Omnicell, Inc. (OMCL) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon my name is Holly and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Omnicell Second Quarter Earnings announcement. All lines have been muted to prevent background noise. After the speakers remarks you will have an opportunity to ask questions. [Operator Instructions]. I’ll now turn the conference over to Rob Seim, CFO. Please go ahead sir.

Thank you. Good afternoon, and welcome to the Omnicell 2015 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 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 30, 2015, 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 July 30, 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. And today I will briefly cover an overview of the results for Q2. Randy will then cover an update on our business. Then I'll finish up with a few more of the financial details about Q2 and our guidance for the remainder of 2015. And following our prepared remarks, we'll take questions. So summarizing the results for Q2, I’d like to comment on the three aspects of our financial results that are most important in the ones, for which we give annual guidance, orders, revenue and non-GAAP earnings per share. Order intake is a head of our own internal expectation so far in 2015. And our pipeline of sales in the late stage of the selling process is strong for the remainder of the year. The competitiveness of our solutions and the propensity of the market to adopt our solutions has continued at the same pace as we expected and is consistent with our previous annual growth guidance. So we see no change in our position in the market, our customer’s willingness to require our solutions. As there were some trends in our historical bookings we had a more significant impact on Q2 than we anticipated. In the three quarters leading up to Q2, we had an average of 47% of our orders from new and competitive conversion customers making first time installation, which is much higher than our 10-year historical range of 33% to 40%. We also booked considerably larger deals over those three past quarters than we had historically. And these business dynamics provided us with a healthy backlog in our automation and analytics product segment that drove a change in the composition of the backlog that we do not fully appreciate going into the quarter. Competitive conversion orders and larger orders often take longer to install and with more than in the backlog, the backlog will take longer to turn into revenues. The result is in Q2, we found our customers we’re not ready to complete installations at the rate we had originally estimated as a consequence our revenue is lighter and we have planned and Wall Street analysts have predicted. In Q2, our orders for first time installations were back to a more normal mix of new customers and therefore our forecast for the rest of the year indicates we will return to a more normal mix of customers installing our solutions. While revenue was lower than expected the third major I wanted to highlight non-GAAP earnings per share is meeting our internal expectations due to the strong product margin mix we had in Q1 and our internal management of cost and expenses. But here too we expect earnings for the balance of the year to be consistent with our previous annual growth guidance. So many times we’re asked about external forces affecting our customer’s propensity to install such as distraction with other IT projects or customers efforts to conserve cash. We have not detected any external forces affecting our customers. We simply have more very large competitive conversions and those customers are planning their projects very carefully which takes time. While we do help our customers actively manage projects to completion we mostly tried and install at our customers own pace. If our customers pace is slower as it was in Q2 then the installations take longer. We also get asked if there are any actions by competitors that slows the installation cycle. The deals in our backlog are fully contracted with us and the competitive part of the sales cycle is over. The installation cycle is driven by our customers' organizational capacity not by our competitors. We often talk about the backlog giving us very good visibility. And having seven to nine months of forward revenue and backlog for our automation and analytics segment does give us good visibility. For the last two quarters it demonstrated that even with that visibility we cannot always accurately forecast when large multihostile systems will complete their installation cycles. So Randy and I will both discuss this morning our prepared remarks. At this point let me turn the call over to Randy to cover more about the business.

