Omnicell Inc (OMCL) 2013 Q3 法說會逐字稿

Good afternoon. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-session. (Operator Instructions) Thank you.

Mr. Rob Seim, you may begin your conference.

Thanks. Good afternoon and welcome to the Omnicell 2013 third quarter results conference call. Joining me today is Randall Lipps, Omnicell's Chairman, President and CEO. You can find our results in the Omnicell third quarter 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 statement, please refer to the information under the heading Forward-Looking Statements in our press release today and other information regarding risks in the Omnicell Annual Report on Form 10-K filed with the SEC on March 11, 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 October 31, 2013 and all forward-looking statements made on this call are made based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change.

Finally, this conference call is a property of Omnicell Incorporated, and any taping or the duplication or rebroadcast without the expressed written consent of Omnicell is prohibited.

Today, Randy will first cover an update on our business and then I'll cover our results for Q3 and our guidance for the remainder of 2013. Following our prepared remarks, we'll take your questions.

Well, good afternoon. I'm really pleased with the performance of the Company so far this year. We set many Company records in Q3, record revenue, record orders and record earnings. Year-over-year growth in Q3 is 12% and we continue on a pace to meet all of our year-end guidance.

Our success in the quarter was widespread across the business and consistent with prior years, Q3 was a very strong quarter for US government orders where we count over half of the veterans administration hospitals as customers. We also continue to see expanding business for our cabinet-based medication control solutions and non-acute care market as well.

In particular, Omnicare increased their commitment to Omnicell automation with new orders expanding their use of automated dispensing systems for first dose and narcotics in long-term care facilities.

We also had a very good repeat business from some of our largest customers who upgraded their systems to G4 or expanded their footprint of Omnicell automation.

Long-term customers such as the University of Florida Shands, the University of Michigan, re-hospital of Indiana and Queen's Hospital in Hawaii were just some of the customers who extended their Omnicell solutions.

And consistent with every quarter over the past eight years, we had several multi-hospital wins during the quarter. One of the more unique wins that we publicly announced was Victory Healthcare in Texas, which is a system of specialized surgical hospitals that is implementing G4, OmniRx automated dispensing systems, our anesthesia workstation and our controlled substance management system.

Our results continue to be driven by our three-leg strategy. Those three legs are market expansion through the delivery of differentiated innovative solutions, expansion into new markets, primarily outside the US and expansion through strategic partnerships and acquisition of new technologies. We continue to make investments in all three of these areas. We believe these investments are paying off by distinguishing Omnicell with our customers and help drive the great results we had this quarter.

Our first leg of delivering differentiated innovative solutions is bringing us into exciting new opportunities such as medication adherence solutions.

International adoption of multi-med adherence packaging, which is more advanced than in the US, continues to grow by double-digits with approximately 550,000 patients receiving medications through our adherence packages every week in Europe. We continue to believe this is an excellent growth market. While our second leg of expanding into new markets is primarily focused on international, expanded use of our automated dispensing solutions is driving growth in the non-acute care segment. In the acquisition and partnership leg of our strategy development with the Cerner iBus continues. We recently demonstrated the fast interoperability at the Cerner User conference and we now have our first customers live with interoperability between Cerner electronic medical records and Omnicell systems.

The healthcare industry is evolving to tackle the many challenges of changing regulations and economics. Providers are consolidating and care is moving to less costly environment. Healthcare institutions have new laws to navigate and face lower reimbursements per patient. And the move to managing population health has started. We know that when patients get the right medications and take it at the right time, the outcomes of healthcare improve.

Omnicell is aligned with the long-term trends of healthcare market to manage the health of patients across the continuum of care. 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. Our solutions help our customers improve clinical outcomes, maintain regulatory compliance and of course save money, all critical measures our customers have in the evolving landscape of healthcare reform which makes Omnicell uniquely positioned for continued success.

Now let me turn it back over to Rob for some financial results.

Thanks, Randy. Well, we certainly have many good results to talk about. This is the first quarter of 2013 where we have year-to-year comparisons that include the results of the MTS acquisition in both 2012 and 2013. And on that like-for-like basis, revenues of $94 million were up 12% from Q3 of 2012. Randy indicated, we had record orders and 35% of those orders were automated dispensing systems with some new and competitive conversion of customers in Q3 with about half of that coming from competitive conversion and about half of from Greenfield customers who have never purchased automation before.

