Omnicell Inc (OMCL) 2011 Q3 法說會逐字稿

Good afternoon. My name is Cortless, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Third Quarter Conference Call. (Operator instructions).

I would now like to turn the call over to Mr. Rob Seim, CFO of Omnicell. Mr. Seim, you may begin your conference.

Thanks. Good afternoon, and welcome to the Omnicell 2011 third quarter results conference call. Joining me today is Randall Lipps, Omnicell's Chairman, President, and CEO.

You can find our results in the Omnicell third quarter press release, posted in our 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 10-K 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 October 27, 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, Inc., and any taping, other duplication, or rebroadcast without the express, written consent of Omnicell is prohibited.

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 the remaining quarter of 2011. Following that, we'll take questions.

Good afternoon, and thank you for joining us today.

I'm pleased to announce we had a strong quarter in Q3. Our new G4 product line, which we announced and began shipping in early May, has continued to see success in the market, highlighted by upgrades to our installed OptiFlex supply management solutions at Athens Regional Hospital in Georgia and installations of our new controlled-substance management solution at the Wellmont Health System in Tennessee and at Sentara Health in Virginia. We also had our largest order yet for the new Savvy mobile-medication system.

In Q3, we took new G4 orders from every size and type of hospital, including new orders in the Middle East and the UK. Competitive replacement orders came from institutions ranging from large, academic centers, such as the University of Chicago Medical Center, to community hospitals, such as Schneck Medical Center in Indiana.

The University of Chicago Medical Center, a 541-bed, teaching facility, nationally recognized by "US News and World Reports" in 12 specialties, signed an exclusive agreement with Omnicell to replace their existing medication control systems. The University of Chicago chose Omnicell for our comprehensive solution set that includes advanced software for managing nurse workflow, medication availability, and security. The solution includes our workflow Rx software for managing medications in the central pharmacy housed in ultra-efficient carousel storage units, OmniRx medication cabinets running Anywhere RN software to enhance nurse workflow, SinglePointe to increase medication availability and nurse efficiency, and Omni dispensers, what we believe to be the safest distributed medication control modules that eliminate costly inventory control tasks from the nurse's daily routine.

The University of Chicago utilized an independent consultant to perform an activities-based costing analysis that demonstrated the workflow efficiency savings of the Omnicell solutions. In fact, they estimated that Omnicell solutions would save them 22,000 nursing hours annually, which would be reallocated back to patient care.

In today's economic environment, the efficiency generated from an Omnicell installation is every bit as important as the clinical improvements our systems provide. The third-party validation completed at the University of Chicago further underscores our capability to contribute to helping solve the financial challenges all healthcare institutions face, whether they are large, academic institutions or smaller, community-based hospitals.

Last week, we announced that one such community hospital, Schneck Medical Center in southern Indiana, had recently chosen Omnicell to replace their existing medication control vendor. Like the University of Chicago, this 114-bed, community healthcare center was attracted to our broad set and workflow efficiency of our advanced software in making their decision to switch to Omnicell.

Every healthcare facility will need to become increasingly more efficient while also providing increasingly safer care. Our solutions bring important improvements tailored to the individual needs of our 1,600 installed customers in every type of acute-care facility.

Our G4 platform was designed to make it easier than ever for hospitals to reduce costs, comply with increasingly stringent regulatory pressures, and safeguard the patient. 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. G4 includes 11 new products, including the first automated dispensing system powered by Windows 7, our new Savvy mobile-medication system, a redesigned anesthesia workstation, and a redesigned controlled-substance management system, which is the latest -- which is the last of the platform to begin shipping during Q3.

G4 was the most extensive product announcement in the history of Omnicell, and I'm very happy with the success so far.

Since G4 is compatible with previous versions of our products, we have made it easier for our customers to take advantage of the new G4 capabilities while protecting the investments they have already made in Omnicell systems. Existing customers can upgrade their current installation to get all the benefits of the latest technology, and new accounts get the ability to take advantage of state-of-the-art technology upon making a decision to upgrade their medication distribution and control process.

