Omnicell Inc (OMCL) 2011 Q2 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 second-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 Chief Financial Officer Rob Seim. Please go ahead.

Good afternoon and welcome to the Omnicell 2011 second quarter results conference call. Joining me today is Randall Lipps, Omnicell Chairman, President, and CEO. You can find our results on 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 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 July 28, 2011. All forward-looking statements made on this call are made based on 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 and any taping, other duplication, or rebroadcast without the express written consent of Omnicell is prohibited.

So Randy will start the call today with an update on our business. I'll then cover the results for the quarter, followed by our guidance for 2011. Following that we'll take your questions. Randy?

Good afternoon. Thank you for joining us today. In early May we announced our new product platform consisting of next generation software and hardware that we call G4. G4 was designed to make it easier than ever for hospitals to reduce costs, comply with increasingly stringent regulatory pressures, and safeguard the patient. This platform will be the backbone of all our products. The new G4 reduces the administrative effort required to operate our systems and increases the interoperability of our software through the introduction of a new architecture.

The announcement covered 11 new products including the first automated dispensing system, powered by Windows 7, our new Savvy mobile medication system, a redesigned anesthesia work station, and a redesigned controlled substance management system.

G4 was the most extensive product announcement in the history of Omnicell and our company is passionately focused on the successful release and implementation. We made a product transition to G4, trained our field staff on new product set, and engaged in new demand generation activities to build the sales pipeline during the quarter, all while simultaneously increasing our profit margins.

While customer reaction to G4 has been very positive, by making G4 compatible with previous versions of our products, we have made it easy for our customers to take advantage of the new G4 capabilities while protecting the investments that have already been made in Omnicell systems. Athens Regional Medical Center in Georgia is an existing account that was one of the first customers to upgrade the Omnicell Systems to G4, extending the value of their investment in our equipment that was initially installed in 2007.

New accounts such as Royal Victoria Hospital, a 300-bed facility in Ontario, Canada, was one of the first new customers outside the United States to order G4 systems to receive all the advantages of state of the art technology on their initial decision to automate their medication distribution and control process.

Looking forward, I expect a steady stream of existing customers to upgrade to G4 and for new customers to be attracted to this next generation platform for the efficiency, security, and safety improvements it offers.

And on the heels of this large product launch in late June, we announced that the new G4 platform has also achieved certification as a modular electronic health record. Omnicell is the first standalone automated medication system to receive this certification Hospitals can use our system to meet a portion of the requirements in achieving meaningful use objectives to qualify for federal funding incentives from the American Recovery & Reinvestment Act. This is an important certification for our customers who are facing unprecedented regulatory and economic pressures in a complex healthcare environment. We are proud to be the leader in our product segments and support our customers' efforts to achieve financial stability while also increasing clinical efficiency and improving the quality of patient care.

During the past quarter our products were again recognized by winning the highest award from the leading independent research firm KLAS. The OmniRx has won the category leader award for automated dispensing cabinets six years in a row and for the past two years has won the Best in KLAS award, an award given to products of particularly high distinction. Our WorkflowRX Carousel was awarded the highest available ranking of category leader for the second consecutive year, and our anesthesia work station was awarded category leader in a new classification for operating room anesthesia systems.

With our new G4 platform, we believe we have the best products in the industry and the KLAS awards will not only reinforce this belief, but also demonstrate we have the best customer experience as well.

Let me turn it back over to Rob for some financial results.

Thanks Randy. The second quarter was a very big quarter for us with revenue and profit exceeding expectations, excellent profit growth sequentially from Q1. The order growth we saw in 2010 is now completing the installation cycle and we're seeing the results increasing our product revenue.

Our service revenues also remain strong. We continued winning new customers during Q2 with orders for new or competitive conversioned accounts totaling 28% of our total orders this quarter. During Q2, about three-quarters of the new accounts were from Greenfield accounts buying medication automation for the first time and one quarter from competitive conversions. Year to date, orders from new and competitive conversions are 34% of our total orders, in line with expectations.

Revenue for Q2 2011 was $61 million, up 7% from the past quarter and up 12% from the second quarter a year ago. Net earnings after taxes for the second-quarter were $2.6 million, or $0.08 per share, which is an increase of $0.06 per share from the past quarter and up $0.02 per share from Q2 of 2010.

