Omnicell, Inc.
Q4 2016 Earnings Call Transcript

Published: 16 Feb 2017

[Operator:]

Good afternoon. My name is Holly, and I will be your conference operator today. At this time I would like to welcome everyone to the Omnicell Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn today’s call over to Mr. Peter Kuipers, Chief Financial Officer. Mr. Kuipers, the floor is yours.

[Peter Kuipers:]

Thank you. Good morning and welcome to the Omnicell fourth quarter and fiscal year 2016 results conference call. At this time, all participants are in a listen-only mode. Later we will conduct the Q&A session, and instructions will follow at that time. Joining me today is Randall Lipps, Omnicell Founder, Chairman, President, and CEO. 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 in our press release today in the Omnicell annual report on Form 10-K filed with the SEC on February 26, 2016 and in other 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 day of this conference call is February 15, 2017, 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 the property of Omnicell, Inc., and any taping, audio duplication, or rebroadcast without the express written consent of Omnicell, Inc., is prohibited. Randall will first provide an update on our business. Then I will cover our results for the 2016 and our guidance for 2017. Following our prepared remarks, we will take your questions. Our fourth quarter and full year financial results are, as usual, included in our earnings announcement, which was released earlier today and is posted in the investor relations section of our website at omnicell.com. Our prepared remarks will also be posted in the same section. Let me now turn over the call to Randall.

[Randall Lipps:]