So, in summary, we believe our new solutions provide tightly integrated capabilities, the highest patient safety standards, and cost savings through workflow efficiency, all in a package that can protect the customer's investment.

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.

Now I'll turn it back over to Rob for some financial updates.

Thanks. As Randy said, we had a very good third quarter, marking a milestone for Omnicell with record revenues of $64.4 million.

Following the announcement and production ramp-up of G4, we saw strong installation demand for the new system through the third quarter that drove revenue up over $3 million, or 6%, from Q2 and up 14% from Q3 of 2010. We continued winning new customers during Q3 with orders from new or competitive conversion accounts totaling 30% of our total orders this quarter. During Q3, about half of the new business was from greenfield accounts buying medication automation for the first time and half was some competitive conversions. Year to date, orders from new and competitive conversion accounts are 32% of our total orders, continuing a six-year trend of consistently adding to our customer base.

Also during the quarter, we saw an increase in the mix of orders from smaller hospitals. While our mix of business is still weighted heavily to large orders, the increase in orders from smaller hospitals is an encouraging change from previous quarters.

Net earnings after taxes for the third quarter were $3 million, or $0.09 per share, which is an increase of $0.05 per share from Q3 of 2010.

During our transition to the G4 platform, we elected to produce a computer console in our California factory to assure a smooth transition to the new products. That early production carried a higher cost than products supplied through our normal contract-manufacturing partners in low-cost regions, which attributed to a 200 basis point drop in gross margin to 54% between Q2 and Q3. We have now transitioned the bulk of our production to our normal supply base and expect to see product gross margins increase again as the California-based production is consumed.

Our expenses in Q3 stayed relatively flat from last quarter, and our tax rate booked in Q3 was lower than previous quarters, as we accounted for our current expectations of research and development tax credits for 2011.

Now I'd like to cover our non-GAAP results. And the 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. Since stock compensation expense is a noncash 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 noncash stock compensation expenses that are a component of our reported results. And a full reconciliation of our GAAP to non-GAAP results is included in our press release and will be posted to our Website.

Our Q3 2011 non-GAAP net income was $5.4 million, or $0.16 per share, which is $0.01 higher than analyst consensus. Our Q3 2011 non-GAAP net income increased sequentially from $5 million, or $0.15 per share, and were also up from Q3 2010 non-GAAP income of $3.6 million, or $0.11 per share.

Adjusted earnings before interest, taxes, depreciation, and amortization, which also excludes stock compensation amortization, were $9 million for the third quarter of 2011, up from $6.6 million a year ago.

Our cash and short-term investments were $187 million at the end of Q3, up $6 million from the past quarter.

During the quarter, we continued a program to repurchase our stock that we began in Q1 of this year. With the addition of $2.5 million in stock repurchased in Q3 2011, we've now repurchased $10.5 million worth of stock year to date at an average share price of $14.20.We have $14.4 million of stock repurchase authorization remaining.

Inventories were $17 million again this quarter. We expect these inventories to reduce during Q4, since we are still carrying inventories of components that would normally be carried by our suppliers. We are also carrying some additional inventory to support the market launch of our new product lines, such as Savvy.

And accounts receivable day sales outstanding were 66, up one day from the past quarter but still on the low end of our expected range of DSO.

For the rest of 2011, we expect to continue towards the guidance we gave in February and exceed that guidance in some respects.

We expect revenue to be at the high end of our previous 2011 annual guidance of between $240 million and $245 million. During our transition to G4, some customers decided to postpone their installations to Q3 in order to take advantage of the new system. This caused Q3 to be a little stronger in revenue than usual. Those extra installations in Q3 will not repeat in Q4, which we believe will make Q4 revenue be in the range of $62 million to $63 million, and that puts us at the high end of the $240 million to $245 million annual revenue guidance range.

