Omnicell Inc (OMCL) 2010 Q2 法說會逐字稿

Good afternoon. My name is Phillip, 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 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 2010 second quarter results conference call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO. You can find our results in 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 Results of Operations in the Omnicell annual report on Form 10-K filed with the SEC on February 24, 2010, as well as any 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 July 22, 2010, and allforward-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 believes to change. Finally, this conference call is the property of Omnicell Incorporated, and any taping other duplication or rebroadcast without the express written consent of Omnicell 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 quarter's business highlights. And then I will discuss our guidance for the remainder of 2010. And after that we will open the call to your questions.

In the second quarter of 2010 we exceeded profit expectations and continued to make improvements in our financial ratios, with higher margins and increased cash on hand. We had a very good operational quarter aided by a favorable mix of products installed, a focused effort to get our customers caught up on renewal of service contracts, and some favorable timing of nonrecurring spending. Our solutions won more awards from the class institute.

We announced further technological advancements in our software, and we continued our consistent track record of adding new accounts to our customer base. Of our orders in Q2, 36% were from competitive conversions and from greenfield customers, which are customers who have never installed automation before. About half of the 36% was from competitive conversions, and the other half was from greenfield accounts. 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.

The market environment did not change much from previous quarters during Q2, with worldwide economic conditions affecting our customers' overall sentiments. We still expect the market to grow slightly during the year, but our orders remain more highly concentrated in large customers and timing of a broader base recovery is unclear in our market.

Revenues for the second quarter of fiscal 2010 was $54.7 million, up 1% from the first quarter of 2010, andup 4% from the second quarter of a year ago. Net earnings after taxes were $2 million, or $0.06 per share, for Q2 2010. This compares to $0.9 million,or $0.03 per share, in Q2 2009. Included in our results for the quarter are some improvements in margins driven primarily from product mix and timing of nonrecurring spending.

Now I'd like to cover our non-GAAP results, the only adjustments to GAAP results are 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 exclude the 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 the noncash stock compensation expenses that are a component of our reported results. A full reconciliation of GAAP to non-GAAP results is included in our press release and will be posted on our website.

Our Q2 2010 non-GAAP net income was $4.1 million,or $0.12 per share, exceeding consensus by $0.01 per share. Our Q2 2010 non-GAAP net income was up $1 million, or $0.03 per share, from Q1 2010, and up $0.8 million,or $0.02 per share, from Q2 2009. Our profits were impacted favorably by about $0.01 per share by factors that we do not expect to continue in subsequent quarters such as the favorable timing of nonrecurring spending in our efforts to get customers caught up on service contracts.

Earnings before interest, taxes, depreciation and amortization, which also excludes stock compensation amortization, were $7.7 million for the second quarter of 2010, up $1.6 million or 27% year to year. EBITDA is a good measure of the operational results of the Company, and we are happy to continue growing this measure faster -- much faster than revenue growth. Our head count at the end of the quarter was 755 regular employees, which is the approximate level we have been operating at since January of 2009. Earlier this month, we announced the consolidation of our development offices from four to two. The consolidation will increase the efficiency of operations and promote collaboration among the Company's engineering teams.

It has been a long-term vision of Omnicell to create a center of excellence in Nashville because of its talented labor pool and reputation as a hub of the UShealthcare industry, as well as its centralized location for many of Omnicell's customers. In anticipation of this consolidation, the Company recently expanded its operations in Nashville, Tennessee, to a new larger facility near the Nashville International Airport, which is complementary to our high tech hub in Mountain View, California.

We are closing facilities in the Woodlands, Texas, and in Bangalore, India. In the consolidation we will eliminate 24 positions, 20 staff members will move to a new location, and some new positions will be created. Additionally, 19 staff members involved with the customer support activities in India will move to a contract service provider. We expect the consolidation to be cost neutral on an ongoing basis and expect to take a pretax $1.5 million one-time charge in Q3. Because there is some repatriation of profits from India, the after-tax one-time charge is expected to be approximately $1.4 million. And while cost neutral, we feel the increased focus of the engineering teams will give us an opportunity to bring more products to market faster with higher quality.

