Omnicell Inc (OMCL) 2012 Q1 法說會逐字稿

Good afternoon. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2012 Omnicell's earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you. Mr. Rob Seim, Chief Financial Officer, you may begin your conference.

Thank you. Good afternoon and welcome to the Omnicell 2012 first quarter results conference call where we will also cover our announcement today of the agreement to acquire privately held MTS Medication Technologies. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO; and Bill Shields, President of MTS Medication Technologies. You can find our results in the Omnicell first quarter earnings press release and the announcement of the agreement to acquire MTS 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 Conditions and Results of Operations in the Omnicell annual report on Form 10-K filed with the SEC on March 8, 2012; 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 during the day.

The date of this conference call is May 2, 2012, and all forward-looking statements made on this call are 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 redistribution without the express written consent of Omnicell is prohibited. Randy and Bill will start the call today discussing the acquisition. Randy will give us an update on the Omnicell business from Q1. I will finish up with the financial aspects of the acquisition, our Q1 results, and our forecast going forward. Following that, we will open the call to your questions. Randy?

Well, good afternoon. I am very excited to announce our agreement to acquire MTS Medication Technologies today. MTS is a technology and market leader in medication management systems for the long-term care market, with a primary focus on medication adherence packaging solutions. Today, the Omnicell business is predominantly in the acute care market. We provide both equipment and software that improves financial and clinical outcomes, by helping nurses and pharmacists assure they get the right medications to patients, in a timely manner, with the lowest amount of clinical work.

MTS provides similar benefits for the long-term care space through medication automation systems and consumables that help patients and caregivers adhere to the medication regime prescribed. Customers see medication adherence as a key requirement for closing the medication loop and delivering better clinical outcomes and financial results. We will discuss medication adherence and explain some of the details of the transaction later in the call. Right up front, I'd like to cover why this acquisition is a great strategic fit for both companies.

First, the combination creates a Company that is aligned with the evolving trends of the healthcare market. Healthcare is moving towards organizations that are responsible for the health of patients across the continuum of care, and moving away from patients -- from payments for an episode of treatment. The combination of our two Companies establishes a market-leading organization that can provide medication management across that broader continuum of care. Together, we can not only provide greater comprehensive management of medications, we can also contribute to improving clinical outcomes by helping healthcare providers assure that medications are administered correctly and in a timely manner.

We believe that medication management solutions, which provide consistent improvement in cost and quality, will be appealing to the emerging accountable care organizations, and broader health care entities that are paid on results. Second, our businesses bring capabilities to each other that strengthen the product lines and expand the medication management coverage of both companies.

MTS has a broad base of experience in the long-term care and home care markets in the US and Europe, and has an expertise in manufacturing of consumables to support these markets. Omnicell has a unique expertise in capital equipment, and software for medication and supply management in the acute care market. Together, we will be able to bring leverage and extensive customer support infrastructure, and we believe our combined companies will have an unmatched capability to provide medication management solutions across a fuller spectrum of the healthcare market.

Finally, the transaction makes good financial sense. Both on a GAAP basis and on a non-GAAP pro forma basis. The combination is expected to be substantially accretive to earnings, to add a growing revenue stream to Omnicell, and to open up new growth markets for the combined Company. It is also expected to support our long-term goal of achieving 15% operating margins. So before I go further on, I would look to introduce Bill Shields, President of MTS Medication Technologies. Bill is a seasoned professional of the healthcare industry, having been president of PharMerica, an executive at AmerisourceBergen, and the CEO of Artromick before joining MTS in 2009. So, Bill, welcome and could you tell us a little bit about MTS?

That is great, Randy. I'd be happy to. First, let me say how excited and thrilled I and my team are about the business combination. We have a great team here at MTS and we believe that we share very similar management values to Omnicell. Joining forces makes a lot of sense and gives us all an opportunity to reach new heights. I joined MTS Medication Technologies 16 months ago as President. MTS has a 28-year history of providing medication management solutions for the long-term care and retail pharmacy markets.

