Omnicell Inc (OMCL) 2011 Q4 法說會逐字稿

Good afternoon. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Fourth Quarter 2011 Earnings Conference Call. (Operator instructions).

Thank you. Mr. Rob Seim, you may begin your conference.

Thank you. Good afternoon, and welcome to the Omnicell 2011 fourth quarter results conference call. Joining me today is Randal, Omnicell Chairman, President, and CEO.

You can find our results in the Omnicell fourth quarter earnings 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 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 January 26, 2012, 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 tapings, other duplication, or rebroadcast with the express written consent of Omnicell is prohibited.

I'll start the call today with a summary of our results. Randy will cover an update on our business. Then I'll cover our guidance for 2012. And, following that, we'll take any questions.

Our 2011 financial performance was strong, with revenues of $245.5 million and non-GAAP net income of $0.60 per share, both above the guidance range set at the beginning of the year.

We ended the year with $200 million of cash in the bank, DSOs at record lows, no debt, and with non-GAAP operating margins stepping towards our goal of 15%.

Our order rates were strong, and we actually had the highest orders in the second half of 2011 that we have ever had in a six-month period. But, while the orders were strong, they were below the levels we were forecasting for the fourth quarter, and we ended the year with backlog at $134 million, $4 million under the bottom of our forecast range. We had a high quantity of large deals we were forecasting for the fourth quarter. The close date of the large deals are inherently harder to forecast, and we found we over-forecasted for Q4.

Despite backlog being below our expectations, the composition of the orders in Q4 was very encouraging. 41% of our Q4 orders came from new greenfield customers or competitive conversions, with the orders fairly evenly split between the two categories. Greenfield customers are those customers buying automation for the first time.

We also took our first orders in Q4 for Mandarin-based products from China Resources Group, our new distributor of China. We continue to view China as a significant, underpenetrated market opportunity for us. And, while it is still early, initial uptake is meeting our expectations.

For the full year of 2011, orders from new and competitive conversion customers were 35% of our total orders, consistent with the range we have experienced for seven years in a row.

Revenue for Q4 2011 was $62.9 million. It was in line with our expectations and up 10% from Q4 2010.

Q4 2011 profit on a GAAP basis was $0.12 per share, up from $0.02 per share one year ago.

We also look at our profits on a non-GAAP basis, excluding stock compensation expense, which is a noncash expense representing the estimated future value of employee stock options, restricted stock, and our employee stock purchase plan. These non-GAAP financial statements are in addition to GAAP financial statements, and we believe it's useful for investors to understand the noncash stock compensation expenses. They are a component for our reported results. Full reconciliation of our GAAP to non-GAAP results is included in our fourth quarter earnings press release and is posted on our Website.

On a non-GAAP basis, EPS was $0.19 in Q4, $0.03 above analyst expectations. Non-GAAP earnings per share was up sequentially from $0.16 in Q3 2011 and up from $0.11 in Q4 of 2010.

Our profits in Q4 reflect the rebound of gross margins after a dip in Q3. Following the introduction of our G4 platform earlier this year, we absorbed the cost of early production done in the United States. Gross margins rebounded in Q4 as we transitioned production to our normal supply base.

Our profit also benefited from less variable compensation expense than usual. We provide variable compensation to senior and middle management based on various Company-wide and individual performance measures. In Q4, we did not pay this variable compensation because backlog was below our expectations. The variable compensation not paid drove $0.02 of earnings per share and is distributed in all the cost and expense lines of the P&L but is primarily in SG&A.

We have a long history of meeting our performance expectations, and we do not expect this P&L benefit to repeat.

Finally, our profit also benefited from the lower provision for income taxes, driven mostly by a more favorable mix of sales between states, driving the average state income tax rate down for the year. We believe the tax rate to expect in the future is 38% on GAAP income.

For the full year of 2011, our revenues of $245.5 million increased over 10% from 2010, and our non-GAAP profit increased 40% from 2010 to $0.60 per share. Non-GAAP gross margin was up 210 basis points, and non-GAAP operating income was up 290 basis points to 11% of revenue.

Our improvements in profitability were driven primarily by maintaining consistent levels of headcount while growing the business. Regular headcount was up just 3% to 773 employees at the end of the year. We expect to grow headcount slower than the rate of revenue growth until we achieve our goal of 15% non-GAAP operating margins.

Adjusted earnings before interest, taxes, depreciation, and amortization, which also include-- exclude stock compensation amortization, was $10.5 million for the fourth quarter of 2011, up from $6.3 million a year ago. For the full year 2011, adjusted EBITDA was $34.4 million, an increase of 30% from $26.4 million in 2010.