Rounding out the highlights of the quarter, our Q3 non-GAAP EPS exceeded analyst expectations by $0.03 and cash grew $29 million during the quarter to $116 million, one of the largest single-quarter increases in Company history.

GAAP earnings per share were $0.21, up $0.01 from $0.20 in Q3, 2012 and up $0.04 sequentially from $0.17 in Q2 2013. Similar to Q3 last year when we had some benefits that we did not expect to repeat, included in GAAP earnings this quarter were benefits in our tax rate mainly associated with the disposition of employee stocks. Several of the executives and employee stock incentive programs did not allow for a tax deduction at the time the stock compensation charge is recorded in the P&L. That tax benefit is only allowed when the employee exercises the option or sells the stock. And there were many quarters over our history where our tax rate was a little higher because we were unable to take the deduction.

In Q3 we had a cumulative benefit from employee stock sales that positively affected our tax rate and drove $0.03 of earnings benefit. This benefit is in our GAAP earnings and our non-GAAP earnings.

We report our results on a non-GAAP basis in addition to GAAP. Non-GAAP excludes stock compensation expense, amortization of intangible assets associated with acquisitions and any one-time costs or benefits. 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 there are component of our 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 third quarter earnings press release and is posted on our website.

On a non-GAAP basis, earnings per share was $0.31 in Q3 up $0.02 from $0.29 in Q3 2012 and $0.03 over analyst expectation. Non-GAAP EPS was up sequentially $0.04 from $0.27 in Q2 2013. The non-GAAP results also include the [$0.03] tax benefit mentioned earlier and our non-GAAP operating margins were 15.5% consistent with our expectation.

Adjusted earnings before interest, taxes, depreciation and amortization, which also excludes stock compensation amortization and the amortization of acquisition-related costs was $18 million for the third quarter of 2013, up 7% from last quarter.

Our acute care segment, which includes everything we sell to hospitals contributed $70.6 million in revenue, and $11.9 million of non-GAAP operating income in Q3 2013, roughly 80% of the total non-GAAP operating income of the Company. Operating margin in the acute care segment was 16.9%.

Our non-acute care business consists of solutions sold outside the hospital setting including equipment and consumables that manage the medications through adherence packages and dispensing systems sold to institutions serving long-term care needs. The non-acute segment contributed $23.4 million in revenue to the quarter and $2.6 million of non-GAAP operating income or roughly 20% of the total non-GAAP operating income of the Company. Operating margin in the non-acute care segment was 11.3%.

We had outstanding balance sheet performance this quarter. Cash was $116 million, up $29 million from Q2 2013. $15 million of the cash increases were driven by strong profitability, $2 million from improvements in working capital and $12 million from the exercise of employee stock options in our employee stock purchase program.

During the quarter, we put in place a revolving debt facility for $75 million with an option to expand to $100 million. The facility was put in place to provide a flexibility to complete acquisitions of larger magnitude than our cash balances would allow.

Accounts receivable days sales outstanding was 63, flat to last quarter. Inventories were $31 million, up $4 million from last quarter with the bulk of the increase in built to order finished goods slated for upcoming installation. Headcount was 1,126, up 33 from last quarter.

Now looking forward, we believe we are right on track for the growth guidance we gave in January and the increased earnings per share guidance we gave in April, and we are now narrowing our guidance ranges. We previously expected revenue to be between $370 million and $380 million. We are now narrowing that guidance range to between $375 million and $378 million. And that range is an increase from 2012 of 19% to 20%. We expect revenue growth for the acute care segment which is all organic still to be up 10% to 12% from 2012 to 2013.

Revenue for the non-acute care segment is expected to be up 60% to 70%, primarily reflecting the full year of the MTS product line. We previously gave a range for non-GAAP earnings to be $0.99 to $1.07 per share. We're now comfortable that we will be at the high end of that range between $1.05 and $1.07 per share.

Earnings per share estimates assume the tax rate of 36% and GAAP earnings in Q4. Although revenue will grow in Q4, we do expect product gross margins to be down due to mix as we recorded revenue on large international orders. We expect 2013 year-end product backlog to be between $160 million and $165 million and product bookings for the year to be between $305 million and $315 million consistent with prior guidance. And our guidance anticipates another record revenue quarter in Q4 and steady contributions from both our acute and our non-acute care segments.