As Randy said, our primary customers are institutional pharmacies that supply highly specialized pharmacy services to long-term care facilities. Our equipment, consumables, and software all work together to provide varying levels of automation to these pharmacies, our customers. As you may know, institutional pharmacies provide service to nursing homes, assisted living facilities, correctional facilities, as well as a large range of facilities that all need to manage complex medication regimens.

In all of those settings, specialized packaging is a core operating requirement to the pharmacy in order to facilitate the safe and cost-effective storage, management, and administration of medications by nurses, other healthcare professionals, and caregivers. Our equipment and automation product line rounds out our value proposition by enabling pharmacies to pack, seal and label medications in our blister cards. These systems range in price from a few thousand dollars for relatively basic equipment that enables the filling and sealing of a single medication blister pack to much more complex and fully automated equipment that can cost up to $1 million per unit.

All of our products are intended to help the medical industry overcome the problem of medication non-adherence and medication safety. Medication non-adherence is a universally recognized problem for people who live at home. Patients who are elderly or suffering from chronic illness, have increasingly complex treatment regimens that can easily include 5 to 10 medications or more. Patients and the nonprofessional caregivers that assist them can struggle to organize, store, and administer their medications as prescribed. As you can imagine, this can create quite a problem in a wide range of human and economic cost, including poor medical outcomes or worse.

According to the New England Healthcare Institute, non-adherence is a costly, critical problem, resulting in approximately 125,000 deaths per year, and creating approximately $290 billion in extra cost annually. The Center for Medicare and Medicaid Services, CMS, estimates that 11% of total hospital admissions are related to this issue. To help solve the problem of non-adherence, our product line also includes multi-med blister cards, which are one way to help patients address these challenges by pre-sorting medications for each dose time individually. Patients know what to take, they know when to take it, and then can visually confirm that the medications have been administered. This approach is catching on the fastest in our international markets, but we can clearly see a benefit for patients here in the US, as well.

As you can imagine, multi-med medication delivery methods are much more complex and take pharmacists and technicians sometimes as much as 20 minutes per patient to fill. We have multi-med automation that can substantially reduce the time required. Once our systems are installed, packaging components are supplied by MTS. When you aggregate both the single and multi med consumables, we carry over 300 different types and ship well over 1 million units of components, daily, from our factory in St. Pete, Florida. We count some of the largest institutional pharmacies in the US, the United Kingdom and Germany as our customers.

Our product mix is approximately 85% consumables and 15% equipment. While our marketing mix is about 80% in the US and North America, and 20% outside the US. For the last three years, MTS has been a private Company. During that time, we focused on operational efficiency and utilized state-of-the-art manufacturing concepts. We developed new products and expanded our medication adherence solutions, improving the financial profile of the Company, and position the Company to capitalize on future growth opportunities.

The Management team and I, that made this happen, will continue -- will be continuing on with Omnicell, and the combination is a very exciting one for us. Like Omnicell, we share the same vision to provide the highest level of customer service in the industry. Our corporate cultures are a very good fit and we are both expanding our presence in medication management. Omnicell's acute care customer relationships and capital equipment experience opens up opportunities we would not have had in MTS alone. I can say the entire team is looking forward to this terrific opportunity.

Thank you, Bill. We are looking forward to working with you and your team. Bill will report directly to me and remain in charge of all currently branded MTS Medication Technologies Solutions. Over time, as our strategies melt together, we will take advantage of opportunities that our combined capabilities provide for us.

I would like to emphasize our history in acquisitions. 85% of the revenue at Omnicell today is associated with an acquisition. So we feel that we have been relatively successful over the past three years. We have extended our acquisition integration expertise in Omnicell to allow us to be successful with larger transactions. We feel we are well-prepared for the acquisition of MTS, and the fact that Bill and his team will be staying with us helps assure success.

Speaking of success, I'd like to turn to Omnicell's results for Q1. We had a solid quarter in Q1 that keeps our momentum in line with our annual growth projections for both revenue and profits. The new products we announced last year and the expansion of our sales team are driving new sales. Our entry into the China market is going well. We feel our international strategy is working. In all aspects, Q1 financial results met expectations.