The balance sheet ended very strong. Cash was $200 million, up $16 million from 2010.

During the quarter, we continued a program to repurchase our stock that we began in Q1 of 2011. With the addition of $2 million of stock repurchased in Q4 2011, we have repurchased $12.6 million year to date at an average share price of $14.10. We have $12.4 million of stock repurchase authorization remaining.

We continue to believe that our organic growth can be augmented by complementary acquisitions. And our strong cash balance ensures that we are well positioned to act should the right opportunity present itself.

Accounts receivable day sales outstanding were 54, down 12 days from last quarter. There was a much higher percentage of installations that were leases in Q4. We sell our lease payment streams to third-party leasing companies and have a very short collection cycle on this part of our business. We expect DSOs to go back up during 2012 but to remain in the range of 60 to 70 days.

Now I'd like to turn the call over to Randy for an update on the business.

Good afternoon, and thank you for joining us today.

Overall, 2011 was a very good year for Omnicell. Revenue was up 10%. Non-GAAP net income was up 42%. And, although year-ending backlog was lower than expectations, backlog grew 6% from 2010.

We completely refreshed our product lines with our G4 announcement in early May. That refresh brought eleven new products to the market, including a new computer console for our medication and supply management systems, a new version of our open platform supply system, a new operating room medication management system for anesthesiologists, a new controlled substance management system for the central pharmacy, and a new version of our analytics software.

Our customers have the ability to upgrade their installed systems to get the latest in technological capabilities while protecting 70% to 80% of their investment. We believe these updated product lines give us a substantial upgrade opportunity with each of the over 30,000 Omnicell systems currently installed.

Our unique industry-leading products, such as SinglePointe, which allows up to 100% of the medications used in a hospital facility to be managed with our systems, and Anywhere RN, which allows for management of our systems from virtually any computer in the healthcare facility, continue to distinguish us.

Towards the end of 2011, we launched another industry-first product. We began shipping medication labeling capability integrated into our medication systems as an addition to our G4 product line, which allows nurses to apply patient-specific labels in their medication workflow and supports compliance with the Joint Commission national patient safety goal.

In the summer, we achieved modular certification for meaningful use of an electronic healthcare record, which gives CIOs satisfaction that our systems are compatible with the investments they are making in their clinical systems to meet new regulations and take advantage of government incentives.

Earlier in 2011, we expanded our sales team by 30%, and we saw the benefits in our reach to new customers. During 2011, we added 200 new customers to our installed base that now totals over 1,600 customers of our main medication and supply systems and over 2,500 customers in total. Added to our installed base during 2011 are leading healthcare providers such as the University of Chicago, the St. Francis Health System of Oklahoma, and Royal Victoria Hospital in Ontario, Canada.

Our reputation in the industry for innovation and service is underscored by several awards from the KLAS Institute, a prestigious, third-party rating organization.

In Q4, we announced our entry into the Chinese market after an extensive trial of our Mandarin language system in Peking Union Medical Center Hospital in Beijing. We are excited about the prospects of this market, where the top-tier hospitals represent an opportunity as large as the market in the US. As Rob indicated earlier, we took our first orders for our Mandarin language systems during Q4.

In Q4 2011, we expected an unprecedented number of large orders to close. I'm disappointed that we were not able to close enough of these deals to meet our backlog guidance. We hold ourselves accountable when we miss an objective. Our sales pipeline grew substantially after we expanded the sales force and announced G4 in the first half of 2011. [I feel] we were a little optimistic on how fast that pipeline would flow through the sales cycle. In today's constrained environment, everything can take longer than expected.

Now, this does not diminish my enthusiasm for our business. Our market in the US is not fully penetrated yet. And the international market is less than 1% penetrated. Our steady track record of innovation continues to bring the valuable, new solutions to the market that help improve healthcare for everyone. We help improve clinical outcomes by increasing patient safety, and we improve business outcomes for healthcare facilities by decreasing costs.

In 2012, I expect to continue to manage toward our growth strategies. We're pushing hard on these strategies. But we will be a little more cautious in our expectations. Our growth strategies are threefold. First, we will continue to provide our customers with an innovative suite of solutions to improve their operations that we believe they cannot find from anyone else. Second, we intend to continue to augment our internal development and acquire product lines that expand our ability to provide value to our customers. And, third, we will continue a focus on international markets that are growing.

We intend to stay keenly aware of our customers evolving operations and needs as the healthcare market changes.

Now I'd like to turn it back over to Rob for our guidance.