Good afternoon, everyone. We’re excited to discuss our fourth quarter and full year results as well as our expectations for 2017. We had a great response to our announcement at ASHP in December last year on our new XT Series from both existing and potential new customers. Now consistent with our long-term successful go-to-market strategy that has helped us win in the marketplace, we’re continuing to be committed to deliver long-term value to our customers and we are allowing customers to upgrade their G4 products that they’ve already booked with us in backlog to the XT Series to get the full benefits of the product and this is really important and understanding Omnicell’s go-to-market and philosophy in the marketplace. It’s to allow for our customers to integrate next generation technologies with minimal disruption and so the conversion of our current G4 bookings to XT backlog does take some time as we offer this to our customers and then it takes time mostly in repapering IT reviews and hospitals and in some cases even C-Suite re-approvals. Our consultants need to explain the differences and the benefits of the XT series. It is not usually a long process but explanation and confirmation does take some time. Now as a result of our expected conversion of our G4 bookings and backlog to XT bookings. The XT manufacturing and installation ramp up, we anticipate two quarters of transition disruption which started earlier than we anticipated and we saw that actually in the month of December last year. Now we expect the backlog revenue conversion to be normalized in more historical levels starting in the second quarter of 2017. We are in the initial stages of the XT rollout, we are shipping and installing XT every day, in order to meet demand we are starting a second shift at our XT manufacturing site this month to meet those demands. The initial customer experience is extremely positive, we’ve already shipped XT to 24 sites. One of our leading institutions in the United States recently commented in an industry journal that XT is more responsive, faster and easier to use delivering a positive impact on patient care and staff efficiency. Now this is exactly why we design the XT Series and is consistent with the positive response we received in December at the ASHP trade show as well as at [indiscernible] where large number of customers were able to see and experience firsthand the advantages of the new XT series. Now despite the yearend disruption in December I’m really proud of our performance in 2016 overall and our consistent track record over the past several years. To review the full year of 2016 was a company record for bookings, backlog, revenues and earnings. For 2016, product bookings were $541 million up 38% for 2015 on a reported basis and up 10% from 2015 when including Aesynt for the full year in 2015 and within our guidance range provided in our third quarter results earnings call. For the fourth quarter non-GAAP revenue was $175 million bringing total year non-GAAP revenue to $703 million and company record and within the guidance range provided in our third quarter results earnings call. During the fourth quarter we did experience some customers wanting to switch from a G4 install to an XT install causing a modest impact on our revenue. Now combined with good cost execution non-GAAP EPS was $0.37 bringing total year non-GAAP EPS to $1.51 and within a guidance range provided in our third quarter results earnings call. So now we finish 2016 with a strong annualized new competitive conversion rate of 30% of bookings, this was a great indicator of the strength of the business over 75% of these bookings were competitive conversions and the remainder were from Greenfield customers who have never automated before. We believe that the new account strength and our install customer base gives us a robust platform for future growth driven by expansion, replacement and upgrade sales as well as cross selling opportunities across our product portfolio. Now in the last couple of years we’ve successfully grown the business by implementing three scalable growth strategies, growth through differentiated solutions, growth in new markets and growth via acquisitions. For 11 consecutive years now we have received the top owners from KLAS, the prestigious third-party rating organization for 12 consecutive years we’ve increased our market share and gained new thought leader customers every quarter. Together with our customers we’re consistently delivering state of the art medication management automation and workflow efficiency for caregivers and better healthcare outcomes for patients. Now in 2016, we continue to experience great wins and added notable customers to our Omnicell family under our first strategic pillar of differentiated solutions. With several large competitive conversions, we estimate that we gain further market share in 2016 and continuation of the market share gains trend and momentum we have experienced for many years. In the fourth quarter we had some great wins with prominent new customers as well as significant deals with existing