Omnicell Inc (OMCL) 2012 Q2 法說會逐字稿

Good morning. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2012 Omnicell 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, you may begin your conference.

Thank you. Good morning, and welcome to the Omnicell 2012 second-quarter results conference call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO. You can find our results in the Omnicell second-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 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 today. The date of this conference call is August 1, 2012, and all forward-looking statements made on this call are based on the beliefs of Omnicell as of this date only. Future events are simply the passage of time that cause these beliefs to change.

Finally, this call is the property of Omnicell Incorporated, and any taping of the duplication or redistribution without the express written consent of Omnicell is prohibited. So, Randy will give us an update on the Omnicell business today. Then I will cover our Q2 results and our forecast going forward. And then following that, we'll open the call for your questions. Randy?

Thanks, Rob. Good morning. Q2 was a big quarter for us with record revenues, major wins worldwide, 33% of our orders from new customers, and the acquisition of MTS Medication Technologies, the market leader in medication management systems for the long-term care market, with a primary focus in medication adherence packaging solutions. We closed the acquisition on May 21, and our second-quarter results include six weeks of MTS contribution. From a number of perspectives, we're happy to report that the acquisition is right on track to our expectations. Financial contributions to our business are on plan, the integration is progressing well, and the reaction from customers has been positive.

I would like to recap why this acquisition makes sense. First, the combination creates a Company that is aligned with the long-term care trends of the healthcare market to manage the health of patients across the continuum of care. Now, Omnicell has a more capability to serve the non-acute care market which complements our current footprint and track record in serving the acute-care market. Our customers want and need sophisticated solutions to manage medications wherever their patients are, and we have the resources to be the Company that provides those solutions. Second, our two businesses bring capabilities to each other that strengthen the product lines and expand the medication management coverage of both companies. The market strength of MTS opens up an exciting opportunity to sell medication cabinets into non-acute care, and to sell adherence packaging systems into acute care.

Long-term, we can also bring adherence multi-med packaging into other new market where is it does not exist today, which can significantly affect the cost and the quality of healthcare. 11% of total hospital admissions are related to medication non-adherence according to the Center for Medicare and Medicaid Services. Blister Cards make up approximately 85% of the medication-management process in non-acute care settings, and MTS is the market leader with approximately 70% of the existing Blister Card market. We see opportunities to expand the existing market for this technology.

Finally, the transaction makes good financial sense. 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 be consistent with our long-term growth plans and to support our long-term goal of achieving 15% operating margins. Now that we have MTS as part of our product family, we'll be referring to anything sold to hospital customers as the acute-care part of our business. Acute care is primarily the traditional pre-acquisition portion of Omnicell. Anything sold outside of hospitals, we will refer to as the non-acute care portion of our business. It is comprised primarily of the former MTS medication technology products.

Our acute-care business is also very much on track with several new wins, including Hackensack University Medical Center in New Jersey, and the University of South Alabama Health System. Hackensack University Medical Center, a 775-bed teaching and research organization, switched to our systems to gain automated control over patient-specific medications and to improve nurse work flow. They will implement G4 Systems with SinglePointe, which allows management of up to 100% of the medical flow; Anywhere RN, which allows management of systems from virtually any work station in the hospital; and OmniDispenser, and most secure dispensing module. They will also implement our Anesthesia Workstations in the operating rooms and our Controlled Substance Management System in the central pharmacy.

The University of South Alabama chose Omnicell G4 Systems to replace legacy systems in its 400-bed medical center, and its 150-bed Children's and Women's Hospital. A key element of their decision was that Omnicell was able to better inter-operate with their physician order entry system, their electronic healthcare record, and their unique bar code system. South Alabama will implement our WorkFlowRx system for the central pharmacy and our medication dispensing systems, including SinglePointe, Anywhere RN, and OmniDispenser. South Alabama will also implement our Savvy Mobile Medication System, which integrates with Omnicell's automated dispensing cabinets and the hospital's IT system to allow nurses to safely and securely transport medications from the dispensing cabinet to the bedside.

Internationally, we continue to add new accounts in China and expand our presence in the Middle East. The King Faisal Specialist Hospital and Research Center, a state-of-the-art 894-bed facility in Riyadh, accredited by The Joint Commission International, recently decided to replace all of their operating systems with our Anesthesia Workstations after installing our supply systems house-wide last year.

