Omnicell Inc (OMCL) 2014 Q4 法說會逐字稿

Good afternoon. My name is Robin and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell fourth-quarter earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Mr. Rob Seim. You may begin your conference.

Good afternoon, and welcome to the Omnicell 2014 fourth-quarter results conference call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO. You can find our results in the Omnicell fourth-quarter earnings press release posted in the Investor Relations section of our website at www.Omnicell.com.

This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell annual report on Form 10-K filed with the SEC on March 17, 2014, and in other 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 February 3, 2015, and all forward-looking statements made on this call are made based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change.

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

Randy will first cover an update of our business today and then I'll cover our results for 2014 and our guidance for 2015. Following our prepared remarks, we will take your questions.

Good afternoon. I am very proud of our performance in the fourth quarter and all of 2014 and of our consistent track record over the past several years. For the quarter, we exceeded our guidance with record revenues and record orders culminating in full-year product bookings performance of $364 million, $9 million about the upper end of our guidance. Q4 was the highest non-GAAP EPS we have ever had. And the full-year 2014 was also a Company record in both revenues and earnings.

But the most compelling statistics are the ones that measure our performance over time. We have doubled the size of the Company in the last five years from [$222 million to $441 million], and we have more than tripled our non-GAAP net profit from $14 million to $46 million. For 9 consecutive years we have received the top honors from KLAS, the prestigious third-party rating organization; for 10 consecutive years we have expanded our market share and won new thought leader customers every single quarter. Most importantly we are driving improved healthcare for everyone.

While we are proud of what we have accomplished, we do not intend to stand still. I believe Omnicell has for expansion opportunities now than we have ever had before and that we are well positioned to take advantage of them with the same growth strategies that we have applied in the past.

At Omnicell, our team is out to change the world by disrupting the cost of healthcare and dramatically improving outcomes to patients. For example, according to New England Healthcare Institute, proper medication adherence can save $290 billion per year in the US alone. There are growing opportunities for Omnicell to impute innovative technologies that significantly improve effectiveness and are easy for our customers to adopt.

Of our three growth strategies, our first strategy of differentiated products continues to attract new customers who adopt our award-winning G4 platform, our analytics tools, and our medication adherence solutions. Throughout 2014 we announced new customer wins at marquee acute care accounts and that continued in Q4 with accounts such as Memorial Sloan-Kettering Cancer Center in New York. Memorial Sloan-Kettering is standardizing on the OmniRx system in their 471-bed inpatient hospital in New York City and in their 11 outpatient facilities in the New York area. As well, they chose our most advanced offering on our Unity platform.

Upgrades also continue at a strong pace with 61% of our eligible customers having now adopted our most advanced platform, G4. These customers come to Omnicell and grow their implementations because our solutions provide what KLAS ranks as the best solution in the industry. We expect new products that we announced in 2014, along with our overall business approach, to continue to drive sales to new customers and expansion at current customers.

Solutions such as our Unity platform of medication management, our recently demonstrated advanced interoperability with Epic, and the new M5000 fully-automated medication adherence packaging system are designed to appeal to customers who are moving towards managing health across the continuum of care. The US Department of Health and Human Services recently announced a goal to have 30% of Medicare payments tied to fee-for-value payment models by the end of 2016, such as accountable care organizations, and 85% of all 2016 Medicare payments tied to quality or value measures.

In support of this direction, our goal is to provide medication management solutions spanning the continuum of care that enable healthcare organizations to reduce costs, enhance quality, and improve the health of their patients' populations.

Our second strategy of expanding into new markets also fueled growth in 2014 and I believe sets us up well for 2015. While we continue to focus on the Middle East, the UK and China, we also see adoption of our technologies in other parts of the world. For example, we recently took orders from the new Perth Children's Hospital in Australia, a 300-bed specialty hospital incorporating OmniRx medication control systems.

Another example of our new market strategy is our expanding medication adherence business, where we saw organic growth in 2014 from an estimated 600,000 to over 1 million patients receiving their prescriptions through our medication adherence solution every week, mostly in Europe.

