Aug 1, 2012
Operator
Good morning. My name is Phyllus, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Q2 2012 Omnicell Earnings Call.
Operator
[Operator Instructions] Thank you. Mr.
Rob Seim, you may begin your conference.
Robin Seim
Thank you. Good morning, and welcome to the Omnicell 2012 Second Quarter Results Conference Call.
Joining me today is Randall Lipps, Omnicell Chairman, President and CEO.
Robin Seim
You can find our results in the Omnicell's second quarter earnings press release posted in the Investor Relations section of our website at www.omnicell.com.
Robin Seim
This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information under the heading Forward-Looking Statements in our press release today and under the headings Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in the Omnicell Annual Report on Form 10-K filed with the SEC on March 8, 2012, as well as more recent reports filed with the SEC.
Robin Seim
Please be aware that you should not place undue reliance on any forward-looking statements made today.
Robin Seim
The date of this conference call is August 1, 2012, 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 redistribution without the expressed written consent of Omnicell is prohibited.
Robin Seim
So Randy will give us an update on the Omnicell business today, and then I'll cover our Q2 results and our forecast going forward. And then following that, we'll open the call for your questions.
Randy?
Randall Lipps
Thanks, Rob. Good morning.
Q2 was a big quarter for us with record revenues, major wins worldwide, 33% of our orders from new customers and the acquisition of MTS Medication Technologies, the market leader in medication management systems for the long-term care market with a primary focus in medication adherence packaging solutions. We closed the acquisition on May 21, and our second quarter results include 6 weeks of MTS contribution.
Randall Lipps
From a number of perspectives, we're happy to report that the acquisition is right on track to our expectations. Financial contributions to our business are on plan, the integration is progressing well and the reaction from customers has been positive.
Randall Lipps
I'd like to recap why this acquisition makes sense. First, the combination creates a company that is aligned with the long-term care trends of the healthcare market to manage the health of patients across the continuum of care.
Randall Lipps
Now, Omnicell has a more capability to serve the non-acute care market, which complements our current footprint and track record in serving the acute care market. The 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.
Randall Lipps
Second, our 2 businesses bring capabilities to each other that strengthen the product lines and expand the medication management coverage of both companies. The market strength of MTS opens up an exciting opportunity to sell medication cabinets into non-acute care and to sell adherence packaging systems into acute care.
Long-term, we can also bring adherence multi-med packaging into other new markets where it does not exist today, which can significantly affect the cost and the quality of healthcare. 11% of total hospital admissions are related to medication non-adherence, according to the Center for Medicare & Medicaid Services.
Blister cards make up approximately 85% of the medication management process in non-acute care settings, and MTS is the market leader with approximately 70% of the existing blister card market. We see opportunities to expand the existing market for this technology.
Randall Lipps
Finally, the transaction makes good financial sense. The combination is expected to be substantially accretive to earnings, to add a growing revenue stream to Omnicell and to open up new growth markets for the combined company.
It is also expected to be consistent with our long-term growth plans and to support our long-term goal of achieving 15% operating margins.
Randall Lipps
Now that we have MTS as part of our product family, we'll be referring to anything sold to hospital customers as the acute care part of our business. Acute care is primarily the traditional pre-acquisition portion of Omnicell.
Anything sold outside of hospitals, we will refer to as the non-acute care portion of our business. It's comprised primarily of the former MTS medication technology products.
Randall Lipps
Our acute care business is also very much on track, with several new wins including Hackensack University Medical Center in New Jersey and the University of South Alabama Health System. Hackensack University Medical Center, a 775-bed teaching and research organization, switched to our systems to gain automated control over patient-specific medications and to improve nurse workflow.
They will implement G4 systems with SinglePointe, which allows management of up to 100% of the medication flow; Anywhere RN, which allows management of systems from virtually any workstation in the hospital; and OmniDispenser, our most secured dispensing module. They will also implement our Anesthesia Workstations in the operating rooms and our Controlled Substance Management system in the central pharmacy.
Randall Lipps
The University of South Alabama chose Omnicell G4 systems to replace legacy systems in its 400-bed medical center and its 150-bed children's and women's hospital. A key element of their decision was that Omnicell was able to better interoperate with their physician order entry system, their electronic healthcare record and their unique bar code system.
South Alabama will implement our WorkflowRx system for the central pharmacy and our medication dispensing systems, including SinglePointe, anywhere RN and OmniDispenser. South Alabama will also implement our Savvy mobile medication system, which integrates with Omnicell's automated dispensing cabinets and the hospital's IT system to allow nurses to safely and securely transport medications from the dispensing cabinet to the bed side.