customers including WellStar, DCH Health System, Inova Health System. Now we’re real excited to announce that WellStar Health System the largest health system in Georgia has selected the full breadth of Omnicell’s automated medication management and analytic solutions for its hospital floors, central pharmacy and operating rooms throughout its facilities. WellStar is focused on improving the patient experience across it’s enterprise as well as streamlining provider workflows and increasing patient safety. To accomplish this, they’re implementing the new Omnicell XT automated dispensing systems on hospital floors, the XT and a seizure workstation and operating rooms and controlled substance manager in the central pharmacy as well as analytics tools. In addition, WellStar purchased both our i.v.SOFT semi-automated and i.v.STATION, fully automated IV solutions to improve accuracy of compounded medications prepared on site. DCH Health System and West Alabama has also chosen Omni IV solutions to support their sterile compounding operation through advanced IV automation technology supported by Omnicell’s robotic IV Insourcing Service or RIIS as we call it. DCH will be able to create a safer more accurate and ultimately more cost effective compounding operation. We demonstrated the IV solutions RIIS model at the ASHP mid-year and have experienced strong interest from existing and potential new customers. The IV RIIS solutions contracts are multi-year with no capital outlay for the provider system. Inova Health System a non-profit healthcare system based in Northern Virginia will incorporate the Omnicell performance center an integrated software and services offering to drive improve pharmacy operations and reduce cost. Through enterprise wide management of pharmacy operations Inova will achieve shared inventory visibility, inventory optimization through relocation of needed medications and the ability to leverage strategic buying opportunities. Our second strategic pillar expanding into new markets also fuel growth in the last several years and we believe sets us up well for the coming years. Internationally current customer Rashid Hospital, a 599 bed general, medical and surgical hospital in Dubai and one of the premier medical facilities for emergency, trauma, critical and ambulatory care chose Omnicell’s XT Series automated dispensing systems to complement their previously purchased state of the art robotic dispensing system. Rashid Hospital is part of the Dubai Health Authority and is one of the first of the DHA hospitals to employ robotic technologies in its pharmacy. Our third strategic pillar of expanding our presence and relevance through acquisition has also continued to deliver great results. The Aesynt integration is progressing well, the product portfolio integration is ahead of schedule and the cost synergies are as expected. Already we’re seeing cross-selling opportunities within the total product portfolio and combined customer base specifically for our IV and performance center solutions. Also our medication adherence business continues to align to macro trends that is poised for growth. On December 8, 2016 we completed the acquisition of a leading retail pharmacy software provider Ateb located in Raleigh, North Carolina. The acquisition reinforces the commitment by Omnicell to help improve patient care and outcomes. In this instance by simplifying management of chronic conditions through increased access to medication adherence solutions. Ateb has more than 30 leading retail pharmacy chains and customers and increases Omnicell pharmacy locations by 15,000. The Ateb acquisition broadens our medication adherence solution scope and now combines into one industry leading product portfolio. Ateb’s innovative patient engagement platform including the market leading Time My Meds medication synchronization software. This solution capitalizes on the retail pharmacy trend toward the appointment base model and medication synchronization. And we believe by 2020, 60% of all retail pharmacy scripts are expected to be dispensed via the appointment base model and combine that with Omnicell’s SureMed medication adherence packaging work symbiotically with this model add to that our broad range of related packaging automation including the Omnicell VBM 200 just announced yesterday and the M5000 and you have a complete product portfolio. This acquisition enables pharmacist improved patient outcomes in retail settings, addressing the problem at medication non-adherence and problem that is estimated to cost more than $105 billion in US alone with more than 32 million Americans taking five or more maintenance medications daily. We believe our hard work over the years and the execution of our three legged strategy laid the foundation for success in 2016 and sets up for continued future growth in scale. And today’s evolving healthcare environment, we remain focused on our mission to change the practice of healthcare with solutions that improve patient and provider outcomes. Let me turn the call back over to Peter for some numbers and guidance.

