Omnicell Inc (OMCL) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2013 Omnicell earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator instructions). It is now my pleasure to turn the conference call over to Mr. Rob Seim, CFO of Omnicell. Sir, you may begin.

Thank you. Good afternoon and welcome to the Omnicell 2013 first quarter results conference call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO.

You can find our results in the Omnicell first 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 and 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 11th, 2013, 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 May 2nd, 2013, 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.

And finally, this conference call is the property of Omnicell Incorporated, and any taping, other duplication, or rebroadcast, without the express written consent of Omnicell, is prohibited.

Today Randy will first cover an update on your business, then I'll cover our results for Q1 and our guidance for 2013. And following that, we'll take your questions. Randy?

Well good afternoon. Our momentum for the second half of 2012 has continued through the first quarter of 2013. Our revenue is in line with expectations, earnings are ahead of our guidance for Q1, and our business grew 36% year-to-year organically and from our acquisition of MTS.

Investments in our three-legged strategy over the past several years continue to drive our success. The first leg of our strategy, which is expansion in the US market for the delivery of differentiated, innovative solutions, has generated another set of new customer wins in Q1 across all types of hospital systems and continued automation footprint expansion amongst existing customers.

The second leg of our strategy is expansion outside the US, where our systems are just beginning to be adopted. While still a small part of Omnicell, our international business continues to enjoy positive momentum with more initial installs in China, and orders now being booked from our 2012 contract win with AP-HP.

The final leg of our strategy is to expand through strategic partnerships and acquisition of new technologies. The actions we took in 2012 are allowing us to use our medication management expertise to bring more comprehensive solutions to customers across a broader spectrum of healthcare. This includes our alliance with Cerner to deliver enhanced interoperability for acute care customers, and our acquisition of MTS to deliver advanced automation to non-acute care customers.

Through MTS we are also reaching the home with our MultiMed solution that are at the forefront of medication adherence. Every day over a quarter of a million patients are utilizing medication adherence packaging from Omnicell in the UK alone, and adoption is starting in other European markets.

In Q1 we saw new accounts moving in Omnicell in all areas of our business. In the for-profit hospital sector I'm very pleased to announce that Vanguard Health Systems, a 7,000 bed, 28 hospital organization headquartered in Nashville, has chosen to convert all their hospitals to our medication systems over the next few years. The contract is signed with Vanguard and we've already taken some initial orders, and expect more orders later in 2013.

Vanguard is adopting our G4 automated dispensing systems with some of the newest capabilities, such as patient-specific medication identification. They're also adopting our controlled substance management system, our anesthesia work stations for operating rooms, and our Pandora analytic software.

Now among our not for profit hospitals, Lucile Packard Children's Hospital, located on the Stanford University campus in California, has decided to replace their current medication control systems with OmniRx. Lucile Packard is one of the premier pediatric health centers in the US, and is in the process of building a new hospital and upgrading all their systems. We have a great record of competitive conversions at leading teaching institutions which are looking for the highest levels of medication management capability available, and we're proud that Lucile Packard chose to move to Omnicell.

In addition to healthcare institutions in the private sector, we've always been strong with government institutions, and that continued in Q1 with new accounts in the Veteran's Administration, and a decision by the State of California to fit out a new 700 bed prison hospital with our systems.

At the heart of all these new customer decisions is our OmniRx automated medication control solution, a system that in 2012 won the top award from the prestigious third party rating firm KLAS for the seventh consecutive year.

In Q1, our non-acute care business segment performed well, with revenue meeting our expectations. We're happy with how the integration of our MPS acquisition progressed last year, and have recently taken the next step by aligning the management structure into the existing departmental organizational structure of Omnicell. As a result, management of research and development, manufacturing and marketing are all now fully integrated, in addition to administrative functions that were consolidated in 2012.

Through this process, Bill Shields, who was head of the MTS subsidiary since the acquisition, and a few other staff members, have left the company. Offsetting these reductions are new staff we've added to put more emphasis on sales, marketing, product development and operations of medication adherence solutions. I'd like to thank Bill for his contribution to leading MTS through the sale of the company, and through the first nine months of integration with Omnicell, and wish him all the best in his next endeavor.

