Omnicell, Inc.
Q3 2010 Earnings Call Transcript

Published: 30 Oct 2010

[Operator:]

Good afternoon. My name is Veneta, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell's third quarter earnings 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. I would now like to turn the call over to Mr. Rob Seim. Sir, you may begin.

[Rob Seim:]

Thank you and good afternoon, and welcome to the Omnicell 2010 third quarter results conference call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO. You can find our results in the Omnicell third 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 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 Discussions and Analysis of Financial Conditions and Results of Operations, in the Omnicell Annual Report on Form 10-K filed with the SEC on February 24th, 2010, as well as 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 October 27th, 2010. 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 a property of Omnicell Incorporated and any taping, other duplication or rebroadcast without the expressed written consent of Omnicell is prohibited. But today, we have quite a lot to talk about, in addition to our quarterly earnings, we will be discussing the acquisition we just completed and other one-time events announced during the quarter. Randy is going to start the call today with an overview of the acquisition and some updates on recent Omnicell wins in the market. I will then cover the expected financial implications of the acquisition and the results for the quarter, followed by our guidance for the remainder of 2010. And following that, we will take questions. Randy?

[Randall Lipps:]

Good afternoon and thank you for joining us today. Omnicell enjoyed success in the marketplace during the third quarter, with strong orders across our entire customer base. Last month, we announced that the Sentara Health Group chose Omnicell medication control systems to replace their existing installation. Sentara, an eight hospital system with over 2,000 beds, and the largest integrated delivery network in Virginia selected our systems for their advanced features and our superb service and support record. In August, we announced that the Wellmont Health System began their conversion to Omnicell, OmniRx automated medication systems, SinglePointe software to manage their patient specific medications and seizure workstations and other solutions to streamline medication management throughout its facilities. Wellmont, a 1,100 bed system in Eastern Tennessee, is upgrading seven of its hospital facilities and chose Omnicell solutions based on long-term cost of ownership and the most advanced technology when compared to competing solutions. And in September, we were happy to report that Deaconess Health System chose to replace its current vendor with Omnicell. We are particularly honored to have been selected at Deaconess’ partner of choice as it is an industry-recognized system of five acute care facilities in southwestern Indiana whose use of electronic health records have been rated among the top 2% of hospitals in the U.S. Omnicell solutions are designed to be easily integrated and interoperable with Deaconess’ already existing IT network. We were specifically selected for our strong reporting tools and a clear solutions upgrade that combine a solid long-term investment with a high level of efficiency and patient safety. In addition to these wins and others we announced in the last three months, we saw resurgence of U.S. federal government business, including orders from some of the largest Veterans Administration hospitals in the systems. Also during the quarter, we announced in addition to our product offering in the field of data analytics and reporting with the acquisition of Pandora Data Systems in September. Pandora is a leading provider of reporting tools used with automated dispensing systems and a well recognized and regarded brand among hospital directors of pharmacy. Pandora has over 700 customers using their sophisticated reporting and analytics tools in conjunctions with most brands of medication control systems. Pandora products have grown to be an integral part of meeting regulatory requirements for many hospital customers. We plan to continue the investment Pandora has made in their platform for the benefit of all users of automated medication dispensing systems regardless of the brand of dispensing system in use. Pandora is located in Scotts Valley, California and employs 15 people. While a smaller acquisition, Pandora is another step in our strategy to offer a broad array of more advanced systems that improve hospital workflow and solve safety, efficiency, and regulatory compliance challenges for our customers. The acquisition closed in September, and I welcome Pandora’s employees and customers to the Omnicell team. We are proud of our successes in the marketplace in contributions to improving healthcare. Now, with the addition of Pandora and the reporting tools to our product offering, Omnicell will have the ability to make an even larger impact on healthcare improvement. We believe there is a large opportunity for further automation at our new and existing customers. We also believe there is significant opportunity to align our business with the healthcare reform requirements that drive hospitals to focus on improving their efficiency and quality of their outcome. The success we have seen throughout the year at large hospital institutions underscores the value of our systems to organizations that are on the forefront of the sweeping changes in healthcare. Now, I would like to turn the call back over to Rob to cover our third quarter results and some of the financial aspects of the acquisition. Rob?