That concludes our prepared remarks and now I'd like to open the call to questions.

(Operator Instructions) Raymond Myers.

Yes, thank you. Yes, I am here. Thanks. I want to ask you about the competitive landscape. It was public recently that McKesson is divesting its hospital medication management business. Can you discuss how that affects the competitive landscape and what opportunities or threats that that might bring as well as, if possible, estimate what revenue that business does in the relevant competitive sectors?

Well, the McKesson business, we believe is about somewhere less than 10% of the install base. We assume somewhere around 10% of the market revenue, but McKesson has not disclosed the revenue numbers publicly. So we don't have precise information there. Our products compete very well against the AcuDose product, which is McKesson's competing product to our cabinet-based system. And our method of handling medications competes very well against the carousel method with a centralized robot that McKesson uses.

We believe our products have been competing well against theirs for quite some time, as well as all the competitors in the marketplace and it really doesn't matter who owns them, they're being sold to Francisco Partners. We still believe that we're going to compete very effectively.

Great. And can I ask a question about the Medicare reimbursement penalty for hospital accessory admissions? Can you give us an update as to the status of that process? Do you have any more color regarding how MTS is planning to leverage that change?

Well, as you know, this started in October of last year, for hospital readmissions for some specific conditions. If a person is readmitted within 30 days and that readmission is associated with Medicare. So obviously, hospitals want to avoid that. It's one of many penalties or reductions in reimbursements that they're seeing through various and different programs. They want to keep their quality high and they don't want people to be readmitted. They want people to go home healthy and stay healthy. And our systems, with adherence packaging, definitely helps that process.

Like we said in the past, we got a product in the marketplace called the OnDemand 400 that automates the packaging of multi-med cards. It's sort of in the middle of the entrance point in that marketplace. We need both bigger products that package more of those cards for our -- and smaller entry-level products, and we're working on those. And we do believe that those are important to have in our product line before we start really making headway into the hospital market.

But we are seeing a lot of interest from some of the larger hospital organizations, the integrated delivery network and how we can help improve the medication adherence and keep people from coming back in the hospital by utilizing our systems.

Did you say that you need to add some new products to the product line before penetrating the hospital market? And if so, when do you expect to have those products completed?

Well, we said we have those products in development. We haven't given any specific dates on when we're delivering anything. But with the MTS product line that handles the nursing home card, we have a full range of automation equipment that provides an entry point for any pharmacist, depending up on how many they're actually doing on the business they have.

And we don't have that full range of products with the multi-med product line yet. So we're working on that. The product that we have is doing very well, but it appeals to a particular segment of that market.

Okay. Great. Thank you. I'll get back in queue and let some others ask some questions. Thank you.

Jamie Stockton, Wells Fargo.

Hi. Good evening. Thanks for taking my questions. I guess maybe the first one on the acute business it sounds like at least sequentially the Greenfield orders picked up a little there. And if I remember correctly your commentary last quarter was that they were mostly replacement conversions. Did the initial shipments of the newer CareFusion cabinets impact the mix of business or what you were seeing from clients, it seems like you've talked historically about maybe some hospitals were waiting to see the new cabinet before they made decisions, any color there would be great?

The quarter-to-quarter mix between Greenfields and competitive conversions fluctuates. It's just really a factor of what business happens to be closing in that quarter. The number of Greenfield accounts in the United States is obviously declining in our smaller hospitals now. And many quarters, the Greenfield accounts are more weighted towards some of our international businesses, primarily all new business they have not admitted before. But generally, there's nothing to really read into the quarter-to-quarter fluctuation in that. Over time, historically we've had about half of that new business from competitive conversions and about half from Greenfields.

Okay. So it sounds like this was a relatively normal quarter. I guess maybe on the non-acute business, it looks like the revenue was down a little sequentially there but you said you had a good quarter. It sounds like with Omnicare, that business kind of took off, it seemed like last quarter. Could you just talk about, sequentially, the mix of the non-acute business between kind of the traditional Omnicell business outside of the acute settings and then the MTS business? Was the traditional Omnicell business still strong sequentially, based on kind of the pickup with Omnicare?

Well, so like all of our business for the medication controlled systems that are cabinet based, there's a time lag between when an order takes place and when installations takes place. They typically don't happen within the same quarter. And so we did see strong orders from Omnicare. The installations of those orders will be in subsequent quarters.