The acquisition of MTS has provided us with multiple significant opportunities in medication adherence, and for market expansion. The changes we made in Q1 resulted in some uncommon charges, which Rob will take through later in the call, but more importantly the changes align and focus us more on the long-term opportunity ahead. I am confident that our integrated management structure and the added resources position the company well to execute on these growth opportunities.

And before I turn the call over to Rob to cover the Q1 results, I'd like to comment about some of our success and what it means for us going forward. As you guys have heard me say many times, on average four times a week a new customer is installing an Omnicell system. Customers such as Vanguard and Lucile Packard make well-informed decisions, and to win them we have to be able to demonstrate value and partnership that helps them through the evolving and constrained healthcare environment.

For example, our recent studies conducted at multiple hospital sites showed that it was approximately eight times more expensive to distribute a dose manually than it was utilizing our medication distribution system. The more of our automation a hospital uses, the more efficiency that is gained.

In the non-acute side of healthcare, we offer a medication adherence solution that can significantly reduce the problem of patients not adhering to their medication routine, the problem that is estimated by New England Health Institute to cost $293 billion, and cause 125,000 deaths a year in the US alone. I am very optimistic that we are participating in growth markets where we have the technology and the skills to deliver long-term value to customers worldwide as healthcare moves to new levels of safety and efficiency. Rob?

Thanks, Randy. So as Randy did mention, once again we had a very good quarter for new customer wins. Consistent with the last eight years, 37% of our automated dispensing system orders were from new and competitive conversion customers, with approximately one-half coming from competitive conversions and one-half from greenfield customers who had never purchased automation before.

Our Q1 revenue is in the middle of the guidance range we provided on our last investor call, and our non-GAAP EPS exceeded our guidance by $0.02. Cash grew $8 million during the quarter to $70 million. Operationally it was a good quarter.

Our revenues were $87.1 million. As we guided, revenue was down 3% sequentially, but up 36% from Q1 in 2012. The revenue decline sequentially simply reflects installation timing. We had record backlog at the end of 2012, much of it with larger customer institutions. Larger installations, especially with new customers, tend to take longer to complete. Many are now under way and we expect them to flow into the revenue process through the remainder of 2013, which is fully contemplated in our annual forecast.

GAAP earnings per share were $0.10, up 43% from Q1 2012, and contains some uncommon one-time charges that largely offset each other. As Randy mentioned, in Q1 we realigned organizationally, resulting in a one-time, pre-tax restructuring charge of $0.7 million comprised of severance related costs.

During Q1 we also recognized a $1.8 million pre-tax impairment software engineering expense that had previously been capitalized. The impairment recognizes that we will not continue with some specific technologies that were in the later stages of the development cycle. The impairment is reflected in the research and development line in the P&L in the non-acute segment. This is an unusual charge and we had not experienced it in Omnicell before and we really don't expect to encounter it again.

Offsetting this impairment charge are lower variable compensation expenses in the quarter. A variable compensation comprises, on average, about 15% of the potential quarterly compensation for Omnicell employees, and is based on a combination of company and individual goals. Because of the software impairment, we did not achieve our company's financial goals. Consequently a significant portion of the variable compensation was not earned. Variable compensation is reflected in every cost and expense line of the P&L, but most heavily affected the sales, general and administrative expense line.

Our Q1 results also reflect some unusual tax activity and I'd like to explain. The R&D tax credit was renewed by Congress in early January, retroactive to January 2012, and prospective through 2013. Following accounting convention, the benefits from 2012 are recorded in Q1 when the law was passed.

We had anticipated the R&D tax credit in our forecast, but the actual credit was a little larger than we planned for, providing some additional benefit in Q1. We also had some tax credits related to stock option exercises. So overall, on a GAAP basis, our taxable income was $3.9 million and our normal tax provision was $1.6 million. The tax credits totaled another $1 million, resulting in a Q1 tax provision, after you remove the tax credits, of $0.6 million.