A great example of a long-standing customer where our new products provide an even better partnership with Omnicell, as in our current announcement of the G4 expansion at Texas Children's Hospital. Texas Children's has been an Omnicell customer for 10 years. Over time, they have expanded their installation to encompass most of the solutions we sell. Children's hospitals have a very exacting standards. Their cases are of the utmost sensitivity. The range of medications and doses is the widest of any healthcare setting. There is no tolerance for error.

This is the type of environment where we feel the advanced features of our systems become most relevant. Texas Children's has recently chosen Omnicell to provide medication and supply management solutions for their $575 million expansion which is served by our new G4 medication systems on both the nursing floor and in the operating rooms. They use Anywhere RN for nursing efficiency, they use our FlexBin technology for single dose dispensing to control narcotics and eliminate nurse inventory counts which allows nursing to spend more time on patient care.

In the central pharmacy, they're using our new Controlled Substance Management system to manage their store of narcotics. They manage their supplies with our OptiFlex supply automation software. The Omnicell systems are a significant part of their electronic healthcare record initiative. As the only medication management system with modular certification for meaningful use, we provide the assistance, the assurance, they need that we will fulfill the requirements for Texas Children's to receive the highest level of federal stimulus dollars available.

I get asked frequently what the customer environment is like now. Our customers face unprecedented challenges in technology changes, healthcare reform, and changing patient and payer mix. In times of uncertainty, there are many reasons to move cautiously with technology and investments. But I believe more and more, our customers are seeing how the capabilities we introduce with our G4 product launch last year, help them through the challenges they face, with minimal disruption.

I continue to be optimistic about our potential in the future. We added over 500 new accounts in the past three years to our core Medication and Supply Automation business. We now have many new solutions to help them if their businesses change. Expansion of our sales force is allowing us to spend more time with these customers, and I believe that we are starting to see this in our results. At the same time, our strategy outside the US to introduce automation in markets that do not have it today is opening up for a whole new opportunity for our customers to apply our innovations for efficiency and control. Overall, our strategy is working. I believe that we are on track to deliver continued improvements in healthcare economics and safety. With that, I'll turn it back over to Rob, for the Q1 financials.

Thanks, so first I'll cover the MTS acquisition. As we said in the past, growth through acquisition is one of the three pillars to our overall strategy, along with international market expansion, and further penetration of our customer base in the United States. The acquisition of MTS expands our business significantly. We believe it's a good use of our cash, because its expected to drive growth in our business. Omnicell is acquiring MTS Medication Technologies for $156 million in an all-cash transaction. We expect the transaction to close in late Q2 or early Q3, following the Hart-Scott-Rodino Antitrust review.

For reference, MTS recorded approximately $75 million of revenue and $12 million of EBITDA in their last fiscal year, which ended on March 31, 2012. Excluding amortization of intangible acquisition related costs, we expect the acquisition to be accretive in 2012. We will be able to give a more specific forecast for 2012 as we get more clarity on the actual close date. For 2013, when we have a full-year of MTS included in our results, we currently anticipate non-GAAP EPS accretion of approximately $0.15 to $0.17 per share. That is excluding amortization of the acquisition related costs.

Following the acquisition, Omnicell's employee base will be approximately 1100 regular employees worldwide, and we will add facility locations in Florida, in Ohio, in the United Kingdom, and in Germany. Following the acquisition, we expect to have approximately $50 million to $55 million of cash and cash equivalents remaining on our balance sheet.

So, now turning to the first quarter of 2012, Omnicell results were just about exactly where we had previously expected with $64.1 million of revenue and $0.13 per share of non-GAAP earnings. Our orders were a little more skewed to existing customers, as we expect them to be, while adoption of the G4 upgrade continues to grow. 28% of our Q1 orders came from new greenfield customers or competitive conversions with about 75% of those from greenfield customers who are buying automation for the first time.