And what you saw in the revenue, reported for the non-acute care segment this quarter, were orders from previous quarters. So overall, what we're seeing is continued growth in that non-acute care segment. Something that we'll call as revenue synergies from the MTS acquisition, more access to the non-acute care. Institutional pharmacies that serve long-term care facilities, good relationships that the MTS team already had. Installations already in place through the nursing home card. And now the same institutions being interested in our cabinet-based systems for the first doses and narcotics, and that's going well. And in fact, going back to your earlier question about Greenfield, those of course they're all on Greenfield accounts. So, we feel very positive about that business and the growth opportunity.

Okay. And then, maybe my last question. Just you've got the line of credit in place, the McKesson business obviously got scooped up by Francisco Partners. As we think about where you might do future transactions, or should we think about you staying within the realm of medication management within or supplies management within the acute care setting or could you go beyond that to look at some other technologies that hospitals might be using?

Hi, this is Randy. And I think it's a great question. But I think we're really centered on the medication supply chain solutions that are out there, fairly close to our core, because there's so much value to drive and making sure people get the right meds at the right time and a lot of ways to solve that, but not necessarily in the acute care space.

And I think, we've proven with MTS that we can take on a larger acquisition and be successful. But that being said, the line of credit was just put in there to have some flexibility and it's obviously a lot harder to acquire something large and be successful at it. So I think we would always be very careful and prudent about it, because we don't go after a large thing.

But there a lot of small or medium-sized things to go after and I think we're going to continue to be very opportunistic at those. And in particularly, on the non-acute care side, where that marketplace is still developing, particularly in the US and in some places in pan-Europe, it's still developing as well. So I think I wouldn't read anything into that line of credit other than just giving us flexibility if an opportunity came up.

Thank you.

Steve Halper, FBR.

Hey, good evening. Rob, could you just repeat, I don't know if you gave the operating cash flow in the quarter as well as the CapEx and software costs?

So, operating cash flow was $18.5 million.

Okay.

Excuse me, $19.5 million and the CapEx was $2.1 million.

Yes.

And we capitalized $2 million in software.

Okay. And you mentioned, Randy, that 550,000 patients using the medication adherence packaging internationally.

Yes.

When you said that, you also mentioned that it doubled. So is the 550,000 a double over what it was a year ago?

No, I'm just sorry. It's growing at double-digit growth.

Okay.

I'm sorry, yes, it's a very fast grower and so, we know that, that market is going to continue to grow.

Okay. And Rob, are you willing to give us what the international revenues were in the quarter between the two segments?

I don't have that number right here handy in front of me. It is something that we, obviously, report in our public filings. So we'll just get back to you on that one.

And then, as we look ahead, towards the December show, what do you expect to -- what's going to be new that you're showing off there?

We always have a demonstration of products there. But I think probably the story that, it's a little bit old, but I think we see a lot of uptick in is actually our G4 upgrades, a product that has done very well. We only have about 25% of our current customers have upgraded to our new systems. So we have a lot of road ahead with that and some of the features and functions that we've added over time to the G4 platform like the medication label feature set, is something that is garnering a lot of attention and a lot of people are using too, as a driver to upgrade our systems mainly to help get lean and meet regulatory requirements. So, we still see a very nice acceleration in our current customers who are upgrading to the G4 platform from the current platform.

And what's the latest competitive intelligence tell you on Pyxis ES and what do you expect to see from them at the show?

Well, I think that we continue to be very well against all the players in the marketplace and many of the feature sets that we have both for patient safety, efficiency, and workflow. have been in the marketplace for multi-years ahead of the competition and so we still feel like we are several years ahead of the competition and many of the things that they are coming out with, our competitors are coming out with, tend to be things that mimic what we've already had in the marketplace for many years. And so I think we will continue to maintain our lead from a technology standpoint, patient safety standpoint, workflow standpoint in the marketplace and that's just going to continue.

Thanks.

Hey, Steve, you asked enough questions that gave me time to get the international revenues, so it's $6 million in the quarter and $19 million year-to-date.

Great, thank you.

Matt Hewitt, Craig-Hallum Capital Group.

Thanks for taking my questions. Going to bounce around here a bit, but I apologize. First of all, 07/04, the 4th of July week, last year, you implemented a vacation for your employee base that week. I believe you've put that in again this year. What was the, if you got it, the EPS impact of that vacation?