During the quarter, our systems were again recognized with several awards. For the seventh year in a row, KLAS, the prestigious third-party evaluation firm, has designated Omnicell RX the best-in-class medication dispensing system, which is the highest award presented by KLAS. Our WorkFlowRx carousel also won category leader designation from KLAS for the third year in a row. Also, our easyBLIST software was awarded the best new product, awarded by the Pharmacy Guild of Australia. easyBLIST is a web-based patient profile system that forms the input to MTS packaging automation.

Overall, both our momentum in the marketplace and the recognition of our product leadership are demonstrating that our strategy is working. The MTS acquisition only strengthens that positioning. I believe that we are on track to deliver continued improvements in healthcare economics and safety. Rob, back to you for some financial results.

Thanks, Randy. Our financial results this quarter exceeded expectations. As Randy mentioned, our total revenue is a record for Omnicell, and the revenue for just the acute-care business is also a record. Profit, excluding transaction costs related to the MTS acquisition, was higher than planned, and analyst consensus. Cash is at the high end of our expectations, even after buying back $7 million of stock during Q2.

Our results include six weeks of MTS business following the transaction closing on May 21. And since this is a transition quarter, I will provide the consolidated results, and I will also provide some acute-care-only figures, which are comparable to Omnicell prior to the acquisition. And in addition, some of our measures discussed in previous quarters will continue to apply only to our acute-care business, and one of those measures is the portion of our orders from new and competitive conversion customers. As Randy mentioned earlier, we had 33% of our acute-care orders from new and competitive conversion customers. And of those orders, we saw a shift towards competitive conversions with over three-fourths of the orders being competitive conversions, and less than one-fourth from new Greenfield customers who have never purchased automation before. We are very happy with these results and believe they continue to demonstrate the competitiveness of our solutions.

Revenue for Q2 2012, was $75.4 million, up 24% from Q2 of 2011, and up 18% from last quarter. We always install on our customers' schedule, and ended Q2 with more installations than we had originally expected, driving revenue over our expectations and consensus. Q2 2012 profit on a GAAP basis was $0.04 per share. We will continue to report our profits on a non-GAAP basis, also, which will now exclude stock compensation expense, amortization of intangible assets associated with acquisitions, and any one-time costs or benefits.

This quarter, our pro forma non-GAAP results exclude transaction costs of $3.2 million, net of income tax. These costs are directly associated with the acquisition of MTS, and consist of professional and advisory fees, a step-up in inventory valuation, and one-time severance costs associated with some restructuring. We use non-GAAP financial statements in addition to GAAP financial statements, and we feel it is useful for investors to understand acquisition-related costs and non-cash stock compensation expenses that are a component of our reported results. Full reconciliation of our GAAP to non-GAAP results is included in our second-quarter earnings press release, and is posted on our website.

On a non-GAAP basis, EPS was $0.20 in Q2 2012, up from $0.15 in Q2 2011, and up from $0.13 in Q1 of 2012. Our non-GAAP operating margin was 13.3.% in the quarter, up from 11% a year ago. Our results are consistent with our expectations and our guidance for overall operating margin improvement towards 15% by the end of the year. Our blended non-GAAP gross margin was 55% for the quarter, and our acute care gross margins tend to be in the mid to high 50s, and our non-acute care gross margins are in the low to mid 40s. Adjusted earnings before interest, taxes, depreciation, and amortization, which also excludes stock compensation amortization and the amortization of acquisition-related costs were $12.4 million for the second quarter of 2012, and that's up 46% from $8.6 million a year ago.

We will now be segmenting our business into acute care, which is the traditional business of Omnicell, and non-acute care, which is the predominantly the former MTS business. Our acute-care business contributed $66.5 million in revenue, which is up 9% from Q2 2011, and is a record all-time revenue for acute care. Our acute-care business contributed $0.18 of non-GAAP EPS. And the acute-care business had non-GAAP gross margin of 57% on products, and 54% on service in Q2, averaging 56% for the quarter.

