Omnicell Inc (OMCL) 2011 Q1 法說會逐字稿

My name is Ashley and I will be your conference operator today. At this time I would like to welcome everyone to the Omnicell first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Rob Seim, Chief Financial Officer of Omnicell. Please go ahead.

Well thanks everyone for bearing with us. Apparently we had some difficulty here with phone lines, we are going to start over from the beginning. No earthquake or anything, we are in California, but that's not the case. So, we're going to get going here. Welcome back to the call. I have Randall Lipps, Omnicell Chairman, President and CEO with me here today. As well is Margaret Ortigas-Wedekind, Omnicell Vice President of Global Marketing and Product Development. You can find our 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 Forward-Looking Statements in our press release today, and under the headings Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Omnicell annual report on form 10K filed with the SEC on March 11, 2011. 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 May 2, 2011, 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 expressed written consent of Omnicell is prohibited.

We do have a lot to talk about today with several product announcements this morning, and our Q1 earnings report. Randy and Margaret will start the call today with an update on our announcements on the market. I will then cover the results for the quarter, followed by our guidance for 2011. Following that we will take your questions.

Good afternoon and thank you for joining us today. Today we announced a broad array of new product solutions, and general availability of products announced last December. At the heart of today's announcement is a new platform consisting of next-generation software and hardware that we call G4. G4 features a single database that powers our automated dispensing cabinet systems, our new savvy mobile medication system, and our redesigned anesthesia workstation and controlled substance management systems.

This platform will be the backbone of all our products, making medication management less prone to administrative errors and inefficiencies that can harm patients. We are excited about the new platform, but we are especially proud that we have decided it to be modular, keeping in tradition of protecting our customer's investments in our products. Our customers are facing unprecedented regulatory and economic pressures in a complex healthcare environment. In this era of accountable care, hospitals struggle to achieve financial stability, while also increasing clinical efficiency and raising the quality of patient care.

Hospitals responding to these pressures by redesigning operations and decision support structures, to maximize productivity and enhance coordination across the entire organization. Our new platform supports these efforts. Marga oversees Marketing and Product Development at Omnicell, and is here to tell us more about these new solutions. Marga?

Thanks Randy. We are very excited about this launch and the unique value it brings to both our existing customers, and the market as a whole. We have been working on the new G4 platform for some time; augmenting our traditional product development methods with a combination of in-depth market research, facilitated brainstorming, clinician involvement in the design and development process, and analysis of workflows in the healthcare setting.

We have done extensive testing for several months at multiple customer sites, running live patient data. We then incorporated all our learning into the establishment of a platform for the future. One of the most salient things we learned is that data management problems are among the most daunting issues for pharmacist who manage medications workflows. Each automation product used in that work flow typically requires its own database for housing all system related data, such as medication, users, patients, and other hospital related data.

In direct response to what we heard in the marketplace, we have dedicated our product development efforts to achieving a high level of interoperability that will help eliminate the inherent workload duplication, and errors that come from maintaining multiple databases. With our new G4 platform, pharmacists can have confidence in the integrity of a single medication cabinet database. No longer defined by the time wasting and risky steps of repetitively entering formularies and rules in multiple occasions.

Combined with an intuitive, consistent user interface across all the medication dispensing solutions, the G4 platform creates a secure, closed loop of medication management all the way from the controlled substance vault, to patient care areas. Including the bedside, operating rooms, and procedural areas of the hospital. We focus not only on improving the pharmacists interaction with our products, but also on nursing workflow and satisfaction.

Continuing our historically strong user ratings for Omnicell cabinets, as evidence by five years of class awards, we were thrilled that in the recent tests of the G4 console, we saw a five-fold increase among nurses rating at the highest possible level. Nurses attributed this to its innovative, intuitive user focused interface, improved interactive high-resolution display, and other innovations.

