though they are on the smaller side, so we continue to get new hospitals every quarter, mostly in the smaller side.

I got you. And then, following up on Steven's question, in the international business front, you mentioned 20% of business maybe in 5 years obviously a very nice point. Could you give us a point of reference here how much bookings you're currently seeing? I think last quarter you said it was like upwards of 5% or maybe what percentage of your backlog at this point has got international business flavor?

Well, last year, we did a little bit more than 5% of our business from the international marketplace. And actually, as Randy chides me a little bit, it's actually our distributer channel, Canada and the US are a direct channel and so when I say that international marketplace, I'm talking about outside of North America, and we expect to grow from there kind of on a steady basis. It's a little hard to tell exactly what rate and pace that marketplace is going to grow because it is kind of a new concept in many of these institutions. We're finding some, just some great thought leaders around the world in various countries that have toured US facilities, seen the benefits both in work flow and safety from the medication control systems and supply control systems and have done very extensive installations in their facilities, but that's still pretty early and they are thought leaders.

Okay, and Rob, the 20% that you guys mentioned earlier of potential business in the future, would that, I assume include Canada at that point, when you're talking about the international business?

I'm talking apples-to-apples, 5% grown to 20.

I got you, okay. And last question for you, Rob. Just wondering if you could provide us with some level of the capitalized R&D this quarter or actually relative to last quarter it would also be helpful. Has it been a little bit more, a little bit less, just trying to get a sense for where that came out this quarter?

It was relatively consistent. We have continued to be innovative in our development labs and of course that means we get products to the point where they're past technical feasibility and we're doing tests with our customers and we've got several products going through those phases.

Okay, thank you very much.

Your next question is from Sean Wieland.

Hello, thanks. Can you give us an update on what's going on on the M&A front?

Well, we've got a team working and looking at a lot of different potential deals, but we're continuing to evaluate those and when one makes right sense for the business, we'll move on that business. There's a lot of things to look at out there, but we're just not announcing anything yet or don't have anything about to announce.

Is the in pediment valuation expectations or not being able to find the right opportunity?

A little bit of both. I think some of it's valuation, there's a lot of things to look at. I'd say it's less about the opportunities. A lot of people may not want to sell now, but maybe later so it's just a matter of timing.

Okay, so a lot of this, it seems like it's very consistent with last quarter's call. Can you highlight anything in particular that's changed over the past three months or is it pretty much status quo with last quarters call?

I think our business has been very consistent and I think we're seeing for us having hospitals adopt and deploy our new technologies and place orders for these new technologies is very key to getting momentum in the marketplace and being an accepted standard practice of Anywhere RN and SinglePointe. And so, as we see these deployed by major institutions, we know that's going to become a standard and is a standard to be developed by the rest of the industry, so I think that's one of the things we want to focus on. Because we took a long time to develop those projects and they are major differentiators between our competitors. And as we see that happen, it's allowing us to continue to win more deals. We're continuing in our pipeline and even this quarter, we're continuing to see adding two new customers every other business day so we're feeling good about our growth prospects and the ability to sell more products into those in the future.

Great. Thank you very much.

Sure.

Your next question is from Leo Carpio.

I had a couple of quick questions. Could you provide a figure -- the number for operating cash flow in the quarter?

Operating cash flow was about $7 million of the 11% increase in cash.

Okay. And in terms of the hospital capital spending environment, it sounds like we may have passed some sort of incremental, small, improvement. What do you think it will take to dislodge it? Is it just simply the economy is a holdup right now or concerns on the endowment?

Well, hospitals, as we said in the past, have had a pretty tough couple of years and they're still seeing many of the same leading indicators, many of the same indicators that they've had to deal with in the past. The unemployment rates continue to be relatively high. The reimbursement mix is affected.

Certainly income from endowments, as you mentioned, hasn't really come back, but some of the institutions have made cost-cutting measures and looking to solutions like ours to increase their efficiency and are doing better now and we see their buying patterns starting to improve. Other institutions are still going through those changes. I think it will take time but certainly we are not seeing and haven't been seeing for the last six months any further decrease in institutions' ability to buy and they seem to be starting to come back, as we mentioned in the prepared comments, the smaller hospitals are certainly buying at a higher rate than they were during 2009.

Okay. And then turning to competition, is the competitive environment still the same? Or perhaps, maybe McKesson is a weak third place right now becoming a little more aggressive? Appreciate any color there.

Well the largest competitor of course is CareFusion and we see CareFusion in most of the deals and we certainly do see McKesson and some of the other competitors. I wouldn't say the competitive environment has changed dramatically in any way. We, as I mentioned continue to take new accounts, and Randy just mentioned we continue to install a new account every couple business days. I think our new products are resonating really well with customers. And hospitals don't move all that fast with these sort of installations. They are key to their work flow. They are key to how they operate their entity. They go through a pretty methodical decision process and we're happy to say that a lot of times that comes our way.

Okay. And lastly, on the international operations, did that have any impact on your gross margin this quarter? If I recall I think it did last quarter. Just want to check.