[Rob Seim:]

Our third quarter of 2010 was a good quarter for Omnicell. We exceeded analyst to revenue and profit expectations. We completed the office consolidation announced in July, and we settled a longstanding lawsuit. Customer wins Randy discussed coupled with strong order rates in nearly every type of hospital segment keep us on path for year-to-year order growth and on track for our backlog guidance. The expansion of our customer base was particularly strong with 52% of our orders from new customers and competitive conversions. About two-thirds of the new accounts were from competitive conversions and the remainder were from Greenfield accounts. This continues our consistent track record, making new accounts and competitive conversions 40% of our business year-to-date. Revenue for the third quarter of fiscal 2010 was $56.3 million, up 3% from the second quarter of 2010, and up 4% from the third quarter of a year ago. Net earnings after taxes were $1.3 million or $0.04 per share for Q3 2010. This compares to $0.9 million or $0.03 per share in Q3 2009. Included in our results for the quarter are several non-routine charges and benefits, which we exclude in our non-GAAP measures. Results also include improvements in gross margins, partially offset by increases in operating expenses. The improvements in gross margins were driven by material costs and efficiency improvements in both of our manufacturing and our customer service operations as well as the strong product mix. Increases in operating expenses were driven by product development and acquisition-related expenses. Additional expenses in research and development of more than $1 million from the second quarter of 2010 were driven by the timing of prototype cycles, capitalization of software coding, and non-recurring use of contract development resources. Also consistent with our discussions in prior quarters, Omnicell is actively assessing acquisition candidates, and our third quarter results include higher-than-normal expenses for the Pandora acquisition and various other acquisition candidates in the pipeline. These expenses were consistent with our expectations in guidance for the quarter. Our headcount at the end of the quarter was 734, which is down 20 from last quarter following the addition of Pandora employees and offset by the consolidation of our development offices from four to two. The facility consolidation which we announced in July and completed during Q3 has already begun to meet its intended results of increasing the efficiency of operations and promoting collaboration among the company’s engineering team. The consolidation included the closure of facilities in The Woodlands, Texas and in Bangalore, India, and the expansion of a new facility in Nashville, Tennessee. We expect the consolidation to be cost neutral on an ongoing basis. And a charge of $1.7 million was booked in Q3 for the facility consolidation restructuring and other related charges. Because there were some repatriation of profits of India, the after-tax charge is $1.6 million. While cost neutral on an ongoing basis, we feel the increased focus on our engineering teams will give us an opportunity to bring more products to market with even higher quality. Also during Q3, we settled the longstanding intellectual property lawsuit with Flo Healthcare Solutions, now part of InterMetro Industries, which is the subsidiary of Emerson Electric. We became involved in that lawsuit as a result of our 2007 acquisition of Rioux Vision. In connection with the acquisition, we booked the liability for the defense of the lawsuit. The payment we made in connection with the settlement and granted licenses totaled $2.65 million, including a cross license of two Omnicell patents. This was less than the outstanding liability resulting in a pretax benefit of $2.4 million. The restructuring charges and litigation settlement benefit largely offset each other on an after-tax basis. Now, I would like to cover our non-GAAP results, the adjustments to GAAP results are the exclusion of stock compensation expenses, the restructuring costs and related charges, and the litigation settlement benefit. Stock compensation expense includes the estimated future value of employee stock options, restricted stock and our employee stock purchase plan. 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. We feel it’s useful for investors to understand the non-cash compensation expenses that are proponents of our reported results. We also measure our business, excluding infrequent events such as the restructuring charge and litigation settlement benefit. A full reconciliation of our GAAP, non-GAAP results is included in our press release that we will be posting to our Website. Our Q3 2010 non-GAAP net income was $3.6 million or $0.11 per share, exceeding analysts’ consensus by $0.01 per share. Our Q3 2010 non-GAAP net income was up $0.4 million or $0.01 per share from Q3 2009. Earnings before interest, taxes, depreciation and amortization or EBITDA, which also excludes stock compensation, amortization, restricting and related charges, and the litigation benefit, EBITDA was $6.6 million for the third quarter of 2010, up $1 million or 18% year-to-year. EBITDA is a good measure of the operating results for the company and we are happy to continue growing this measure much faster than revenue. Cash and short-term investments were $179 million at the end of Q3. The acquisition of Pandora and the litigation settlement used $9 million of cash, which was offset by $2 million cash generated from operations. Days sales outstanding were 74, up 10 days from last quarter. Our mix of installations was less heavily weighted to leases, which tends to drive DSOs up. Our DSO was near an all-time low in Q2 at 64. Despite the increase in Q3, we are operating in our expected range of DSO and expect to continue in the 70 days to 80 days DSO range in the future. Our inventories were $10 million, consistent with the previous quarter. The acquisition of Pandora will change our balance sheet and operating results slightly. Pandora was acquired for $6 million in cash, and the transaction closed on December 29th, 2010. We expect Pandora to add $2 million to $3 million of revenue annually, but because of some of the unfulfilled product promotions that expire in Q2 2011, we expect most of the revenues for the next six months to be deferred into the middle of 2011. So, there will be negligible revenue contribution from Pandora in Q4 2010 and Q1 2011. On a GAAP basis, including the amortization of purchased intangible assets, we expect the acquisition will be dilutive $0.02 per share in Q4 2010, dilutive $0.01 per share in Q1 2011, and breakeven for the rest of the year in 2011. Our pro forma basis, excluding the amortization of purchased intangible assets, we expect the results will be dilutive $0.01 per share in each of Q4 2010 and Q1 2011, and slightly accretive for the full year of 2011. Pandora’s financials have been incorporated into our Q3 balance sheet, but there is virtually no impact to the P&L in Q3. For 2010, the guidance we have said at the beginning of the year is reconfirmed. We expect product backlog at the end of 2010 to be towards the upper end of our previously stated range of $118 million to $125 million. We expect 2010 revenue to between $220 million to $222 million. Our backlog gives us good visibility to the revenue to be installed in the next few quarters, and we expect there will be little change to these installation schedules. Our guidance for non-GAAP earnings excluding stock compensation expenses and restructuring charges for 2010 is between $0.40 and $0.45 per share. These profits expectations assume an effective tax rate of 42% on GAAP earnings, no material change in interest rates, and include the consolidated results of Pandora Data Systems. These non-GAAP expectations exclude the charges for facility consolidation during Q3, the benefit to litigation settlement and our stock compensation expenses. We feel that maintaining our profit guidance including the initial dilution due to the Pandora acquisition and the absorption of other expenses we discussed is a positive indicator of the underlying strength of our business. So with that, operator, I would like to open the call to questions.