Thanks Rob. Well, Q2 revenue was lighter than expected, the fundamentals of our business have not changed. The business indicator is that we continue to close a solid mix of competitive wins and our existing customers continue to expand their implementations. 31% of second quarter orders in automation and analytics segment were from customers making first time installations of Omnicell systems underscoring the competitiveness of our solutions. Over three-fourth of those were competitive conversions and the remainder was from Greenfield customers who have never automated before. These new customers are often attracted to us because of our differentiated solutions which comprise the first leg of our growth strategy. For example we announced LC MC system that selected Omnicell for the New University Medical Center New Orleans Hospital. Working collaboratively, LCMC health and Omnicell seek to bring industry leading levels of quality and safety to medication management and the new facility through Omnicell's medication automation and analytics offering that helped improve workflow in the central pharmacy and clinical units. The University of Medical Center stands at the state's largest teaching hospital and training facility for doctors nurses and allied health professionals and we are happy to be their partner of choice. We also booked orders from the Hospital for Sick Children, Canada's leading center dedicated to advancing children’s health through the integration of patient care, research and education which is located in Downtown Toronto. For the hospitals liked at Omnicell's automated dispensing systems after an expensive and multidisciplinary vendor selection process. The initial installation spans the nursing areas, operating rooms and central pharmacy all running on our unity platform, the various modules of our solution and operate easily saving valuable time in resources for our customers. The unity platform also allows our customers to more tightly interoperate with their electronic health record system such Cerner and EPIC. The differentiation of our solution in the market place is a huge reason why our order intake is ahead of our plan, so far this year, and revenues for the first half of the year are up 11% in total and 8% organically. The other two legs of our growth strategy, our expansion into new markets and growth through acquisition, in Q2 we completed the acquisitions of MACH4 Pharma Systems and Avantec Healthcare both adding to our expanding business in Europe. MACH4 produces robotic dispensing systems used in the hospital central pharmacy and in retail pharmacies to automate the handling the medications in original manufactures packaging, which is the workflow used in many countries outside the U.S. Avantec is our long standing reseller in the UK, where they have gained a strong presence with a national health system over the past 10 years. In addition to Omnicell systems, Avantec designs and provides country specific products for the UK market. With the acquisition, Omnicell now interacts directly with the customers in the UK on all our product lines including medication adherence, robotic dispensing systems, supply chain systems and automated dispensing cabinets. To wrap it up, despite slower completion of installation than expected this quarter, overall the business is doing well. We believe the continued investment in our three-leg strategy of differentiated products, expansion into new markets and acquisitions and partnerships is driving profitable growth. We are executing our growth strategy well, delivering state of the art medication management and workflow efficiency to our customers, results for our investors and better healthcare for everyone. I believe we have all the ingredients for continued long term success. And Rob I am turning back over to you for some financial updates.