Revenue for Q1 2012 increased 12% from Q1 2011, and 2% from Q4 of 2011. Q1 2012 profit on a GAAP basis was $0.07 per share, up from $0.02 per share 1 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.

We used non-GAAP financial statements in addition to GAAP financial statements, and we feel it is useful for investors to understand the non-GAAP stock compensation expenses. They are a component of our reported results. You'll find a full reconciliation of our GAAP to non-GAAP results included in our first quarter earnings press release and it is posted on our website. On a non-GAAP basis, EPS of $0.13 in Q1 2012, was up from $0.11 in Q1 2011 but down from $0.19 in Q4 2011.

There were three reasons for the decline in profit from Q4 over the last year. All of them were anticipated in our guidance for Q1 that we gave in January. First, we typically have seasonally higher expenses in Q1 that cause a drop in earnings for the quarter. Second, we had higher R&D expense booked in the quarter, because we did not capitalize any software R&D expense. We were on about $6.2 million of gross R&D expense each quarter on a non-GAAP basis. The amount of R&D that is capitalized can vary depending upon where we are in product development cycles. Finally, we had a benefit of $0.02 per share in Q4 2011, for a Company bonus plan that was not achieved. That benefit did not repeat in Q1 2012.

Or non-GAAP operating margin was 9.2% in the quarter, that is up from 7.7% in Q1 of 2011. This is down sequentially, but in line with our expectations and our guidance for overall improvement towards 15% by the end of the year. Adjusted earnings before interest taxes, depreciation, and amortization, which also excludes stock compensation amortization, were $8.2 million for the first quarter of 2012, up from $6.3 million or an increase of 32% from a year ago. The balance sheet remains very strong. Cash and cash equivalents were $210 million, up $10 million from Q4, 2011. We did very well in collections, keeping our accounts receivable day sales outstanding at 56 days, up two days from last quarter, but will below our current target range of 60 days to 70 days. Inventory also decreased from $18 million to $17 million.

As we demonstrated today, we target our cash for complementary acquisitions and we believe after the acquisition, we will continue to generate enough cash to remain active in the acquisition market. Regarding the remainder of 2012, we believe we are on track with our previous guidance. We expect 2012 revenue excluding MTS Medication Technologies to be between $263 million and $267 million, up 7% to 8% year-to-year. We expect non-GAAP earnings, excluding MTS Medication Technologies, again, to be between $0.67 and $0.72 per share, up 14% to 22%.

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. We expect 2012-year end product backlog, excluding MTS Medication Technologies, to be between $138 million and $142 million, an increase of 6% from 2011. We are keeping our sights on our goal of 15% non-GAAP operating margins and expect to make significant progress towards this goal through 2012. By the end of the year we expect to be very close to achieving 15%.

After we close the acquisition of MTS Medication Technologies, we expect to reevaluate our guidance for 2012. We expect to continue our practice of giving guidance on annual revenue, annual non-GAAP earnings per share, and year-end product backlog. Although product backlog will represent less of our business, after the MTS acquisition, because MTS has a heavier mix of consumables. Operator, now I would like to open the call to questions.

(Operator Instructions)

Charles [Ray], Cohen and Co.

Congrats on the acquisition. If I could just ask a couple of questions, maybe to Bill, when MTS went private, I guess it was in 2009, when you look at the last Q that was available, it looked like results were sort of flat. Basically I think it looked like about 5% EBITDA margins, revenues annualized were around $70 million. Now we are talking with $75 million and $12 million in EBITDA. Can you talk about what were the issues back then that led the company to go private? And talk about what you were able to achieve while -- when you came on board.

Sure. Thanks for the question.

I couldn't really speak to all the different reasons that the Company, not having been there, why it went private. I think it was a great opportunity for the Company to make investments in process and in people. Over that time, a lot of that is exactly what we have done. We have made substantial efforts in operating efficiency and product margin expansion, using lean manufacturing. We brought in a lot of new talent to the organization, both here and abroad, and continue to focus on the things that make MTS a great opportunity, which is innovating with our customers, and great customer service. So, those are things that combine to create the Company that we are today.