We previously gave guidance for 2011 non-GAAP earnings per share, excluding stock compensation and litigation and settlement expenses, to be at the high end of the $0.51 to $0.56 per share range originally set at the beginning of the year. And now we're increasing that guidance. We expect non-GAAP earnings per share to be $0.57 to $0.58. These profit expectations assume an effective tax rate of 38% on GAAP earnings and no material change in interest rates.

And, for backlog, we previously guided to a range of $138 million to $144 million, and we expect to still be within that range. We have sufficient business in the late stages of our sales process to meet guidance. However, achievement of the backlog guidance is heavily dependent on several larger transactions closing in the last quarter of 2011. While achievement of the high end of the range is possible based on the high mix of new, large customers in our forecast and our experience with these types of transactions, we now guide to the lower end of the backlog range, which is year-over-year growth of 9% to 10%.

Operator, that's the end of our prepared remarks. I'd like to open the call to questions.

(Operator instructions). Steven Crowley, Craig-Hallum.

Congratulations on a nice quarter. In terms of understanding the backdrop for the business, it sounds like the response to G4 has been good. Smaller hospitals are coming back. Your yearend backlog performance is going to be somewhat dependent or very dependent on some larger pieces of business closing, implying larger hospitals. What is the tone and tenor of those larger hospitals in terms of capital spending and the overall environment for you guys as you look at fourth quarter here?

Well, we've seen the larger institutions kind of all along here have some strength. I think the larger institutions, especially the academic institutions, are doing well. They have money to spend. They continue to put in best-of-breed solutions and systems and tools. We certainly have, as said several times, seen the mix of our business shift more towards them. It was a little encouraging to see more smaller institutions buying in the third quarter. I wouldn't say that one quarter is a trend. But it was certainly encouraging to see some resurgence there.

Overall, I think that, as far as general economic conditions, all healthcare institutions are under stringent demands. There's a lot of changes going on, and we anticipate that will just be the norm.

Okay. In terms of a numbers question, you addressed the gross profit margin drop in the quarter and the prospects for rebound. Really, the only other number that looks surprising in a somewhat negative light, and it's not a big-swing variable, was you had other income that flipped from modest interest income of $70,000 or so last quarter into the negative category, almost $200,000. Was there something quirky there? And is that a one-quarter phenomenon?

Yes. It really is a one-quarter phenomenon. We had some currency loss that is a little bit of residual from closing down our operations in India.

Okay. Back to the business. Randy, you mentioned the introduction of a new controlled-substance management product and the acceptance of that product by a couple customers. And I missed the first customer you mentioned. So I wanted just to ask for that again, plus maybe some more details on the opportunity for that product. How significant a price point is it or increment to your market opportunity?

Well, one of our goals is helping hospitals manage their controlled substance. These are the narcotics, if you will, that require additional regulatory controls. And, at Wellmont, which is in Tennessee, which is a three-hospital -- a six-hospital system, and, at Sentara, which is a large, three-plus-hospital system in Virginia, both implemented our new controlled management system. And this is quite important because the architecture of this new product really allows us to run off a single database, so they can manage all of their drugs, both up on the floors and down in the pharmacy, that have to do with controlled substance.

So, it's a very advanced system, the most advanced system in the marketplace. And we think a lot of customers are going to move to the new platform fairly rapidly because, once you have our server, you basically have the database, and you're ready to go.

It's probably not the largest of markets. You can spend somewhere between $50,000 and $100,000 a customer on this new product. So it's not as large as whole hospital system cabinets. But it is a very important piece of our solution set.

Great. And just one final question for you, Randy, and I'll hop back in the queue. You appropriately highlighted the success at a major new customer, the University of Chicago Medical Center. In and of itself, it seems pretty significant. But I'm wondering if the win there and the switch from one of your larger competitors has prompted a major opinion leader in the Chicago area, whether it's prompted any of the followers of that opinion leader to engage in discussions with you, and whether or not there is that opportunity for some viral benefits besides UC.

Well, I think there always is. Every time you announce a large medical center or regional player, it certainly has an impact in other hospitals in the region. And Sentara was a good example of that. So was Wellmont in Tennessee.

