GlassHouse Analysis’s brief report on Omnicell, Inc. (NASDAQ:OMCL).
Initiation of Omnicell with a Goal Worth of $35.50 (59% draw back)
Vital declines in income and earnings await Omnicell as the corporate has obfuscated its financials by prematurely recognizing income in prior durations and failing to write-off legacy stock.
Q2 hedge fund letters, convention, scoops and so forth
- Omnicell possesses one of many worst internet AR positions we have now seen inside a public firm. Hid long-term receivables and declining deferred revenues lead us to consider the corporate prematurely acknowledged roughly $38.three million in gross sales over the LTM. The corporate might have to restate financials based mostly on the magnitude of those inauspicious developments.
- OMCL grossly mismanaged its stock and now carries a extremely bloated stock stability that must be written off as out of date. We calculate at minimal, administration must write-off over $23 million (22.four% of complete) of out of date stock.
- Anomalous surges in each capitalized bills and pay as you go commissions lead us to consider that the agency has accelerated the capitalization of regular bills over the LTM. Our evaluation factors to $38.zero million in further capitalized bills that we consider ought to have been expensed. This represents a tailwind of $zero.72 to TTM non-GAAP EPS (30% of non-GAAP EPS).
- The shortage of accounting expertise among the many CFO, audit chairman and audit committee current large pink flags to GlassHouse at a time when accounting gimmicks are extremely prevalent at Omnicell.
Key Similarities Between Omnicell and Prior Uncovered Corporations
GlassHouse juxtaposes each Omnicell and the previous transgressions of different fraudulent corporations. We consider that many of those accounting gimmicks listed under by prior companies might have been utilized by present Omnicell administration.
Omnicell Financials Are Set to Unravel in H2 2019
The previous two years in Omnicell’s (OMCL) historical past have been very important to administration’s future progress plans as the corporate has launched three main product strains; some which have changed older legacy fashions. The XT collection (decentralized pharmacy), XR2 (centralized pharmacy), and the IVX Workflow and Cloud product strains have been central to the current run up in OMCL’s inventory worth as clients have been upgrading to the newer methods. Nevertheless, whereas administration is fast to color a rosy image of heightened gross sales and earnings as clients improve, our evaluation factors to one thing totally different occurring at Omnicell.
Based mostly on feedback made by OMCL administration, buyers are being led to consider that the corporate’s current income and earnings features stem primarily from natural sources. This sentiment has been mirrored in OMCL’s inventory worth, which has virtually doubled because the starting of 2018. And whereas GHR does consider there’s some benefit to OMCL’s product strains inside the healthcare business, we opine that the corporate’s present inventory worth is very inflated and has been based mostly on fake income and earnings over 2018 & 2019.
After going by way of numerous filings, earnings calls and shows, we consider that OMCL administration has been utilizing quite a lot of accounting gimmicks to show round an organization that beforehand reported depressed margins and earnings. Based mostly on our in depth expertise researching accounting frauds, we take difficulty with each the amount and scope of monetary engineering utilized by administration over the previous two years. Too many accounting anomalies occurred on the revenue assertion, stability sheet and inside the footnotes for GHR to consider these actions weren’t purposeful in nature.
Once we analyze Omnicell’s accounts receivable (AR), stock, and capitalized expense diagnostics, we discover a firm that we consider has been manipulating its accounting for vital features to the revenue assertion. Nevertheless, in our expertise, the manipulation of all these stability sheet accounts factors to future share worth degradation in upcoming durations as these points are likely to violently reverse.
Administration’s Feedback Relating to Receivables Spike Are Not Believable
Delving into the crux of our thesis when taking a look at OMCL’s accounts receivable (AR) balances, we consider that administration has been recognizing income prematurely with respects to their efficiency obligations. We discover this extra regarding than a collectability challenge, as any such accounting concern finally ends up with materials income shortfalls in future durations. Under, we element OMCL’s unfavorable AR tendencies and the way we consider this can impression income and earnings going ahead:
- Within the newest interval, present AR grew by 6.7% YOY to $203.5 million. In consequence, Omnicell’s days-sales-outstanding (DSO)1 ranges stood at 90 days and 88 days of 3M DSO and 12M DSO, respectively at Q1 2019. This represented a rise of seven.6% YOY from Q1 2018 (12M DSO). We view the present ranges of 90 days to be extraordinarily heightened from an absolute degree because the agency is now ready roughly three months to receives a commission on its merchandise. Moreover, we level out within the subsequent part that the true DSO worth truly lies a lot larger than 90 days when together with long-term AR and factored receivables.
