Jul 22, 2010
Executives
Rob Seim - VP, Finance and CFO Randy Lipps - Chairman, President and CEO
Analysts
Steven Crowley - Craig-Hallum Capital Glenn Garmont - Think Equity Mohan Naidu - Piper Jaffray Gene Mannheimer - Auriga Leo Carpio - Caris & Company
Operator
Good afternoon. My name is Phillip and I will be your conference operator today.
At this time, I would like to welcome everyone to the Omnicell Second 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-answer session. (Operator Instructions).
Thank you. Mr.
Seim, you may begin your conference.
Rob Seim
Thank you. Good afternoon, and welcome to the Omnicell 2010 second quarter results conference call.
Joining me today is Randall Lipps, Omnicell’s Chairman, President and CEO. You can find our results in the Omnicell second quarter 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 the 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 Risk Factors, and under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations in the Omnicell Annual Report on Form 10-K filed with the SEC on February 24, 2010.
As well as any 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 July 22, 2010 and all forward-looking statements made on this call are made based on the belief 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, or the duplication or the rebroadcast without the express written consent of Omnicell is prohibited. I'll start the call today with an overview of the financial results for the quarter, followed by Randy who’ll cover some of the quarter's business highlights.
And then, I’ll discuss our guidance for the remainder of 2010 and after that we’ll open the call to your questions. In the second quarter of 2010, we exceeded profit expectations and continued to make improvements in our financial ratios with higher margins and increased cash on hand.
We had a very good operational quarter, aided by a favorable mix of products installed, a focused effort to get our customers caught up on renewal of service contracts, and some favorable timing of non-recurring spending. Our solutions won more awards from the class institute.
We announced further technological advancements in our software and we continued our consistent track record of adding new accounts to our customer base. Of our orders in Q2, 36% were from competitive conversions and from Greenfield customers, which are customers who had never installed automation before.
About half of the 36% was from competitive conversions and the other half was from Greenfield accounts. The percentage of our business from new and competitive conversion customers fluctuates from quarter-to-quarter, but we believe new and competitive conversion orders will be within our historical annual range of 33% to 40% of our business for the full year of 2010.
The market environment did not change much from previous quarters during Q2 with worldwide economic conditions affecting our customers' overall sentiments. We still expect the market to grow slightly during the year, but our orders remain more highly concentrated in large customers and timing of a broader base recovery is unclear in our market.
Revenues, for the second quarter of fiscal 2010 was $54.7 million, up 1% from the first quarter of 2010. And up 4% from the second quarter of a year ago.
Net earnings after taxes, were $2 million or $0.06 per share for Q2, 2010. This compares to $0.9 million or $0.03 per share in Q2, 2009.
Included in our results for the quarter are some improvements in margins driven primarily from product mix and timing of non-recurring spending. Now, I'd like to cover our non-GAAP results, the only adjustments to GAAP results are the exclusion of stock compensation expenses.
Stock compensation expense includes the estimated future value of employee stock options, restricted stock and our employee stock purchase plan. And since stock compensation expense is a non-cash expense, we use financial statements internally that exclude stock compensation expense.
In order to measure some of our operating results. We use these adjusted statements in addition to GAAP financial statements and we feel that’s useful for investors to understand the 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 press release, and will be posted on our website. Our Q2, 2010 non-GAAP net income was $4.1 million or $0.12 per share, exceeding consensus by $0.01 per share.
Our Q2, 2010 non-GAAP net income was up $1 million or $0.03 per share from Q1, 2010 and up $0.8 million or $0.02 per share from Q2, 2009. Our profits were impacted favorably by about $0.01 per share by factors that we did not expect to continue in subsequent quarters such as the favorable timing of non-recurring spending in our efforts to get customers caught up on service contracts.
Earnings before interest taxes, depreciation and amortization which also excludes stock compensation, amortization, were $7.7 million for the second quarter of 2010, up $1.6 million or 27% year-to-year. EBITDA is a good measure of the operational results of the company and we are happy to continue growing this measure faster, much faster than revenue growth.
Our headcount at the end of the quarter was 755 regular employees, which is the approximate level we have been operating at since January, 2009. Earlier this month, we announced the consolidation of our development offices from four to two.
The consolidation will increase the efficiency of operations and promote collaboration among the company's engineering teams. It’s been a long term vision of Omnicell to create a center of excellence in Nashville, because of its talented labor pool and reputation as a hub of the US healthcare industry, as well as its centralized location for many of Omnicell's customers.