Randall Lipps
Internationally, we continue to add new accounts in China and expand our presence in the Middle East. The King Faisal Special Hospital and Research Center, a state-of-the-art 894-bed facility in Riyadh, accredited by the Joint Commission International, recently decided to replace all of their operating systems with our Anesthesia Workstations after installing our supply systems house-wide last year.
During the quarter, our systems were again recognized with several awards. For the seventh year in a row, KLAS, a prestigious third-party evaluation firm, has designated Omnicell Rx the Best in KLAS Medication Dispensing System, which is the highest award presented by KLAS.
Our WorkflowRx Carousel won Category Leader designation from KLAS for the third year in a row. Also, our EasyBliss [ph] software was awarded the best new product, awarded by the Pharmacy Guild of Australia.
EasyBliss [ph] is a web-based patient profile system that forms the input to MTS packaging automation.
Randall Lipps
Overall, both our momentum in the marketplace and the recognition of our product leadership are demonstrating that our strategy is working. The MTS acquisition only strengthens that positioning.
I believe that we are on track to deliver continued improvements in healthcare economics and safety.
Randall Lipps
Rob, back to you for some financial results.
Robin Seim
All right. Thanks, Randy.
Our financial results this quarter exceeded expectations. As Randy mentioned, our total revenue here is a record for Omnicell, and the revenue for just the acute care business is also a record.
Profit, excluding transaction costs related to the MTS acquisition, was higher than planned and analysts' consensus. Cash is at the high-end of our expectations, even after buying back $7 million of stock during Q2.
Robin Seim
Our results include 6 weeks of MTS business following the transaction closing on May 21. And since this is a transition quarter, I will provide the consolidated results and I will also provide some acute care-only figures, which are comparable to Omnicell prior to the acquisition.
Robin Seim
And in addition, some of our measures discussed in the previous quarters will continue to apply only to our acute care business. And one of those measures is the portion of our orders from new and competitive conversion customers.
As Randy mentioned earlier, we had 33% of our acute care orders from new and competitive conversion customers. And of those orders, we saw a shift towards competitive conversions with over 3/4 of the orders being competitive conversions and less than 1/4 from new greenfield customers who have never purchased automation before.
Robin Seim
We are very happy with these results and believe they continue to demonstrate the competitiveness of our solutions.
Robin Seim
Revenue for Q2 2012 was $75.4 million, up 24% from Q2 of 2011 and up 18% from last quarter.
Robin Seim
We always install on our customer's schedule and we ended Q2 with more installations than we had originally expected, driving revenue over our expectations and consensus.
Robin Seim
Q2 2012 profit on a GAAP basis was $0.04 per share. We will continue to report our profits on a non-GAAP basis also, which will now exclude stock compensation expense, amortization of intangible assets associated with acquisitions and any one-time cost of benefits.
This quarter, our pro forma non-GAAP results exclude transaction costs of $3.2 million net of income tax. These costs are directly associated with the acquisition of MTS and consists of professional and advisory fees, step-ups in inventory valuation and one-time severance costs associated with some restructuring.
Robin Seim
We used non-GAAP financial statements in addition to GAAP financial statements, and we feel it is useful for investors to understand acquisition-related costs and non-cash stock compensation expenses. They are a component of our reported results.
Full reconciliation of our GAAP to non-GAAP results is included in our second quarter earnings press release and is posted on our website.
Robin Seim
On a non-GAAP basis, EPS is $0.20 in Q2 of 2012, up from $0.15 in Q2 of 2011 and up from $0.13 in Q1 of 2012. Our non-GAAP operating margin was 13.3% in the quarter, up from 11% a year ago.
Robin Seim
Our results are consistent with our expectations and our guidance for overall operating margin improvement towards 15% by the end of the year.
Robin Seim
Our blended non-GAAP gross margin was 55% for the quarter, and our acute care gross margins tend to be in the mid- to high-50s and our non-acute care gross margins are in the low- to mid-40s. Adjusted earnings before interest, taxes, depreciation and amortization, which also excludes stock compensation amortization and the amortization of acquisition-related costs, were $12.4 million for the second quarter of 2012, and that's up 46% from $8.6 million a year ago.
We will now be segmenting our business into acute care, which is the traditional business of Omnicell and non-acute care, which is predominantly the former MTS business.
Robin Seim
Our acute care business contributed $66.5 million in revenue, which is up 9% from Q2 of 2011 and is a record all-time revenue for acute care.
Robin Seim
Our acute care business contributed $0.18 of non-GAAP EPS, and the acute care business had non-GAAP gross margin of 57% on products and 54% on service in Q2, averaging 56% for the quarter.