Bill, a little bit of -- it's not quite the same Business today. You divested a little bit during that time also.

That's also true. One of the things we did last year, we had an add-on acquisition to MTS, the name of which was a Bath in the UK, was a much more commodity-driven business. We thought that was a distraction to our core. Last year, we did a lot of work in the International side to consolidate five locations to a single location, brought in new leadership, and exited that smaller business in the UK. We really feel like the International business is primed to not only continue to grow at the rate that it has been growing as successfully in the past, but accelerate forward in the future.

Can you maybe describe what the revenue growth has been? Because if I look - if I annualize the six months ended in fiscal '09, it looks like the compounded growth has only been maybe 3%, but it seems like if we back out the divestiture, what would the growth rate have been?

I think the growth rate over the last 10 years has been between 5% and 8%. Consumable stream has been a very steady, continuous opportunity for the Company. Sometimes, we also have, as I mentioned earlier, our equipment. Like any capital sale, that can be -- that can have some lumps in its progression. Overall, consumables continue to drive very steady and continuous growth curve. The equipment is doing very well, as well.

Two last questions. I apologize, here. One, if I look at the mix between -- as of the last public Q, between consumables and total revenue, that is still roughly the same percentage, or is equipment a bigger piece, today?

Consumables today are 85% of the business. And15% is represented by small equipment, all the way through to the more complex automation that I already mentioned. Also, some service and support revenue that goes with that equipment and automation. So 85/15 today.

My understanding is Omnicare is your largest customer, is that still correct?

It is.

When you think about the future growth, and maybe this is a question for Rob and Randy as well, because I understand that you are already starting to work with Omnicare. Is that sort of how you guys were brought together? That you found out about each other? Or were you guys -- or were Randy and Rob -- were you already looking at MTS prior to, perhaps working with Omnicare? When we look at Omnicare's discussions about their goals for automation, and how much they want to have dispensed through automated dispensing, is that sort of jumps what we should expect coming through the MTS line?

I think -- this is Randy. I have known MTS and Todd Siegel, the founder, for many years. We were aware of the Company. Yes, in our own Business line, we see -- Omnicell's line -- we see the acceleration of sales into the long-term care environment through Institutional Pharmacy. But, our primary objective wasn't only that.

Really, when you look at our overall business, Omnicare will not be a very large portion of the business when you combine it with all of Omnicell's business. It's really the drive outside of the four walls of the hospital. The healthcare trend is to get patients out of hospitals. Those patients that are outside of hospitals that used to be in the hospitals, now they need more sophisticated care and skilled nursing and long-term care in order to do some of the same things that we are doing in hospitals.

This is a big healthcare megatrend. We were looking for a good strategic fit that helped us take us outside the four walls of the hospital. That is what's really driving us there is our customer base. The IDNs that we work with. They are either acquiring or doing joint deals in the long-term care environment. We certainly see that synergistic market effect through the healthcare trend.

Great. Thanks a lot, guys.

Matt Hewitt, Craig Hallum Capital Group.

Good afternoon. Congratulations on a good start to the year. Bill, welcome.

Thank you.

A couple of questions here. First, it appears that this is the first uptick in product sales you've had from Q4 to Q1 going back all the way to 2008. It sounds like the mix was consistent with what you had telegraphed. Could you talk a little bit about the pipe line? I know that exiting Q4, there was a fair amount part or a number of large deals that were in the pipeline, hadn't gotten to the goal yet. Could you give us an update on those?

I think that --. We don't have -- we don't report backhold, just give guidance on the bookings. I would just say most of those deals did eventually close in Q1. I am not sure they all did. New deals close, and new deals get pushed out. I would just say that we had a very strong quarter in all aspects, financially, for Q1. We feel really positive about the business in the go forward. We can see the momentum in the pipeline for G4 building.

So, is it fair to say, then, that since you closed a lot of those large deals, that barring the MTS acquisition, if that wasn't occurring, it sounds like there was almost an opportunity that you could've increased your year-end backlog guidance. Is that accurate?