So to summarize all the unusual items in the results, we had a restructuring charge of $0.7 million and an impairment charge of $1.8 million that was largely offset by lower variable compensation expense. We had anticipated some tax credits in Q1, but they were larger than expected. Underlying all these events, our business performed solidly at or above expectation.

In addition to the GAAP financial results, we report our results on a non-GAAP basis, which excludes stock compensation expense, amortization of intangible assets associated with acquisitions, and any one-time costs or benefits. In Q1 we have excluded the $0.7 million severance cost in calculating our non-GAAP earnings, but we have not excluded the software impairment charge of $1.8 million or the offsetting reduced variable compensation expenses as we view those as more operational events.

We use non-GAAP financial statements in addition to GAAP financial statements because we believe it is useful for investors to understand acquisition related costs and non-cash stock compensation expenses that are a component of the reported results, and the results from ongoing operations, excluding one-time events. A full reconciliation of our GAAP to non-GAAP results is included in our first quarter earnings press release, and is posted on our website.

On a non-GAAP basis, earnings per share was $0.21 in Q1, up 62% from 2012 and $0.02 over analysts' expectations. Non-GAAP EPS was down sequentially from $0.25 in Q4 2012, as expected, but up from $0.13 in Q1 of 2012. The sequential decline from Q4 2012 occurred because Omnicell has some seasonally high expenses in Q1 of every year that affect both cost and operating expenses.

In addition, from time to time, the mix of our products installed in any one quarter fluctuates with installation schedules. We had more lower margin products installed in Q1, on the acute care part of our business, which lowered overall gross margin, but was consistent with our expectations and the guidance.

Adjusted earnings before interest, taxes, depreciation and amortization, which also excludes stock compensation amortization, and the amortization of acquisition related costs, and the one-time charge, was $12.2 million for the first quarter of 2013. That's up 48% from $8.2 million a year ago.

Our acute care segment, which includes everything we sell to hospitals, contributed $66 million in revenue, and $6.6 million of non-GAAP operating income in Q1 2013, or roughly 75% of the total non-GAAP operating income of the company.

Our non-acute care business consists of solutions sold outside the hospital setting, including equipment and consumables that manage medications through adherence packages and dispensing systems sold to institutions serving long-term care needs. About 80% of the non-acute segment revenue is comprised of consumables used by pharmacists to make blister cards that are at the center of medication control in most non-acute care facilities. The non-acute segment contributed $21.1 million of revenue to the quarter, and $2.2 million of non-GAAP operating income, or 25% of the total non-GAAP operating income of the company.

Our balance sheet continues to be strong, cash of $70 million, up $8 million from Q4 2012. Accounts receivable days sales outstanding were up to 69 from 56 days last quarter. In Q4 2012 we took a large order from the Sidra Hospital in Qatar that fully shipped in Q1, but the payment terms extend into Q2. In addition, our installation mix was less weighted to leases, which have a quicker collection cycle than purchases. These two factors drove DSO up in Q2 but we expect both to be temporary. We expect DSO to be in the 55 to 65 day range in the future.

Inventories were $26 million, down $1 million from last quarter, and our head count was 1097, up from 1088 at the end of 2012.

So looking forward, we believe we are right on track to the guidance we gave in January, and we do have some increases in earnings expectations.

We expect revenue to be between $370 million and $380 million, an increase of 18% to 21% over last year. We expect revenue growth for the acute care segment, which is all organic, to be up 10% to 12% from 2012 to 2013. And revenue from the non-acute segment is expected to be up 60% to 70%, reflecting the full year of MTS product line.

We previously expected non-GAAP earnings to be between $0.97 and $1.05 per share. Because of the results in Q1, we now expect non-GAAP earnings to be $0.99 to $1.07 per share, up 14% to 22% year-to-year. Earnings per share estimates assume an annual average tax rate of 38% on GAAP earnings.

We expect steady revenue and earnings growth through the year, and to finish with an average annual operating income in the 14% to 16% range. We expect 2013 year end product backlog to be between $160 million and $165 million, and product bookings to be between $305 million and $315 million. Except for the increase in earnings per share guidance and the tax rate, all this guidance is the same as we provided in January.