We continue to generate cash from our operations and drive down our receivables balance. Our cash and short-term investments grew to $185 million at the end of Q2 2010, an increase of $5 million from Q1 2010. Days sales outstanding were 64, down 4 days from last quarter. And our inventories were $10 million, consistent with the previous quarter. And now I would like to turn the call over to Randy for an update on the business.

Thanks, Rob, and good afternoon. The economic conditions around the world continue to be challenging for everyone. In today's environment I'm proud that our solutions continue to be recognized by independent researchers and customers alike. During the quarter we continued our string of awards from KLAS, the prestigious research firm that monitors the performance of healthcare technology manufacturers. Omnicell's OmniRx automated dispensing system was the recipient of the 2010 Best in Class award for automated medication dispensing units for large hospitals with more than 200 beds. The Best in Class ranking is given to the vendor scoring the highest position in its category and is a special recognition for vendors and market segments that have the broadest organizational impact for hospitals and clinics. Our OmniRx product has received the highest possible KLAS award for medication dispensing units for the fifth year in a row. Additionally, Omnicell was awarded Category Leader for Pharmacy Automation Medication Carousels for its Workflow Rx products. These recognitions are especially gratifying because KLAS bases its awards on actual customer satisfaction and feedback.

Customers also continue to recognize Omnicell's solutions as reflected by 36% of our business coming from new and competitive conversion customers again this quarter, including new US government business, new hospitals being added to IDM customers, and brand new customers to our account base through both competitive conversions and sales to the first-time buyers of automation solutions. As we -- and we found that smaller hospitals, who have not automated in the past, join our customer base with significant purchases when they have the budget available, bringing them current in medication automation technology.

Our proprietary solutions such as Anywhere RN and SinglePointe continue to differentiate us. Anywhere RN software allows management of our remote dispensing systems from virtually any workstation in the hospital. SinglePointe is our 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 missed medications. Solutions such as these improve the efficiency of nursing and pharmacy workflows, reducing interruptions and distractions that had been proven to increase medication error.

During the quarter we extended our technology with our announcement that our OmniCenter software, which is the engine behind all our automated dispensing systems, is now VMware ready. Virtualization of servers at hospitals is an emerging trend. Passing the extensive VMware specified testing helps ensure that the OmniCenter makes the best use of VMware technology and puts us at the forefront for deployment in virtualized customer environments.

In the marketplace, we continue to see a cautious capital spending environment. Large customers were, again, a larger percentage of our business than they have been historically, while the smaller hospitals are still operating under stricter financial constraints. The larger customers take longer to complete their installations and often have delays in their deployments. We believe the market overall is growing slightly in 2010, but we believe there is a larger opportunity for further automation at our existing customers and at new customers, both domestically and outside the US.

We believe healthcare reform will have a positive long-term effect on our industry, as hospitals must focus on improving their efficiency and quality of their outcomes. We are proud of our track record of bringing what we consider the safest and most efficient solutions to hospital institutions of ever size and type. Although overall economic indicators remain the same, with little change in unemployment or interest rates, we believe that as economic conditions improve and hospitals begin to expand their capital budgets, we will be well positioned to solve their safety and workflow efficiency needs. Let me turn it back to Rob for some guidance.

So we are reconfirming our 2010 guidance ranges from previous quarters and refining the revenue range now that we are halfway through the year. Overall we expect our booking rates to grow between 5% and 10% during 2010. And since our customers take one to 12 months to complete installations and more of our business is from bigger deals, 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 within the same range as we discussed previously of $118 million to $125 million, which is up 4% to 10% from 2009.

We now expect 2010 revenue to be between $220 million and $222 million. We previously guided to a broader range of $218 million to $225 million. Our backlog gives us good visibility in the -- to the revenue to be installed the next few quarters, and we expect there to be little change in the installation schedules.

We expect non-GAAP earnings, excluding stock compensation expenses and restructuring charges for 2010, to be between $0.40 and $0.45 per share, which is up 5% to 18% and is consistent with our previous guidance. And these profit expectations assume an effective tax rate of 42% on GAAP earnings and no material change in interest rates.