So, our hospital customers will be facing unprecedented change over the upcoming years. We're optimistic about how we can help them meet regulatory and cost challenges. We're also realistic about the constraints all healthcare organizations will experience. We believe our solutions are a key part of the technology that makes any healthcare organization more efficient.

Based on our opening backlog and the pipeline for new business that we have now, we expect 2012 revenue to be between $263 million and $267 million, up 7% to 8%. We expect non-GAAP earnings to be between $0.67 and $0.72 per share, up 14% to 22%. We expect there to be steady growth through the year, but we expect Q1 2012 to be $63 million to $64 million of revenue and approximate $0.13 of non-GAAP earnings per share.

We typically experience higher expense levels in Q1 due to several seasonality factors in our business, and we do not expect the benefits in variable compensation or the tax rate to repeat in Q1.

Consistent with our strategy, we expect orders to shift towards existing customers as the G4 upgrade cycle becomes a greater percentage of our business. Of the new customers, we expect greenfield customers to be a higher mix of our business because most international accounts are first-time buyers of medication or supply automation. And, consistent with being a little more cautious about the market, we expect 2012 yearend product backlog to be between $138 million and $142 million, an increase of up to 6% from 2011.

We're keeping our sights on our goal of 15% non-GAAP operating margins and expect to make significant progress towards this goal through 2012. And, by end of the year, we expect to be very close to achieving the 15%.

So, at this point, I'd like to open the call to any questions.

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

In terms of the business and the order book in the second half of the year, were there some elements or characteristics of customers who were healthier than others, large customers, small customers, type of institutions? Can you give us a little more color for where the slotting was easier and more difficult?

Well, Steve, you know, through the years, we've seen kind of step-function, incremental improvements in the small customers. I would say that, as we got through the second half of the year, we saw both the government and small customers coming back into the order book in a greater amount. I think just enough time has passed that those customers need to upgrade their systems. They're looking to expand their systems. They're looking to gain greater efficiency. So that was encouraging to see more business from those customers.

We also, of course, have more feet on the street, so to speak. We have more people on our sales teams, so we're able to cover those customers better.

And, in terms of the larger pieces of business that you were hoping to close, where you had been selected vendor of choice, was there a common theme to why those have been still slower to close? And what is the status of those closing opportunities? Do they really move to the end of the first quarter or to some logical time in the future, or have you had the opportunity to close some of those already in Q1?

Well, like we've said before, those larger deals have a lot of decision-makers involved, and, you know, a lot of approval hoops to go through, especially in today's economy. They-- The orders that did not close that we had in our forecast will be worked on through this year. But it's our experience that, when they slip, it's usually because of additional approvals have been put in the process or something like that. And that takes more sales cycles and more effort on our part. So we recognize that we'll have to spend time on those to close them in 2012.

And then one more question from me, and I'll hop back on the queue. In terms of international, the fact that you've been able to take initial orders out of China seems encouraging. As you look at that market for 2012, is that something that can gather momentum on a steady basis, or do you think it's going to be more fits and starts?

And what other markets in 2012 internationally can we look to with promise?

And thanks for taking my questions.

Well, as you guys know, we just announced the partnership with our new distributor in China in late November, so that is very early. I think our viewpoint is still the same as it was when we made that announcement. We're optimistic about the marketplace. We believe we're the first in the market with a Mandarin-based product. We believe we've got a great distributor there and a great partnership to get into the market. And we believe there is a commanding need for our products.

That all being said, it is a brand-new market, and we've got to do the work to-- between us and our distributor, to get the market to understand what our products do and how they help-- how they provide value.

Our experience with new markets is, usually, hospitals install a few systems at first, try them out, figure out how they'd have to change their workflow to optimize those systems; and then full expansions come after that cycle. And we're still expecting it to be like that.

But I think it's encouraging that we've got the initial orders-- that we've got the initial hospitals lined up to do the installations there.

Steve Halper, Stifel Nicolaus.

Sure. So I understand the large orders. Just one other question. Based on what was in the pipeline, did any of those go away yet to, say, competitors?

You know, the orders are-- as Steve Crowley said, generally ones where we're a vendor of choice. Not everything that we had in our pipeline were we at that stage. And, if we haven't got to vendor of choice, it's still a competitive situation, so there's always some of those that we don't win. But, generally, once we get vendor of choice, those orders tend to be our business.

So that's how you would characterize the orders that didn't sign? Most of them were vendor of choice?

Right.

Okay. One other question. On the $0.67 to $0.72 per share on earnings for next year, what is the implied stock comp assumption?

We're still assuming that the stock comp will roll along at about the same rate that it has been, between the $2 million and $2.3 million per quarter.

Okay. Great. Thanks.