Now that concludes our prepared remarks and now I'd like to open the call, operator, to questions.

Thank you. (Operator instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jamie Stockton with Wells Fargo.

Yes, good evening. Thanks for taking my questions. I guess maybe the first one, the restructuring, could you just confirm which line that you stuck that $700,000 in?

Yes, so the restructuring for $700,000 is in the GAAP statements, and we did remove it for the non-GAAP statement. It is primarily in the SG&A line.

Okay. That's great. And then on the Vanguard deal, I think you said that the timing was going to be a few years. Should we literally interpret that as rolling out across, I think I got what 28 hospitals over the course of three years?

Yes, that's about right. We found with large organizations, such as Vanguard, that we've done in the past, that they typically roll out approximately 10 hospitals a year.

And just to confirm on that deal, it's not a hunting license, it is a, you know they're going to go system-wide with Omnicell and the parent organization is essentially driving the deal. Correct?

That is correct. They have 28 hospitals, one of them is already an Omnicell Hospital. The other ones will all be competitive conversions. And they are standardizing on us.

Okay. And then maybe one last question. The MTS business, could you talk about -- you know, I assume you're not seeing any material orders with the acute care business with the MTS product until you officially roll out kind of the newer I think lower ASP equipment from MTS that's more targeted to acute care. Is that still essentially the situation?

As we've said before, we do have products under development that will make it more attractive for acute care institutions to start adopting that type of product. But we are seeing interest from acute care institutions that want to reduce the chance of readmittance and have outpatient pharmacies and so forth. It's just like it always is with those institutions, the sale cycle tends to be in the year to two year long range. And so (inaudible).

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

You bet.

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

Good afternoon, gentlemen. This is actually Dillon subbing in for Matt, so thanks for taking the questions. The first one, really what we notice with product gross margins seem to regress back to what they were at Q2 of 2012. And there's been quite the range for that number over 2012, and kind of leading into this quarter. How should we think about product gross margins going forward for the rest of year? What kind of level do you guys target or do you think is optimal to run the business?

Well we've got a range of products in our portfolio that carry a variety of different gross margins, from pure software products to hardware products that we OEM, so the mix of the products tend to affect the gross margin in any one quarter. Overall, we feel like the gross margin that we had last year is the type of overall average gross margin -- is the type of gross margins that we would expect overall this year.

Okay, thanks. And then one of the metrics we like to track is your government orders. And it looks like in Q1 they were pretty strong. Do you guys think that was a function of kind of a pull through from the effects of the sequestration trying to jump ahead of that? Or were there any other dynamic that kind of drove those purchasing decisions?

So we don't think it was really driven by anything to do with sequestration or those type of events. The government, just like other institutions, go through a pretty long and thoughtful purchasing process, and we did have some new VA hospitals that jumped onto Omnicell's platform, and that drove a very strong quarter with the government.

Okay. Thank you, that's it for me.

Your next question comes from the line of Charles Rhyee with Cowen and Company.

Yes, thanks. Hey guys. I'm sorry, if you could go over the tax thing a little bit, just to make sure I understood that correctly. I missed a little bit of sort of the things that went into it. And if we normalized for -- can you talk about what -- you had said you had expected some benefit from the R&D tax credit, but when you guys gave guidance, what did you kind of assume for the tax rate in the first quarter relative to clearly what you got, you got more than you expected?

So we were anticipating an overall tax rate for the year of 40%, but we were anticipating the first quarter would be a bit better than that. And the way that this works is you apply an annualized tax rate and then the R&D tax credit for last year comes in as a one-time item. It provides you a much better tax rate in Q1. And we had anticipated that. We actually ended up with $200,000 more R&D tax credit in Q1 than we had anticipated in the guidance. So that, with a little bit of other benefits in tax associated with stock options, we ended up with about $0.01 more earnings from the one-time events in taxes.

Okay. And then the restructuring, how much did that affect the tax rate or was that separate? I might have confused the two together.