For Q2, excuse me, for Q3 we expect non-GAAP profit in the range of $0.09 to $0.10 per share, as we are anticipate additional nonrecurring spending in the quarter in research and development and other area of our which business. These non-GAAP expectations exclude the anticipated one-time charge for facilities consolidation during Q3, and they exclude stock compensation expenses. So now, operator, I would like to open the call to questions.

(Operator Instructions). Your first question comes from the line of Steven Crowley.

Good afternoon, gentlemen.

Afternoon.

You have given us some color that large customers continue to be more pronounced in your business mix right now. But for some additional color on those smaller hospitals that represent an additional gear of growth as we move forward, there seemed to be some activity at the end of last quarter that represented maybe the light at end of the tunnel flickering. Are you still seeing signs of activity but it is very sporadic, or was that more of a head fake as you look back?

Well, it is a little hard to tell. Each quarter we have 500 to 600 orders, and we still have 500 to 600 orders coming through, but the mix tends to be moving more and more towards the larger hospitals. The -- we did see a little bit of improvement in the order rates from smaller institutions during Q1. That hasn't changed much since then. So it is hard to tell whether those institutions are going to be growing in the near future or not. Our pipeline -- as we examine our pipeline we of course spend much more time on the larger deals, a lot of these smaller orders are add-on orders at small hospitals. They could be in the range of anywhere from $20,000 to $100,000, $150,000. There is not as much focus put on those.

Okay. And then in terms of the strength in the service portion of your business, you mentioned that you had some success catching up -- helping customers catch up with their annual maintenance contracts. I want to make sure I have that, correct. Because there historically has been another positive variance scenario where customers who were coming off lease and weren't buying equipment or delaying buying equipment might extend their leases for a little while, which is a bit of a short-term boon for you, but you would prefer probably to have them buying new equipment. It doesn't sound like that was the biggest component of that strength in service, but I want to confirm that.

We still had variability in the service and other line item quarter to quarter, depending upon whether customers do renew a lease or make their decisions on what they are going to do with their equipment right when their lease ends, or if they continue on a month-to-month basis. And the month-to-month charges tend to be a little higher, and we tend to recognize those when we receive them. We also -- particularly this quarter we sometimes have customers who come to the end of their service agreement with us and do not renew their service agreement right away, either just because administratively they haven't done it or for any number of other reasons. But we did put a concerted effort to make sure that those customers were contacted, and if they were going to renew their service they got us the orders. And when we get the orders we are able to book revenue for that service for the period that they are signing up from, which is from when their last contract ended. So we put some effort into making sure we got those all on the books.

Okay, and then one final question and I will hop back in the we. In terms of the Rioux or the one called Rioux bubble medication management solution, what can you tell us about your plans there and what in terms of timing and potential impact? Thanks for taking my questions.

Thanks, this is Randy. On the Rioux acquisition product line, we have been integrating that product and are focused to have that product out in beta the later part of this year. And we will start to be taking orders for that in 2011. So it is on schedule, we are getting good feedback from it, and it is a key part of our product line as it represents the medication control of products from our stationary units to the bedside.

Great. Thanks again.

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

Thanks, good afternoon. A real quick question, Rob, on the earnings guidance for the balance of the year. The $0.09 to $0.10 in Q3 implies a wider range for the fourth quarter, some where in the $0.09 to $0.14 range, I guess. And I'm just wondering, is that just reflective of these larger deals and the unpredictability around, the installs there? Or what else -- I'm trying to understand what would influence whether or not you come in at the low end of that range versus the high end?

Well, certainly, Glenn, the next quarter's revenue is much more certain than each subsequent quarter after that. As the backlog fills up you kind of know exactly what is going to happen in the next three months, and then you have a pretty clear view on the quarter coming after that. And there could be variability on which products install. We also have -- from quarter to quarter there is always some customers who find that their schedule for installation is not proceeding on the time table they would like, and so they push out. And there is other customers who want to install faster or give us orders and need a quick installation. And the mix of those products that are coming in and out of the backlog and for installation scheduled can change, and can change the profitability of our business. Finally, it's just got some variations that could happen in the mix of our business between lease renewals and straight purchases, and the mix between some of the service contracts like we had this quarter that can change profitability.