I think we gave the guidance we gave because it was the right guidance. As I said in the call, as I said on the script -- we reaffirmed our guidance. We feel that we are on the right path to hit those numbers.

Matt, we had several questions about this last quarter when we announced -- when we have a deal that slips into the subsequent quarter, it usually doesn't just show up as an order next week or the next couple of weeks. Usually it has slipped because additional sales cycles have to be taken. When we are extending the time on those additional sales cycles and the customer, that's time that we are not spending some place else. When those deals slip, they don't just become incremental to the subsequent year. We did close several of the deals that did not close in Q4, but we feel that the guidance we gave in Q1 already contemplated that and we are on track to it.

Okay. Fair enough. Thank you. Secondly, it sounds like you had a very strong quarter internationally, if I heard you a correctly. Have you had initial sales, in China, could you give us an update maybe on the Middle East, how that's progressing?

Sure. As I reported last quarter, we have had the initial sales -- the initial orders -- in China. We are doing installations, now. We are happy with how that launch has gone in China. The Middle East continues to be an area that is a good opportunity for us.

We continue to have installations. We have done business in the Middle East for quite some time now. So, those are the two predominant areas that we are focusing on, internationally. Although, as you know we are in over 20 countries around the world. We have sales in various geographies at any point in time.

Last question from me, then I'll hop back in the queue. This is for Bill. Could you describe the margin structure a little bit at MTS, today? I think going back in the historical record, it was a 33 % gross margin business, but it sounds like you've done quite a bit to increase the efficiency, there. Where does that stand today?

Gross margins of equipment and consumables are approximately 45%, and I think some of that reflects my earlier comments about our work with lean manufacturing and improving operating efficiency. The operating margins at MTS are fairly similar to what Omnicell has, today. We expect future operating margins to continue to improve.

Just to add a little bit to that. Obviously, all businesses have different types of gross margin structures. Omnicell's gross margin structure is in the high 50%s. MTS has a structure that's a little bit different. But, less sales cost and less engineering costs involved. The operating margin structure is just about the same as we are at. Our plans line up for achieving 15% operating margin. It's the same goal as we have had, all along.

All right. Thank you very much and congratulations on the announcement.

Mohan Naidu, Piper Jaffray.

Thanks for taking my questions. For Bill, to start off, you said the 20% outside of the US revenue, mostly in Europe right now. Do you have any presence outside of Europe?

We do. We shipped last year probably to about 26 different countries. We have got an automation and consumable presence in Australia, Europe, Germany, Spain, UK, et cetera. We think we have a lot of business opportunity to continue expanding. The multidose market segment for us is very interesting overseas. We see adoption of multi-med packaging that is much faster than what we have been given to see here in the US. We are very excited about those opportunities.

Okay. Randy, is Europe a target market for you? Do you have a significant presence right now in Europe?

Well, Omnicell does have a presence in Europe and pretty much the same countries. Spain, the UK are sort of the main places. We do have some in France and some of the other countries. But, the UK and Spain are the primary. Middle East and the Far East, Singapore and China are our biggest. We actually have the opportunity to take the MTS solution into these countries, where they are not in and a little bit vice versa, but I think we'll have a lot of opportunities in the UK to combine the momentum we have there and their momentum to offer a joint solution to patients so they can have an Omnicell solution inside the acute care or inside the hospital and outside the hospital.

We have also had a growing market in Germany, as well. Not sure if I mentioned that.

Yes.

On the growth profile, you said 5% to 8% in the last 10 years or so. Is that -- the mid range of that is an accurate presentation for going forward into 2013 [as we look out]?

We are really not prepared on this call to give guidance for 2013. I gave you, in the prepared remarks, a structure of what we thought the EPS would be, next year, I think, when you look at the MTS business, there is a lot of consumable business there, a lot of recurring revenue that's based on the placements of their equipment. You should expect that same sort of placement in the future, and growth as the acuity increases of patients and there's more people in the system. We feel that, overall, our growth profile for the combined Company will be consistent with what we've been seeing and what we have been forecasting the past.