We've also incorporated new safety features. We believe G4 will be the only product in the marketplace to include an integrated medication label printer, to meet recent new regulatory standards that today are addressed by manual workarounds in the hospital. And the new G4 console is also the first medication and supply automation product to leverage Windows 7 for the latest in reliability, security, and performance, bolstered by Microsoft's long-term commitment to this operating system.

Today's launch is consistent with our unique business model, which allows customers to upgrade software at their own pace and as part of normal maintenance costs. This, coupled with Omnicell's modular hardware design philosophy, means that customers can easily and cost-effectively keep their automation assets updated overtime. In other words, we allow them to be on the cutting edge of technology without the hassle and expense of whole product replacement.

Today, we've also announced the general availability of our Savvy mobile medication system. Savvy extends the control offered by our automated dispensing cabinets to a mobile system, which then safely and securely transports medications to the bedside. With Savvy, we have created a brand-new product category in the automated medication management continuum. Savvy is integrated with Omnicell dispensing systems and the hospital's other information systems.

The unique workflow that Savvy provides specifically addresses key regulatory concerns for the hospitals. Namely, the Institute For Safe Medication Practices Core Process 10, for safe transport of medication, as well is the CMS rule for 30 minute medication administration. Savvy is a new concept that we have now run for several months in live user testing. Nurses have told us they love Savvy for making med administration safer and more efficient. We believe Savvy plays a critical closing role in comprehensive doc to bedside medication management. We think it will become a standard of care.

Our new Controlled Substance Management system, or CSM, is a solution designed from the ground up, based on customer insight and analysis of existing and future changes in regulatory compliance in patient care. CSM provides extensive functions that allow for precise, perpetual inventory management, and regulatory compliance of heavily controlled narcotics in the hospital.

And the last of today's product announcements that I would like to highlight is a completely redesigned anesthesia workstation for the operating room that incorporates the G4 design, but also includes a number of substantial workflow enhancements for the peri-operative areas of the hospital. I would like to emphasize that our shared database, between pharmacy, operating room, nursing cabinets and mobile medication solutions, tracks and monitors medication movement throughout the hospital. And it's unmatched in the industry. We believe this capability will become necessary in a closed loop medication process.

Thank you Marga for describing the new products and for your leadership, and the team's hard work in bringing these new product solutions to market. In summary, the Omnicell G4 platform was designed to make it easier than ever for hospitals to reduce cost, comply with increasingly stringent regulatory pressures, and safeguard the patient. G4 consoles, anesthesia work stations, Savvy, and a number of the 11 products we launched, are shipping now.

Many of our new customers, such as St. Francis Health System of Oklahoma, which we announced earlier this quarter, and Sentara Healthcare of Virginia, announced in Q3 last year, are installing on the new G4 platform. Existing customers, such as the Lifespan Health System in Rhode Island and Denver Children's Hospital, are also expanding on the G4 platform.

This substantial opportunity for Omnicell to upgrade existing customers, and expand their installation with technologies for patient safety and medication control, is one of the reasons we invested to increase our sales force late last year. Since Microsoft announced the end of the life for Windows XP, we believe customers will need to upgrade to a more current operating system and G4 will support their needs.

In addition, Omnicell was featured in the interoperability showcase at the Healthcare Information Management Systems Society, or HIMSS, annual trade show in February. We also announced our support for the emerging healthcare industry adoption of GS1 Standards. GS1 is the most widely used supply chain standard system in the world, facilitating improved business processes, product tracking, and patient safety across the health network. Charter members, Geisinger Health System and Sisters of Mercy Health System, use Omnicell solutions to implement the GS1 standards.

With our announcement today, we have further extended our technology differentiation, and further strengthen our ability to provide the safest systems available to our customers. I'd like to turn it back over to Rob for Q1 results and our guidance for 2011.

Thanks Randy. First-quarter 2011 financial results net and in many areas exceeded our expectations. Orders from new and competitive conversion customers were 41% of our total orders this quarter, a continuation of the strong presence we have with new customers. About half of the new accounts were from competitive conversions, and the remainder was from Greenfield accounts buying medication automation for the first time.