We -- it is only, as you know, only about $300,000 changes our profit by a penny, so when your orders are often in the $400,000 or $500,000 level, you can have some changes pretty quickly. And that is why we keep the range. We are fairly clear on where the profitability is going to be in Q3, and we are going to have some this of nonrecurring spending that I mentioned in the prepared comments coming through. So we do expect the profit not to be at the same levels it was in Q2.

And, Rob, the nonrecurring spending, is that going show up in SG&A? If you provided some color on, that I'm sorry, I missed it.

Yes, it is operating expenses.

Okay.

A good portion of it is research and development.

Okay. All right. Thank you.

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

Good afternoon. This is [Somu Hidoo] for Sean. Any -- are you seeing any impacts with Cerner's partnership with CareFusion on the field right now?

We haven't seen any direct impact. Some customers bring it up -- not very many -- in conversation. But we are not aware of any orders that it has impacted us or our pipeline.

Okay. The second question, any updates on the use of cash?

No change from all of the previous guidance that we have given. The cash that we have accumulated we intend to use to expand our product line, and that would be primarily through acquisition. And we still have a team that is looking at a good pipeline of acquisitions, so we do expect to use that within the foreseeable future.

All right. Thank you, guys.

Thank you.

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

Thank you. Just two quick ones. Just to elaborate about the comments earlier, Rob, about the gross margin, particularly in services where it was much higher than sequentially or even a year ago. Just wanted to verify that was due to the timing of certain renewals of service agreements, therefore we wouldn't necessarily expect that to sustain for the balance of the year?

That's correct. We have maintained a pretty steady staff, and most of the cost of services associated with the people that are performing the service and then any spare parts that are replaced. And those expenses have remained pretty consistent.

Okay. Good, Rob. And then second one, if I could ask your commentary on hospital behavior. So in this soft economy you talked about cautious spending and then combined with the focus on EMR software by many hospitals right now, my intuition would tell me that hospitals would be less apt to swap out vendors in place of our system, yet your competitive statistics don't seem to reflect that. Am I thinking about that the right way?

Well, I would beg to differ on that. I think hospitals are more willing to switch out, because they are making maybe big changes in several places. And our statistics in our pipeline really demonstrate that we have a -- we will finish at in our range, which we have historically done for the last three years, 33% -- five years, 33% to 40% of our business is from new or competitive conversions. And we don't really see a slowdown in that. And a lot of hospitals are trying to, as groups -- particularly the larger ones actually act more like a group and making sure their product lines are consistent throughout all of their hospitals just like their EMR systems. So I think that the trend really is you do see some hospital aggregation and they really want to make sure all of those hospitals are using their systems consistently. And so I think that does help us with the current IDMs we have, because the new hospitals coming into those IDMs obviously get converted over to our product line, and it gives an opportunity to go into new places as well.

Good comments. Thanks, Randy.

Thanks, Gene.

(Operator Instructions). Your next question comes from the line of Leo Carpio with Caris & Company.

Good afternoon, gentlemen, can you hear me?

You bet.

Okay, [gentlemen], I have two quick questions. First, regarding to the competitive environment. Has that changed much?I mean, historically we have seen you make inroads against Pyxis, and then a few quarters ago we saw McKesson weaken a bit. Is it still basically you versus Pyxis and McKesson? Just a little more color there would be helpful.

Sure. I think the competitive landscape has pretty much been the same for the last three to five years, and we have been gaining one and a half to two market share points a year in each of those years and across the competitive base, mostly obviously from the CareFusion and some from McKesson. And we don't really see a change in that in recent months or on a go-forward basis.

And in turning over back to Gene's question on the gross margin, is it correct to assume that the momentum you saw this quarter in the gross margin is not going carry over into the second half of the year? That it most likely will return back to kind of like normal or trend levels?

