Feb 3, 2015
Executives
Rob Seim - CFO Randall Lipps - Executive Chairman, CEO and President
Analysts
Mohan Naidu - Stephens Sean Wieland - Piper Jaffray Matthew Hewitt - Craig-Hallum Capital Group LLC Gene Mannheimer - Topeka Capital Markets Steve Halper - FBR Capital Markets
Operator
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.
Rob Seim
Good afternoon, and welcome to the Omnicell 2014 fourth quarter results conference call. Joining me today is Randall Lipps, Omnicell's 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.
And finally, this conference call is a 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.
Then I'll cover our results for 2014 and our guidance for 2015. And following our prepared remarks, we'll take your questions.
Randall Lipps
Good afternoon. I’m 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 above the upper end of our guidance. Q4 was the highest non-GAAP EPS we’ve 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 overtime.
We’ve doubled the size of the company in the last five years from $222 million to $441 million and we’ve more than tripled our non-GAAP net profit from $14 million to $46 million. For nine consecutive years we’ve received the top honors from class, the prestigious third-party rating organization for 10 consecutive years we have expanded our market share and one new thought leader customers every single quarter.
Most importantly we’re driving improved healthcare for everyone. While we’re proud of what we’ve accomplished, we do not intend to stand still.
I believe Omnicell has more expansion opportunities now then we’ve ever had before and that we’re well positioned to take advantage of them with the same growth strategies that we’ve 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 U.S. 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 track new customers who adopt award winning G4 platform, our analytics tools and our medication adherence solutions.
Throughout 2014, we announced new customer wins of marquee [occupier] 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 and there are 471 bed inpatient hospitals in New York City and then there are 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 class brings 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 of 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, a design to appeal to customers are moving towards managing health across the continuum of care. The U.S.
Department of Health & 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 cost, 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 U.K. and China, we also see adoption of our technologies in other parts of the world.
For example, we recently took orders from the new 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. Today is evolving and to march with healthcare environment, we remain focused on our mission to change the practice of healthcare with solutions that improve patient and provide our outcomes.
With that I will turn back over to Rob for some finances and guidance.
Rob Seim
Well, as Randy mentioned the fourth quarter and full year results for 2014 exceeded our expectations in nearly every way 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 the year of growth and resulting in record order volumes.
Product bookings which include all orders that are installable in the next 12 months that exclude service finished the year at $364 million and it's above our guidance of $345 million to $355 million. Those bookings are up 10% from $328 million in 2013, contributing to the quarter or a significant number of new customer wins in our automation and analytical segment and strong performance in the medication adherence market.
We have also seen continued expansion of demand for our Q4 upgrades to existing automated sensing 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. Now, the consistent contribution to bookings or orders from new and competitive conversion customers in the automation analytic segment.
In Q4 these accounted for 40% of the bookings and 39% of the orders for the full year. This represents record dollar volume from 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 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, our G4 upgrades which often shipped shortly after their order. 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.
The GAAP earnings per share of $0.83 was up $0.16 from $0.67 in 2013. We also report our results on a non-GAAP basis, which excludes stock compensation expense, amortization of intangible assets associated with acquisitions and any non-recurring costs or benefits.
These non-GAAP financial statements in addition to GAAP financial statements because we believe it's useful for investors to understand acquisition-related costs and non-cash stock compensation expenses that are 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 U.S. 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 the $1.26 per share, an increase of 17%.
Adjusted earnings before interest, taxes, depreciation and amortization which also excludes stock compensation amortization and amortization of acquisition related costs was $23 million for the fourth quarter of 2014, up 23% from $19 million a year ago. And for the full year 2014, adjusted EBITDA was $82 million, an increase of 24% from $66 million in 2013.
Our automation and analytic 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 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 at 15% operating margin we are currently in an investment phase.
Cash increased to $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.
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 at Surgichem.
We have authorization to repurchase up to another 50 million of stock. And for the full year of 2014, our free cash flow was $53 million, that’s up from $43 million last year.
Accounts receivable, day 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's 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 are optimistic about 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 a $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 for 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 the results to fluctuate from quarter to quarter, but to average near to 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 would like to open the call to take questions.
Operator?
Operator
[Operator Instructions] The first question comes from the line of Mohan Naidu.
Mohan Naidu
Randy and Rob thanks for taking my question. Just to start with couple of housekeeping questions here.
So, on the booking side Rob what do you include from medication adherence segment or is that purely acute care?
Rob Seim
We include both the segments and include all of the products that are booked in both of the segments. So, there is no service in there but all the product orders.