- Wanting on the long-term development of DSO values, we see an inauspicious sample of longer and longer receivables cycles at OMCL. Courting again to 2013, we see that the corporate persistently reported DSO values inside historic and peer group ranges from 50 to 60 days. Nevertheless, since this time, DSO values have been on a constant rise with very restricted or inconsistent explanations given by administration as mentioned within the subsequent part. To place issues into perspective, the present DSO worth of 88 days now lies 63% above the 2012 ending stability of solely 54 days (see Chart 1, Web page eight).
- Turning to ending AR balances, we discover comparable outcomes when analyzing the agency’s AR-to-sales metrics. Three-month and 12M balances stand properly above their five-year averages at 100.5% and 25.2% respectively. Furthermore, OMCL’s AR-to-3M gross sales ratio stands on the fourth highest ratio reported in any interval over the previous 5 years.
- Administration supplies their very own calculation of DSO values in each convention name that barely differs from our calculation; nevertheless, the antagonistic development nonetheless is very obvious. Within the newest interval, administration discloses a worth of 93 days, the second highest worth ever reported by OMCL, solely to the 97-day worth reported in Q1 of final yr.
For reference, the final time OMCL reported a DSO close to these ranges at 95 days in Q2 2015, the agency’s inventory worth drew down by 33% afterwards in H2 2015. Once more, we consider OMCL’s present predicament lies in a a lot worse place at the moment than in 2015.
Hidden Lengthy-Time period Receivables Metrics Exacerbate OMCL’s Dire State of affairs
Additional diving into OMCL’s receivable footnotes, GHR finds extra regarding metrics that recommend Omnicell will face materials gross sales headwinds over the subsequent yr because it offers with billing points. Along with OMCL’s commerce receivables which it shops underneath present belongings, the corporate additionally shops each long-term sales-type leases and unbilled receivables in “Different Lengthy-Time period Belongings” on the stability sheet. Readers conversant in our work know we view these long-term receivables because the worst types of income high quality on the market as they carry the very best danger.
- Illustrating this, we observe that sales-type leases and long-term unbilled AR presently stand at $19.5 million and $11.four million, respectively, as of 03/31/19. Once we add these figures to the present receivables stability, we discover that the corporate is in a a lot worse place than they’re main on.
- For instance, we see that administration is patting themselves on the again for reporting a bloated DSO metric of 93 days within the Q1 2019 earnings name. Nevertheless, once we add these hidden receivables again into our 3M DSO metric, this causes the present worth to surge as much as 109 days in Q1 2019; this represents the second highest worth ever reported by OMCL. Twelve-month DSO additionally hit an all-time excessive, growing by 10% to 106 days within the interval (see Chart 1, Web page eight).
- GHR finds it to be fairly deceptive by OMCL administration to solely report a DSO stability solely utilizing commerce receivables. In truth, we level out that long-term AR is the riskiest type of receivable stability and it ought to without-a-doubt be included of their given metric to analysts. For instance, if administration needed to hide a poor DSO metric in any given interval, administration might subjectively transfer commerce AR into “Different Lengthy-term Belongings” on the stability sheet to cover the undesirable receivables.
- Unbilled receivables on a stability sheet particularly imply that the corporate acknowledged income, however has but to bill the shopper, instantly contrasting from CFO Kuipers’ explanations detailed within the subsequent part. GHR additionally needs to level out that ASC 606 changes have been to not blame for the rise in receivables both, because the pronouncement solely impacted Omnicell’s AR stability by $819,000 on 12/31/17.
- To make issues worse for OMCL, the agency is factoring its receivables, as evident within the footnote under from the 2018 10Okay. This stability has elevated by 39.four% and 16.5% in 2017 and 2018 respectively; far outpacing the current rise in gross sales. We consider administration could also be factoring its receivables at a heightened tempo to masks the agency’s already bloated AR stability. The issue with that is that the motion is simply transitory in nature and can’t cease the eventual rise in AR stability; plus the agency takes a loss on the sale of those receivables, pressuring margins. If we add these values again to AR, we calculate an astonishing DSO stability of 126 days on the finish of 2018.2
Gross sales of Accounts Receivable
The Firm data the sale of its accounts receivables as in accordance with accounting steerage for transfers and servicing of monetary belongings. The Firm transferred non-recourse accounts receivable totaling $46.6 million, $40.zero million, and $28.7 million throughout fiscal years 2018, 2017, and 2016, respectively, which approximated truthful worth, to leasing corporations on a non-recourse foundation. Accounts receivable stability included roughly $10.6 million, $zero.1 million, and $zero.2 million due from third-party leasing corporations for transferred non-recourse accounts receivable as of December 31, 2018, December 31, 2017, and December 31, 2016, respectively.