[Operator:]

(Operator instructions) Your first question comes from the line of Steve Crowley of Craig-Hallum.

[Matthew Hewitt:]

Hi congratulations on the good quarter. This is Matt calling in for Steve. First question, you guys had a particularly strong quarter on the competitive conversions. It looks like that was your highest quarter going back to Q1 ’09. Has something changed in the market that you guys are just able to continue to take share and maybe even take more share than you have in the past or is it just pure execution on your part?

[Rob Seim:]

Well, I think the consistent point of what has not changed is 30% to 40% of our business is from competitive conversions or new accounts and that has been in place for almost five years. The timing of by which those come is a little bit varied because many of them are large deals. So, while we saw almost a record, probably new accounts and competitive conversions and Greenfield accounts, when you average it out for the year, it’s very consistent with what we have done over the past, and I think that’s an important number.

[Matthew Hewitt:]

All right, and then one follow-up and I will jump back in the queue. It appears that large hospitals have figured out a way or figured out where the medication management fits into the meaningful use criteria in the stage two. What are the accounts telling you, is that aiding some of your orders, any color there would be helpful?

[Rob Seim:]

Matt, at this point, we are working on how our systems may fit into the meaningful use criteria for electronic and healthcare records, but they haven’t been identified as qualifying for being certified at all. So, I don’t believe that we are seeing a lot of change in demand for us being included in the stimulus, reimbursements at this point. That’s maybe something that could happen in the future where as I said we continue to work on it, but we haven’t been certified at this point.