All right, so I’ll finish up with the brief summary of the financial results and our guidance for 2015. So our revenues of $112.8 million in Q2 were up 7% from the same quarter last year. Earnings per share in accordance with generally accepted accounting principles were $0.24 in Q2 2015, which was up from $0.21 in Q2 2014. GAAP earnings include a $3.4 million gain on our original investments in Avantec from several years ago. That gain is unusual and not reflective of our ongoing operating performance that we have excluded it from our non-GAAP reporting. Our gross margins were 51%, the sequential drop in margins is reflective of MACH4 and Avantec now being included in our results and the purchase price accounting for those acquisitions. The acquisitions due lower our gross margins but we expect the impact to be less after the purchase price accounting adjustments, the inventory and deferred revenue completely flow through the income statement over in the next couple of quarters. Service gross margins in the quarter were very strong at 61%. In addition to GAAP financial results, we report our results on a non-GAAP basis, which excludes stock-compensation expenses and amortization of intangible assets associated with acquisitions. This quarter, we also excluded the one-time gain our original investment in Avantec. There are no other one-time acquisition related expenses associated with MACH4 or Avantec which we are excluding from the non-GAAP measures. These non-GAAP financial statements in addition to GAAP financial statements because we believe it is useful for investors to understand acquisition amortization related costs and non-cash stock-compensation expenses, there are a component of our reported results as well as the one-time [event] such as the gain on Avantec investments. A full reconciliation of our GAAP to non-GAAP results is included in our second quarter earnings press release and is posted on our website. And once again you’ll find additional GAAP to non-GAAP reconciliations in the press release this quarter that we intend to provide regularly in the future. On non-GAAP basis earnings per share were $0.28 in Q2. The acquisitions has contributed approximately $4 million of revenue and were dilutive approximately $0.01 to non-GAAP earnings per share in Q2. Adjusted earnings before interest, taxes, depreciation and amortization which also excludes stock-compensation amortization, amortization of acquisitions related costs and the one-time gain on the investment in Avantec were $18.5 million for the second quarter of 2015, down from $20 million a year ago. Our business is also reported in segments consisting of automation and analytics and medication adherence. Automation and analytics consist of our OmniRx automated dispensing cabinets, Anesthesia Workstations, Central Pharmacy, Omnicell supply and analytics and MACH4 robotic dispensing systems. Our acquisition of Avantec is also included in this segment. The Medication Adherence segment consists of all adherence package consumables which are now branded SureMed and equipments used by pharmacists to create adherence packages. Our acquisitions medication technologies and Surgichem are included in the Medication Adherence segment. As a reminder, we now report certain corporate expenses that cannot easily be applied to either segments separately. On segment basis, our Automation and Analytics segment contributed $88.7 million of revenue, up from $84.7 million in Q2 2014 or an increase of 5%. $23.3 million GAAP operating income this quarter compares to $22.7 million GAAP operating income last year and $21.8 million of non-GAAP operating income in Q2 2015, compares to $23.8 million last year for this segment. The Medication Adherence segment contributed $24.1 million of revenue to the quarter compared to $20.4 million in Q2 2014. GAAP operating income of $2.3 million compares to $2.5 million a year ago and non-GAAP operating income of $3.7 million compares to $3.6 million in Q2 a year ago. Non-GAAP common expenses were $11.1 million, the same as they were in Q2 2014. In Q2, our cash decreased from $140 million to $88 million. During the quarter we extended $24 million on the acquisitions of Avantec and MACH4, net of cash balances acquired and those acquisitions may cause an additional $9 million of future expenditures for unpaid consideration held in escrow and potential earn outs from the Avantec acquisition. During the quarter, we also repurchased approximately 680,000 shares of our stock for $25 million, at an average price of $36.74 per share. We have approximately $29 million of stock repurchase authorization left. Accounts receivable day sales outstanding were 95, up 25 days from last quarter. Now several factors are driving the DSO this quarter. We had substantially higher shipments than normal at the end of Q2 in preparations for the installations scheduled in Q3, which drove half the increase. We also had receivables added from the acquisitions and a higher mix of international distribution customers who generally have contractual payment terms of 90 days. We review the collectability of our receivables regularly and we don't feel this increase in DSO indicate any potential increase in the rate of bad debt. This quarter is an anomaly and we generally expect DSO in the 65 to 75 day range. Inventories were 46 million up 13 million from last quarter. And we added 7 million of inventory with the acquisitions and the remaining 6 million increased represents increases in our inventory and preparation for our installations schedules in the second half of 2015. Our headcount was 1418 following the addition of 160 MACH4 and Avantec staff members. For the rest of 2015, we are reaffirming our guidance ranges. We expect non-GAAP earnings to be between $1.31 and $1.36 per share consistent with our previous guidance. We expect product bookings to be between 400 million and 420 million in 2015 also consistent with our previous guidance. We previously expected revenue to be between 495 and 510 million. We expect the first time installations in the size of the deals in our installation backlog to return to more normal mix in the second half of 2015 but we don't believe we will make up the entire revenue shortfall from Q2. As our installation teams have spent more time on these new customers. We now expect to be in the lower part of the revenue guidance range. We still expect non-GAAP operating margins to be approximately 14% after absorbing the cost integrate the acquisitions. We expect to return to 15% operating margins in 2016 when both acquisitions become accretive to earnings. And finally we’re assuming an annual average effective tax rate of 38% on GAAP earnings. So this concludes our prepared remarks and now I’d like to open the call to take questions.

[Operator Instructions]. Your first question will come from the line of Matt Hewitt with Craig-Hallum Capital.

Good afternoon gentlemen. Couple of questions from me, first how much of a headwind was FX in the quarter, how much did that impact your business there?

So, Matt as you know we are growing our international business but a lot of it is still done in the US dollar. The foreign exchange is sort of about 600,000 in revenue in Q2 and about the same amount in Q1.

Okay. Thanks and then I’m trying to rationalize your comment that your customers are distracted that your products remain a priority but at the same time you are seeing a lengthening of the installation process and you kind of install on their time table, so help me understand how they are being distracted but at the same time you are seeing the lengthening that those two comments I guess just on jive to me?