Desk 1: OMCL Receivables Metrics ($ in tens of millions)
Chart 1: OMCL Lengthy-Time period DSO Tendencies
Omnicell Administration Continues to Transfer Goalposts and Provides Elucidations that Do Not Maintain Water
Courting again to 2014, then CFO Robin Seim said that he believed the agency’s anticipated DSO vary would lie between 65 and 75 days. Subsequently, when DSOs once more started to development out of line in Q3 2015, the newly appointed CFO Peter Kuipers echoed the identical sentiment that OMCL would look to enhance on this metric subsequent interval.
We usually anticipate DSO to be within the 65 to 75 days vary. We evaluate the collectability of our personal receivables repeatedly and we don’t consider the fluctuation of DSO are indicative of a change in our price of dangerous debt. – CFO Peter Kuipers
Since Q3 2015, administration has stayed pretty silent relating to the persistent rise in DSO and AR values. In truth, we discover it fairly deceptive that administration dodged questions relating to the heightened ranges of DSO values within the newest quarter. Particularly, CFO Kuipers disclosed within the Q1 2019 earnings name, “OMCL’s DSO worth of 93 days have been down 4 days from the primary quarter of 2018. The lower was principally pushed by robust collections.”
GHR finds this extremely disingenuous, as it’s all Mr. Kuipers determined to say on the topic. We level out that the agency’s 93 days worth is the third highest ever reported by the corporate, however apparently the corporate is patting themselves on the again for not being as dangerous because the disastrous ranges of Q1 2018. Let’s not overlook that the present worth now stands 23 days above the agency’s self-reported goal vary for DSO values.
So, what’s going on with OMCL and their receivables? Administration is fast to level out that this rise doesn’t stem from a collectability problem and we at GHR are likely to agree with them. Nevertheless, our analysts at GHR truly consider that one thing extra nefarious could also be at play right here. Courting again to 2014, GHR discovered eight situations of OMCL administration blaming the agency’s ominous DSO stability on “timing of billing.” Nevertheless, herein lies the issue for Omnicell and their argument that doesn’t maintain water to us or any accountant on the market. In Q3 2018 as an example, CFO Kuipers explains that current DSO worth of 93 days on the time was because of the following:
Accounts receivable days gross sales excellent for the third quarter have been 93 days, up 7 days from the second quarter in 2018. The rise is usually pushed by timing of billing in the course of the quarter. Based mostly on our buyer agreements, we largely bill upon shipments. Usually, shipments and associated billings within the final month of the quarter turn into income within the following quarter after set up is accomplished. The month of September 2018 was a document billing month.
Kuipers, who just isn’t licensed as a CPA within the U.S. and carries extra of a FP&A piece historical past, doesn’t seem to offer a legitimate rationalization as to why the agency’s receivables stability continues to outpace gross sales interval after interval in the long run. Right here, he states that billings turn into income within the quarter after set up is accomplished, however in earlier statements he claims that they bill upon cargo.
These two statements battle with one another and don’t clarify the current rise in DSO values; in truth they might clarify the other. If this assertion from Kuipers was true, we might see AR values plummeting relative to gross sales. What Mr. Kuipers fails to know is that when the agency’s AR stability (each billed and unbilled AR) continues to rise at an accelerated price, it means that OMCL is recognizing income earlier on within the gross sales cycle in comparison with earlier durations by jamming in gross sales on the finish of the quarter.
In truth, we level out that OMCL additionally carries unbilled receivables on its stability sheet. This type of AR is income that has been acknowledged within the interval, even earlier than the bill has been despatched out to the shopper! The transaction Mr. Kuipers is describing is extra akin to deferred revenues, which might be saved as a present legal responsibility (current deferred income tendencies don’t recommend that is occurring in any approach).