[Matthew Hewitt:]

All right, thanks. I will jump back in the queue.

[Operator:]

Your next question comes from the line of Newton Juhng of FBR Capital Markets.

[Newton Juhng:]

Thanks so much. One of the comments you made was around the government contracts. I know the third quarter tends to be a bit stronger guys, and I was just wondering if you could give us a little bit more detail as to how it’s done relative to last year and prior years, were you happy with where the government contracts came out and if there is a number that you could give, that would obviously be great, too?

[Rob Seim:]

Yes, we have not disclosed the particular number for the government or any one particular customer and will stay consistent with that. But what I can tell you is last year, the government really didn’t place hardly any orders with us and we commented in our Q3 earnings release the year ago, we really did not see any strong Q3 from the government. Now, Q3 for us is the government’s Q4 right at the end of their year, and it is typically a time when they spend more of their capital budget. We did see a strong year this year more consistent with previous years, and it is good to see the government customers coming back, but like all hospital customers, they expand their systems overtime, their systems with their existing providers get old or get dated, and they are looking to upgrade to newer technology. And when they go looking for newer technology, we fare very well.

[Newton Juhng:]

Got you. Actually the next question is for Randy. Randy, comment you made earlier about stronger orders really being across the board on a customer base, I was wondering if you could tell us how or what do you attribute the improvement on the smaller end of the market, and whether or not that something that you see is sustainable going forward, or this kind of an initial pop that you are not really ready to kind of extrapolate going forward?

[Randall Lipps:]

Yes, I think we are not seeing the resurgence of the smaller orders that we have noted in our earlier conference calls. The small hospitals tend to still be laggards in this market as to coming back, but we still, I think resurgence for the government and hospitals really starting to understand that in order for them to deal with lower revenues or lower margin patients and more patients coming through their facilities, they have to become a lot more efficient. Only way to do that is to become totally automated and not just be halfway automated. So, a lot of people are back in the game where we kind of put some of their decision-making off, and so we started seeing the larger accounts gaining a little momentum there, and it was nice to see a broad base of new customers really across the country and not in just the certain locations. So, from that aspect, it was a strong quarter, but the small hospitals are still lagging somewhat for us. I mean, they haven’t returned to the 2008 levels.

[Newton Juhng:]

Got you. So still waiting a little bit on that front. And then just last, in terms of your guidance you have put out and obviously this is really helpful to understand with all the moving parts that you have got here, but $0.40 to $0.45 being a relatively wide range implying what $0.08 to $0.13 of earnings in the fourth quarter, and I am just wondering, it seems like you guys have fairly good visibility into what you can do kind of the next 90 days out more actually at this point, it’s even less than that. Can you give us an idea as to the choice to kind of keep the guidance at that level? I know you talked about the factors, but just in terms of your desire not to tighten it at this point.

[Rob Seim:]

Yes, we pretty much capped all of the ranges at the same level that we have been talking about all year, and I think you and all the other analysts have forecast that are appropriate to factor in that Pandora will be a little dilutive in Q4, about $0.01 on a non-GAAP basis, and it pretty much got where the company is going.

[Newton Juhng:]

Got you. Okay, so that’s helpful. Thanks Rob.

[Operator:]

Your next question comes from the line of Steve Halper of Stifel Nicolaus.

[Steve Halper:]

Yes, so for next year when you report, are you going to back out that amortization expense and show it as adjusted earnings?

[Rob Seim:]

The amortization, the acquisition related amortization expense for Pandora?

[Steve Halper:]

Yes.

[Rob Seim:]

You know, we probably noted if not lot of expense through next year, but we have other acquisitions in those, those acquisition-related expenses start mounting, we will definitely make that adjustment.

[Steve Halper:]

So, based on the order momentum that you saw in the third quarter, is it fair to say that 2011 will be a better year than 2010?

[Rob Seim:]

Well, we intend to give our guidance for 2011 on the Q4 earnings call, beginning of next year. I think, overall we said for several quarters, the economy is coming off the bottom. Next year’s growth rates are really dependent upon the order rate through this year and we still have the fourth quarter in front of us.