In anticipation of this consolidation, the company recently expanded its operations in Nashville, Tennessee to a new larger facility near the Nashville International airport which is complementary to our high tech hub in Mountain View, California. We are closing facilities in the Woodlands, Texas, and in Bangalore, India.
In the consolidation, we will eliminate 24 positions, 20 staff members will move to a new location, and some new positions will be created. Additionally, 19 staff members involved in the customer support activities in India will move to a contract service provider.
We expect the consolidation to be cost neutral on an ongoing basis, and expect to take a pre-tax $1.5 million onetime charge in Q3. Because there is some repatriation of profits from India, the after tax onetime charge is expected to be approximately $1.4 million.
And while cost neutral, we feel the increased focus of our engineering teams will give us an opportunity to bring more products to market faster with higher quality. We continue to generate cash from our operations and drive down our receivables balance.
Our cash and short-term investments grew to $185 million at the end of Q2 2010, an increase of $5 million from Q1, 2010. Days sales outstanding were 64, down four days from last quarter.
And our inventories were $10 million, consistent with the previous quarter. Now, I’d like to turn the call over to Randy for an update on the business.
Randy Lipps
Thanks, Rob, and good afternoon. The economic conditions around the world continue to be challenging for everyone, today's environment I'm proud that our solutions continue to be recognized by independent researchers and customers alike.
During the quarter, we continued our string of awards from KLAS, the prestigious research firm that monitors the performance of healthcare technology manufacturers. Omnicell's OmniRx automated dispensing system was the recipient of the 2010 best in class award for automated medication dispensing units for large hospitals with more than 200 beds.
The best in class ranking was given to the vendor scoring the highest position in its category, and is a special recognition for vendors and market segments that have the broadest organizational impact for hospitals and clinics. Our OmniRx product has received the highest possible KLAS award for medication dispensing units for the fifth year in a row.
Additionally, Omnicell was awarded category leader for pharmacy automation medication carousels for its workflow RX products. These recognitions are especially gratifying because KLAS bases its awards on actual customer satisfaction and feedback.
Customers also continue to recognize Omnicell solutions has reflected by 36% of our business coming from new and competitive conversion customers again this quarter, including new US government business, new hospitals being added to IDM customers, and brand new customers to our account base through both competitive conversions and sales for the first time buyers of automation solution. And we found that smaller hospitals who have not automated in the past join our customer base with significant purchases when they have the budget available, bringing them current in medication automation technology.
Our proprietary solutions such as AnywhereRN and SinglePointe continue to differentiate us. AnywhereRN Software allows management of our remote dispensing systems from virtually any work station in the hospital.
SinglePointe is our software solution that allows up to 100% of patient medications to be securely stored, managed and tracked by automation systems, reducing the inefficiency and safety issues associated with missed medications. Solutions such as these improve the efficiency of nursing, and pharmacy workflows, reducing interruptions and distractions that had been proven to increase medication error.
During the quarter, we extended our technology with our announcement that our OmniCenter software which is the engine behind all our automated dispensing systems is now VMware Ready. Virtualization of servers at hospitals is an emerging trend.
Passing the extensive VMware specified testing helps ensure that the OmniCenter makes the best use of VMware technology and puts us at the forefront for deployment in virtualized customer environments. In the marketplace, we continue to see a cautious capital spending environment.
Large customers were, again, a larger percentage of our business than they have been historically, while the smaller hospitals are still operating under stricter financial constraints. The larger customers take longer to complete their installations and often have delays in their deployments.
We believe the market overall is growing slightly in 2010, but we believe there is a larger opportunity for further automation at our existing customers and that new customers both domestically and outside the US. We believe healthcare reform will have a positive long term effect on our industry as hospitals must focus on improving their efficiency and quality of their outcomes.
We are proud of our track record of bringing what we consider the safest and most efficient solutions to hospital institutions of ever size and type. Although, overall economic indicators remain the same, with little change in unemployment or interest rates, we believe that as economic conditions improve and hospitals begin to expand their capital budgets, we will be well positioned to solve their safety and workflow efficiency needs.
Let me, turn it back to Rob for some guidance.
Rob Seim
So, we are reconfirming our 2010 guidance ranges from previous quarters and refining the revenues range, now that we are halfway through the year. Overall, we expect our booking rates to grow between 5% and 10% during 2010.
Since our customers take one to 12 months to complete installations and more of our business is from bigger deals, we don't expect all of the order growth to become revenue in 2010. Part of the order growth will remain in our ending backlog and we expect backlog at the end of 2010 to be within the same range as we discussed previously of $118 million to $125 million, which is up 4% to 10% from 2009.