Mohan Naidu
Okay. On the medication adherence segment specifically, do you get the long term contracts in there or like how much visibility do you have into contracts that you put into bookings?
Rob Seim
So, medication adherence is predominantly the consumables.
Mohan Naidu
Right.
Rob Seim
90% of the revenue is consumables and they’re 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 overtime, some more to the automation analytics, but it’s a smaller piece of the medication adherence revenue.
Mohan Naidu
Okay. And did you disclose a backlog number?
Rob Seim
Pending backlog was a 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 and the consumables and we have a lot more of our orders turning to backlog quicker.
The upgrades, the G4 upgrades and some of the equipment that goes into non-acute type facilities and they get installed much quicker. So, backlog number isn’t quite the indicator that it used to be that’s why we are focusing more on the product bookings, the better indicator of our business.
Mohan Naidu
Fair enough. And one last question on M5000, can you give us view on what you guys are seeing, how the market is reacting to that product?
Rob Seim
Yes, so the M5000 we announced last quarter and we said we would be shipping the first line off for the data installation and that has been installed. It came up, we’re very proud of it, we shifted on a Sunday and by Wednesday it was installed and Thursday it was producing medication adherence packages.
So, it's going well so far.
Mohan Naidu
That’s great. Thanks a lot for taking my question.
Operator
Your next question comes from the line of Sean Wieland with Piper Jaffray.
Sean Wieland
Thank you very much. Two quick ones, is there an update on the stop clinical study that is underway?
Rob Seim
That’s still in progress.
Sean Wieland
Okay. What’s the timing on that?
Is that basically is it going to be [indiscernible] for a year?
Rob Seim
So, I believe that it was timed out in Q3. I have to actually check, but I believe it's going to go few months or few quarters before it was finished up.
Sean Wieland
Okay. 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?
Randall Lipps
Well, we have got, like we said, we got about 39% of that installed base yet to go and as we said at the beginning we thought it was $200 million opportunity or little bit more. So, we have done 60% of it about 120 million inception to-date.
So, we do still think that most of those customers will upgrade, but now we are into the later adopters and it will probably take the next couple of years before most of them do that process.
Sean Wieland
Okay. When you say the eligible customer, so what is at the Surgichem customers that are excluded from that or who would be excluded from that?
Randall Lipps
No, back in 2011 we had an installed base of over 30,000 units that were on their 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 has been a G4.
Sean Wieland
Got it, okay, thanks for your time.
Operator
Your next question comes from the line of Matt Hewitt with Craig-Hallum.
Matthew Hewitt
Congratulations gentlemen. Couple of questions.
First, how much assistance or help do you think you are getting from this care fusion acquisition. I mean, has that created significant distraction and I guess concern among their existing users to prompt them to re-evaluate Omnicell and maybe make the conversion now versus taking a chance with the new owner?
Randall Lipps
I don't think it has that much impact. I think we have just continued to demonstrate our technology being wider and wider gap to what's available in the marketplace and that's what attracting folks.
Plus the story of the non-acute and the acute sides of the continuum being more important to both segments of the businesses is very important. So people like our broader story, our broader product line and solutions set that we are taking into the market and that's probably the hottest issue today is how we are going to get great results and outcomes not just in the hospitals or just outside the hospital but combined in.
we have both sets of solutions there that make a lot of sense for people to go with us.
Matthew Hewitt
Okay, alright. I guess a couple of questions regarding the old product set, the cabinet versus on the adherence, in the past you talked a little bit about some of the cross selling opportunities that you are seeing there, maybe some conversion rates.
Any color that you could provide on that opportunity?
Randall Lipps
Well, of course, it’s cross selling in two directions right, but we had the most successful part is implementing the dispensing systems and what we call non-acute care facilities. And those sales 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 going well for us. That business was really $60 million and after we bought MTS and started getting access to those customers, it t has grown to more meaningful numbers for us.
So, up in the 20 million range so that continues to go on.
Rob Seim
Going on for direction where we are just now with the M5000 getting to the point where we got a product that we might be able to sell into larger hospital systems for medication adherence.
Randall Lipps
We definitely have some in the pipeline, so it's definitely a product appropriate for large IDN.
Matthew Hewitt
Okay, alright. And then, maybe shifting gears a little bit, international sounds like continues to be a driver for you guys.
Where is Asia and specifically how is that China opportunity playing out obviously it seems we’re dragging a little bit longer then I think anyone has anticipated, but where does that sit today?