Okay. Switching back on the [hospital] market, you commented last quarter I think, the small hospital segment and media markets are resuming a little bit. Any updates on that, any changes in that Q?

We have certainly now seen a trend through the second half of 2011 and the first quarter of 2012 of a rebound in the smaller institutions. Like I said before, that is due to two factors. Those institutions really went on a -- I would say a buying hiatus, for a while. They got to the point where they needed to then make some purchases of our types of equipment. So, you're seeing maybe a little bit of that resumption of the demand.

Also, with the expansion of our sales force, we have a lot more people calling on customers, so we are able to get to more of the smaller customers. I think that presence has helped. I would probably also add that with our product refresh last year, we brought products to market that are very appealing to some of the smaller customers, so we have a lot of factors going on there. I can't tell exactly how much is just market driven and how much is driven by us.

Okay. One last question. From the higher R&D because of no capitalization in the quarter, when do expect to see some capitalization in there? The next couple of quarters, how d you see that playing out?

Based on our product lines, we do expect to have a more normal level of capitalization throughout the rest of the year. It is lumpy, of course. To remind everyone, that portion of software R&D expense is capitalized once a product reaches technical feasibility, which is kind of late in the software development cycle.

We had ranged anywhere from nothing capitalized, as you saw this quarter, up to even $1.5 million capitalized in a quarter. We will continue to see variability quarter-to-quarter, but we expect overall to be at similar levels to what we have been in the past, over the rest of the year.

All right. Thank you very much for taking the questions.

Gene Mannheimer, Auriga.

Congratulations on the acquisition. Welcome aboard, Bill. On that, a follow up on an earlier question. Margin profile. Could you delineate for us the consumable margin from the equipment, historically? Thanks.

It's about the same. Right now, Gene. It's up about 45%.

Great. With respect to competition in that space, can you talk just a little bit about that and what share you comprise?

I wouldn't comment directly on the share we have. We believe we are a market-leading competitor. We do see some competing technologies in the packaging space with regards to pouches, and sometimes reusable plastic trays, and even in some cases vials. MTS is fairly unique in the fact that we have both consumables, equipment, and automation.

We have something for a pharmacy at every end of the spectrum. If you want to pack for 10 patients, we can help you do that. If you want to pack for tens of thousands of patients, we can help you do that, as well. So, we think we are very unique. We believe that will help us to continue our success in the future.

That is great. Switching to the quarterly results, while the SG&A looked pretty tight this Q, was there anything extraordinary about that? Or is that the right run rate to use going forward? Thank you.

So, SG&A, of course, is up a little bit from the prior quarter, because we did not have the expenses associated with paying out some of the bonuses last quarter. Our Q1 expenses are always higher, because, as you know, we have a lot of professional folks in the company. They had payroll tax time, again. You get that in Q1 and Q2. Typically, the expenses start to decline, as you go through the rest of the quarter. We have other seasonal expenses that hit during Q1, our audits, we have our kickoffs for the year, and so forth.

So say to expect the SG&A, that may be the high point for the year in Q1?

Q1 typically is the high point.

Thank you.

Brad Hoover, Sidoti and Company.

Good afternoon. Bill, just curious to see what your view might be as the first part of the opportunity in Asia for MTS, seeing that Omnicell sees great long-term potential there.

We have not yet spent a lot of time there. Although, we have just recently began discussions with some folks in Japan, who have placed their first orders for consumables. We have had a natural extension of our product marketing and supply chain across the pond to Europe and to Australia. It's very interesting. Obviously, all of the macro factors like a growing and aging population, modernization of healthcare, all the things that drive our Business are present in large measure. We will be looking after the close to work with Omnicell on those opportunities, and those markets.

Great, and then secondly, as far as, I see you're more in the long-term care and Omnicell in the acute care side. As far as getting your foot in the door of the [C3] providers -- curious to know, Bill, what you see as Omnicell's relationships benefiting MTS gaining new customers going forward.