EPS impact. So, I think what you're referring to is, last year, we initiated actually a shutdown for the Company during the 4th of July week. We're trying to make sure that people have time to take their vacations, spend time with their families and we kind of -- and we're all gone at the same time. We don't generate work for each other. So it's just a healthier thing to do.

Last year, we were anticipating that people would take that week as a vacation and they actually ended up taking additional weeks during the summertime and that drew down the vacation accrual and caused, if I remember right, about a $0.01 improvement. So this year, there was much more pre-planning, it was known that, that week was going to be taken months and quarters ahead and we didn't see that same doubling up on vacation during the quarter. We did -- people take vacation during the summer and we did draw down that accrual, but there wasn't any material impact on the earnings.

Okay. All right, fair enough. Secondly, R&D was down sequentially and there was just a little bit of a surprise there given the development that you're working on with the multi-med packaging and some of the systems that you're hoping to have in place for next year. Was that more just a project timing issue or do you expect that to continue to trend down over the next several quarters?

We do not expect R&D to trend down. In fact, we are actively increasing our investments in the future. Now that we're hovering around the 15% operating margins, we intend to manage that level, which means we are going to grow our expenses fairly consistent with revenue. R&D does have some fluctuations quarter-to-quarter because of capitalization of late-stage software development.

We follow all the accounting rules there and so when you get to the point where you are in essentially test, customer test, that gets put in the balance sheet and amortized later into the cost of goods sold line. We did, as I mentioned to an earlier question, we did capitalize $2 million of R&D expense in the quarter, which was more, I believe, last quarter, we capitalized, if I remember right, it's about $1.3 million.

Okay. You mentioned a couple different times in your prepared remarks regarding some of the pressures that hospitals are facing regarding readmission penalties, reimbursement cuts. They've also got the other side of the equation, where you've got this influx of patients because of the ACA or, at least that are anticipated. Because of the ACA, you've got the HITECH Act. I've been reading, hearing, and seeing a lot of stress on hospitals regarding particularly the IT side of things where they're feeling under the gun to get ready for ICD-10, and trying to improve their revenue cycle management in general. Historically, you've talked about your products typically falling near the top of the list from a priority standpoint. Specifically, you've always talked about being a top five type priority. How do you ensure given everything that's going on from the IT side that you're able to maintain that standing at least over the next several quarters?

Well, I think it's a good observation and you are totally right. Hospitals and healthcare systems are technology fatigued. There is a lot going on with initial installation, upgrades and the like, Meaningful Use certifications. But in the same regard, the same reason why hospitals are saying, look, we've got to have an enterprise solution set for healthcare, electronic medical records.

We've got to have an enterprise solution set for medication management, and that means the 30% to 40% areas of the hospital that are still manual, that do not have an automation equipment and must be fully automated. And the second piece is, boy, if we're spreading out the EMR to more locations, we have to integrate medication management into the EMR like the Cerner interoperability advanced work that we've done there.

And so actually, it almost pushes us up higher on the priority scale because we're so interconnected with the EMR. Remember 40% of a nurse's activity in a hospital is medication management, that is almost half of her workload or his workload and it is important to provide systems and functionality to make that efficient, safe, and to meet the regulatory requirements.

Okay, understood. And that's good to hear that you may be able to stay up there. One last from me and then I'll jump back into queue. International, any update on the Chinese market? You've had 30 or so customers trialing the product now, in some cases, for up to a year. I'm just curious, you've been able to make any headway and when we might hear about that first, big, full implementation.

Well, implementations are proceeding along, but as any new markets that we enter, we've got to continue to modify our software systems to meet the very specific needs of that market, which are very different than the US. And we're first in the marketplace and we continue to make headway, but we really need to continue to make investments in R&D to make our products much more acceptable to the marketplace.

And so, we've got to do both and I think before we get large adoption of our Chinese automation systems, we're going to have to make a few of those changes. And so we've got resources and people in place doing that and we feel like that's going to continue to help us keep the lead there and get a much broader expansion of our product into the market.

Okay, great. Thank you for taking our questions.

You bet.

Sean Wieland, Piper Jaffray.

Thank you. How was your government business in the quarter?

It was great, Sean, nice to hear from you and your dog. No, as always, Q3 is a great quarter for us in the government, right? And we already have half of the VA systems. And what happened is a lot of the government is taking advantage of the G4 upgrades. And we haven't seen much impact from either the shutdown or the sequester, because I think that the government is taking on the attitude that supports the veterans either through the DoD or the VA, as these are -- will remain high priority for our government, which makes sense.