Robin Seim
The MTS non-acute care business contributed $8.9 million of revenue to the quarter and contributed $0.02 of non-GAAP EPS. 85% of the MTS non-acute care business is consumables used by pharmacists to make blister cards, they're at the center of medication control in most non-acute care facilities.
The MTS machinery business is approximately 15% of the non-acute care revenues and includes about 3% of total revenues that are ongoing maintenance services on the machinery. Non-GAAP gross margin for Q2 non-acute care business was 43% and is consistent with our expectations.
Robin Seim
The balance sheet remains very strong after the acquisition. Cash and cash equivalents were $54 million.
During the quarter, we used $159 million for the acquisition of MTS and related deal costs and repurchased $7 million of stock. These expenditures were partially offset by an increase of $9 million from the rest of our operations in Q2.
Robin Seim
Our accounts receivable day sales outstanding was 52, down 4 days from last quarter. And our new consolidated inventory is $25 million.
Our consolidated regular headcount is 1,086 after the addition of 293 staff from MTS.
Robin Seim
Regarding the remainder of 2012, we believe we're on track with our previous consolidated guidance issued in June. We expect 2012 revenue to be between $307 million and $315 million.
Non-GAAP earnings per share are expected to be between $0.75 and $0.81 per share. Non-GAAP EPS excludes stock-based compensation and amortization of any intangible assets or step-up in inventory valuation associated with the acquisition of MTS Medication Technologies.
Robin Seim
Non-GAAP earnings also excludes one-time expenses associated with closing the transaction. Most of the one-time charge is behind us.
Robin Seim
Before the acquisition, we believed we would be very close to 15% operating margins by the end of 2012. We've already made significant progress towards our goal, and we still believe we'll be very near our goal of 15% operating margins by the end of the year in the -- in our acute care segment.
Non-acute care segment is already achieving 15%. And so we believe, following the acquisition, we are still on track to achieve 15% for the consolidated company.
And our Product backlog, which is the value of firm orders that have not yet completed installation, is expected to be between $138 million and $142 million. It's comprised of acute care, medication and supply management products.
Robin Seim
That concludes our prepared remarks. And now, I'd like to open the call to take your questions.
I'd like to note, for the Q&A session, Randy and I are joined by both Chris Drew, our Executive VP, in charge of all field operations for acute care; and Bill Shields, our Executive VP, in charge of non-acute care.
Robin Seim
Operator, if you could open the call?
Operator
[Operator Instructions] Your first question comes from the line of Matt Hewitt with Craig-Hallum.
Matthew Hewitt
My first question. You had a very strong quarter.
I'm wondering if there -- it sounds like you had some customers that pulled some business forward into the second quarter, at least per your prior expectations. Was there anything special about some of those orders, or was it just simply a timing issue?
Randall Lipps
Yes. I don't know if I would say they pulled forward.
We're always, as I said, installing on our customer's schedule and sometimes, customers need to have something installed a little bit earlier. So we did do a bit more revenue than we had originally expected, which helped the profitability this quarter.
Nothing really special there. And really, we can call it a pull-forward.
It's just timing of when transactions were completed.
Matthew Hewitt
Okay. And then another area that it appears that you had a good performance was in government.
At least looking back over the last several years, what is your expectation? Normally, you see a bolus of business in the third quarter from government but it looks like you got a chunk of it in the second quarter this year.
Given some of the macro issues, do you think that, that's probably maybe a little bit little bit lower in the third quarter than we have historically seen? Or is the government coming back at least as you see it?
Randall Lipps
Well, we did have a substantial presence in the VA system and with the other government hospitals. And there are ongoing orders from government institutions, pretty much every quarter.
It's true that a lot of the government orders -- most of them, in fact, come in the third quarter just because the government's year end is right at the end of the third quarter. But we do see orders from, particularly, VA systems and some of the Department of Defense hospitals and Indian health systems throughout the year.
Matthew Hewitt
All right. Last question for me and then I'll hop back in the queue.
You mentioned you had a good quarter internationally, the Saudi Arabia hospital. You also mentioned China.
Could you update us on the progress there?
Randall Lipps
Sure. So -- yes, we talked about, with China, we're excited about that market.
We expected that the rollout would be -- so hospitals installing 4 to 6 cabinets and trying out the Omnicell systems. That is definitely going on.
The schedules of installations and rollout is meeting our expectations, so that's all good. We do find, of course, with all of our customers when they're admitting a new concept and each one of them wants to try out and see how it works and then they have to alter their workflows and to figure out how to optimize with our systems and that process is going on.