Now, the MTS non-acute care business contributed $8.9 million of revenue to the quarter and contributed $0.02 of non-GAAP EPS. 85% of the MTS non-acute care business is consumables, used by pharmacists to make Blister Cards that are at the center of medication control in most non-acute-care facilities. The MTS machinery business is approximately 15% of the non-acute-care revenues, and includes about 3% of total revenues that are ongoing maintenance services on the machinery. Non-GAAP gross margin for Q2 non-acute-care business was 43%, and is consistent with our expectations.

The balance sheet remains very strong after the acquisition. Cash and cash equivalents were $54 million. During the quarter, we used $159 million for the acquisition of MTS and related deal costs, and repurchased $7 million of stock. These expenditures were partially offset by an increase of $9 million from the rest of our operations in Q2. Our accounts receivable, day sales outstanding, was 52, down 4 days from last quarter. And our new consolidated inventory is $25 million, and our consolidated regular headcount is 1,086, after the addition of 293 staff from MTS.

Regarding the remainder of 2012, we believe we're on track with our previous consolidated guidance issued in June. We expect 2012 revenue to be between $307 million and $315 million. Non-GAAP earnings per share are expected to be between $0.75 and $0.81 per share. Non-GAAP EPS excludes stock-based compensation and amortization of any intangible assets or step up in inventory valuation associated with the acquisition of MTS Medication Technologies. Non-GAAP earnings also excludes one-time expenses associated with closing the transaction. Most of the one-time charge is behind us.

Before the acquisition, we believed we would be very close to 15% operating margins by the end of 2012. We've already made significant progress towards our goal, and we still believe we'll be very near our goal of 15% operating margins by the end of the year in our acute-care segment. Non-acute-care segment is already achieving 15%, and so we believe following the acquisition, we are still on track to achieve 15% for the consolidated company. In our product backlog, which is the value of firm orders that have not yet completed installation, is expected to be between $138 million and $142 million, comprised of acute-care, medication, and supply management products.

That concludes our prepared remarks, and now I would like to open the call to take your questions. I would like to note for the Q&A session, Randy and I are joined by both Chris Drew, our Executive VP in charge of all field operations for acute care; and Bill Shields, our Executive VP in charge of non-acute care.

Operator, if you could open the call.

(Operator Instructions)

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

Congratulations and good start with the combined entities. My first question, you had a very strong quarter. I'm wondering if there -- it sounds like you had some customers that pulled some business forward into the second quarter, at least per your prior expectations. Was there anything special about some of those orders, or was it just simply a timing issue?

Yes, I don't know if I would say they pulled forward. We're always, as I said, installing on our customer's schedule, and sometimes customers need to have something installed a little bit earlier. So we did do a bit more revenue than we had originally expected, which helped the profitability this quarter. Nothing really special there, and I really wouldn't call it a pull forward. It's just a timing of when transactions were completed.

Okay. And then another area that it appears that you had a good performance was in government, at least looking back over the last several years. What is your expectation? Normally, you see a bolus of business in the third quarter in the government, but it looks like you got a chunk of it in the second quarter this year. Given some of the macro issues, do you think that that's probably maybe a little bit lower in the third quarter than we've historically seen, or is the government coming back, at least as you see it?

Well, we do have a substantial presence in the VA system and with the other government hospitals, and there are ongoing orders from government institutions pretty much every quarter. It is true that a lot of the government orders the -- most of them, in fact, come in the third quarter, just because the government's year-end is right at the end of the third quarter. But we do see orders from particularly VA systems and some of the Department of Defense hospitals and Indian Health Systems throughout the year.

All right. Last question for me, and then I'll hop back in the queue. You mentioned you had a good quarter internationally, the Saudi Arabia hospital. You also mentioned China. Could you update us on the progress there?

Sure. So as we talked about with China, we're excited about that market. We expected that the rollout would be several hospitals installing four to six cabinets, and trying out the Omnicell systems. That is definitely going on. The schedule of installations and rollout is meeting our expectations, so that's all good.

We do find, of course, with all of our customers, when they're implementing a new concept, each one of them wants to try it out and see how it works, and then they have to at alter their work flows, and figure out how to optimize with our systems, and that process is going on. So my feeling is that the rollout in China is going very well, and we're still the only ones with a Mandarin system in the market, so that's good.