So the restructuring only affected taxes in that it lowered the overall earnings of the company. You know, taxes are of course calculated on GAAP earnings.

Oh, I see. Okay. That's all folks. No, okay. Can I just ask then also on the international side, can you talk a little bit more, sort of what was the overall growth in international revenue in the quarter? I think you talked about 2012 ending sort of up 20% year-over-year. If you could give us a sense of how fast this side of business is and how much of that was maybe from the Qatar deal versus the rest of the international side.

Well the Qatar has shipped. We have fully built the product in our factories and shipped it to Qatar, but it is not installed yet. So it is sitting in our deferred revenue, deferred gross profit, on the balance sheet, but it has not yet flowed through the P&L. We expect that hospital, which is still finishing out construction, to be ready to start implementing in the second half of this year.

Okay. And then (inaudible) so obviously then the international growth today was without it. What was that in the quarter?

You know, I don't have it at my fingertips what the international growth was year-to-year, but we do anticipate this year international growth in revenue to be about 20%.

About 20%. Okay. Okay, that's it for me. Thanks.

Your next question comes from the line of Sean Wieland with Piper Jaffray.

Hi, thanks. What exactly did you restructure and why did you restructure it?

Well there were two events that happened, right, restructuring which was a reorganization, which was outside the pro forma. And then within the pro forma, we sunset some non-acute care products that we just thought weren't going to grow fast enough for us, and picked some new lines to invest people, time and energy in that we thought long-term, or even medium-term, had much better growth and speed to market and growth factors that made a whole lot more sense.

So it was painful to kind of shut down the line, but moving the resources over to this faster growing opportunity made a whole lot more sense to us. And so these products have not hit the market yet, and so they don't really impact current revenues and earnings projections, but we're really excited about making the change in allocation of resources really to drive the MultiMed opportunity even faster.

Were they products that were part of the MPS portfolio?

Yes, they were all products in the MTS portfolio, both small hardware and some software.

Okay. I got it. And then just one quick one. How does the Vanguard deal roll into the backlog? How do we think about that factor into your backlog guidance?

Well as Rob was saying, usually we -- it's still early and usually you sign a big deal with a big hospital and you know that you're going to swap out all the hospitals eventually. And so you have to really go back and have that discussion with them, so it's a little bit hard to tell. Usually there's some pent up demand there because they probably delayed purchasing any products at any hospitals over the last six months before they decided on a single vendor like us.

So usually in the early start of the deal there's some pent up demand and they want to move more quickly. But I think, but as we get clearer understanding on how fast they want to move on that, it will be helpful. We haven't had much in the backlog in Q1, but we know it will impact a lot in Q2, and we'll see how the roll out schedule goes and perhaps more toward the back end of the year.

Okay. Thank you very much.

Sure, Sean.

Your next question comes from the line of Raymond Myers with Benchmark Company.

Thanks for taking the questions. Randy, my first question, and Rob also, is how should we view the cadence of R&D expenses throughout the year considering that $1.8 million was non-recurring in Q1?

Sure. So if you look at the R&D line, you'll see that Q1 is quite a bit higher than it's ever been in the past, at $7.5 million, and that includes the $1.8 million. We typically, on a gross basis, before any capitalization software, are spending in the range of about $7.5 million, and we typically have somewhere in the range of $1 million or so, $1 million, $1.2 million in capitalized.

But I would say that that does fluctuate quarter to quarter, depending upon the actual schedules of our products, and when they're in [life] stage development before we bring them into market. So you will see some ups and downs that overall those numbers, $7.5 million gross and about $1 million, $1.2 million in capitalization are the average that you'll see.

So you did about $8 million in the first quarter. $1.8 million was a special charge. That's only $0.5 million. That's a big difference and you're saying it's only $7.5 million going forward. I don't understand the difference.

Okay. So in a normal quarter we would spend $7.5 million on development activity, and we would capitalize about $1.2 million of that. And so you'd end up with a net development in the $6.3 million range. And like I said, it does fluctuate quarter to quarter. In this quarter, we had that same sort of activity, a little bit more capitalization, but then we wrote off $1.8 million. And so the net effect ended up with $7.5 million on the income statement.