Our headcount at the end of the quarter was 771 people, up nine from the past quarter. Our gross margins continued to be strong during Q2, reflecting changes we've made in our product costs and continued strong mix. Expenses this quarter shifted back to more normal rates without some of the anomalies that we saw the past quarter. R&D capitalization rates returned to the rates we experienced prior to the G4 launch, and we had a reduction in SG&A following the nonrecurring charge we took for the settlement of our lawsuit with MediSys in Q1.

Now I'd like to cover our non-GAAP results and the adjustments to GAAP results are the exclusion of stock compensation expenses in the current quarter and the exclusion of both stock compensation expenses and the one-time litigation settlement fee in Q1. Stock compensation expense includes the estimated future value of employee stock options, restricted stock, and employee stock purchase plan. And since stock compensation expense is a non-cash expense, we use financial statements internally that exclude stock compensation expense in order to measure some of our operating results.

We use these adjusted statements in addition to GAAP financial statements and we feel it is useful for investors to understand the non-cash stock compensation expenses that are a component of our reported results. We also measure our business excluding infrequent events such as the litigation settlement charge. A full reconciliation of our GAAP to non-GAAP results is included in our press release and will be posted on our website.

Our Q2 2011 non-GAAP net income was $5 million or $0.15 per share which is $0.02 higher than analyst consensus. Our Q2 2011 non-GAAP net income increased from Q1 2011 non-GAAP net income of $3.7 million or $0.11 per share. We were also up from Q2 2010 non-GAAP income of $4.1 million or $0.12 per share.

Adjusted earnings before interest, taxes, depreciation, and amortization, which also excludes stock compensation amortization, were $8.6 million in the second-quarter of 2011, up from $6.3 million the past quarter and up from $7.7 million a year ago.

Our cash and short-term investments were $181 million at the end of Q2, roughly equal to the past quarter. During the quarter we continued the program to repurchase our stock that we began in Q1. With the addition of $3.5 million of stock repurchased in Q2 2011, we've now repurchased $8 million worth of stock year to date at an average share price of $14.28. We have $17 million more share repurchase authorization outstanding.

In addition to using cash for the stock buyback, we added to our inventory by $2 million to cover the transition to our G4 platform. Initial supply of our new computer console for the G4 platform was produced in our factory in California to assure a smooth transition and quick correction of any initial production issues. Consequently, we carried inventories in components and finished goods normally carried by our suppliers. During Q3 we will transition the production of the computer console to our suppliers in China and we expect our inventories of $17 million to decrease through the year.

Accounts receivable and days sales outstanding were 65, up one day from the past quarter, but still on the low end of our expected range of DSO. And for the rest of 2011, we expect to continue growing the business towards the guidance we gave in February.

We continue to expect product backlog at the end of 2011 to be between $138 million and $144 million. As we've discussed on previous calls, our sales mix has shifted more towards larger transactions and the timing of closing larger transactions is more difficult to predict. The customers' decision process can easily slip from one quarter to the next.

Our backlog guidance is dependent upon several larger transactions closing in the second half of 2011. Our orders we currently have in our backlog give us good visibility to the revenue to be installed in the next two quarters and beyond. We continue to expect 2011 revenue to be between $240 million and $245 million.

We previously gave guidance for 2011 non-GAAP earnings, excluding stock compensation and litigation settlement expenses of between $0.51 and $0.56 per share. We now expect to be at the high end of that range. And these expectations assume an effective tax rate of 40% on GAAP earnings and no material change in interest rates.

And now, Operator, I would like to open the call to questions.

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

Good afternoon, gentlemen, and congrats on the nice quarter. In terms of the G4 rollout, it seems like one, you're excited. Two, you sound pleased with the customer response. Can you help us understand at all what kind of pipeline of opportunities you've built there and how that might translate to revenues?

Yes, so Steve, as we've talked about in the past, there is a great opportunity to upgrade systems that are installed in the field right now that we've sold over the last five to six years with the new technology. We are happy with the response to the announcement that we made in May, but it's still kind of early. There is a cycle that customers have to go through, including getting upgrades into their budget. So we're happy with the response we've seen and the increase we've seen in early stages of our pipeline, but I think it's still pretty early to tell exactly what the overall result will be.

We do expect that the customer buying cycle, which is anywhere between six months up to two years, will continue to be the same buying cycle we see, so we do expect most of the revenue from G4 upgrades to be late in the year or next year.

And then in terms of the Savvy rollout in the context of G4, the Savvy rollout period, what can you tell us about reaction and orders as it relates to Savvy?