Revenue was $57.2 million, about the same as the fourth-quarter of 2010, and up 6% from the first-quarter of a year ago. Net earnings after taxes for the first-quarter were $0.7 million, or $0.02 per share, which is the same as net earnings for Q4 2010, and compares to net earnings of $1 million or $0.03 per share in Q1 2010. During Q1, we booked a contingent liability for the settlement of our litigation with MediSys Corporation, to recognize the pending agreement with MediSys for a one-time, $1 million cash payment, in exchange for a perpetual license for one of their patents.

Our headcount at the end of the quarter was 762. Up nine from last quarter. Our gross margins were strong during Q1, and in expenses you'll see some shifts due to the preparation of the launch of our new products. Research and development is down quarter-to-quarter because more of our engineering costs were capitalized for amortization in future periods, since so much the software, including G4, was well into customer testing. SG&A was up from last quarter as we incurred additional expenses for the launch, and legal fees to settle the MediSys lawsuit.

Now I'd like to cover our non-GAAP results, and the adjustments to GAAP results are the exclusion of stock compensation expenses, and the exclusion of the one-time litigation settlement fee. Stock compensation expense includes the estimated future value of employee stock options, restricted stock, 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 our investors to understand the non-cash stock opposition expenses that are a component of our reported results. We also measure our business excluding infrequent events, such as the litigation settlement charge. Full reconciliation of our GAAP to non-GAAP results is included in our press release and will be posted on our website.

Our Q1 2011 non-GAAP net income was $3.7 million or $0.11 per share. Which is $0.01 higher than analyst consensus. Our Q1 2011 non-GAAP net income was flat to Q4 of 2010, and up from $3.1 million in Q1 2010. Earnings per share for the quarter were equal to Q4 last year, and up from $0.09 in Q1 2010. Adjusted earnings before interest, taxes, depreciation and amortization, which also excludes stock compensation, amortization and the litigation settlement, were $6.3 million for the first-quarter 2011, up from $5.8 million a year ago.

During the quarter, we began to repurchase our stock against the $25 million authorization that is outstanding. We repurchased $4.5 million in an average price of $13.79 per share. Our cash and short-term investments were $182 million at the end of Q1 2011, down $2 million quarter-to-quarter. In addition to using cash for the buyback, we added to our inventory by $5 million to cover the transition to our G4 platform. Our inventories were $15 million, but we expect this increase to be temporary. Stock buyback and the inventory increase was partially off set by $6 million of EBITDA and a $3 million decrease in receivables.

We continue to earmark our cash reserve primarily for acquisition, but have taken advantage of the buyback authorization to partially offset the dilutive effect of the employee stock programs in 2011. Accounts receivable days sales outstanding were 64, down five days from last quarter, and on the low end of our expected range of DSO. For the rest of 2011, we expect to continue growing the business towards the guidance we previously gave in February.

We expect product backlog at the end of 2011 to be between $138 million and $144 million. Our backlog gives us good visibility to the revenues to be installed in the next two quarters and beyond. We expect 2011 revenue to be between $240 million and $245 million. Achievement of the revenue goal is dependent upon the volume of our order rates in the first half of 2011 that can be installed within the year.

We intend to shift the new G4 platform products to most of our customers that are in backlog today, or planning their installations. We believe existing customers will increment their next capital budget to upgrade to G4, and we have anticipated orders beginning in the second half of 2011. Our guidance for non-GAAP earnings, excluding stock compensation and litigation settlement expenses in 2011, is between $0.51 and $0.56 per share. These profit expectations assume an effective tax rate of 40% on GAAP earnings, and no material change in interest rates. We expect non-GAAP earnings to increase as the year progresses, and expect Q2 non-GAAP earnings per share to be $0.12 to $0.13.

Now operator I would like to open the call to questions.

(Operator Instructions) Sean Wieland with Piper.