So, just given the shutdown and all that, there was -- the government business came in according to your plans?

Yes. There was -- I would say insignificant disruptions or maybe a couple of orders that were delayed, but nothing significant.

Great.

I'd add that the government, they are upgrading to G4, like all our customers are upgrading to G4. So there's even with the existing install base, there's still a lot of business to be done with the government.

All right, got it. And then on the Cerner iBus integration, does that -- can you give us a specific example as to why that would be a competitive advantage for you in the market?

Well, the workflow advantage, what we do in the marketplace is allow the nurse, whatever she sees on the screen, on her Cerner, she queues up meds, she can queue them directly from her Cerner viewpoint. And so that when she goes to our system to retrieve them, she doesn't have to specify that she needs those, it's already been queued up. And so, it's a huge dramatic workflow improvement in that the nurses can virtually drive results, their medication needs through the Cerner system, and we prepared the transaction ahead of time, so it really stays for a longer time.

Great. Thanks so much.

Charles Rhyee, Cowen and Company.

So, Rob, can you go over again the comments on tax rate? You basically -- if I hear it correctly, you're saying we should be at a 36% rate for the fourth quarter, is that a good rate as we think about 2014 then?

Yes, that's a very good question. We've seen so much unusual activity in 2013 on taxes. I'm a little hesitant at this point to give any specific guidance on 2014 yet. We've had a couple of really odd things happen during the year, I mean, first of all, in the beginning of the year, we had the R&D tax credit approved by Congress. And so that ends up being a one-time discrete event that hits tax rate in Q1 and drove it way down. And it was bigger than we had anticipated and we had a couple other unusual things there. We had [$200,000] additional tax benefits.

Then here in Q3, we had quite a bit of benefits in tax deductions from employees selling their employee stock purchase plan shares or exercising some options which triggered deductions that would be applied discretely in the quarter. And a few other smaller things that were all positive, such as the tax rates are coming down in the UK and we have some deferred tax liabilities there that were revalued positively. So, generally, we expect the tax rate to be between 38% to 40%, depending upon the mix of states and how much R&D tax credit in California manufacturer's credit we're able to take. But it falls in that range and only when really unusual items like happen this year come about, do we have something materially different.

Okay, that's helpful. And then did I hear you correctly, I think when you said that cash flow in the quarter, about $19.5 million was for the quarter itself, is that right?

Yes, that was for the quarter itself. We had a very high positive cash generation quarter. But a lot of that was from the profitability and cash flow from operations was $19.5 million.

Okay, so if I add that I think you did 21, six months -- first six months, so we're running about 40? Is this sort of a good run rate, would you expect to be around $60 million or so for the year? Or is there something in the fourth quarter as a much, historically, a very strong cash flow quarter for you guys?

Well, we've been making several improvements in the working capital through the year. And our capital expenditures in 2013 have been relatively light. On an ongoing basis, about $10 million a quarter is what I would expect from the business in terms of cash generation at the current size. And as we grow next year and profitability continues to grow with the business, that will probably increase. But right now, about $10 million a quarter would be a normal rate.

Okay. I think that's all I've got. Thanks guys.

You bet.

Leo Carpio, HM Global.

Good evening. Hi, my question is regarding the hospital capital spending environment, just kind of probing a little further from the prior comment. What have we been seeing in terms of in general terms, in terms of cap spending from the small hospitals versus the midsize and the large? Has the budget been still consistently growing and how do you still stay on top of the food chain in terms of priority?

So we are seeing pretty consistent growth across all the different segments, no matter how you cut the hospital market, large versus small, private versus public hospitals, government versus community-based hospitals. They are all seem to be interested in the efficiencies that our type of systems can bring, keeping their systems current with the G4 upgrades. We actually, as you saw the numbers, had a great Greenfield amount this quarter. There were some questions about that earlier. But we continue to see hospitals have never implemented automation before, seeing that they can pretty significantly improve their workflows with our type of equipment, so installing. Unlike prior years, where we have seen slowdowns in the small hospitals or at least -- and have the economic capability, either they have the economic capability or we become higher in their priority list, but I think you did see sales from them.

