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Omnicell Inc. (OMCL - Analyst Report) reported first-quarter 2013 net operating earnings of 14 cents per share, missing the Zacks Consensus Estimate of 19 cents. Results nevertheless improved 7.7% year over year.
Including $0.4 million reorganization costs related to the continued integration of MTS Medication Technologies and $0.6 million amortization expense for all intangible assets acquired in connection with the acquisition of MTS in May 2012 and earlier acquisitions by Omnicell, net income was 10 cents per share, higher than 7 cents earned in the year-ago quarter. 
Revenues in the first quarter (including the results of MTS Medication Technologies) jumped 35.8% year over year to $87.1 million. Despite the massive improvement, top-line marginally missed the Zacks Consensus Estimate of $88 million. Product revenue, contributing 79.5% of total revenues, surged 42.7% to $69.2 million in the quarter, while Services and Others (contributing the rest) witnessed an upside of 14.4% to $17.9 million.
Cost of product sales increased 65.3% year over year to $33.5 million in the quarter while cost of services and others revenues increased 1.2% to $8.2 million. Consequently, gross margin contracted more than 270 basis points (bps) to 52.1% in the quarter.
Omnicell’s research and development (R&D) expenses shot up 22.5% to $8 million while selling, general and administrative (SG&A) expenses increased 29.8% to $33.2 million. Due to declining gross margin and higher operating expenses, operating margin decreased a whopping 900 bps to 4.8% in the first quarter.
Omnicell exited first quarter with cash and cash equivalents of $69.8 million, compared with $62.3 million at the end of 2012. 
Omnicell envisages revenue in the range of $370–$380 million (up 18%-21%) for 2013. The current Zacks Consensus Estimate is pegged at $375 million. While the expected revenue growth for Acute Care segment is 10%-12% (organic growth), the same for Non-Acute segment is 60%-70%. The company forecasts EPS in the band of 99 cents –$1.07 (14%-22%) compared with the prior outlook of 97 cents –$1.05 for the ongoing year. The Zacks Consensus Estimate of $1.02 lies within the outlook band.
At the end of 2013, Omnicell expects backlog to come in at $160-$165 million while it projects product bookings of $305–$315 million.
Our View
Omnicell’s first-quarter results missed the Zacks Consensus Estimate despite year-over-year growth on the back of synergies from MTS acquisition. Margin pressure was another cause of concern.  
On the other hand, Omnicell’s three-pronged strategy of domestic expansion, selective acquisitions and targeted international expansion is yielding positive results. Further, geographic expansion into lucrative markets such as the Middle East and China, should accelerate growth.
The stock carries a Zacks Rank #3 (Hold). While we remain on the sidelines for Omnicell, other medical sector stocks such as Intuitive Surgical Inc. (ISRG - Analyst Report), Mindray Medical (MR - Analyst Report) and Abiomed Inc. (ABMD - Analyst Report) are worth considering. These stocks carry a Zacks Rank #2 (Buy). 

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