So we're very happy with the initial orders for Savvy And Savvy obviously is a brand new product in the marketplace. We've got several new orders that came in on Savvy. We think that those customers are going to kind of buy it in an incremental way, try out the new system, change their workflows. But so far we've very happy with how Savvy is going.

Have you shipped any for revenue beyond some of the beta or really -- real kind of live orders since the announcement in May?

No, we just started taking the orders in and there is a bit of a cycle, so we do have the beta units as you mentioned and we do have orders that we'll be shipping this quarter.

Will the lead times and the requests for installation of those be quicker, higher velocity potentially? Or are you still kind of figuring that out?

That is something that we don't know yet. Being a new class of product, we're not exactly sure what the whole cycle will be on it and we'll learn that as the year unfolds.

Okay, one more for me and then I'll hop back in the queue. In terms of environmental factors that impact your customers psyche, ability to spend, the macroeconomic environment seems to have become a bit less certain in the last eight weeks. And I've seen some news on credit downgrades, credit rating downgrades for not-for-profit hospitals, a little more consternation on the part of CFOs. Is this just headlines? Are these just headlines sloshing around or are you sensing any additional challenges or trepidation on the part of customers our there in the real world?

Well one of the good things about our customers is that they don't react to small upswings real quickly and that they don't react to small downswings real quickly either. Right now we see a real healthy pipeline. Customers, especially the ones you talked about before, the bigger institutions, academic institutions, are moving through this process at about the same rate that they've moved through in the past. So I wouldn't say that we've seen any material change in our opportunity due to what we've heard in the news in the last couple of weeks.

Thanks for taking my questions.

Newton Juhng, FBR.

Afternoon, guys. I had a couple questions here. One was, Rob, did you say that the inventory was going to be reduced going forward because -- and I didn't catch why, something to do with consoles moving to China. Is that manufacturing just moving out offshore?

Yes. Some years ago we established a supply chain with China suppliers, suppliers in China for the console of our system, the computer console. For the G4 transition, since it's a whole brand new console, we decided to take some risk out of that transition by doing the early production here in California. And everything is going great with that, but products are now in the midst of moving that supply chain back to our normal suppliers in China. But in the meantime, building it here caused us to buy a lot of parts and more finished goods inventory on the console that we don't normally hold. It's normally inventory that our suppliers hold. And as that product moves into a normal supply chain, our inventories will reduce.

Gotcha. Understandable that you you'd want to control that process maybe a little bit tighter at first. Okay, so in the past we've talked about your visibility being two to three quarters. Pretty high, reflective of what you have in your backlog. So as we look at your decision here to talk about the high end of the range, I'm just wondering, your revenue guidance you kind of reiterated, but you moved to the higher end of the range on the EPS side. So can you kind of help me understand where -- does the revenue line also kind of run more to the high end of the range or what's the variability there that would give you confidence on the top end of the range on the EPS but not really movement on the revenue side?

Well, we're doing well year to date relative to our own expectations on our profitability. We've had, as you've seen, very strong margins driven by our own cost reduction activities as well as our product mix. And we believe that will continue through the rest of the year based on what we see being installed. And so based on those forecasts, we believe we'll be at the higher end of the profit range thus staying on that same revenue range of 240 to 245.

Okay. The other thing I was just wondering about was your competitive conversions and committed displacements. You said 28% in the quarter coming from those, so roughly 7% of your numbers coming this quarter from that. That seemed to be a little down historically with what you've seen in the past and I was just wondering if you could kind of give us some idea -- I know that there's been some quarters where it's been very low and other quarters where it's been really beefy. Just giving us some better understanding as to where those numbers came out this quarter?

Yes, Newton, this is Randy Lipps. We certainly don't see any change in the rate of our business and the mix of new customers and competitive wins. It does move up and down during the quarters based on the size of deals. As the deals have gotten larger, as we've moved through the years. But our year to date is roughly in the same range it traditionally has been for the last six years or more which was 33%. So we feel pretty confident that by the end of the year we'll be in the same range that we traditionally have been which is the medium 35% as a total.

Gotcha, Randy. So the pipeline that you're looking at still looks good in terms of the mix there and so you feel pretty confident on that front?

Absolutely.

Okay, thank you very much.

Sean Wieland, Piper Jaffray.

Thanks. Rob, you said when you're thinking about your yearend backlog guidance, there's a couple of large transactions in there. Tell us how you weight those or how you think about adding these larger transactions where the timing is uncertain. How do you add those into your guidance?

