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California-based healthcare solutions provider Omnicell, Inc. (OMCL - Analyst Report) reported second-quarter 2014 adjusted earnings per share (EPS) of 23 cents (considering stock-based compensation as a regular expense), up 21.1% from the year-ago adjusted figure of 19 cents. The adjusted EPS also remained ahead of the Zacks Consensus Estimate by a penny. The earnings improvement came on the back of solid revenue growth and improved operational performance.
 
However, the positive earnings surprise failed to raise investors' confidence and share prices declined 4.0% since the earnings release to eventually close at $26.30 yesterday.
 
On a reported basis, Omnicell's net income was $7.8 million or 21 cents per share, higher than $6.0 million or 17 cents per share recorded in the year-ago quarter.
 
Revenues in Detail
 
Revenues in the quarter grew 12.1% year over year to $105.1 million, topping the Zacks Consensus Estimate of $103 million. Revenue growth was primarily led by the healthy customer demand in the reported quarter, with 47% higher Automation and Analytics bookings from new customers. In addition, the recurring revenue nature of consumables in the company's medication adherence segment also contributed to the revenue upside in the second quarter.
 
During the quarter, the Automation and Analytics segment contributed $84.7 million in revenues, up from $73.7 million in the year-ago quarter. The Medication Adherence segment reported revenues of $20.4 million, up from $19.8 million a year ago.
 
Operational Update
 
Omnicell's total cost of revenues was up 10.6% year over year to $49.0 million. Gross profit improved 13.5% to $56.0 million. Consequently gross margin expanded about 60 basis points (bps) to 53.3% in the quarter.
 
Omnicell's research and development expenses declined 9.5% to $6.5 million while selling, general and administrative expenses jumped 12.6% to $37.0 million. Accordingly, operating margin expanded 20 bps to 12% in the quarter.
 
Financial Update
 
Omnicell exited the second quarter with cash and cash equivalents of $126.4 million compared with $104.5 million at the end of 2013.
 
Outlook
 
Omnicell reiterated its full year 2014 revenue guidance in the range of $415–$425 million (estimated growth of 9–12%). The current Zacks Consensus Estimate of $424 million lies close to the upper end of the range. Full year adjusted EPS forecast also remains unchanged in the band of $1.17–$1.23 (estimated growth of 8-14%). However, the Zacks Consensus Estimate is pegged at 91 cents, much lower than the company's guidance.
 
At the end of 2014, Omnicell expects product bookings of $340–$350 million (unchanged).
 
Our Take
 
Omnicell reported an impressive second-quarter 2014 with both the top- and the bottom-line beating the respective Zacks Consensus Estimates. Reported revenues and earnings performance was decent on a year-over-year basis, as well. However, we note that constrained hospital spending still exists in the U.S. economy, which remains a matter of concern. A tough competitive landscape also remains an overhang.
 
However, Omnicell's management remains bullish despite challenging macroeconomic environment. Management believes the company remains high on a customer's demand list, given the improved efficiency and safety capabilities of the technologies offered by it.
 
The stock currently carries a Zacks Rank #2 (Buy). Other well-placed stocks in the broader medical sector include Amedisys Inc. (AMED - Analyst Report), Chemed Corp. (CHE - Snapshot Report) and HEALTHSOUTH Corp. (HLS - Snapshot Report). All these stocks sport a Zacks Rank #1 (Strong Buy).

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