Hi, thanks. Nice quarter. The conversion to the G4 platform, that's included in the maintenance payments that your customers are making; is that correct? So it doesn't cost them anything to upgrade, or is there an upgrade fee?

The software portion is included in the maintenance portion of their support maintenance agreement. There is several aspects of this platform that is hardware related. The customer is not required to upgrade the hardware in order to get the new software, but there are features that make it more effective if the hardware is put in place. Kind of at the center of that is a new computer console that is available to customers, and that we actually are starting to ship in our products that are rolling off the line right now.

Okay, so if I'm a customer today fully loaded on, we'll call it the legacy platform, how painful is it -- what's the conversion process to go to G4? And talk to us about how you are preparing for that. And looking at this through the lens of other companies that have gone through a major software upgrade, and it didn't go so smoothly. Just talk to us about the conversion process, and what you've done internally to get your customers ready for this, and get yourselves ready for it?

Let me take that one, Sean. If our customers are currently on our 14 release, they can upgrade to 15, just simply because of their maintenance product and move on. Now if they want to order a new system, they can just add one on, and when they get the new system they can either have the choice of upgrading that system to the new software platform, or going with the upgraded version of the classic version, 15 software. So they can use either user interface, but to get the more advanced user interface, they would have to have the new console, which has the different screen resolution and different next advanced level of user interface.

So, they have the choice, and both are compatible. You can have new software and new hardware is compatible with the old hardware and the old software, so there's no reason to have to upgrade everything. But let's say a customer has only 10 units, and they buy 20 more, and they say -- we want to upgrade to all of the latest and greatest hardware and software platforms, then they only have to upgrade 10 of their consoles and move to the new G4 platform totally from end to end. So the customer has the choice of what they do based on the timing, but they can buy the feature set in the classic version of the software, which is free with the upgrade, or they can get the new interface version with the new hardware platform.

Okay.

It's been very important to us to maintain a path for customers to keep the investment that they have in the systems they bought from us, but be able to upgrade their systems in a modular way and take advantage of new capabilities. And this whole new platform was designed with that in mind.

Okay. If I can have a follow-up. Curious what your view is on either proposed stage 2 meaningful use, where they're talking about automating the medication administration reporting process. Do you think that is going to provide some opportunity for you in the future?

Well, I particularly think the fact that we have this end-to-end solution not only starts at the new G4 platform not only starts down at the medication control management and goes up to the stationary units, but with the new Savvy product line that is mobile, the integration points of the closed medication process can be accomplished very easily with our systems as an integration point to the hospitals' HIS systems. So, as that becomes more prominent, whenever that is stage 2, stage 3, I think there will be a great reason to move to the G4 platform, particularly on the mobile Savvy system that we have. And that really facilitates the actual workflow of meeting the new meaningful use whenever it comes on medication closed loop, which is right at the bedside.

Sure. Okay, great, thank you very much.

Your next question comes from line of Matt Hewitt with Craig-Hallum.

Congratulations on the new product release team. Real quickly, what drove the timing of the introduction of G4 today? Was there a desire to dovetail it in with the Savvy launch, and what is this going to do to your competition? Was the timing now versus at Ashby later in the fall, was that to front-run maybe what they had in queue?

I think it was more of a natural timing for us. This has probably been a while since we've had a significant hardware upgrade on our platform, almost 5 years. There were some new demands on the new hardware platform in order to drive Win 7, which has higher levels of encryption and higher levels of performance that we needed. So we knew that we eventually had to move to that, and plus, we knew that our customers were really -- wanted a single platform that really allowed them to maintain their databases, their hardware, [backward] compatibility, to work in concert together. And this in conjunction with the sales force really allowed us to have a really -- puts our sales force in a lot tighter connection with our customers as they upgrade into the next platform.

Alright, and then just a follow-up on that. Does this G4 platform give you an opportunity to maybe participate in stage 1 of meaningful use? I know, Randy, on the last conference call you had mentioned there were some changes late last year that might have created an opportunity; I'm just wondering if G4 furthers that, and what progress you have made on that front?