Thank you for taking my questions.

Your next question comes from the line of Mohan Naidu, with Piper Jaffray.

Congratulations on a strong quarter here. Randy, to start off with, now that you have MTS, what kind of conversations are you having with your customers, all MTS, customers across (inaudible) cross-sales? And do you see any synergies in the sales force, and how are you targeting cross-sell opportunities at this point?

We think some of the best opportunities we have right away obviously are to bring our cabinets presentations right into the institutional pharmacy, where MTS has 70% of the market share in the Blister Card world. So they have vastly more relationships and business partnerships there. So we can bring in our systems from the cabinet automation world right into those settings, and it's creating a nice pipeline for us. So those are some easy wins for us, and we've actually reorganized some of our sales force to attend to that directly.

And then, of course, into the IDNs that we sell into, readmission rates, which are going to be tracked next year, are directly tied, in some cases, to medication adherence. So we're looking at starting some initial projects in IDNs that would demonstrate the medication adherence packaging solutions and automation solutions to help drive success in those areas. And our early discussions are going very well, and we hope to have, by the end of the year, some pilot projects on that. And that's right in tune with the conversations that people in the C-Suite are having. How do we impact the cost and keep people out of hospitals, and move them to other low cost areas in the healthcare system, and medication adherence is a key driver in that. It's nice to be right in the target of healthcare systems conversations these days.

Okay. Thanks, Randy. Rob, looking at the backlog for the year-end, how should we look at that, and presuming at this point it primarily consists of acute-care product, is that correct?

That's correct.

So is there any way to give us a metric there? How do we look at MTS, gauge their performance, or to line it up?

Well, most of MTS's revenue is from consumables. As I said in the prepared remarks, 85% of their business is from consumables. The remaining part of their business is, compared to Omnicell, relatively small amount of machines, and somewhat lumpy. At any point in time, there's not necessarily any large backlog after the MTS machines. Many of those machines can be produced on a relatively short cycle. So we really didn't increment our backlog forecasts for anything in MTS. If there is a machine on order in the stage of being produced or installed at the end of the year, that will be in the backlog, but we don't expect it to significantly change the number.

Okay. On the consumables, is it accurate to look at that as more of a recurring revenue where you'd see a constant stream of orders flowing in?

Absolutely. And that's frankly one of the benefits of the acquisition. There's much more consumable revenue now as part of the Omnicell base.

Perfect. Last question for me here. R&D, significant leverage in the quarter. I thought with MTS folded in, it would be a little bit up. Any comments there? Is that a correct run rate to look forward to?

Yes. Well, our R&D is relatively the same total gross spending, but as we've had in the past, part of our R&D is capitalized. When we get towards the end of the development cycle, we're more into testing. We didn't really have hardly anything capitalized in Q1, and in Q2, we did capitalize $1.2 million.

All right. Thank you.

Excuse me, we actually capitalized $1.4 million, including MTS.

MTS, okay. Are there any new programs starting up that would impact Q3 on the capitalization?

We always have plenty of new development going on. Reinvesting in our business is very important.

Thanks for taking my questions.

(Operator Instructions)

Your next question comes from the line of Steve Halper with Lazard Capital Markets.

Two quick questions. Number one, on the amortization add-back, obviously most of that is MTS, but what was the add back related to, say, your other acquisitions that might have been included in that number now?

In the quarter, we amortized about $600,000 of intangible assets. About $150,000 of it was from previous acquisitions, and the rest was from MTS.

And then your -- just for information purposes, can you tell us what the MTS top-line growth would have been in the quarter year-over-year, just for a comparable basis for the full quarter? I know you didn't own the Company for the full quarter.

Well, MTS is growing at about 5% to 7%, depending upon the quarter and the period that you're looking at.

Okay. So it would be within that range?

Right.

Okay. Great. Thanks.

Thank you, at this time, there are no further questions. I would now like to turn the call over to Randy Lipps.

Well, thanks for joining us this morning. We're really pleased with our acquisition and the momentum we have both in the acute care and non-acute care businesses. We think it opens up some great growth opportunities to continue to explore and move both domestically and internationally. Thanks again for joining us today.

Thank you. This does conclude today's conference call. You may now disconnect.