Gene Mannheimer, Auriga.

Nice quarter. Just a couple of follow-on questions. With respect to the deals that slipped, can you sort of quantify for us? I thought Randy mentioned at the start that-- or Rob mentioned that there were four deals that slipped. And maybe correct me if I'm wrong on that. How many of them do you think could potentially close in, say, the first half of the year?

A second question on the number of customers you added during the year, 200. How many institutions or contracts did that comprise? Thank you.

So, the 200-- I'll take the second part of that first. The 200 new customers are individual facilities. We do have IDNs that are-- quite a few IDNs in our business base. I don't have the exact number of individual contracts. But, you know, IDNs tend to be anywhere from a couple of hospitals to, generally, in the eight to ten range and be a larger, multi-hospital organization.

As far as the number of contracts, in any one quarter, the difference between making our objectives and not making our objectives typically hinges on a few larger deals. And, certainly, in any quarter, we take 600 or so orders, so there's a few larger ones that can make the difference. And it's those larger ones that are-- have a lot of aspects in the sales cycle you have to happen. That's called negotiations and contracts, and they might be in competitive positions if we're not (inaudible).

So I didn't say that it was four, but it's always a handful of deals. And, certainly, we're working on closing a number of those deals each and every quarter, and we'll be working on closing those in Q1 and Q2 and Q3. Every quarter, we'll have probably a handful of those. It's the nature of the business.

Okay. And a last question from me. The G4 upgrade-- I think Randy mentioned that perhaps you'd over-forecasted the conversion of the pipeline there. Some big numbers being thrown around on the theoretical opportunity for G4. How much of your growth forecast should we view as the G4 opportunity? Thanks.

Well, I know a part of our business, of course, is system upgrades. We rarely lose a customer. But our customers do like to stay current technologically. And so, when we offer new technology, which is either in the form of software versions or new pieces of hardware or hardware upgrades, there's kind of a usual cycle of customers upgrading. And it's been a part of our revenue in the past.

We do expect, as G4 gives us more opportunity because we now have all of our install base essentially that has this upgrade available-- we have got a reasonable ramp-up of that baked into our forecast for 2012. I would say that there's-- there's probably always upside as customers move faster. But we do have some good history on how customers move, and that's more or less what we have baked into our sales forecast.

Okay. Thank you.

(Operator instructions). Mohan Naidu, Piper Jaffray.

Rob, for the gross margins, do you continue to see the current low as the new baseline going forward?

Well, we've worked very hard on our cost base and gross margins, and we've got quite a bit of efficiency in some of our more fixed-cost areas that are in cost of goods sold. And we do believe that, given the mix of products, depending where it's that, that, yeah, we can maintain these sort of gross margins. We do have quite a bit of variability in some of our products. You know, we have very high-margin products. We have other products (inaudible) OEM that are lower margins. In any one quarter, we could see some variability in the gross margins just based on the product mix.

Okay. On the guidance, it does not include any international revenue, does it-- or in the backlog?

No. International orders flow through our backlog just like all other orders.

Okay. How much are you counting in right now in the guidance?

For international business, it's still relatively small percentage of our business. I mean, we're encouraged because it has grown, but it's still under 10% of our business.

Okay. My last question. The new sales force that you added last year-- how productive are they right now? Are they up to the level that you were expecting, or do they have some time to go?

They are pretty productive. We are-- We're pretty pleased with the extended reach that we've been able to have with the sales force, particularly in the second half of the year. And I think it really shows up in the number of new accounts. We've never had new accounts quite at the level-- quantity level that we had last year.

Okay. And they have the quotas like almost similar to the usual that you will expect?

I'm sorry. Say it again.

Yeah. The quotas are--

Quotas.

Yeah. That's kind of consistent with (inaudible).

Okay. Thanks a lot.

Leo Carpio, Caris & Company.

I have a couple of questions, the first question regarding the competitive environment. We saw at AHHP your competitors sprawling out some new product introductions, even though some of them may be considered me toos. Have you seen that having any impact in your sales or-- from your sales force comments in the first quarter this year so far? Or it's too early to tell?

Well, I think, you know, we introduced a whole plethora of new products in our platform. And I think that the marketplace, both our current customers and new, prospective, competitive customers-- we've been engaged with that over the six months. And I still feel like we have the best products in the industry-- things like SinglePointe for single-dose dispensing, and other-- I mentioned Anywhere RN. These are unique feature sets that we offer that, I think, still give us a great competitive advantage.

And so I would say that it's probably a little too early to tell what impact that is. I would say we haven't seen any significant change in competitive positioning of where we are today.