Yes, this is Randy. The timeframe for installation is the same as it always historically has been for the particular types of customers we have, existing customers a little quicker because we don't need to install servers and interfaces and maybe not quite as much training. Newer customers as always has been, there has been a longer timeframe to get the initial set of server installation and interfaces and training upfront before you could start installing some of the initial units that has always been the case, what has changed is the fact that we’ve been winning in the market place and we have been winning big time and what I mean big time, big customers, consolidation having in the market we’re now getting customers with much larger orders, much bigger deals that we won and the larger the deal, and when it’s large and new, there is a little more time probably another I’d say, up to another 90 days of installation the newer deals have always taken, but because we have such influx of the high percentage of first time customers almost 47% on average over the last three quarters, before this one. It just put an [indiscernible] amount first time customers into the pipe and then we know that they move slower. So that customers haven't changed, it’s simply the mix of customers that we’ve signed up. So behind the scenes the order taking is going great, we’re winning in the market place, we’re winning big customers and we had this little bit of revenue change because of what in our backlog not because of the change in the timing or what’s in our backlog.

I guess one follow-up on that for the large orders, when you are dealing with multihospital system, are you doing that all at the same time or you’re doing at hospital by hospital and if that’s the case, are you able to book the revenue at each leg of the process or do you have to wait for the entire health system to be installed before you can recognize that revenue?

Yes, more of the orders that we’re getting today are systematic hospital and sometime the time frame swap outs. And so many in the hospitals whether use to had individual IT departments that each of the hospitals and you could kind of go one other time in each of them are now consolidated into a single IP backbone that you plug and play into and we find that many of them do want to move pretty quickly in their installation, but they are very careful about setting up the whole hospital system for an orderly change over a system. So we have both types for customers, but the types that we’ve recently had put into the backlog or the types that are getting their interfaces setup for all their hospitals and all the places they want to go and they were rolling out systems fairly quickly and then we generally roll them out, yes in hospital or area wide and then we count the revenue as we complete significant areas of each hospital group.

And your next question will come from the line of Steve Halper with FBR Capital Markets.

Two housekeeping questions and then one more, the percentage of orders from new and conversion orders, I just missed that?

31%.

31%, okay. And then what was the amount of lost deferred revenue from the acquisitions?

So you’re talking about the revaluation of deferred revenue on purchase price accounting?

Yes.

So if I recall right that was less than a million dollars. We did bring in amount of backlog associated with particularly both of the acquisition of Avantec and MACH4 because there were similar products that install over a period of time.

Okay and then the other question was so you sort of pointed; you definitely pointed us to the lower end of the range of the revenue guidance. But what’s the delta to keep you in the same earnings range? Where is that offset coming from in terms of on the cost side?

Well, we’ve had a few things going on. I mean first of all, as we start seeing the orders not completing in the quarter, we put it in place expense controls in the quarter. And as you recall, in Q1, we pretty substantially overachieved against everyone’s expectations and the rest of Wall Street’s expectations. So those things taken in combination with achieving our internal plans to the rest of the year keep us in the range.

So basically you didn’t really increase your expectations after Q1, you sort of kept some of that in the back pocket?

Well, we said after Q1 that we had more installations complete that were of a higher product margin mix. So in Q1, we had a different set of completions than we had originally forecasted and we said that we saw the rest of the backlog that we always saw coming through in the rest of the year. And so that’s still true, the remainder of the reduction is all in the expense control that we put in place. So despite the fact that we’re guiding towards the lower end of the range at this point, we still think that we’ll be achieving same range in profit.

Okay. And on the cash collection side, you had those shipments at the end of Q2 accounting perhaps the increased in terms of number of days, it’s July 30. Have you collected on any of that?

So we’re starting to collect on some of that. Our payment terms range generally between 30 and 45 days for domestic customer, so they’re right about at the collection period now.

And you didn’t make any changes to your bad debt calculations?

Not as a rate of bad debt. We book a provision that the percentage of our AR, so of course we just booked the higher provision for the quarter. But we don’t expect any higher rate of bad debt on the collectables that we have right now than we have ever had. And just to note household customers generally do pay, there is a very little bad debt in our business, they very literally pay on time, but they generally do pay.

The next question will come from the line of Sean Wieland with Piper Jaffray.

Hi, thanks. So I am just trying to wind up a couple of thing which you have said also around service margins were strong. So it doesn’t appear that your implementation resources were idle and waiting for the calls and we can start the implementation. So can you just help me understand what the utilization is of your resources, what they are doing if they are not working on these big deals?