[Steve Halper:]

Okay. And one other question, this pickup that you saw from government, were you expecting that? Was that built into your forecast?

[Rob Seim:]

Like Randy said, we have had some large VA institutions that were buying from us and usually a large hospital would be going through a pretty large long sales cycle. So, we are certainly, we are working with those customers for some time, and saw them in the forecast. Like all large customers, it’s just a little unclear when they are actually going to sign that contract, but the government has a little bit of a forcing factor in their own Q3. What we were really pleased about is that there were several other systems, several other hospitals in the VA system that also ordered during the quarter that we were tracking as closely. So, there is definitely the resurgence.

[Steve Halper:]

Right. So, I guess last year was more of the anomaly and this year sort of return to normal?

[Rob Seim:]

Yes, this year was return to normal and maybe a little bit of a catch up, too.

[Steve Halper:]

Okay, great. Thanks.

[Operator:]

Your next question is from the line of Leo Carpio of Caris & Company.

[Leo Carpio:]

Hi good afternoon. Quick question regarding back on the hospital capital spending environment, it sounds like you are describing a situation where the large hospitals are still providing the bulk of your activity including the mid-sized hospitals, but it seems like the small hospitals are still lagging, is that a correct statement?

[Rob Seim:]

Yes, that’s a good characterization.

[Leo Carpio:]

Okay. And then turning over to Pandora, just housekeeping item I kind of missed the numbers, what did you indicate was going to be the dilution effect in the fourth quarter of 2010 and then in the first quarter of 2011?

[Rob Seim:]

On a non-GAAP basis, the dilution will be $0.01 in each of those quarters.

[Leo Carpio:]

Okay.

[Rob Seim:]

And on a GAAP basis, the dilution will be $0.02 in Q4 this year and rounds to $0.01 Q1 of next year.

[Leo Carpio:]

Okay. And lastly, in terms of the M&A activity, in the past we have talked about priority targets or segments you were interested in looking at Pandora, does Pandora mark a different direction or are your priorities still the same?

[Randall Lipps:]

The priorities are still the same. In fact, Pandora fits right in those priorities. Pandora produces a product that helps hospital workflow, it’s sold to the same call point that we sell to today. It is an established product, it has been around for a number of years, well regarded both the brand and their service and how they go about their business is very consistent with how we go about our business. So, we thought if it is type of acquisition that fits right in with all the criteria that we have been talking about before. And it is, one we get through the amortization and kind of transition costs that’s accretive for the business.

[Leo Carpio:]

Okay. Thank you.

[Operator:]

Your next question is from the line of Gene Mannheimer of Auriga.

[Gene Mannheimer:]

Thank you, nice quarter guys. Couple of quick ones. As we look at the numbers, certainly the best gross margin that we witnessed in quite a long time notably on the services line, is this is a run rate that we can model going forward, or do you expect much of variation from that? Thanks Rob.

[Rob Seim:]

I have to give some accolades. Our service team has really been doing a great job, and I think you had probably noticed as the margins have been growing for several quarters. There is always a potential for some fluctuation in the service margins and they are a little sensitive to relatively small changes in the revenue, but I think this is kind of a high point we have had for a while in the trends. I should look for service margins to continue in the range that we have had over the last three quarters.

[Gene Mannheimer:]

Okay, sounds good. And one more if I could, with respect to your product line and I understand that you are not going after certification per se, but have conversations among your customers heated up regarding their strategies for closed loop medication administration and how your products can play a role in that?

[Randall Lipps:]

We definitely play a role in the closed medication loop where we are tracking the meds from the time it enters the hospital through the pharmacy up to the bedside and eventually via a route through the patient. So, we play a big part of that and it’s mostly been discussion points about Phase II of meaningful use where that’s going to be a hurdle for hospitals to get through. I think while that is kind of fuzzy and it’s kind of out there, I don’t see people particularly making decisions about that. I think they are more concerned about being able to get rid of manual processes that create inefficiencies of patient safety issues, and then how they interface with their electronic medical record systems to make sure they stay updated with accurate information as well as I think there are some new pressures on precise billing and precise dispensing of meds because of the RAC audits, the folks who come in and look at how Medicare is billed. These audits are very zeroing on high-priced runs, and if you don’t have good accurate record for these billing processes, the RAC audits will reverse these charges. And so, hospitals are very concerned about precise accuracy of their processes, so that they can make sure they meet all the requirements in order to get reimbursed properly from the government.