We now expect 2010 revenue to be between $220 million and $222 million. We previously guided to a broader range of $218 to $225.
Our backlog gives us good visibility to the revenue to be installed in the next few quarters, and we expect there to be a little change in these installation schedules. We expect non-GAAP earnings excluding stock compensation expenses and restructuring charges for 2010 to be between $0.40 and $0.45 per share, which is up 5% to 18% and is consistent with our previous guidance, and these profit expectations assume an effective tax rate of 42% on GAAP earnings and no material change in interest rates.
For Q2, excuse me, for Q3, we expect non-GAAP profit in the range of $0.09 to $0.10 per share. As we are anticipating, additional non-recurring spending in the quarter in research and development, and in other areas of our business.
These non-GAAP expectations exclude the anticipated onetime charge for facilities consolidation during Q3, and they exclude stock compensation expenses. Now, operator, I’d like to open the call to questions.
Operator
(Operator Instructions). Your first question comes from the line of Steven Crowley
Steven Crowley - Craig-Hallum Capital
You have given us some color that large customers continue to be more pronounced in your business mix right now. But for some additional color on those smaller hospitals that represent an additional and a gear of growth as we move forward, there seemed to be some activity at the end of last quarter that represented maybe the light at end of the tunnel flickering.
Are you still seeing signs of activity, but it’s very sporadic or was that more of a head fake as you look back?
Randy Lipps
Well, it’s a little hard to tell. Each quarter we have 500 to 600 orders and we still have 500 to 600 orders coming through.
But the mix tends to be moving more and more towards the larger hospitals. We did see a little bit improvement in the order rates from smaller institutions during Q1.
That hasn't changed much since then. So, it’s hard to tell whether those institutions are going to be growing in the near future or not.
Our pipeline, as we examine our pipeline we of course, spend much more time on the larger deals, a lot of these smaller orders are add-on orders at small hospitals. They could be in the range of anywhere from $20,000 to $100,000 to $150,000 and there is not as much focus put on those.
Steven Crowley - Craig-Hallum Capital
Okay. And then in terms of the strength in the service portion of your business, you mentioned that you had some success helping customers catch up with their annual maintenance contracts.
I want to make sure I have that, correct. Because there historically has been another positive variance scenario where customers who were coming off lease and weren't buying equipment or delaying buying equipment might extend their leases for a little while, which is a bit of a short-term boon for you, but you prefer probably to have them buying new equipment.
It doesn't sound like that was the biggest component of that strength and service, but I want to confirm that?
Rob Seim
We still have variability in the service and other line item quarter-to-quarter depending upon whether customers do renew a lease or make their decisions on what they are going to do with their equipment, right when their lease ends or if they continue on a month-to-month basis and the month-to-month charges tend to be a little higher and we tend to recognize those when we receive them. We also, particularly this quarter, we sometimes have customers who come to the end of their service agreement with us and do not renew their service agreement right away, either because just administratively they haven't done it or for any number of other reasons.
But, we did put a concerted effort to make sure that those customers were contacted and if they were going to renew their service they got us the orders and when we get the orders, we are able to book revenue for that service for the period that they are signing up from, which is from when their last contract ended. So, we put some effort into making sure we got those all on the books.
Steven Crowley - Craig-Hallum Capital
Okay. And then one final question, I’ll hop back in the queue.
In terms of the real or the ones called the (inaudible) medication management solution, what can you tell us about your plans there and what in terms of timing and potential impact? Thanks for taking my questions.
Randy Lipps
On the [real] acquisition product line we have been integrating that product and are focused to have that product out in beta the later part of this year, and then we will start to be taking orders for that in 2011. So it’s on schedule, and we are getting good feedback from it and it is a key part of our product line as it represents the medication control of products from our stationary units to the bedside.
Operator
Your next question comes from the line of Glenn Garmont with Think Equity.
Glenn Garmont - Think Equity
Just a real quick question, Rob, on the earnings guidance for the balance of the year. The $0.09 to $0.10 in Q3 implies sort of a wider range for the fourth quarter, somewhere in the 9 to 14 range I guess and I’m just wondering is that just reflective of these larger deals and the unpredictability around, the installs there or what else, I'm trying to understand, what would influence whether or not you come in sort of at the low end of that range versus the high end?
Randy Lipps
Well, certainly, Glenn, the next quarter's revenue is much more certain than each subsequent quarter after that. As the backlog fills up you kind of know exactly what’s going to happen in the next three months and then you got a pretty clear view on the quarter coming after that.