Sure. So we take between 600 and 700 orders every quarter. And in any one quarter there's 10 to 15 of these rather larger transactions. So obviously it doesn't take very many of them to move one way or the other to change the results on bookings. Typically they're far enough along in the sales cycle that we can see that they will be a transaction for us, it's just a matter of when they close. Whether or not we include them in our forecast is dependent upon how far along they are in that sales pipeline and what we're seeing in the customer's decision making process.

If it's a customer where there's many, many people involved in the decision making process and I would say they're not moving consistently along, then we tend to keep them out of the forecast. If the customer is the opposite where they seem to be decisive and where they're clearly moving along with a purpose, we tend to put them in the forecast. And then we take into account contracts and all the other aspects of the deal.

There are always several other transactions of a sizable nature that kind of form a pool of upside in our potential bookings and therefore in the backlog. You've seen in the past where we've ended up with more backlog than we expected typically because one of those transactions in the pool of upside went along a little bit faster than we expected, recorded a month or a quarter earlier.

So we try to do our best estimate when we think these deals will close, and that's what we put into our backlog guidance. And I just would like to caution folks that it only takes a couple of them to change what the backlog will be.

Sure. Can you comment on your pipeline at all?

Well our pipeline, we're very happy with our pipeline. Our pipeline has pretty steadily increased over time since the downturn of 2009. We see that as good. There's more institutions in the process of assessing us. We're getting into more deals now since we have more sales people working the territory so to speak which is exactly why we expanded the sales team. And so we're happy with the additional pipelines they're bringing in.

Okay. So maybe could you humor us with year over year percentage growth in pipeline?

We don't really disclose those numbers.

All right, it was worth a shot. Okay, thank you very much.

It's larger than it was a year ago, how about that, Sean?

That's what I wanted to hear. Thank you.

Gene Mannheimer, Auriga.

It's Auriga, thank you. Great quarter, guys. A couple of quick ones here. I don't know if you mentioned it, but do you talk about what percent of the backlog have you built in for the Savvy product? And what portion of the backlog is related to government business?

So as I said earlier, we're a little unclear on what the sales cycle will be for Savvy. And so we really haven't earmarked any portion of our backlog specifically for Savvy. We do expect that we'll get orders for Savvy and we've got I'd say a sales goal for it, but it's just a little unclear as to how quickly those deals will close.

The government, typically the portion of the backlog we attribute to the government is relatively high in the October range because the government does most of their purchasing in Q3. So right now there is not a lot of future installs that we're looking at (inaudible) for the government, but that tends to change quite a lot and works down as the year goes on.

Thanks, Rob. And just looking at the numbers, gross margin came is strong again, relatively flat sequentially. How should we think about that going forward? Is there a lot more room to expand there or should we view most of the leverage in the model coming from SG&A going forward?

We continue to work on our gross margins all the time. We're always working on our cost structure, we're always thinking about efficiencies in the install process and the service process. But on the same token, we try to balance it out with customer satisfaction and make sure we've got plenty enough insulation and sort of people to give a great customer experience. We really expect most of the leverage as we work up to 15% operating margins, non-GAAP operating margins, to come from the SG&A area, SG&A and OpEx area.

Okay, excellent. And then last one for me -- you talked about the sales force expansion that's probably at least half a year in the works now. Can you talk about how that's going, vis-a-vis your expectations and what the sales count is today versus last quarter? Thank you.

This is Randy. I would just say that our expectations have been exceeded. It's really allowed us to have a much larger platform in the marketplace and these sales people have been performing quite well and already have some nice wins under their belt. So I think the move that we made to expand the sales force was a good one. And when you combine that with the new G4 announcement, which really allows us to go to every single customer and put them in play over the next five years for an upgrade, is a significant addition to our market as we address it. And I didn't really catch your last question.

The back half of that, Randy, was on the sales force count today versus last quarter or when you bifurcated the territories. Thanks.

I think our total target was roughly 60 and I think we always have a few openings, so it's probably a little less than that. But we're pretty close to that target, at least within 10%.

Great. Thanks again.

(Operator Instructions). Brad Hoover, Sidoti & Company

Hi, good afternoon. Thanks for taking my questions. Just going back to the backlog and large hospitals, obviously they're still a meaningful part of your backlog today, but they certainly were a year ago. And I was just curious, if you look at the mix in total, is it still a similar percentage of large hospitals? Or is there any sign of life from small hospitals? Maybe just core relative to last or two quarters ago?