[Gene Mannheimer:]

Okay, makes sense. Thank you Randy.

[Randall Lipps:]

You bet.

[Operator:]

Your next question comes from the line of Mohan Naidu of Piper Jaffray.

[Mohan Naidu:]

Thanks a lot for taking my questions guys. Any update from the international markets, and are you guys seeing any traction in there?

[Rob Seim:]

The international business is like we said before, it’s a great opportunity for us. It is lumpy, and it’s kind of startup business in a lot of the countries we are in. We are doing well and continue to do well in UK and Spain where we have been more established for a while and in the Middle East, but it’s still kind of lumpy.

[Mohan Naidu:]

Okay, one more question. Are you guys seeing any impact of (inaudible) relationship with one of your competitors in the market?

[Randall Lipps:]

We haven’t really seen an impact on our pipeline, but I think they are still working through what the offer is for customer base, and I think we have a good track record we are dealing with all the vendors and being able to deliver good value there.

[Mohan Naidu:]

Okay, and one last question, Rob, I think you were talking about the guidance on the effective tax rate for the full year. Was it like 40% you were talking about, I missed that?

[Rob Seim:]

Yes, 42% is what’s assumed in our guidance for the full year.

[Mohan Naidu:]

For the full year, okay. Thanks a lot for taking my questions guys.

[Randall Lipps:]

You bet.

[Operator:]

Your next question is from the line of Steve Crowley of Craig-Hallum.

[Matthew Hewitt:]

Hi guys, this is Matt again. One quick follow-up on Rioux. Is that one still on track for late in the first half of next year, how is the form factor for that product evolved from its initial form to what your plans are for the go-to-market, and have opportunities changed at all or are they similar to your existing products, any color you could provide would be great?

[Randall Lipps:]

All right. So, just a recap on the Rioux acquisition. We acquired a company that made mobile carts. Our objective was to use that base of hardware technology coupled with our software to bring out a new product in the marketplace. As I said last quarter, that product is in data testing, and it did take us much longer than we anticipated to the flush out exactly what the customer demands would be for this product. It is brand new type of technology in the marketplace, but what it does, it couples the controls we provide around drugs with a mobile environment so a nurse can, and a pharmacist can have complete control of the drugs right through the bedside both from a software standpoint and from a physical standpoint. And from the comments we were talking about earlier about closed loop medication control, this is a product that fits right in with that, because it closes the loop in every respect, all the way through when the drug is consumed by a patient. We are happy with how those trials are going. We have set up our home manufacturing supply chain and that product is in the process of rolling out, but like I said, it’s brand new in the marketplace, and we are going to make darn sure it works really well and meets every need of our customers before it’s out and going. I don’t think the needs have really changed, but we have certainly gone through a process of defining what they are, and we are really happy with now the results that we have got.

[Matthew Hewitt:]

Great, thank you.

[Operator:]

(Operator instructions) Your next question is from the line of Glenn Garmont of ThinkEquity.

[Glenn Garmont:]

Yes, thanks. Good afternoon. Rob, I apologize if you provided this, I missed. What was the headcount at the end of the quarter?

[Rob Seim:]

The headcount was 734 and that was down about 20. We did complete our facilities consolidation which lowered our headcount, but then we added on the Pandora folks. And that left us with 734.

[Glenn Garmont:]

Okay, so 734 is inclusive of the employees you picked up from Pandora?

[Rob Seim:]

Yes.

[Glenn Garmont:]

Okay, and then are there any opportunities remaining on the efficiency front either offshoring, outsourcing, consolidating of facilities, any additional opportunities there?