But University of Chicago is a real important hospital in the area of the pharmacy. They're well respected not only in their region but in the nation. And so we think it has a lot of impact on our visibility and this new G4 release as to the true difference you can provide to your employees as a hospital and, eventually, to the patient in terms of safety and efficiency.

As I noted in the comments, the nursing received huge benefits from the workflow. And those are the kinds of things we think have more importance in the future, not only the safety, but hospitals have got to get more people through the system quicker. And, with our solution set and the new G4, it really helps the hospital meet those goals.

Great. Thanks for taking my questions.

Sean Wieland, Piper Jaffray.

How did the shipments of the Savvy carts go during the quarter?

That product is still in, of course, the early stages. We're more in the taking order process as opposed to actually shipping them. We did have our largest order so far of Savvy, which we're happy about. There's a lot of the interest, I'd say, in that product. We actually have kind of a marketing program going on right now, where we've got a road show going on around the country, and that product's driving a lot of interest as it goes into different hospitals and people see it.

Okay. Cerner -- We just got off the Cerner call, and they said that their Pyxis sales are very strong. Are you seeing any impact of the Cerner relationship with CareFusion on your win/loss ratio versus Pyxis, particularly in Cerner accounts?

Well, I think we compete in all of the HIS companies fairly well. But there are some customers who are dedicated to the Cerner platform and see some benefit in the relationship there. But it doesn't prevent us from competing. We feel like we have a lot of features and benefits to offer, particularly with our new G4 platform, that make sense there.

Okay. And, then, these couple of handful of outlier deals in the forecast for the fourth quarter -- are these new footprints or greenfields? Are they existing customers? Can you give us any characteristics?

Well, most of these or a high proportion of these that so happen to be in the fourth quarter are new customers. We're already the vendor of choice. We just have the additional step of the contracting piece, which is a very large, variable piece, whether it can get done quickly or gets delayed. But they're mostly new customer -- new large accounts, new footprints for us. Almost none of them are existing customers.

Okay. Is it more a matter of -- that you're uncertain about the timing of when these contracts are going to come but not so concerned about (inaudible)?

Absolutely. We don't see any change in the momentum of the business or the competitive landscape which would lead us to think that the business is any different than it has been. And, in fact, the G4 launch is -- it's been extremely successful. I think it's helped us get more involved in some of these newer, larger deals that are making a larger part of the mix this particular quarter.

All right. And remind us. What percentage of the deals do you typically win when you're at vendor of choice?

Once we get to vendor of choice, we almost always win those deals.

99%?

It's just a matter of the -- I'd almost call it an administrative process of getting the contract done and the actual order configurations. In these larger deals, there's a team that has to go in and figure out exactly what they want to buy. We have seen at times that that could take two or three months to get that process done, and we're in that process with most of these customers. It's just a matter of whether it's going to get done by the end of the quarter or not.

Okay. That's great. Thank you very much.

(Operator instructions). Brad Hoover, Sidoti.

On the service revenue, is there anything that led that to decline sequentially, albeit it a small number, from the second quarter?

The service and other line has the service contracts in it, which makes up the bulk of that revenue. But it also has some other kind of miscellaneous categories of revenue, including additional, add-on training classes that we give and any time a customer goes into a month-to-month period after a lease runs out before they renew a lease, any time and material on services. And those things can fluctuate from quarter to quarter. We frequently have a few hundred thousand fluctuation up and down in that other category, and that's what we saw.

Okay. As far as G4 goes and kind of the sales cycle, I know we talked last quarter about it being a little too early to tell how that might look. Do you have any better sense as to how the cycle may work for G4?

I think the main thing for G4, since it's -- for a lot of customers, it would be an upgrade to an existing installation -- is for them to actually get it in their budget cycle. And what we anticipated were many of our customers go through a budget cycle in the fall. They're going through it right now. So we wanted to make sure to have that product announced a little bit earlier in the year, so they could learn what it was and, if they're choosing to move onto the G4 platform, certainly, in 2012, they could get it in that cycle.