Particularly, he’s suggesting that the shopper obtain cargo of the product and is invoiced, nevertheless NO income is recorded till set up is accomplished within the following quarter. Once more, OMCL can’t debit (improve) AR until income is being credited. Subsequently, underneath this weird state of affairs Mr. Kuipers is describing, OMCL’s AR stability would truly be taking place.
A extra doubtless state of affairs can be the next at OMCL: the agency has been recognizing income at an accelerated fee relative to historic norms on the finish of every interval (i.e. recognizing income prematurely), which might then trigger the agency’s AR stability to spike to anomalous ranges. As a result of the shoppers are being invoiced at a later time limit, they nonetheless pay inside the 60-day normalized timeframe, once more not a collectability difficulty. Nevertheless, the issue now lies inside taking income from future durations to satisfy present estimates, and everyone knows how that finally ends up for corporations that do this. Time and time once more, administration explains how the DSO rise just isn’t attributable to assortment/credit score considerations. If we’re to consider them, the one different rationalization is that the corporate is recognizing income prematurely, resulting in non-recurring positive factors to the top-line.
Our thesis is additional corroborated by statements made by CEO Randall Lipps when discussing the delayed rollouts of the XT collection pharmacy in This fall 2017:
First query, perhaps you possibly can give us an replace on the implementations. It feels like there have been a pair sticking factors right here the final couple of quarters. Clearly, whenever you’ve obtained a brand new platform rollout, resembling XT, that is the software program in addition to the hardware, you’d anticipate perhaps a pair hiccups. Nevertheless it appears to be these are dragging on slightly bit. Perhaps should you might present an replace on that entrance.
Randall A. Lipps, CEO
Nicely, I feel there are a few dynamics which might be altering, however considered one of them is the orders are getting very giant. And subsequently, the implementation items are getting very giant. And so it is just a little blockier, which is — it isn’t a nasty factor. However when anyone slows it down, it slows down a bigger block of implementations. And the workforce has gotten higher and higher each quarter at establishing the installations and shifting these ahead. And I feel that, definitely, for 2018, we have now inbuilt a plan that permits for extra of those last-minute modifications if we get them, simply because backlog has backed up even just a little extra.
So there is no particular person purpose why a few of these accounts get pushed off. They’re all the time for various causes. However it’s simply that the dimensions of a few of these single installations are on the measurement that it does impression the income.
One query, simply when it comes to the outlook after which a few housekeeping gadgets. So first, we have seen 2 quarters in a row the place you’ve got had this concern with implementations. Understanding that it is troublesome to kind of get the client to maneuver within the bigger implementations, however do you assume relative to your steerage for 2018, you’ve got factored in a few of these points — do you assume you adequately mirrored a few of these
implementation, if you would like name them, challenges that you’ve got had the final couple of quarters?
Randall A. Lipps, CEO
Undoubtedly. We have shifted each our technique with our clients, the best way we have positioned specific Q1 to make it possible for — to be conservative in case one thing occurs. I simply assume — I am such as you. The final 2 quarters, I stated, “That is sufficient of this.” And so this yr’s plan is constructed on not doing that anymore.
Whereas these delayed implementations absolutely corroborate our thesis, Mr. Lipps has said that these implementation considerations have been fastened in later durations. Nevertheless, within the newest earnings name we proceed to see points pop up:
Randall A. Lipps, CEO
The implementations are all the time somewhat bit longer in that sense in that we often should do some preparatory work and redesign perhaps in a pharmacy to get a few of these installs carried out.
Based mostly on these feedback made by administration that recommend that set up and implementation of Omnicell’s new merchandise are taking longer than anticipated, we consider that administration might have possessed excessive motivation to acknowledge income prematurely with a purpose to meet income targets. Because the proof suggests, OMCL is just not dealing with a collectability concern from its clients, subsequently the one different rationalization for the unfavorable receivable developments is administration recognizing income prematurely of assembly its efficiency obligations. This instantly conflicts with CFO Kuipers feedback about “timing” and “deferring” income on the revenue assertion till the subsequent interval.