We are definitely pursuing meaningful use, we are not a EHR system, electronic healthcare record system, so hospitals are going to have to lean on their HIS system in order to achieve total stage 1, but there are components of both stage 1 and perhaps in stage 2 and stage 3 that we can help hospitals meet if we certify the meaningful use vendor. So we're definitely out pursuing and investigating that, and pursuing that, and when we have something on that side to announce, we'll announce.

Thank you, I'll jump back in the queue.

Your next question comes from the line of Newton Juhng with FBR.

Hi, afternoon guys. Had a couple quick questions here. One, so you're saying that obviously G4 is a lot of work that's come to fruition here, and I'm just trying to understand this. But you have current customers that could be looking to upgrade hardware, but getting the software upgrade for free. And you guys have also worked on your inventories there in anticipation of this. Should we expect margins to get impacted in the back half of the year as a result, or maybe not expand as much as previously considered, considering this launch?

Whenever you launch a new set of hardware, which G4 has a lot of new hardware in it, there is a ramp-up of the new production, so that has all been contemplated in our forecast for the year. The operating results and the EPS guidance that we have given have all taken that into account. There are multiple aspects of hardware to this. There is a new computer console, there's a new anesthesia workstation, there is the Savvy global medication system that is shipping. We have quite a substantive redesign in the overall user interface that a nurse would experience, as well as all the software aspects to it.

And Rob, the anesthesia workstation I believe you guys make yourselves, but the console, is that just a pass-through of somebody else's stuff, or is that -- can you give me an idea as to the margin you are getting on that type of an upgrade?

Well, the upgrades have relatively the same margin as the rest of our business, but the computer console is something that we design ourselves. It's not just, for instance, a laptop. They specialize to the application to the particular way that this appliance is used, and has particular things in it that allow for it to be specialized for the hospital setting. For instance, one of those things that we just announced with G4 is an integrated medication label printer. Second printer that actually produces the labels that will go on medications when a nurse dispenses them from the system. So, that's something that is unique in the industry and unique to our type of console.

Okay. So there's definitely customization on there, okay, for your system. Rob, can you give me how much this software development costs were this quarter since you don't provide a cash flow breakout? Just kind of curious how it did relative to last year? I think last year was like $2.2 million and the previous year was like $3 million. I'm just trying to get a gauge obviously with G4 coming available, that does stop the clock on the capitalization, but I'm just kind of curious how much you had this quarter?

Yes, we actually capitalized $1.8 million, which was about 28% of our gross R&D spend. Historically, we are predominantly a software company, and of course, there is a part of our R&D that is capitalized each and every quarter. Tends to range in the 5% to 15%, but we had so many products going through test this quarter, Q1, and will continue through Q2, of course, we are a month into Q2 now, that's a lot more of our R&D was capitalized.

Would you expect it to be kind of in a similar range, a little bit higher, a little bit lower than the $1.8 million you did this quarter?

Fairly similar, and then we will start tailing off.

Okay, and then last question for you guys is -- there was a little bit in the release about waste management. I saw that care fusion picked up, I think it's [Visterra], the farmer waste management company recently. I know that was something you guys had talked about in the past as a potential area for M&A, and I'm kind of wondering did you develop something yourself and then you're happy with it now? Is there still a desire to get something better in there? Talk to me about where G4 is with this -- on that side of things on the waste management front?

Sure, so Omnicell systems have always had software routines for recording the wasting of drugs that were not used. And we've made those routines much easier for the nurse over time, particularly products like our Anywhere RN product that allows the nurse to do all of that transacting from the nurse workstation as opposed to from a cabinet. We just continued to enhance those processes with each version of the software to make the workflows easier for the clinicians. We did not develop a system like the [letharis] system that categorizes waste or physically has bins for waste to be stored in.

Okay, so it's kind of an enhancement of what you previously had, but you haven't gone to that level. Is that something that you are still look at, trying to find something? Or just kind of a potential for next generation to add on, or is it something that you are happy with what you have now?