[Randall Lipps:]

You know, Glenn, we are always looking for how to run our business more efficiently. We do, as you know, a lot of work that’s very customer intimate. We spend a lot of our resources making sure we have got many people that are with the customer, high tech sales service and installation process. At times we find things that are opportunities make those more efficient. I think on the manufacturing side, we have got a pretty good supply chain setup now that we feel is quite efficient from a cost standpoint, but there is always opportunities through design and other changes to get cost out and we continue to work on those.

[Glenn Garmont:]

Okay, and then given the current sort of headcount, how should we think about the revenues that could be generated here without having to start adding to headcount again? I mean, I think clearly we are at an inflection point, I think somebody made the comment earlier that given some of your recent sales successes, 2011 could shape up to be a better year than 2010, now certainly this was a better year than last year. I mean, how should we think about on a go-forward basis how your staff right now to deal with maybe a resumption of growth in the market?

[Rob Seim:]

Consistent with what we have said before, we will be able to grow our revenues up to around the $240 million range without a lot of additions to our headcount. We would be only adding in directly variable areas. There will be some pockets and some departments that we will want to bolster and grow as we grow revenues, but we should be good up to that level, and see some fairly good leverage as we get to that point. Then we will start have to adding headcount a little more consistently, but it is our long-term goal to get the 15% operating margins on a non-GAAP basis. That hasn’t changed. We have been there before and we see a pretty quick path to get there again.

[Glenn Garmont:]

Okay, great. Thanks Rob.

[Operator:]

Your final question is from the line of Ernest Segundo of Pandion Capital.

[Ernest Segundo:]

Hi, sticking with the growth theme, how do you see the growth theme distributed between some of the competitive wins that you have demonstrated in the past quarter versus some of the government growth versus M&A going forward?

[Randall Lipps:]

Okay. So, Omnicell has three components of the growth strategy. The first component of the growth strategy is further penetration of our existing customers in the market in general. We have consistently had competitive wins and new customers that are between 33% and 40% of our business. And the rest of the business, the other 60% to 65%, call it percent of our business comes from existing customers expanding their installation. And from our near, the best we can tell, our nearest estimates are most customers are penetrated around the 60% range. They have about 50% of what they could have if they were keeping all the drugs that they eventually will on our systems. So, that’s a good component of our growth. Now, augmenting that would be the growth in our international markets, which are pretty new and for the most part Greenfield, and we can see the international markets expanding from where they are today which is about 5% of our business o about 20% of our business in the course of five to six years. And then acquisitions are on top of that, and acquisitions, of course, they are very dependent upon what type of company you buy and what type of business they are in at the time.

[Ernest Segundo:]

So, do you see any shift in that growth outside of the international increase?

[Randall Lipps:]

I think most of our growth has been organic, and they will continue to be from my current account base and new account acquisitions. And there is a lot to grow within our current accounts and our continued acquisition of market share is the hallmark of the company and will continue.

[Ernest Segundo:]

Great, thanks. If I could just ask one last question, could you give us an update on the Hanger relationship and the revenue that that’s generating for you?

[Randall Lipps:]

Hanger is a customer of ours, and we sell them product, and with that product, they put it out in the marketplace, but we don’t disclose individual numbers on that relationship.

[Rob Seim:]

I am sorry, what was the question?

[Ernest Segundo:]

Is that a business model that you see going forward as a potential growth strategy?

[Rob Seim:]

We have several customers that are OEM type of customers and I call it, non-traditional customers, meaning they are hospitals buying our systems and putting them in place for their own use. They are potentially an intermediary utilizing our systems for other types of deployments. They have not been a large part of our business, but as I said, we don’t disclose what any particular or individual customer is.

[Ernest Segundo:]

Yes, I understand. Thank you.

[Operator:]

And there are no further questions, I will turn the call over to Mr. Randy Lipps.

[Randall Lipps:]

Thanks for joining us today everyone. Just to recap, our financial results exceeded expectations. We had a strong order quarter with good success with our new accounts category. Certainly, the Pandora acquisition adds to our data analytics capabilities and our market presence. Overall, it’s a very strong quarter for the company and sets us up for the future. Thanks for joining us.

[Operator:]

Thank you for your participation in today’s call. You may now disconnect.