Okay, and in the international market, besides -- in terms of what particular region you're seeing anything strengthen, is it still the Mid-East or are we looking at perhaps maybe some resurgence in Europe?

We are putting most of our emphasis on the acute care side of our business into the Middle East and China, with some emphasis in Western Europe. But Middle East and China is -- Middle East is a market that's happening and China is a big opportunity for us. On the non-acute side of the business, we continue to see good double-digit growth in Western Europe. We have quite a bit of business in the UK. We sell directly in Germany, business in the rest of the Continent Europe. So it's a little bit different depending upon the segment you're looking at.

Okay, thank you.

Gene Mannheimer, B. Riley.

Thanks guys. Congrats on a good quarter.

Thank you.

Thanks, Gene.

I was hoping that, if you could, similar to previous quarters, Rob, can you quantify the amount of revenue that came from cabinets or medication control in the non-acute setting? I think last quarter, it was about $5 million, but I'm getting about $2.5 million, $3 million this quarter? Does that sound, right?

It's about $4.5 million between product and service.

Okay. Perfect. Thank you. And so $4.5 million this year -- this quarter, $5 million last quarter. Is this probably the run rate that we should be using going forward?

Well, we view that that portion of our business is a good growth opportunity. There's a lot of non-acute care setting that is not automated and as I mentioned earlier, with the relationships that the MTS team have, we're actually doing quite a lot in that marketplace. And those customers are finding a lot of value in our systems. So we're actually hoping to continue to grow it. Probably a good run rate now, but there's a lot of Greenfield there in front of us.

Excellent. And I don't know how comfortable you are getting into specific clients opportunities, but like with respect to Sidra Hospital, is there any update on the revenue expectation there, given the delays in the construction over there?

Well, actually, this is a good question. What we have been working on through the year is a certification program for our partners, so that when there is a partner involved and responsible for the installation that we would actually be recognizing the revenue when we felt that partner was certified through a kind of a series of training and tests, and capable of doing the installation. We think that that is going to be a much -- also a much better result for the partner and for the customer.

In the past, we generally did the training of the partner on the first installation. That sort of on-the-job training is fine, but certification programs are actually better. So the Sidra Hospital is still -- has construction going on. We're not exactly sure when the full implementation will take place. They have taken delivery of all of the equipment actually sometime ago. They paid for it, they do own it. And the partner there is going to be certified on all the different products that we sell. We have training center in Dubai, they're doing the work there. And we expect to do booking of the revenue after that certification takes place, so either in Q4 or possibly in Q1 of next year.

Good deal. Thank you.

Steve Halper, FBR.

Yes. Hi. Regarding non-acute, could you sort of break down sort of the core MTS business versus the cabinets that you're selling into that segment? Because we always thought that MTS was growing right in the 6%, 7% range and the $23.4 million suggests a much better growth rate because it's an apples-to-apples comparison now.

Yes, yes. So the MTS business is growing in the mid-single digits, MTS-branded business. And that consists of consumables and the equipment and fluctuates a little bit depending upon how much equipment is being sold.

And we've kind of moved away from thinking about branded equipment anymore, because now we have dedicated sales force calling on acute and non-acute and they're selling the products that have the best opportunity, and that's the way we should run the business. So I think it could go up and down, but it's a really total approach to a marketplace, I think, that helped us really be successful of course.

So you have that consumables and some equipment growing in the mid-single digit range, and that's consistent with historical trends, correct? Maybe a touch below? And then, the delta between that and the 17%, would you say it's all the other, including cabinets?

Exactly. Still, leverage was made in the business there with the combination.

Am I right in saying that MTS was just a tad lower than historical levels or am I reading too much into that?

In the quarter, yes, a little bit, but on a year-to-date basis, it's pretty much the same.

And is there any alarming trend there?

I don't think so. In the MTS side of the business, there's a smaller amount of equipment being installed, as opposed to the consumables. And that equipment business is quite lumpy.

Yes. Okay. Thanks.

There are no further audio questions at this time. Mr. Randy Lipps, please proceed your closing remarks.

Well thanks for joining us today, and we're really up, as a mission of the Company, to figure out how do we get patients with their proper meds safely at the right time. Because we know that when patients take their meds on time and they get those meds, it will have a big inflection point on the cost of care. And we're constantly trying to figure out how to do that to help out patients, eventually, and those who serve them. So it's been a great mission and it was a great quarter. So we'll see you next time.

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