Our third strategy of expanding our presence and relevance through acquisition has also delivered results. Augmenting our medication adherence solutions sold to pharmacies supplying non-acute care facilities, in Q3 we completed the acquisition of Surgichem Limited from Bupa Home Care in the United Kingdom. Surgichem added $5 million of revenue in 2014 and another estimated 300,000 medication adherence patients, bringing our total estimated patients served each week to 1.3 million. In 2015, Surgichem is expected to add $12 million to $14 million revenue in total, or $7 million to $9 million incrementally, from 2014.

We believe our hard work over the years and the execution of our three-leg strategy laid the foundation for our successes in 2014 and sets us up for continued future growth. In today's evolving and tumultuous healthcare environment, we remain focused on our mission to change the practice of healthcare with solutions that improve patient and provider outcomes.

With that, I'll turn it back over to Rob for some finances and guidance.

Well, as Randy mentioned, the fourth-quarter and full-year results for 2014 exceeded our expectations in nearly every way. It set us up for what we expect will be another great year in 2015. So, first of all, orders were very strong in the quarter, topping off a year of growth and resulting in record order volumes. Product bookings which include all orders that are installable in the next 12 months, but exclude service, finished the year at $364 million, and that's above our guidance of $345 million to $355 million.

And those bookings were up 10% from $328 million in 2013. And contributing to the quarter were a significant number of new customer wins in our automation and analytics segments and strong performance in the medication adherence market. We've also seen continued expansion of demand for our G4 upgrades to existing automated dispensing system installations. Randy mentioned that 61% of the upgrade-eligible customers have made the move to G4 since we announced it in mid-2011.

2014 was the strongest year so far with 24% of the installed base upgrading. We still believe the majority of the remaining upgrade-eligible customers will upgrade. Another consistent contribution to bookings are orders from new and competitive conversion customers in the automation and analytics segment.

In Q4 these accounted for 40% of the bookings and 39% of the orders for the full year. This represents record dollar volume for new and competitive conversion customers and like quarters leading up to Q4, the bulk of the orders came from competitive conversions, and a smaller number of orders from greenfield customers who had never purchased automation before.

Our strong 2014 financial performance resulted in record revenue of $441 million, non-GAAP net income of $1.26 per share, also a record, exceeded the high end of our guidance, and our annual average non-GAAP operating margins were 15.2%, consistent with our goals. Revenue for Q4 in 2014 of $121.5 million was above our expectations, driven by strong demand for G4 upgrades, which often ship shortly after they're ordered.

Revenue was up 15% from Q4 2013 and up 8% from Q3 of 2014. Q4 2014 profit on a GAAP basis was $0.25 per share and that's up from $0.19 per share one year ago. For the full year of 2014, revenue of $441 million was up 16% from 2013. GAAP earnings per share of $0.83 was up $0.16 from $0.67 in 2013.

And we also report our results on a non-GAAP basis, which excludes stock-compensation expense, amortization of intangible assets associated with acquisitions, and any nonrecurring 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 that are a component of our reported results. A full reconciliation of our GAAP to non-GAAP results is included in our fourth-quarter earnings press release and is posted on our website.

On a non-GAAP basis, earnings per share was $0.39 in Q4, $0.05 higher than analyst expectations. Non-GAAP EPS was up sequentially from $0.30 in Q3 2014 and up from $0.29 in Q4 of 2013.

Among the factors positively affecting both our GAAP and non-GAAP results, is the US Government's extension of the Research and Development Tax Credit in December 2014. The credit was not in our guidance and provided a $0.02 benefit in the quarter.

For the full year of 2014, our non-GAAP profits increased from $1.08 per share to $1.26 per share, an increase of 17%. Adjusted earnings before interest, taxes, depreciation and amortization, which also excludes stock-compensation amortization and the amortization of acquisition-related costs, was $23 million for the fourth quarter of 2014, up 23% from $19 million a year ago. For the full year of 2014, adjusted EBITDA was $82 million, an increase of 24% from $66 million in 2013.

Our automation and analytics segment contributed $354 million in revenue, $48 million in GAAP operating income and $60 million of non-GAAP operating income in 2014, or roughly 90% of the total operating income of the Company. Our medication adherence segment contributed $87 million of revenue, $2 million of GAAP operating income, and $7 million of non-GAAP operating income, or 10% of the total operating income of the Company.