I'm actually very happy with the order rate so far. We're actually seeing some upticks in the number of customers that are upgrading their systems. Of course, everything that's shipping now is G4, so all those upgrades are to the G4 platform.

Okay. Great. Thanks, Rob. Lastly, and then I'll hop off, just as far as M&A goes, are the two buckets still kind of generally, one, data analytics, and, two, kind of hardware/software automation? And, secondly, have any priorities shifted as far as what you're looking at within those areas?

No. We're still focused on those two areas.

Great. Thanks, Rob.

Leo Carpio, Caris.

A quick question regarding the small hospital cap-spending environment. How can you characterize it? Is it back to 2008 levels, or is it slowly de-thawing? The [order] activity you had this quarter sounds encouraging. Just trying to get a sense of the gauge and the speed of its improvement.

I would put it more in the thawing. It's not back to the 2008 levels. We saw a little uptick this same time last year, and we were encouraged by that. And then it pretty much flattened out, and now we've seen another uptick. So, as I said, one quarter certainly isn't a trend. But it is encouraging existing customers, small hospital customers, kind of across the board saw some strength.

Okay. And, in your conversations with hospitals, have they given you any sense of what 2012 cap spending budget looks like in terms of if they're improving? Or there's just concern over double-dip recession still?

Well, when we talk to individual customers, they all become kind of an individual personality. And some of them have plenty of budget, and other ones are tight in budget. We've seen several reports out that cap spending would be up somewhere in the 5% to 10% range. I'm sure everybody else has seen those same sort of reports, surveys of various hospitals. We take, certainly, a number of new customers each year, but I don't know that we have so many that we can get a statistical sample at any point in time.

Okay. In terms of the competition -- actually, a question from before. It sounded like in the Cerner conference call -- it seemed like Pyxis was doing well competition-wise. How about McKesson? Any updates there?

We don't see McKesson as frequently in the marketplace, certainly, as we see CareFusion. CareFusion is much more of the marketplace, so we see them in most deals. We compete very effectively with McKesson, and we have competitive conversions from McKesson accounts every year. But they have a very good product, and they're a formidable competitor also.

Okay. Thank you.

Gene Mannheimer, Auriga.

Nice quarter. I don't know if you mentioned this, as I came over from another call. But did you talk about the impact of the government business in the quarter? I think Q3 is seasonally pretty strong.

Q3 is always the large quarter for the US federal government, and, of course, we have a strong presence, particularly in the VA system. We did see a strong quarter, as we expected, from the government. It certainly wasn't a record spending quarter for us, but it was a good, strong quarter from the government.

Okay. I don't know want to turn this into a Cerner call, but they also cited, I think, record levels of Rx station sales. Are you seeing them out in the market any more promoting their own, homegrown system?

We haven't really encountered Cerner selling their own system.

Okay. Good. Just another question on the gross margin dip. Did you sort of explain that? Was that related to any certain large deals or government business? How did you explain that?

No. It's neither of those. As we transitioned from our G3 to G4 platform, we decided to build those initial production units in our California factory, just to make sure that the transition went smooth since we were going 100% to G4. So we built a little bit more than a quarter's worth of production there. Those are much higher costs than our normal supply chain. That new production went really well. We've already transitioned production to our normal supply chain. But we did absorb the higher cost of those units built in California during Q3. So we'll see those margins start to recover again.

Perfect. Thanks, Rob.

[Charles Ryhee], Cowen.

If I could just maybe talk about the G4 again, and I might have missed it a little bit earlier, Rob, can you remind us again sort of what you think the total opportunity for the G4 upgrade cycle is? I know it only started earlier this year. An earlier question asked about it, and you said it's early stages. But what's sort of your expectations as we think beyond maybe the next quarter and we get into next year? Should we think that it's going to ramp at a much steeper pace? And I'll ask a follow-up. Thanks.

Okay. Just to remind everybody, our systems are modular, and we do have history upgrading our systems with new computer consoles. So we kind of know what the general path is and how quickly customers adopt. The cycle tends to take four or five years for customers to adopt. Most of them do adopt the new platform. We have over 30,000 cabinets out there today with a computer console in them. These consoles sell for about $8,000. So it's about a $250-million opportunity over five years.