And there could be some variability on which products install. We also have from quarter-to-quarter there is always some customers who find that their schedule for installation is not proceeding at the time table that they would like, and so they push out, and there is other customers who want to install faster or give us orders and need a quick installation and the mix of those products that are coming in and out of the backlog and for installation schedules can change, and it can change the profitability of our business.
Finally, just got some variations that could happen in the mix of our business between lease renewals and straight purchases and the mix between some of the service contracts like we had this quarter that can change profitability. It’s only, as you know, only about $300,000 changes our profit by $0.01, so when your orders are often in the $400,000 or $500,000 level, you can have some changes pretty quickly, and that's why we keep the range.
We are fairly clear on where the profitability is going to be in Q3 and we are going to have some of this non-recurring spending that I mentioned in the prepared comment coming through, so we do expect the profit not to be at same levels as it was in Q2.
Glenn Garmont - Think Equity
And Rob, the non-recurring spending, is that going to show up an SG&A, if you provided some color on that? I'm sorry, I missed it.
Rob Seim
Yeah, it’s operating expenses.
Glenn Garmont - Think Equity
Okay.
Rob Seim
A good portion of it is research and development.
Operator
Your next question comes from the line of Sean Wieland with Piper Jaffray.
Mohan Naidu - Piper Jaffray
Good afternoon. This is Mohan Naidu for Sean.
Are you seeing any impacts for the Cerner’s partnership with CareFusion on the field right now?
Rob Seim
We haven't seen any direct impact. Some customers bring it up, not very many in conversation.
But we are not aware of any orders that has impacted us or our pipeline.
Mohan Naidu - Piper Jaffray
Okay. The second question, any updates on the use of cash?
Randy Lipps
No change from all of the previous guidance that we have given. The cash that we have accumulated, we intend to use to expand our product line.
And that would be primarily through acquisition. And we still have a team that is looking at a good pipeline of acquisition, so we do expect to use that within the foreseeable future.
Operator
Your next question comes from the line of Gene Mannheimer with Auriga.
Gene Mannheimer - Auriga
Just two quick ones. Just to elaborate on your comments earlier, Rob, about the gross margin particularly in services where it was much higher than sequentially or even a year ago.
Just wanted to verify that, that was due to the timing of certain renewals of service agreements, therefore we wouldn't necessarily expect that to sustain for the balance of the year?
Rob Seim
That's correct. We have maintained a pretty steady staff in most of the cost of services associated with the people that are performing the service and then any spare parts that are replaced.
And those expenses have remained pretty consistent.
Gene Mannheimer - Auriga
And then second one, if I could ask your commentary on sort of hospital behavior? So, in this soft economy, you talked about cautious spending, and then combined with a focus on EMR software by many hospitals right now, my intuition would tell me that hospitals would be less apt to swap out vendors in place of your system, yet your competitive statistics don't seem to reflect that.
So am I thinking about that the right way?
Rob Seim
Well, I would beg to differ on that. I think hospitals are more willing to switch off, because they are making maybe big changes in several places and our statistics in our pipeline really demonstrate that we will finish at in our range which we have historically done for the last three years, 33 to 45, 33% to 40% of our business is from new and competitive conversions.
And we don't really see a slowdown in that. And a lot of hospitals are trying to as groups, particularly the larger ones actually act more like a group and making sure their product lines are consistent throughout all of their hospitals just like their EMR systems.
So I think that the trend really is you do see some hospital aggregation and they really want to make sure all those hospitals are using their systems consistently. So I think that does help us with the current IDMs we have, because the new hospitals coming in those IDMs obviously get converted over to our product line and it gives us an opportunity to go into new places as well.
Operator
(Operator Instructions). Your next question comes from the line of Leo Carpio with Caris & Company.
Leo Carpio - Caris & Company
I have two quick questions. First, regarding the competitive environment, has that changed much I mean, historically we have seen you make inroads against (inaudible) and then a few quarters ago we saw McKesson weaken a bit.
Is it still basically you versus [Pixus] and McKesson. Just a little more color there would be helpful.
Randy Lipps
I think the competitive landscape has pretty much been the same for the last three to five years. And we’ve been gaining a one and a half to two market share points a year in each of those years and across competitive base mostly obviously from the confusion and some from McKesson and we don't really see a change in that in recent months or on a go-forward basis.