Yeah, we had more international installations completing last quarter than this quarter and did adversely affected our mix a little bit. I mentioned that our mix was a little stronger this quarter. That was one of the factors that affected us but the 5% of our business, those international installations will be a little lumpy and they tend to be some larger installations that it doesn't tend to be a steady stream out on business, it tends to be coming in in individual hospital installations.

Alright, well thank you.

Your next question is from Glenn Garmont.

Yes, thanks. Good afternoon. Most of my questions have been answered at this point, but just getting back to sort of the competitive landscape, Randy and Rob, why should investors not be concerned? You've taken a lot of beds from Pyxis over the past couple quarters and certainly now, that is, that they've been spun out of Cardinal and they are part of CareFusion, why should investors not be concerned about more of a competitive response from them going forward than maybe what we've seen to this point?

Well, Glenn, I think the key that's been driving our success not only since CareFusion was spun out or before they were spun out is the technology and innovation that we've been able to bring to the marketplace has been mountain movers. And as you see these academic medical centers really make a big change. It's a big deal for them to change vendors from a competitive product to our product and that not only just is a demonstration of our technology, it means a lot to the surrounding hospitals in the region or territory or nationwide about what our technology can do and how it can really make a difference in their institution when it comes to safety and quality. And so, we have been ahead of the curve, we intend to stay ahead of the curve, and that's why you kind of see our investment in R&D has not slowed down. It continues on because we have more products to come out that that will keep moving the bar and raising the bar, and that's the single most reason people choose us.

It's not because of our price or anything other than this is the technology that's going to get me where I need to be and that's why we're in Silicon Valley. We aren't here because the rents are cheap. We're here because we can get access to the best people we can find to drive our technology to be the absolute best in the marketplace and that's what wins and these hospitals need it. They need it.

Okay, that's helpful. Thanks, Randy.

Your next question is from Steve Halper.

Yes, hello. What are the Company's latest views on share repurchases? It doesn't appear that you bought much stock back this quarter.

No, we didn't buy any stock back this quarter. Our views are consistent with the last few quarters. We believe that the cash balance can be most effectively used to add technologies on to our portfolio through acquisitions and so we have not gone forward with the remaining 25 million of stock repurchase that's been authorized.

So does that sort of signal a larger acquisition because the cash balance continues to build quite impressively.

Well, I think it points more to the fact that Randy said there's plenty of potential acquisitions for us to consider that might work for us. We do have Nhat Ngo running our strategy and Business Development team and is looking through a pretty steady stream of potential businesses that would make us more valuable to our customers.

So, is the share repurchase something that the Board is continually evaluating to potentially either complete and/or accelerate, or is it just off the table?

We reevaluate it relative to other options every quarter.

Okay, great. Thanks.

Your next question is from Steven Crowley.

You mentioned earlier how you've been pretty happy with some of the new products that you've developed. They took a little while to develop but they are having the desired impact now. I'm hoping that's a graceful segue, but regardless, it's a question about the future of Rioux, and where we sit there and what kind of potential you see with that product as we chat today.

Just so that the Rioux Vision acquisition, which brought us some card technology, we do continue to sell those original cards that Rioux had on the marketplace and have had a few larger installations of those over the last couple quarters. But really, of course, what we're looking to do is bring a new technology into the marketplace with an integrated system that takes medication control to the bedside with both the physical control and the electronic control. That product has certainly taken us longer to get to the marketplace than we expected.

There was a lot to learn about how those workflows could be optimally implemented in a hospital. I think we've done a lot of good market research and a good understanding with our customers. We have been showing, previewing, as we say those products over the last couple of trade shows, both at AsiaP and at HEMS, and we have them in betas right now, operating in betas, so, provided that all of that goes well, we'll have those things out in the marketplace this year.

Great, and then a couple bookkeeping items that might help everybody. Stock comp expense was a bit below where it's been trending and where it's been for as far back as I can see. Should it stay down around here or how should we think about stock comp expense?

Well, we've been actively working to lower our stock comp expense and, of course, that's something that happens over a long range because you amortize that stock comp expense over several years. There is always a bit of a dip in the first quarter just through the cycles of when we grant stock options in this Company. But, in addition we've seen our stock have a little less volatility, day-to-day volatility in the marketplace over the last few quarters, which favorably impact that calculation. I can't tell you whether there will continue to be less volatility in the marketplace, but I can tell you that we're actively continuing to work to have those stock options, stock comp expense come down over time.

And then just in terms of D&A and Capex in the quarter and then outlook? That would be real helpful. Thanks again for taking my questions.

Okay, D & A was about $2.5 million consistent with where it has been. We expect it to be over time. We are depreciating our assets just a little bit faster than we're adding on new capital assets at this point in time. Capex was about $1.8 million in the quarter.

Thanks, Rob. Well in Summary it's great to see our new technology is not only being acquired but deployed by key customers and driving more orders. We also see in our pipeline and continue to see new customers join the Omnicell family, capturing a new customer, every few business days on average. And again, it's pleasing to see that we're delivering on our new products and solutions as well as on our financial performance. It's good to have you with us today and we'll see you next time.

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