Okay. And then, turning to the international market, any updates on Europe and the Middle East? I think I saw an (inaudible) regarding the Middle East recently.

Yes. We just were in the Middle East. We have a team there. We have a small office in Dubai, a training center that we opened earlier in 2011. So we have been expanding in that area.

As far as Europe goes, we have good distributors in Europe, and we've got some good business going on there. But, of course, the economy is pretty muted in Europe.

We do believe that the growth areas are probably more in the Middle East and in China, some other areas in Asia, where they're building new hospitals and kind of going onto a standard that's similar to a clinical standard that's similar to the United States.

Okay. And then, lastly, in terms of the capital spending environment, if I've heard your comments, and, hopefully, I interpreted them correctly, it sounds like the small hospital market seems to be improving year over year, whereas the large hospital market, because of needs for more approvals-- these orders kind of drag themselves, and the cycle is just elongated a little bit more. Is that a correct characterization?

Well, I think we're seeing the small hospital market open up kind of incrementally each quarter. And, like I said, I'm not sure that it's that they necessarily have a lot more money to spend or business is getting a lot better for them. But I think they have been holding back for, you know, a few years now. And they get to the point where they're far enough behind technologically that they have to do something.

We did see good rebound (inaudible) business through 2011, and we have incrementally seen more business from small hospitals.

I would also say that, as I said earlier, the fact that we have more salespeople on our team gives us an opportunity to call on more of those customers, and I think that's probably also helped us.

Okay. Thank you.

Steven Crowley, Craig-Hallum Capital Group.

Just some clarification or some context for that record number of new accounts, the 200 number that you've referenced. What does that compare to as, for example, a prior high-water mark for a year?

Well, we typically have somewhere in the range of 50 to 75 competitive conversions and 75 to 100 new, greenfield accounts each year. And so I called it around 150 new customers coming onto our install base every year. In the last three years, for instance, we had 500 customers come on, and 200 of them are here in the last year or so. That gives you an idea of the growth.

Thanks for that color. I think that's useful.

Now, in terms of the market reaction and your progress with the Savvy cart introduction, can you give us a little feel for what kind of reaction and traction you've either gained or think you can gain with that product and how, as you've learned more about it, that works into your backlog or may not work into your backlog, meaning is it faster turn? And what does that do to the character of your backlog? So there are a couple different questions embedded there.

So, as time goes on, we have gained more information about-- kind of more market intelligence about how that product's going to work in the market. And, as we take more orders, we see how fast customers will be installing it. The Savvy system installs very quickly because it runs on the same databases as the rest of our products. So it's easy in that respect.

However, there is a workflow change that customers have to go through. And what we're experiencing is that workflow change takes as long as-- to kind of flow through the backlog as any other installation. So we're expecting the Savvy products to flow through-- on the same cycle of time, I guess I should say, between order and installation as the rest of our products.

In terms of market reaction and traction and competitors to that approach, what can you tell us about that? And thanks again for taking the questions.

Well, Savvy's pretty unique in the marketplace. I think it's the only medication control system of its type. It combines a computer on a mobile system that allows customers to run all their other HIT systems with specific medication control software and a locked environment-- controlled environment physically for the medication that hooks right into our systems. I believe we're the only one with this type of product in the marketplace.

And I think it's-- it positions well when a customer is looking to consider changing to us. They may not. That's usually probably one of the later pieces they would install in the process. So there may be a lot of high interest in the product, but they need to get some of the other parts of the installation done first. And then that would come in the next year's budget at times.

So, it's a great product. And I think it will have great adoption, and it certainly is helpful in winning new accounts, both existing and new, competitive wins.

Thanks.

Steve Halper, Stifel Nicolaus.

What level of CapEx are you expecting in 2012?

You're talking about the marketplace or in our own business?

No. For your own business.

Oh, okay. So, in 2011, we had a little bit over $8 million in CapEx. We expect to be at roughly the same amount in 2012.

Okay. And what does that go for principally?

It is mostly for our own infrastructure in operating the business-- the software that we use internally, upgrades to our own IP infrastructure, and facility upgrades.

Okay. Thanks.

At this time, there are no further questions. I will now turn the call back over to Randy Lipps for any closing remarks.

Well, thank you for joining us today. We did have a great year in 2011. I'd really like to thank the Omnicell team for doing great performance for us.

We believe that, ahead of us, we have another solid year in 2012. We're well positioned in the marketplace. We've got the new solutions set, the expanded sales force, and a great opportunity in international. And so we're very positive about the go-forward.

Thanks for joining us today.

Thank you for participating in today's conference call. You may now disconnect.