Leo Carpio - Caris & Company
And then turning over back to Gene's question on the gross margin, is it correct to assume that the momentum you saw this quarter in the gross margin is not going carry over into the second half of the year, that’s most likely will return back to kind of like normal or trend levels?
Rob Seim
Well, on the service gross margin, we have been kind of hovering around the 40% range on a non-GAAP basis for the last four quarters prior to Q2. We believe that we’ll still be in that, the low 40% range as we go through the rest of the year.
On the product gross margin, we have been kind of in the mid 50s and we as most companies do are constantly working on improving our cost structure and our efficiency and how we deliver products. We don't expect those gross margins to change really dramatically, as we go through the next couple of quarters.
Remember everything we are installing and taking revenue in next couple of quarters was actually sold last quarter or the quarter before, even before that, and a lot of that stuff has already been built and has shipped or is shipping now. So costs are already done on it.
Leo Carpio - Caris & Company
And then the last question, regarding the international market, any updates there in terms of new countries or new contract, notable contracts you’d like to highlight?
Rob Seim
You know, like all of our customers, there is some of them that like to have their name announced and a lot of them don't. So we are not announcing any particular customers on this call.
But the international market tends to be about the same as it has been. And it’s growing for us.
It’s still a small piece of our business. We feel we got a great team that is working with our international distributors there and bringing some very marquise institutions are up.
The Karolinska Institute in Sweden that we've mentioned before has been installing and Singapore is finishing up their installations and we continue to make good sales in the UK. But, there is no other customers that we are announcing this quarter.
Operator
Your next question comes from the line of Steven Crowley with Craig-Hallum Capital.
Steven Crowley - Craig-Hallum Capital
Yes, guys, I just wanted to come back given how we filled in the picture here, you start to get a sense for the kind of jump in R&D and SG&A you are talking about in the third quarter period here which would appear to be pretty darn significant. I mean, sequentially, we are probably talking about, $1.2 million or so from the levels you just reported.
And I want to make sure that, that’s the right inference and it sounds like a big part of that is R&D, but I got to believe there is some SG&A of substance in there and what would that relate to?
Randy Lipps
Well, Steve, we have been doing quite a lot to make sure that our brand is well known by our customers. A couple of quarters ago, we talked about kicking off the brand awareness program that has been going on and that has many different facets that are particular to the hospital industry and our customers in the pharmacy and the materials management area of the hospitals.
That's ongoing. And we are happy with how it’s going so far.
But a lot of campaign like that is not spending that's done internally, it’s done with outside vendors, and it’s got some sporadic nature to it. On our R&D, most of the R&D work we do is inside of our own company with our own software and hardware development engineers and test engineers.
But we do have some work that we contract outside and we do have prototype [domes] that we do to make sure that we have got all our new software version fully tested. And so those things can hit in any one period and scheduled being as they are we have some of this non-recurring spending happening in Q3.
Steven Crowley - Craig-Hallum Capital
Okay. And then in terms of historical seasonality you had with installation schedules, in more normalized periods there has been a dampening effect in that holiday laden December quarter.
But last year that was a bit overshadowed by the recovery in the overall economy. I guess, I am wondering whether we are likely to see more normalized seasonality where we see a step function and installations or at least a jump in installations in Q3 and a plateau in Q4 or whether there is a less natural trend to what's in your installation schedule?
Rob Seim
There isn't really anything unnatural about the installation schedule. Always there is a little bit of a challenge in December as people get into the holiday, that’s true and we try to work around all those holiday schedules and keep a pretty consistent installation process going.
Despite the holidays, our customers still have the demand to get the installations done, sometimes during Q4 we just have to work some overtime to do that. But, we are not anticipating anything out of the norm and our guidance has given it a pretty narrow range, so you can kind of see where we are coming out through the rest of the year.
Steven Crowley - Craig-Hallum Capital
The genesis of that question is given the volatility in recent annual periods there have been years where things have stepped down in that fourth quarter, because of the seasonality noticeably and other periods where there has been nice sequential growth and I'm trying to figure out what the new normal is?
Randy Lipps
We are all trying to figure out what the new normal is, I guess, in this world. But we see the installation schedules pretty consistent from quarter-to-quarter.
Operator
There are no further questions at this time.
Rob Seim
Great. Well, I think we are continuing to see our customers enjoying the benefits of our advanced solutions.
We continue to install a new hospital customer every two business days on average. And we see our pipeline indicates strong demand for our new accounts in the future and we are delivering on our new solutions and on our financial performance.
So, we appreciate you joining us today, we’ll see you next time.
Operator
That does conclude today's conference call. You may now disconnect.