As we've noted in the past, we are investing in filling out our medication adherence product line to be able to provide more comprehensive solutions across the continuum of care. While our long-term goal is for the segment to be a 15% operating margin, we are currently in an investment phase. Cash increased $22 million during Q4 to $126 million. During the quarter we completed share repurchases totaling $4.5 million. We bought back approximately 163,000 shares at an average price of $27.29.

Cash increased $21 million during the full year. And during the full year we repurchased $24 million of stock and used $21 million to acquire Surgichem. The cash from all other sources was up $66 million, offsetting the buyback and Surgichem. We have authorization to repurchase up to another $50 million of our stock. And for the full year of 2014 our free cash flow was $53 million, and that's up from $43 million last year.

Accounts receivable days sales outstanding was 63 days, down 15 days from last quarter. We had very favorable collections at the end of the year, very strong revenue. Going forward, we expect our DSO to be between 65 and 75 days.

And our supply chain organization has done a really nice job consistently managing inventory flat to $31 million over the past 18 months, despite revenue growing 29% over the same period. And last numbers here, our headcount was 1,236, up from 1,134 at the end of 2013. That is a 9% increase.

So looking forward, we know our customers are going to continue to face unprecedented change over the upcoming years. We believe we can help them meet regulatory and cost challenges. We're optimistic about the new emerging opportunities for medication adherence. We believe our solutions will play an increasingly integral role in making healthcare organizations more efficient and to improve patient outcomes. So we are optimistic about our own growth prospects.

For 2015 we expect revenue to be between $480 million and $490 million, an increase of 9% to 11%. We expect non-GAAP earnings to be between $1.35 and $1.40 per share, growth of 7% to 12%. We expect steady revenue and earnings growth through the year, but we expect Q1 2015 to be $110 million to $115 million of revenue and approximately $0.23 non-GAAP EPS.

We typically experience higher expense levels in Q1 due to several seasonal factors in our business. And we expect full-year product bookings for 2015 to be between $390 million and $405 million. Throughout 2015 we expect to significantly ramp up our research and development from an average of 6% of revenue that we experienced in 2014 to 8% of revenue in 2015.

Despite that, we expect to maintain our non-GAAP operating margin at our goal of 15%. We do expect our results to fluctuate from quarter to quarter but to average near the 15% objective for the year. And finally we are assuming an annual average effective tax rate of 38% on GAAP earnings in all this guidance.

So now, I'd like to open the call to take questions. Operator?

(Operator Instructions)

Robin, do we have the line open for questions? Operator?

The first question comes from the line of Mohan Naidu.

Thanks for taking my questions. Just to start with a couple of housekeeping questions here. So on the bookings side, Rob, what do you include for medication adherence segment or is that purely acute care?

We include both the segments, it includes all of the products that are booked in both of the segments, so there is no service in there, but all the product orders.

Okay. On the medication adherence segment specifically, do you get the long-term contracts in there? Or how much visibility do you have into contracts that you put into bookings?

So medication adherence is predominantly the consumables. 90% of the revenue is consumables and they are generally ordered on purchase orders. We fulfill those orders within days or weeks and so there isn't a lot of longer-term visibility there. The equipment orders tend to be delivered more over time, similar to the automation analytics, but it's a smaller piece of the medication adherence revenue.

Okay. Did you disclose a backlog number?

Ending backlog was $187 million. I just have to say, the composition of our business has changed quite a bit. We now have 40% of our revenues coming from service in the consumables. And we have a lot more of our orders turning through backlog quicker.

The G4 upgrades and some of the equipment that goes into non-acute-type facilities tend to get installed much quicker. So that backlog number isn't quite the indicator that it used to be. That's why we are focusing more on the product bookings as a better indicator of our business.

Fair enough. And one last question on the M5000. Can you give us a view on what you guys are seeing, how the marketing is reacting to that product?

Yes. So the M5000 we announced last quarter and we said we would be shipping the first one for the data installation and that has been installed. We're very proud of this. We shipped it on a Sunday and by Wednesday it was installed, and Thursday it was producing medication adherence packages, so it's going well so far.

That's great. Thanks a lot for taking my questions.

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

Thank you very much. Two quick ones. Is there an update on the STOMPP clinical study that is underway?

That's still in progress.

