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Omnicell Inc. (OMCL - Analyst Report) reported EPS of 4 cents in the second quarter of fiscal 2012, lower than the year-ago quarter EPS of 8 cents. The Zacks Consensus EPS for the second quarter 2012 was 6 cents. However excluding the impact of certain one-time items associated with the MTS acquisition, the adjusted EPS for the quarter came in at 13 cents.

Revenues in the reported quarter increased 23.6% year over year to $75.4 million, exceeding the Zacks Consensus Estimate of $73 million. Product revenue, contributing 78.6% of revenues, climbed 28.4% to $59.3 million in the quarter while the same from Services and Others (contributing the rest) witnessed an upside of 8.9 to $16.1 million%.

Margins

Cost of Product sales were up 44.9% to $20.3 million in the quarter. However, cost of services and others revenues edged down by 0.8% to $7.4 million. Gross margin contracted 329 basis points (bps) to 52.2% during the quarter.

The company’s research and development (R&D) expenses were up 4.1% to $5.5 million while selling, general and administrative (SG&A) expenses jumped 29.4% to $31.4 million. As a result, operating margin during the quarter contracted a significant 370 bps to 3.2%.

At the end of the reported quarter, the company had cash and cash equivalents and short-term investments of $54.1 million compared with $99.9 million at the end of fiscal 2011.

Our take

We are encouraged by Omnicell’s strong top-line performance in the reported quarter. In this quarter, the company achieved the seventh consecutive annual top KLAS ranking for its automated medication dispensing system. However, margin contractions remained a matter of concern. Still, we expect that the MTS acquisition is concurrent with the company’s strategy to strengthen its foothold in the automation and business information solutions market.

Additionally, given the fact that very few hospitals have adopted medication control systems in the international market, Omnicell is presently striving to establish its presence in the global arena, especially in markets with huge potential.

Omnicell stands to benefit from favorable demographic trends, regulatory environment and lack of nursing staff. Owing to the growth in the information technology market along with increasing investments from healthcare industries, Omnicell is confident about its success in the near to medium term, specially aided by its SinglePointe and Anywhere RN products.

However, several macroeconomic uncertainties as well as intense competition from major players such as CareFusionCorporation ((CFN - Analyst Report) and McKessonAutomation (MCK - Analyst Report) remain concerns.

Currently, the stock retains a short-term Zacks #2 Rank (Buy). Over the long term, we are Neutral on Omnicell.

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