That's a great question. We have two segments. Our core Business is institutional pharmacies. Our customer there is an institutional pharmacy, and their user of their pharmacy services, consulting, clinical packaging, et cetera, is typically a facility like a skilled nursing facility, or assisted living, or correctional facility. The value proposition there is a cost-effective and regulatory compliant medication management process.

We solve for operating efficiencies by having the equipment and automation that drive that to the pharmacy. But a very, very important part of our strategy in the future, is also in a segment that is related to the community market. This is the challenge of non-adherence. It's a universally held and recognized problem. There, you have essentially retail type pharmacies that are serving a user who is a patient, or someone helping the patient at home. That's a slightly different type of packaging. It's multidose.

That is a very exciting part of our Business. It's one of the fastest-growing. We see markets at varying levels of adoption for that approach. The UK is very far down the road. Germany, Australia, these are countries that have a lot of that going on. So, I think to continue them, and the exciting thing from my perspective here is that Omnicell and MTS will be able to take a patient end to end through the continuum. They certainly have relationships with payers and providers and IDNs, where we can get into a more fulsome discussion of this adherence opportunity out in the community. After all, patients generally leave the hospital and head out into the community, where this adherence problem is most recognized.

Okay. Great. Thanks for the color, Bill.

Carolyn McAdam, Lazard Capital Markets.

Hi. I think Rob mentioned something about four new locations in Florida and Ohio and two in Europe. Are those part of the acquisition? Or are you guys planning to build those?

Those are the existing locations that MTS has, today. Most of the 300 people at MTS are in St. Petersburg, Florida. Also, a small plant in Ohio and international operations in Leeds and in Frankfurt.

Okay. Turning back to your medication management core market. When you think about your existing hospital customers, I'm trying to think about kind of, overall penetration. What kind of opportunities still exist within that base within hospitals? On average, what number of cabinets are they buying, upfront? How does that opportunity look, over time?

Well, the market, of course, is varied, depending on the size of the hospital. Overall, most hospitals, almost 90% of hospitals, have some medication management installations. Most of them do not have them in all of the locations inside the hospital; they eventually will. We find that most of our installations are in the 60% penetrated stage.

Typically, when an installation is fully penetrated and the facility is running all of their drugs through our systems, you end up with one of our cells of our cabinets. It's kind of a 19-inch wide rack mount and as tall as a person, segment. One of those for every 5 to 8 beds. You'll typically find the hospital is more in the range of 10 or 15 beds, now. There's certainly much more penetration opportunity. We see that typically when customers get to a point where they are bringing on a remodel for a part of their facility, or they're bringing on a new nursing area of the hospital. They will relook at their whole installation and start putting more drugs onto the systems and get more efficiencies by doing that.

Okay. Thank you.

Matt Hewitt, Craig Hallum Capital.

Follow-up question. First, could we get an update on adoption with the Savvy mobile carts?

As you know, we don't typically break out revenue by any one of our particular product lines, but Savvy was introduced last year. We are pretty happy with the uptick on Savvy and the adoption, so far. We have several of our customers, we call them our key customers that have adopted the system.

Great. Lastly, competition. There has been some movement, with your number one competitor, as far as getting out of some markets. Has that changed anything from a focus or an effort, that you have seen?

I think there are always tough competitors. Especially, when we are in a potential swap out situation. I think they always will be. We plan for them to be. We swing at a few fastballs and occasionally we get one. I think, we don't say a lot different dynamics there in the marketplace than we've seen in the past.

Thank you.

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

I just wanted thank everybody for joining, today. For joining on the call today. It is certainly a watershed moment for the Company. We have tried to be a very prudent with the capital we have and use it for shareholders' best value. We were patient, over the last few years, to find the right kind of acquisition that would make the most sense strategically, what a great fit this is for the company.

The core competencies that we can socialize between the two companies, will really allow us to provide some new products and new avenues for revenue growth. Certainly, on the accretive side, it makes a lot of financial sense. We felt like we took our time to find the right acquisition to put our hard-earned capital to work and to grow Omnicell into a faster growing, successful healthcare entity. Thanks for joining us today. We look forward to giving you updates later on.

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