Our expectation was that customers would be in the planning cycle, and some of the more early adopters would start adopting later this year and next year. As I said, we're pretty happy with how many upgrade orders we've already gotten. But we really expect that to kick in in 2012 in a bigger way.

Is it more of a linear curve, or is it maybe more like an S curve, kind of steeper in the middle part of the five-year cycle?

Yes. It is steeper. Years two and three are the bigger years of the upgrade cycle.

Okay. And maybe following on to another question about the budgeting cycle, any kind of -- ? How does these upgrades compete with the hospitals' resources as they're maybe doing more software upgrades? And how does that affect it, particularly for those hospitals that get an extension for stage two? Do you see that having an impact as you're discussing with hospitals on their plans?

I think most hospitals are putting the upgrades in their budget cycle. And I think the biggest issue is just scheduling with IT because they have a lot of activity. So, hospitals definitely want to move forward with it. I think a very large percentage of the folks that we've presented to are going to plan it in their cycle or already have planned it in their cycle over the next few years. And then it's a matter of, really, just scheduling it with the IT resources. I think that's important.

And stage two, meaningful use, still hasn't come out. I think, as that gets further defined, we believe there's some more closed-loop medication issues likely to arise there that we will strive to fill. In meeting those requirements, once those are defined, we'll have a better understanding of what they are and how our systems can help meet those things. But that's still in the early stages.

I'd also like to point out that, while this is a great opportunity for us in the whole scheme of a hospital's capital budget, this really isn't a big expenditure to do this upgrade. So, when you're talking about it competing against other software programs and so forth, it just doesn't raise to quite that level.

Got it. All right. Thanks a lot.

(Operator instructions). Steven Crowley, Craig-Hallum.

In talking about backlog, there's the element of how much backlog, and then there's an element of velocity of your backlog. And, as I think about Savvy and maybe even the G4 upgrade, I'm wondering whether the velocity of that backlog might actually be faster than the historical velocity of your backlog and whether or not we should start to think about that.

That's a pretty good question. There's actually differences in how fast the backlog turns over, depending upon the type of installation and the type of customer. Smaller customers and existing customers that are doing add-ons move through the backlog much faster than a new customer, like the University of Chicago or some of the others we mentioned here -- Wellmont or Sentara, who are very big institutions. They're doing substantial workflow changes when they implement our systems, and so their actual implementation point after they order is usually quite a lot of time in between those two events. So upgrades to G4 do go through the backlog, typically, faster.

Savvy, as I said, we're learning with that product. We don't know quite how fast that will go through the backlog. The installation on Savvy is pretty easy because it hooks onto an existing Omnicell installation, and it's fairly seamless. But there are some workflow changes that go with it. And so I think it's probably too early to tell how fast that moves.

All right. And, in terms of Savvy, it sounds like you've been, largely, in the order-taking mode so far. Do you begin to transition to shipping product in earnest in fourth quarter, or is that really an early 2012 story?

We had some early shipments in Q3, but I think most of the shipments for orders so far are going to be in fourth quarter and next year.

Okay. And then just one bookkeeping question related to -- What was cash flow from operations in the quarter, CapEx in Q3, and your plans for CapEx for all of 2011? I think you've talked around $7 million for the year, if I have it correct.

We're still looking at the $7 million to $8 million range for CapEx. CapEx for the quarter was $2 million. Cash flow from operations, I believe, was $7 million.

Thank you again for taking the questions.

And there are no further questions at this time. Mr. Lipps, do you have any closing remarks?

Thank you, operator. In just closing, we continue to have a lot of excitement in the Company in the successful launch of our G4 product, which has really invigorated both our customers and attracted new, potential customers to our platform. We continue to promote that. And, as people learn about it, we see them get excited about it, which is satisfying to see as we really help healthcare move to the next stage.

Thanks for joining us today, and we'll see you next time.

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