Well the smaller hospitals tend to move through the backlog a little bit quicker. So thinking about how to actually answer your question, I think your question really relates to are we seeing any resurgence in smaller institutions. I would say that the smaller institutions would vary quarter to quarter We haven't seen any meaningful change or recovery to levels that smaller institutions, purchases from smaller institutions that we were seeing back in say 2007, but we have seen kind of I would call it a slow but steady recovery from the smaller institutions.

The larger institutions I think one, just become larger themselves, they're purchasing more. And we have been winning several multi-hospital organizations that give us orders for just about all of their hospitals. And so they make up a pretty sizable piece of the backlog. And institutions like New York Presbyterian or Sentara have a pretty lengthy sales process or installation process.

Okay, thanks, Rob. And just secondly, the meaningful use certification, I know it's only about four or five weeks since you announced that, but just curious what the interest is among customers so far and what kind of conversations you're having with them and what they're asking about?

I think it's a confidence factor for our customers that we have products that are certified to meet the meaningful use criteria. And we've gotten several -- feedback from several customers that it actually played in several of the points for which they chose us. So we do think it's important to have and it will influence decisions. But there are a lot of key characteristic on why people buy our products and I think that's just another one to add.

Great. Thanks, Randy. Just lastly, Rob, could you provide the approximate revenue contribution from Pandora and where that's split between product and service revenue if you can ballpark that for us?

So Pandora we had talked about before that we expected $3 million to $4 million of revenue from Pandora this year and we're very much on track for that. We're through the point where we had revenue deferrals on Pandora so everything is pretty much happening as we expected. Pandora tends to be a little bit more than half in service content and the rest of it is software licenses.

Okay, great. Thanks, guys.

Leo Carpio, Caris and Company.

Good afternoon, gentlemen. I actually have two quick questions. First question regarding the hospital capital spending environment. It sounds like it's still predominantly driven by mid and large hospitals and the small hospitals are still on the sideline. I think in the past you have indicated there was some encouraging signs it may be coming back. Is it still the same situation we have right now, that small hospitals are still on the sidelines just waiting for improving economy? Or is it something else that we're looking for.

Well I wouldn't say that they're completely on the sidelines. We certainly do have purchases from small hospitals and some of those purchases are surprisingly large. But just not quite the quantity of purchases from small hospitals that we saw back in 2007 range through 2008. We -- like I said, we've seen some improvement, kind of slow and steady, but not a material change. I think small hospitals are still struggling with the payer mix and unemployment and all the things that have been giving them trouble over the last few years.

Then turning to the international market, are you seeing any more activity there in terms of the UK or perhaps the Mid East and any insight in terms of the (inaudible) Far East picking up in the future?

Well the international market is still an early adopter market as we've said over the last few quarters. We do see good activity from mostly teaching type institutions or other type of thought leaders in a variety of regions around the world. I think we've had sales in over 10 different countries just so far this year. The economy and economic conditions in the UK and Europe are not great, but we are still seeing sales there. Middle East continues to be a good geography for us and Asia is kind of in the early emerging stage.

Okay, and then last in terms of the competitive environment, has there been any change there in terms of (inaudible), McKesson or places you're getting most of your wins from? And how about [Pixus]? Have they come back or they're pretty much status quo situation?

Well Pixus has most of the installed base and so just by the numbers we have most of our competitive conversions from Pixus, not McKesson. But we do see both competitors in the marketplace. We certainly see (inaudible) all the time. I would not say that anything has materially changed on the competitive front as far as we can see.

Okay, thank you.

Beau Davenport, Stifel Nicolaus.

Hi, guys. I missed your cash flow in the quarter, your operating cash flow. Thanks.

We generated about $7 million from operations, EBITDA in rest of operations

What was your CapEx in the quarter?

CapEx was 2.

2? Okay, great. Thanks a lot.

Steven Crowley.

Hey, guys. In terms of the government business that you're looking at and hoping to corral, does the mess in DC, the budgetary mess present an extra obstacle in VA hospital ordering or not really?

Steve, it's Randy. I don't think so at this time. I think sort of military spending, VA spending is probably pretty high on the list and we haven't gotten any indications that there would be issues. Not saying that there couldn't be, but we haven't seen anything that would indicate that a slowdown was there or a delay.