Rob Seim
We 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 are driving towards as quickly as we can in the full hospital wide installation which we don't have yet and that's necessary to kind of go to the next step. I think we are kind of a rebuilding year still, but we still have - feel like China is certainly a big market, but it's a market like any other market in the world.
They need management of their medication across the broad array of continuance and they lack the technology and we have got the solutions, we just got to get it fine tuned for that market.
Matthew Hewitt
Alright, thanks and congratulations again.
Operator
Your next question comes from the line of Gene Mannheimer with Topeka Capital.
Gene Mannheimer
Thanks. Congrats on a great quarter guys.
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?
Rob Seim
Well, it's pretty consistent with what we have been saying in the past as we go revenue what we are going to do is reinvest in the various growth opportunities that we have in front of us. Those are the same ones we talked about before.
Continuing our leadership position with products in the automation analytics segment of our business, filling out the medication adherence product line with more equipment to deal with various different size pharmacists. Those things are our focus for internal development and we just think that we have got a lot of opportunities around the world for these solutions and so we intend to invest to participate in that revenue stream.
Gene Mannheimer
Okay. 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.
Rob Seim
So, you are probably talking about announcement [indiscernible] 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 to do that part of the distribution process, management process and this products do very well. But, we don't compete directly with an IV robot.
Gene Mannheimer
Okay. Thanks a lot.
Operator
[Operator Instruction] Your next question comes from the line of [indiscernible]
Unidentified Analyst
Hi, good afternoon. Just wanted to follow up a little on the international front especially as it relates acquisitions with Surgichem now into fold, what's your appetite in terms of doing more acquisitions and especially focus is going to be more on products or distribution or combination?
Rob Seim
Well, Surgichem is the first acquisition that we have done that was really about distribution. The product at Surgichem is relatively similar to the product that we distributed MTS, but they sold to lot of the smaller pharmacies and so that gave us lot more access.
As we said in the past, we are interested in acquisitions that expand our market in a number of ways in medication management. Surgichem is an example one, but most of our acquisitions tend to be product oriented and we’re really looking at anything that improves the work flow of hospital or healthcare institution or provides more data analytics in the work that they do.
And so, we are open to acquisitions both in the United States and internationally.
Unidentified Analyst
Thanks. And as it relates I believe you said, you are still in investment mode, we’re going to see more in terms of R&D being spent.
On the SG&A front, however, as you look to expand more into Middle East, China etcetera. Do you need to have more feet on the ground as it relates to maybe expanding your sales force?
Rob Seim
Well, we have also been investing a little bit ahead of the revenue particularly in automation analytic segment in our international markets. Yes, as that grows we would expect to grow there also.
Randy mentioned that we are in a little bit of transition in China and we have expanded our presence there not only with the SG&A, but a little bit in country development effort. So, we will be doing that around the world, but most of our sales model outside the United States in Canada is the resellers.
So yes, we don't necessarily build up the whole service team or installation team when we expand in a country.
Unidentified Analyst
Okay. Thanks for taking the questions.
Operator
Your next question comes from the line of Steve Halper with FBR.
Steve Halper
Yes, hi Rob. Could you just clarify that 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 your cash from other sources?
Rob Seim
Yes, so for the year the operating cash flow was $65 million and purchase of property and equipment were $12 million.
Steve Halper
Great, thanks. So, we appreciate the higher R&D investments, do you feel like you underinvested in 2014?
And what are, I guess trying to get into a little more details what are some of the priorities around that spend in 2015?
Randall Lipps
No, I don’t think we underinvested 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 is times when you invest in product development.
Going forward our development activities are like I was saying with the previous questions they’re targeted right out those opportunities we have been talking about for the last couple of years. We continue to do work to make sure that we are keeping the leadership position with the dispensing systems and central pharmacy systems and we have got opportunities to fill out the product line and that adherence.
So, we have products that are appealing to every size of pharmacist.
Steve Halper
Thanks.
Operator
And at this time there are no available questions, I will now like to turn the conference back over to Randy Lipps for closing remarks.
Randall Lipps
Well, thanks for joining us today. And also like to thank Marga Ortigas-Wedekind, who is leaving Omnicell after six years of contribution running marketing and our international operations.
I’m changing the management structure of Omnicell and the 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. We ended the year as a good time to celebrate and reflect, none of these results are optimism for the future, could be possible without the innovation and dedication of over 1,200 Omnicell employees around the globe.
I would like to thank our team for their hard work and continuing to build and evolve our company. Thanks very much we will see you next time.
Rob Seim
Operator that concludes our remarks.
Operator
Thank you for your participation and that concludes today’s conference call. You may now disconnect.