Okay. What is the timing on that? Is that basically it's going to be radio silent for a year?

I believe that it timed out in Q3. I would have to actually check but I believe it was going to go a few months -- or, excuse me, a few quarters before it was finished up.

Okay. The second question is on the G4 upgrade business. I know you like to give it in terms of percentages, but on a dollar basis, can you tell us how that contributed to the growth in 2014? And in 2015, will there be more G4 upgrade revenue in 2015 than in 2014?

Well, like we said, we've got about 39% of that installed base yet to go. And as we said at the beginning, we thought it was a $200 million opportunity or a little bit more. So we've done 60% of it, about $120 million exceptions to date. So we do still think that most of those customers will upgrade, but now we're into the later adopters and it will probably take the next couple of years before most of them are through that process.

Okay. And when you say the eligible customer, so what -- is it the Surgichem customers that are excluded from that or who would be excluded from that?

No. Back in 2011 we had an install base of over 30,000 units that were on the earlier version G3. And in May of 2011 we started shipping the G4 to every new customer or every customer that ordered a new cabinet because it could go into the same installation as the older units. So it's that base of over 30,000 units that were in place in 2011 that are eligible to be upgraded. Any cabinet that anybody purchased since then has been a G4.

Got it. Okay. Thanks for your time.

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

Congratulations, gentlemen.

Thanks.

Couple questions. First, how much assistance or help do you think you are getting from this CareFusion acquisition? Has that created a significant distraction and concern among their existing users to prompt them to reevaluate Omnicell and maybe make the conversion now versus taking a chance with the new owner?

I don't think it has that much impact. I think we've just continued to demonstrate our technology being a wider and wider gap to what's available in the marketplace and that's what's attracting folks. Plus the story of the non-acute and the acute sides of the continuum beginning to more important to both segments of the business is very important.

So people like our broader story and our broader product line and solution set that we're taking in the market. And that's probably the hottest issued, today, is how are we going to get great results and outcomes, not just in the hospital or not outside of the hospital, but combined. And we have both sets of solutions there that make a lot of sense for people to go with us.

Okay. All right. I guess a couple of questions regarding the old product set, the cabinets versus on the adherence, in the past you've talked a little bit about some of the cross-selling opportunities that you're seeing there. Maybe some conversion rates. Any color that you could provide on that opportunity?

Well, of course, there's cross-selling in two directions, but where we've had the most success so far is implementing the dispensing systems in what we would call non-acute care facilities. And those sales have mainly been through institutional pharmacies that place those systems into long-term care facilities, essentially own the system and own the inventory that's in it.

So that's gone well for us. That business was really just a few million dollars, and after we bought MTS and started getting access to those customers, it has grown to a more meaningful number for us, so up in the $20 million range. So that continues to go well. And, going the opposite direction, we are just now, with the M5000, getting to the point where we have got a product that we might be able to sell into larger hospital systems for medication adherence.

And we definitely have some in the pipeline. So it's definitely a product appropriate for large [IDMs].

Okay. All right. And maybe shifting gears a little bit, international sounds like it continues to be a driver for you guys. Where is Asia? And specifically, how is the China opportunity playing out? Obviously it seems to be dragging out a little bit longer than I think anyone had anticipated, but where does that sit today?

Well, I still think it's a great opportunity for the Company, but it's still early on. We're kind of doing a restart there. We're trying to continue to drive local specific options and features into the product. And also learn from our early installations that we have there. And what we're driving toward, as quickly as we can, is a full hospital-wide installation, which we don't have yet. That's necessary to go to the next step.

But I think we are in a rebuilding year still. But we still feel like China is not only a big market, but it's a market like any other market in the world, they need management of their medications across a broad array of continuums, and they lack the technology and we've got the solution. We've got to get it fine-tuned for that market.

All right. Thanks, and congratulations again.

Thanks.

The next question comes from the line of Gene Mannheimer with Topeka Capital.

Thanks. Congrats on a great quarter, guys.

Thanks, Gene.

The step-up in R&D, Rob, that you talked about for 2015. Can you speak in general terms, or as specific as you can get, about how those R&D dollars are going to be spent?