Sure. So first of all service organization does post installation customer support is a separate organization from the installation team. But they are actually physically different people and so the service people supporting the install base there as we do. And we just become increasingly more efficient there as the G4 products are at a higher quality level than of products that we have in the field before. So we have been able to become just more efficient with our [staff]. The installation folks perhaps were not quite as utilized in Q2 as they normally are but they were still working with these larger customers. When we say that the installation cycle on larger customer is longer and it doesn’t mean that we are idle waiting for them to do the installation, there is actually a lot of work in the preparation and planning. Particularly with the very large customers we go out and map out their workflows with them and help them fully utilize our systems to get the most efficiencies they possibly can when they install. So that's a more lengthy process with the very large customers that are typically competitive conversions that takes more time. And so that installation team was actually working with all these customers, they just didn’t get through the revenue cycle.

Okay. And how many customers are we talking about here?

So at any particular quarter, we have anywhere from two or three to 10 very large deals. And over the past three quarters, we have announced quite a few of those. So that's the range that we are talking about. In the past, competitive conversions tend to be in the range of 70 to 100 accounts a year.

Okay. My question though is I mean, I am just trying to get a sense of among the customers that are seeing as elongated implementation cycle. Is it 2 to 3, is it 10 to 20?

10 to 20.

10 to 20. Okay. Thanks so much.

Your next question will come from the line of Gene Mannheimer with Topeka Capital.

I just want to piggyback on Sean’s question. So you’re seeing the delays that drove the softer revenue were encompassed more than 10 large clients that contributed to the deferrals?

That’s right.

Okay. And also based on your comments about the installation team not being at full utilization, it sounds like the delays were a lack of readiness, I guess for a lack of a better term by the end customer as oppose to a mutual decision to put these off?

Well, we certainly don’t encourage our customers to push out their installations unless we think that there are just flat out not ready. A lot of the installation work is we’re actually doing and like I said we actively manage the installation programs with the customers. These are not common projects for our customers, but they are common projects for us, we do it all the time. And so the customers rely on our expertise to help with the project management and get it to the cycle. But that being said there is a lot of work that the customers have to do themselves, for instance they have to physically fill up all the machine with the medications and they have to make decisions on how exactly drug is going to be handled and that is where all the planning cycle comes into play.

And then just switching gears to medication adherence. Looks like if I heard you right about 17% year over year growth, I’m just curious how much of that was organic if we net out I guess Surgichem revenue?

So Surgichem is contributing about 3.2 million, 3.4 million a quarter. But we have $6.5 million of growth from Surgichem with the inorganic piece year-over-year.

Your next question will come from the line of Mohan Naidu with Oppenheimer. Your line is open sir.

Hello?

Okay. That question has been looped on. Your next question will come from the line of Mitra Ramgopal with Sidoti.

Just a couple of questions, as we enter the second half. What percentage of the customers are now on the G4?

69% of the customers in the original installed based that are agreeable have placed order so far. And when we look at the service margins to 61.4% number, I mean certainly the highest we have seen, I was wondering how sustainable you think that is and how higher what kind of potential you take it and get to?

Well this is certainly a high mark for our service margins. We anticipate that service will be in the 55% to 60% range on ongoing basis. We do add service people at that times as we get more installations in the field and occasionally there are more parts usage in other so that the margin will fluctuate a bit, we’re pretty confident that we’ll be in the 55% to 60% range of it.

Okay. And how should we think about the tax rate in the second half of the year, I know it’s moved around quite a bit the first couple of quarters?

So we’re guiding to a 38% annual tax rate on GAAP earnings, which is pretty close to where we are due to the first half of the year. And the only thing I would say is of course that does not include any R&D tax credit and that would not be included in our accounting and so that all government passed that is not and renewed for this year yet, perhaps it will be in the second half so that would come into our accounting at that point.

Okay. All right thanks again.

[Operator Instructions]. And at this time we have no further questions. I’ll turn the call back over to Randy Lipps for closing remarks.

Well thanks for joining for -- for joining us today. The business does remain strong I think the most important piece, there is some aberration in this quarter is that we continue to win in the market place. We have the best solutions and of course the best people to make it happen. So thanks to the Omnicell team out there every day winning and we’ll see you folks next time.