So my feeling is that the rollout in China is going very well, and we're still the only ones with a Mandarin system in the market, so that's good.
Operator
Your next question comes from the line of Mohan Naidu with Piper Jaffray.
Mohan Naidu
Randy, to start off with, now that you have MTS, what kind of conversations are you having with your customers, IDN [ph] customers, for cross-sells? And do you see any synergies in the sales force?
And how do you -- how are you targeting cross-sell opportunities at this point?
Randall Lipps
Well, yes, we think some of the best opportunities we have right away, obviously, are to bring our cabinets presentations right into the institutional pharmacy, where MTS has 70% of the market share in the blister card world. So they have vastly more relationships and business partnerships there.
So we can bring in our systems from the cabinet automation well right into those settings and it's creating a nice pipeline for us. So those are some easy wins for us.
And we've actually reorganized our -- some of our sales force to attend to that directly. And then of course, into the IDNs that we sell into, readmission rates, which are going to be tracked next year, are directly tied, in some cases, to medication adherence.
So we're looking at starting some initial projects in IDNs that would demonstrate the medication adherence packaging solutions and automation solutions to help drive success in those areas. And our early discussions are going very well.
And we hope to have, at the end of the year, some pilot projects on that. And that's right in tune with the conversations that people in the C-Suite are having, how do we impact the cost and keep people out of hospitals and move them to other low-cost areas in the healthcare system.
And medication adherence is a key driver in that. So it's nice to be right in the target of healthcare systems' conversations these days.
Mohan Naidu
And, Rob, looking at the backlog for the year-end, how should we look at that? I'm presuming, at this point, it primarily consists of acute care product?
Is that correct?
Robin Seim
That's correct.
Mohan Naidu
And so is there any way to give us a metric? How do we look at MTS, gauge their performance or to line them out?
Robin Seim
Well, most of the MTS' revenue is from consumables. I -- so as I said, in my prepared remarks, 85% of their business is from consumables.
The remaining part of their business is, compared to Omnicell, a relatively small amount of machines and somewhat lumpy. At any point in time, there's not necessarily any large backlog after the MTS machines.
And many of those machines can be produced on a relatively short cycle. So we really didn't increment our backlog forecast for anything in MTS.
If there is a machine on order, in stage of being produced or installed at the end of the year, that would be in the backlog but we don't expect it to significantly change the number.
Mohan Naidu
Okay. On the consumables, is it accurate to look at that as more of a recurring revenue where you see constant stream of orders flowing in?
Robin Seim
Absolutely. And that's -- frankly, one of the benefits of the acquisition is there's much more consumable revenue now as part of the Omnicell base.
Mohan Naidu
Perfect. A last question for me here.
R&D, significant leverage in the quarter. I thought that with MTS, in quarter-end, it will be a little bit up.
Any comments there? Is that the accurate run rate to look forward to?
Randall Lipps
Yes. Well, our R&D is relatively the same total growth spending but as we've had in the past, part of our R&D is capitalized when we get towards the end of the development cycle.
We are more into testing. We didn't really have hardly anything capitalized in Q1.
And in Q2, we did capitalize $1.2 million. We actually capitalized $1.4 million, including MTS.
Mohan Naidu
MTS. Okay.
Are there any new program starting up that would impact Q3 and the capitalization?
Randall Lipps
We always have plenty of new development going on. Reinvesting in our business is very important.
Operator
[Operator Instructions] Your next question comes from the line of Steve Halper with Lazard Capital Markets.
Steven Halper
George, just 2 quick questions. Number one, on the amortization add-back, obviously most of that is MTS, but what was the add-back related to, say, your other acquisitions that might have been included in that number now?
Randall Lipps
In the quarter, we amortized about $600,000 of intangible assets. About $150,000 of it was from previous acquisitions and the rest of it was from MTS.
Steven Halper
Okay. And then just for information purposes, can you tell us what the MTS top line growth would've been in the quarter year-over-year, just for a comparable basis for the full quarter?
I know you didn't own the company for the full quarter.
Randall Lipps
Well, MTS is growing at about 5% to 7%, depending from the quarter and the period that you're looking at.
Steven Halper
Okay. So it would be within that range?
Randall Lipps
Right.
Operator
At this time, there are no further questions. I would now like to turn the call over to Randy Lipps.
Randall Lipps
Well, thanks for joining us this morning. We're really pleased with our acquisition and the momentum we have, both in the acute care and non-acute care businesses.
We think it opens up some great growth opportunities to continue to explore and move both domestically and internationally. Thanks again for joining us today.
Operator
Thank you. This does conclude today's conference call.
You may now disconnect.