Well, on the service gross margin, we have been kind of hovering around the 40% range on a non-GAAP basis for the last four quarters prior to the Q2. We believe that we will still be in that kind of 40%, low 40% range as we go through the rest of the year. On the product gross margin, we have been kind of in the mid-50s, and we, as most companies do, are constantly working on improving our cost structure and our efficiency and how we deliver products. We don't expect those gross margins to change really dramatically as we go through the next couple of quarters. Remember, everything we are installing and taking revenue in the next couple of quarters was actually sold last quarter or the quarter before, or even before that. And a lot of that stuff has already been built and has shipped, or is shipping now. So costs are already done on it.

Okay. And then the last question, regarding the international market, any updates there in terms of new countries or new notable contracts you would like to highlight?

Like all of our customers, there is some of them that like to have their name announced and a lot of them that don't. So we are not announcing any particular customers on this call. But the international market tends to be about the same as it has been. It is growing for us. It is still a small piece of our business. We feel we got a great team that is working with our international distributors there and bringing some very marquee institutions up. Karolinska Institute in Swede that we mentioned before has been installing, and Singapore is finishing up their installations, and we continue to make good sales in the UK. But there is no other customers that we are announcing this quarter.

Okay, thank you.

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

Yes, guys, I just wanted to come back. Given how we filled in the picture here, you start to get a sense for the kind of jump in R&D and SG&A you are talking about in the third quarter period here, which is -- would appear to be pretty darn significant. I mean sequentially we are probably talking about a $1.2 million or so from the levels you just reported. And I want to make sure that that is the right inference, and it sound is like a big part of that is R&D, but I got to believe there is some SG&A of substance in there, and what would that relate to?

Well, Steve, we have been doing quite a lot to make sure that our brand is well known by our customers. A couple of quarters ago we talked about kicking off a brand awareness program that has been going on, and that has many different facets that are kind of particular to the hospital industry and our customers in the pharmacy end and the materials management area of the hospitals. That is ongoing, andwe are happy with how it is going to so far. But a lot of campaign like that is not spending that is done internally, it is done with outside vendors, and it has got some sporadic nature to it. And our R&D, most of the R&D work we do is inside of our own company with our own software and hardware development engineers and test engineers, but we do have some work that we contract outside, and we do have prototype builds that we do to make sure that we have got all of our new software versions fully tested. And so those things can hit in any one period, and schedules being as they are, we have some of this nonrecurring spending happening in Q3.

Okay. And then in terms of historical seasonality you have had with installation schedules, in more normalized periods there has been a dampening effect in that holiday-laden December quarter, but last year that was shadowed by the recovery in the overall economy. I guess I'm wondering whether we are likely to see more normalized seasonality where we see a step function in installations or at least a jump in install lakes in Q3 and a plateau in Q4, or whether there is a less natural trend to what is in your installation schedule?

There isn't really anything unnatural about the installation schedule. There always is a little bit of a challenge in December as people get into the holidays, that is true. And we try to work around all the holiday schedules and keep a pretty consistent installation process going. Despite the holidays, our customers still have the demand to get the installations done, and sometimes during Q4 we just have to work some overtime to do that. But we are not anticipating anything out of the norm, and our guidance that I have given is a pretty narrow range, so you can kind of see where we are coming out through the rest of the year.

Yes, the genesis of that question is, given the volatility in recent annual periods, there have been years where things have stepped down in the fourth quarter because of the seasonality noticeably and other periods where there has been nice sequential growth. And I'm trying to figure out what the new normal is?

We are all trying to figure out what the new normal is, I guess, in this world. But we see the installation schedule as pretty consistent from quarter to quarter.

That's helpful, thanks again.

There are no further questions at this time.

Great. Well, I think we are continuing to see our customers enjoying the benefits of our advanced solutions. We continue to install a new hospital customer every two business days on average. And we see our pipeline indicates strong demand for new accounts in the future, and we are delivering on our new solutions and on our financial performance. So we appreciate your joining us today, and we will see you next time.

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