Deferred Revenues Recommend Decrease High quality of Revenues
When analyzing corporations which have a spiking AR stability, we additionally have to ensure that the agency’s deferred income (DR) stability doesn’t offset this rise with an increase of its personal. If the agency is pulling in more money within the type of deferred income, this often alleviates most our concern for the AR improve. Nevertheless, this isn’t the case for Omnicell. Once we dive into the deferred income footnotes, we discover a state of affairs just like what administration defined for his or her DSO improve above:
Observe 9. Deferred Revenues
Brief-term deferred revenues of $81.eight million and $78.eight million embrace deferred revenues from product gross sales and repair contracts, internet of deferred value of gross sales of $11.1 million and $16.9 million as of December 31, 2018 and December 31, 2017, respectively.
The short-term deferred revenues from product gross sales relate to delivered and invoiced merchandise, pending set up and acceptance, anticipated to happen inside the subsequent twelve months.
A contract legal responsibility is an obligation to switch items or providers for which we’ve got acquired consideration, or for which an quantity of consideration is due from the client. Contract liabilities embrace buyer deposits beneath non-cancelable contracts, and present and non-current deferred income balances. Our contract balances are reported in a internet contract asset or legal responsibility place on a contract-by-contract foundation on the finish of every reporting interval.
Nevertheless, none of what Mr. Kuipers said nonetheless makes any sense, as deferred revenues have been on a constant downtrend relative to gross sales within the final 5 years. On prime of that, we might anticipate a CFO of an organization to know the distinction between accounts receivable and deferred income, however based mostly on his flawed explanations, we aren’t so positive in the mean time. Under, we element OMCL’s current unfavorable deferred income developments:
- When analyzing each present and non-current DR balances, we discover that DR truly decreased by three.9% YOY to $100.four million in Q1 2019. Once more, from a top quality of income standpoint, our analysts want to see deferred revenues growing, particularly when relative to gross sales. When unearned revenues improve on the stability sheet, this added money acts as a “down cost” by the shopper and nearly ensures future revenues on the revenue assertion.
- Right here we discover the other influence has been plaguing OMCL. Relative to 3M gross sales, DR has decreased by 765 bps YOY to 49.6%, representing a five-year seasonal low for the corporate. This compares unfavorably with the five-year seasonal common of 60.2%. Longer-term metrics report comparable discouraging tendencies with DR falling by 156 bps YOY to 12.four% relative to 12M gross sales.
- Days-of-deferred revenues (DDR)three additionally reported materials degradation by falling 10.three% (9.1%) YOY to 43 days (44 days) as referenced on Desk 2, Web page 14. Each figures represented a brand new five-year low for the agency. Ouch.
- As said above, our analysts like to guage internet receivables and deferred revenues tendencies to get a full image of the agency’s high quality of revenues. Normally, we anticipate to see corporations with a internet stability close to $zero or unfavourable, because the agency’s deferred stability is above AR. This was the case for Omnicell within the years previous 2013, suggesting robust high quality of revenues.
- In Omnicell’s case, internet AR reached its third highest absolute degree (solely to Q3 & This fall 2018), growing by 17.four% YOY to $143.zero million. This absolute worth stands at a particularly excessive degree for the corporate, particularly once we see that this stability stood at a unfavorable $1.three million solely 4 years in the past.
- As one would anticipate, relative to quarterly gross sales, internet AR jumped by 391 bps to 70.6%, representing the second highest ratio recorded in any interval. Twelve-month internet AR-to-sales reported an identical improve of 140 bps to 17.7%. Make no mistake about it, these are completely horrible internet figures reported by OMCL and really not often seen to this extent in our expertise.
- General, the continued improve of receivables coupled with the deterioration of unearned income metrics lead us to consider that the standard of OMCL’s current gross sales is at extraordinarily low ranges. Based mostly on our expertise, we anticipate to see a cloth drop off of revenues in future durations in consequence. That is corroborated by the excerpt above detailing contract liabilities as being “buyer deposits underneath non-cancelable contracts”.
- To quantify the impression that recognizing this income earlier relative to historic requirements has had on efficiency, we will reverse engineer OMCL’s internet AR stability utilizing the agency’s internet DSO worth reported in Q1 2018 (47 days). Consequently, we calculate that OMCL acknowledged an astonishing $38.three million extra in income (additionally pure margin features) over the TTM. This appreciable determine additionally interprets to a tailwind of 72-cents in EPS during the last yr, or 30.2% of non-GAAP EPS!
Desk 2: Deferred Income and Internet AR Metrics ($ in tens of millions)
Chart 2: Lengthy-Time period Internet AR & DSO Tendencies ($ in hundreds of thousands)
See the complete report right here.