Well, it's pretty consistent with what we've been saying in the past, as we grow revenue what we're going to do is reinvest in the various growth opportunities that we have in front of us. They're the same ones we talked about before: continuing our leadership position with products in the automation and analytics segment of our business, filling out the medication adherence product line with more equipment that appeal to various different- sized pharmacists.

Those things are our focus for internal development, and we just think we've got a lot of opportunities around the world for the solutions. So we intend to invest to participate in that revenue stream.

And then I noticed some of your competitors have been touting their solutions for improving safety and efficacy of the IV prep. What do you have in that regard? Are you looking to build anything in that area? Thanks.

So you're probably talking about announcements from Aesynt about their products. We don't have a specific product that is an IV robot. We do have, as you know, a number of central-pharmacy oriented products for the management of medications through that part of the distribution process and management process. And those products do very well. But we don't compete directly with an IV robot.

Thanks a lot.

(Operator Instructions)

You next question comes from the line of Mitra Ramgopal with Sidoti.

Good afternoon. Just wanted to follow up a little on the international front, especially as it relates to acquisitions. With Surgichem now in the fold, what's your appetite in terms of doing more acquisitions? And especially is the focus going to be more on products or distribution or a combination?

Well, Surgichem is the first acquisition that we've done that was really about distribution. The product that Surgichem has is relatively similar to the product we distributed, MTS, but they sold to a lot of the smaller pharmacies and so that gave us a lot more access.

As we've said in the past, we're interested in acquisitions that expand our market in a number of ways in medication management. Surgichem is an example of one. But most of our acquisitions tend to be product oriented, and we're really looking at anything that improves the workflow of a hospital or a healthcare institution or provides more data analytics in the work that they do. And so we're open to acquisitions both in the United States and internationally.

Thanks. And as it relates, I believe you said you are still in investment mode. We are going to see more in terms of R&D being spent. On the SG&A front, however, as you look to expand more in the Middle East, China, et cetera, do you need to have more feet on the ground as it relates to maybe expanding your sales force?

Well, we have also been investing a little bit ahead of the revenue, particularly in the automation and the analytics segment, in our international markets. Yes, as that grows, we would expect to grow there also.

Randy mentioned that we're in a little bit of a transition in China, and we've expanded our presence there, not only with the SG&A but a little bit of in-country development effort. So we will be doing that around the world. But most of our sales model outside the United States and Canada is through resellers. So we don't necessarily build up a whole service team or installation team when we expand in a country.

Okay. Thanks for taking the questions.

The next question comes from the line of Steve Halper with FBR.

Rob, could you just clarify the -- you gave us the free cash flow for the year. Could you give us the operating cash flow for the year? You just called out $66 million from cash from other sources.

Yes, so for the year, the operating cash flow was $65 million and purchases of property and equipment were $12 million.

Great. Thanks. So we appreciate the higher R&D investments. Do you feel like you under invested in 2014? And I guess try to get into a little more details, what are some of the priorities around that spend in 2015?

No, I don't think we under invested in 2014. As we talk about, we manage our business to the 15% operating margins and there are times when you invest in go-to-market activities and there's times when you invest in product development.

Going forward, our development activities, like I was saying with the previous questions, they are targeted right at those opportunities we've been talking about for the last couple of years. We continue to do work to make sure that we're keeping a leadership position with the dispensing systems, central pharmacy systems, and we've got opportunities to fill out the product line in med adherence, so we have products that are appealing to every size of pharmacist.

Thanks.

At this time there are no further questions. I would now turn the conference back over to [Randall Lipps] for closing remarks.

Thanks for joining us today. And I'd also like to thank [Marga Ortigas-Wedekind], who is leaving Omnicell after six years of contribution running marketing and our international operations, changing the management structure of Omnicell, and her responsibilities will now be part of Chris Drew and Rob Seim's organization, which will provide the organizational alignment we need to fulfill our growth strategies and meet the evolving needs of our customers.

The end of the year is a good time to celebrate and reflect. None of these results or optimism for the future could be possible without the innovation and dedication of the over 1,200 Omnicell employees around the globe. I'd like to thank our team for their hard work in continuing to build and evolve our Company. Thanks very much. We'll see you next time.

Operator, that concludes our remarks.

Thank you for your participation. That does conclude today's conference call. You may now disconnect.