And then you kind of addressed, or you largely addressed this, but in terms of the pricing environment, we continue to run across a situation where you've made good inroads in customers and Pixus throws them some pricing that's too good to pass up. But it still sounds like that's one off versus any epidemic?

No, I think the competitive situation is largely the same as it's been except it's probably improved for us to the advantage side because we now have the G4 which really puts a distinctive separation between us and our competitors in the fact that we're on better architected systems, better operating systems, and we're the first one to be certified. So I think when we get into competitive situations, people are looking for leading technology that's going to get them where they need to go. And I think that price is always an issue. But long term, customers have got to figure out who they want to go and partner with. And I think we win more than our fair share by offering our same model. But I haven't seen anything significantly different in the marketplace. I would say competition is at a different level.

Thanks for the color there. On the numbers side, Rob, last year in the second half of the year, there was a pretty big jump in R&D. You eluded to some of the reason for that, but I'm wondering how we should think about the slope in R&D for the balance of the year. We kind of saw it step up in Q2 from Q1. Should we expect that kind of step through the year or is there something going on there we should talk about?

Well, Steve, we're spending about $6 million a year on a gross basis for R&D. There's a little bit of an ebb and flow quarter to quarter based on whether we're doing some prototypes or not. But about $6 million. Now what causes the fluctuation, a large fluctuation quarter to quarter, is how much of that is spent on software and is capitalized on the balance sheet and amortized over a later point in time which is the later stage of the software development process when we're going through testing.

We did a lot of beta testing at the beginning of the year in Q1 and in Q2 as we rolled out the G4 platform. A little less in Q2 than we did in Q1. And we'll see that tapering down and so we'll be capitalizing less of the R&D and rolling more of it directly through the P&L in the second half of this year.

But it could step up a bit towards $6 million but there will still be a capitalized portion?

There will.

Okay, and then on the sales and marketing side, how should we think about that? You've had some factors that have knocked that line up and down. It seems like we're in a more normalized mode here coming out of Q2. You've got a big tradeshow later in the year. How should we thing about that line?

Well there's a lot of operation spending in SG&A. All of our sales and marketing and G&A functions are there. We have made investments, as you know, starting in the last year in our sales force. We grew the sales force in the last year and have experienced a higher spending rate due to that. Otherwise, we're pretty much keeping our headcount flat as you've seen from the headcount reports I've given each quarter. And we expect to be able to grow the revenue, holding those lines flat. So other than unusual one-time expenses, you ought to see it relatively at the same level that we're at today.

Yeah, there's a little bit of variable cost because of commissions I trust, but no real steps in there that you can put your finger on right now?

That's right.

Okay. In the service gross margin, from time to time there have been periods where you've had people run beyond lease terms and such and those were enhancers to the service gross margin. It doesn't sound like the nice number you just put up in Q2 was enhanced by anything like that. But is that 49.5 kind of beefy relative to a normalized number or is that a new level for us?

Well our service function, you're right, we had some catching up on some of those things you just mentioned that enhanced the revenue in the past. But we've also been shipping steadily and increasing our installed base and most of our customers do buy service from us. And so that steadily increases the service revenue. We haven't have to increase our service staff much and so we're operating at what we feel is a pretty efficient service gross margin right now. And we expect that business model to stay relatively consistent through time.

Great. Thanks for the extra color.

Newton Juhng.

Thanks. I just -- I'm not sure I missed this. Did you provide what the third quarter number on EPS might be for guidance or is that something you decided not to disclose this time around?

I didn't give any guidance on anything specifically for the third or fourth quarter. Just held to the upper end of our EPS range for the year.

Okay, and there was no particular reason why you chose to do that, obviously being given quarterly guidance for a little bit now?

The last few quarters I did give some guidance on the quarterly results because we had some unusual activities going on obviously that were before the announcement. We had the G4 announcement coming, but then we had expenses associated with that so I wanted to make sure and give some specific guidance. We don't have those sort of unusual activities in front of us now.

I gotcha. Okay, I'll take the rest of my questions offline. Thanks.

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

Well thanks for joining us today. I think at Omnicell we've got a great business model and with our G4 launch it really allows us to go out and upgrade all of our customers in the marketplace. In fact the value of that is probably around $250 million over the next five years. With our award winning products and a certification that helps hospitals meet the needs they have in a changing healthcare environment, being able to deliver the best customer experience in the marketplace, really puts us well positioned and allows us to expand on our revenue base and improve our profitability over the years to come. So thanks for joining us today.

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