I think we have pretty good workflows in the software right now. There certainly is a possibility to add on anything that aids the workflow in the hospital setting.

Okay, thanks very much for answering my questions.

Your next question comes from the line of Steve Halper with Stifel Nicolaus.

Can you give us the -- just a housekeeping item, can you give us the operating cash flow number for the quarter, the consolidated number?

Yes, I think I have it here. Cash provided by operating activities is $2.9 million.

Okay, and you gave us the capitalized R&D number, and the CapEx number, your maintenance CapEx?

Yes, CapEx was $2.4 million.

So what are the components -- I'm assuming that was above and beyond that R&D number of $1.8 million that you gave us before?

That's correct.

Okay, and so what are the components of that CapEx number? It seems relatively high compared to the operating cash flow number, recognizing that you did build up some inventory in the quarter.

Yes, none of the CapEx number is associated with inventory. Most all of our CapEx is associated with IT systems that we put in place. We develop those over time, do work to put them in place, and then as they go online we capitalize them all. It is a little bit higher than it normally is, but there's -- it's kind of lumpy.

And the inventory build was $4 million? Is that what you said?

$5 million.

$5 million. Okay, thank you.

(Operator Instructions) Your next question comes from the line of Brad Hoover with Sidoti and Company.

Good afternoon. On the service revenue, do you recognize any Pandora-related revenue at all in the quarter, and how much was it if you did?

We did recognize some, and we typically don't break out individual elements of the revenue. But as you know, we were deferring some Pandora revenue until a upgrade offering had expired that was in place when we bought Pandora. Actually more of those customers had moved to the new version of the software, so we were able to recognize the service on earlier versions a little bit quicker than we had anticipated. But we still are on track for the guidance that I gave of about $3 million of Pandora revenue during the year.

Okay. And then just on the CardinalASSIST Program, how is that progressing, and have you signed any hospitals to contracts from that, that perhaps you maybe wouldn't have otherwise, or is that still in the very early stages?

We haven't announced any, but we do have hospitals in contracting process.

Okay. And just lastly, going back to Pandora, how is the cross-selling going as far as the hospitals that you didn't have, weren't using Pandora, the majority of them, only 10% I think were with Omnicell before that, how is that cross-selling going?

It's actually going well. We've obviously rolled out Pandora to our own sales team, and it's quite a few of our customers that have become interested in Pandora that weren't using it previously, so we're happy with the progress there.

Great, thanks, Rob.

And you do have a follow-up question from the line of Matt Hewitt with Craig-Hallum.

My follow-up, just real quickly on the state of your customers, a number of the hospitals have been reporting positive earnings this quarter. Obviously that should impact their willingness to come back and order more as they feel more comfortable with their P&Ls. I'm just wondering, we saw the larger hospital systems come back earlier last year. How are the small hospitals situated now, and maybe the overall health of your customer base?

Yes, we've also been noticing some of the smaller systems then reporting a little bit better health, which is great, it's good to see that. Of course, it takes a little while for that health to flow into a capital budget, and like most institutions they'll want to see a couple quarters of good results before they start opening up the purse strings. But it's good to see that, plus also some of the macroeconomic trends of unemployment rates coming down a bit, and ability to gain capital a little bit easier.

Great, alright, thank you.

There are no further questions at this time. I would now like to turn the call back over to Randall Lipps for any closing remarks.

Well, thanks for joining us today. We are happy to be moving to a solution on a single database from the central pharmacy to the nursing unit, to the bedside, in the same tradition of technological leadership that we demonstrated by the first to market with single-dose dispensing, and the first to market with SinglePointe. We have a lot of positive momentum at the Omnicell today, and it's supported by the outside verification of 5 years of best-in-class awards presented by the KLAS Institute. And we've demonstrated our continued product leadership, and we look forward to a great 2011. Thanks for joining us again today.

This concludes today's conference call. You may now disconnect.