Okay. Thanks, that helps. And then will you be disclosing the revenue split between acute care and non-acute care going forward?

Yes, we will.

Can you tell us what it is?

So acute care was $66 million, and non-acute care was $21 million.

$21 million, great. And can you tell us what operating cash flow was, and capital expense in Q1?

Capital expense was about $2.7 million and I don't have the operating cash flow right here at my fingertips. I'll have to get back to you with it.

Okay, that's fine. And then I wanted to touch on the competitive conversions. Did you say 38% of revenue was from new customers and half of that's competitive conversions?

Yes, the metric that we give pertains to our acute care business, the medication dispensing systems. And of the orders for those systems, 37% were from new and competitive conversion customers. Half of that was competitive conversion, and the other half were new greenfield customers.

So reading into that, it sounds like about 19% of your new business was competitive conversions. That looks a little bit lower than what we've seen in the past. Am I reading too much into that?

Yes, you are. It does fluctuate from quarter to quarter. Sometimes most of our new business is from competitive conversions, and sometimes most of it's from greenfield. But overall, we've had a pretty consistent metric when you average it out over the last eight years, (inaudible) 15% to 20% of our business is from competitive conversions.

(Inaudible) of Vanguard, there's a lot of orders to come. That's not in the 38%. We haven't taken very many orders from Vanguard yet, so that's all to be consumed in the future of the 38% rate as we move forward.

Okay. Very good. That's all my questions. Thank you very much.

(Operator instructions). Your next question comes from the line of Gene Mannheimer with B. Riley.

Thanks, good afternoon and nice quarter as well.

Thanks.

Thanks Gene.

Question on the Vanguard contract. Congratulations on that. Was that built into your guidance that you'd given at the beginning of the year for backlog?

Yes, so the guidance definitely assumed that a number of deals that were in the pipeline would close. We don't know exactly which ones we'll be able to close, but we do assume that there will be a number of new contracts just like Vanguard.

Okay. So I was thinking, given you've already taken some initial orders as early as Q1, that maybe that would be incremental to your backlog guidance for the full year.

Yes, you know it sort of depends, as Randy said, on how fast Vanguard wants to roll out.

Yes, that's the wildcard, Gene. If Vanguard decided gee, let's move really quickly, that could accelerate more orders and therefore more backlog this year. But as we said, I mean we just literally inked the deal a few weeks ago and we're still in discussions on the roll out.

Okay. Sounds good. And then with respect to the software engineering impairment, was that related to projects that were in development prior to your acquiring MTS or since you've bought them?

So they were projects that were in development prior to us acquiring MTS, but they didn't really hit the late stage where we would be capitalizing the software until after the acquisition.

Okay. So just to clarify then regarding adjusting for the one-time charges and credits in the quarter, you'd characterize the business as in line or better for the first quarter?

Yes, in line, some aspects a little bit better, but most aspects in line.

Okay. And then the last thing for me. Given one of your competitors is working diligently to roll out a new platform, are you seeing a window right now to take share that's disproportionate to what you're accustomed to seeing there?

Well I think our products have always been leading technology and I think that whether our competitor comes out with new stuff or current stuff, it's just getting the word out on Omnicell. And there is momentum in the marketplace that's refreshing to see, and especially seeing these for-profit hospitals looking to buy systems that really not only meet the basic needs, but are really going to drive efficiency and more enterprise functionality that allows them to get the benefits of running a very large system.

Great. Thank you.

You bet.

This concludes the question and answer session. I will now turn the conference over to Mr. Randy Lipps for closing remarks.

Well thanks for joining us today. As you can tell, we're really excited about the momentum we have in the marketplace, both on the acute care and the non-acute care side, and lots of opportunity there. And I think the fact that we're raising our EPS guidance illustrates that we're committed to making all our numbers and exceeding them. So we look forward to a great 2013 and see you guys next time.

Thank you, ladies and gentlemen. This concludes today's first quarter 2013 Omnicell earnings conference call. You may now disconnect.