[Peter Kuipers:]

Thank you, Randall. I’ll discuss a summary of our fourth quarter and full year financial results and our guidance for 2017. As Randall mentioned earlier in this call, the 2016 product bookings were a record $541 million up 38% on a reported basis and up 10% in 2015 when including Aesynt for the full year in 2015. The resulting backlog of $301 million for December 31, 2016 is up from $205 million at December 31, 2015 which is a company record and represents a year-over-year increase of 47%. Our fourth quarter 2016 GAAP revenue of $172 million was up 32% from the same quarter last year and down 3% sequentially. As Randall referred to earlier in this call, the announcement of the Omnicell XT Series caught some delays in December and impacted our fourth quarter revenue modestly for new customers that wanted to switch to XT installs. The full year 2016 year-over-year strengthened revenue was driven by both expansion and upgrades at existing customers as well as by new and competitive conversion customers. We continue to see particular strength of the combined solutions portfolio that enabled strategic, tailored, [indiscernible] solutions for our customers. Earnings per share per in accordance with GAAP were $0.00, which is down from $0.21 in the fourth quarter of 2015. GAAP gross margin for the quarter was at 43.2%. In addition to GAAP financial results, we reported our results on a non-GAAP basis, which excludes stock compensation expense and amortization of intangible assets associated with acquisitions. One-time acquisition-related expenses and the acquisition accounting impacts related to deferred revenue and inventory fair value adjustments. We use non-GAAP financial statements in addition to GAAP financial statements because we believe it’s useful for investors to understand acquisition amortization-related costs and non-cash stock compensation expenses that are components of our reported results, as well as one-time events, such as the gain on the Avantec investment in 2015 and the one-time acquisition related expenses. A full reconciliation of our GAAP to non-GAAP results is included in our fourth quarter earnings release and is posted on our website. Our fourth quarter 2016 non-GAAP revenues of $175 million were up 34% from the same quarter last year and down 2% sequentially. On a non-GAAP basis, earnings per share of $0.37 in the fourth quarter of 2016, down $0.03 or 8% from the same quarter last year and down $0.03 sequentially. Non-GAAP revenue of $703 million for full year 2016 was a company record representing an increase of 45% year-over-year. Non-GAAP EPS of $1.51 per share for full year 2016 was also a record. Non-GAAP gross margin was 48.1% in the fourth quarter and 50.0% for full year 2016. The non-GAAP gross margin was negatively impacted in the fourth quarter 2016 by lower overhead cost absorption as we entered into the product launch phase of the XT Series and also less overhead cost could be absorbed by lower G4 volume in the quarter when compared to prior quarters. The negative impact of lower gross margins on non-GAAP EPS was approximately offset by R&D tax credit settlement benefit for the years prior to 2015 of around $2 million. Non-GAAP adjusted EBITDA was $23.3 million for the fourth quarter of 2016 and was $103 million from total year 2016 or up 19% from total year 2015. Our business is also reported in segments consisting of automation, analytics and medication adherence. Automation analytics consists of our XT AcuDose and OmniRx automated dispensing cabinets, anesthesia workstations, central pharmacy, Omnicell supply, Omnicell analytics, and MACH4 robotic dispensing systems. Our acquisitions of Avantec, MACH4, and Aesynt are also included in this segment. The medication adherence segment consists of all adherence packaged consumables, which are branded as SureMed and equipment used by pharmacists to create adherence packages. Our acquisitions of MTS Medication Technologies, SurgiChem Limited and [indiscernible] Inc. are included in the medication adherence segment. As a reminder, we now report certain corporate expenses that cannot be easily applied to either segment separately. On a segment basis, our automation and analytics segments contributed $144 million in GAAP revenues in the fourth quarter of 2016, up from $106 million in the fourth quarter of 2015 or an increase of 36%, driven by the acquisition of Aesynt and organic growth. $18.6 million of GAAP operating income this quarter compares to $29 million for the same quarter last year. $32.4 million of non-GAAP operating income in the fourth quarter of 2016 compares to $31.3 million last year in the fourth quarter. The medication adherence segment contributed $28.4 million of GAAP revenue to the quarter compared to $24.4 million in the fourth quarter of 2015. GAAP operating income of $1 million compares to $1.3 million a year ago. The weaker Great Britain pound exchange rate impacted medication adherence operating income by around $700,000 compared to the same quarter last year as most of the medication adherence product sold in the United Kingdom are manufactured in the United States. Non-GAAP operating income was $2.8 million in the fourth quarter compared to $2.6 million of non-GAAP operating income in the fourth quarter a year ago. Non-GAAP common expenses were $16.5 million compared to $13.4 million in the same quarter last year and the increase is mostly driven by the Aesynt acquisition. Non-GAAP operating margin was 11.6% for full year 2016 including the Aesynt integration cost. Excluding the Aesynt integration cost non-GAAP operating margin was 13% for 2016. In the fourth quarter of 2016, our cash increased from $47 million to $54 million, primarily driven by strong cash flow from operations. Total year 2016 cash flow from operations is $48 million up from $34 million in 2015. Our strong cash flow in the year enabled us to repay approximately $35 million of the outstanding balance during the year as of December 31, 2016 we had $60 million of outstanding from the debt and a loan leverage measured as outstanding total from the loan balance over the last 12 months of EBITDA was 2.4. Accounts receivable days outstanding were 82 for the fourth quarter, down 9 days from the third quarter. The decrease in DSO was driven by record cash collections in the quarter. For contracts [ph] our customer agreements specify that for equipment sales, the company typically invoices 100% of the contract value at shipment date. We review the collectability of our receivables regularly, and we do not believe that the fluctuation DSO are indicative of a change in our rate of bad debt. Inventories at December 31, 2016 were $69 million and down $5 million from last quarter. Our headcount was 2,444 for the end of the year with increase from last quarter driven by the acquisition of Ateb in December last year. Let me now move to guidance for 2017. During the last year we introduced the XT Series to a number of customers on the non-disclosure agreements for first launch purposes. We gave these customers the opportunity to move from G4 to XT and the vast majority of these customers are moving to installing XT starting in the first quarter of 2017 and ramping through the year in 2017. We do see some timing delays of the conversion of G4 bookings and sales quotes to XT bookings and revenue as Randall talked about earlier in the call, that is mostly driven by paper work and approvals taking longer than expected and timing of the scheduling of implementations. Stepping back and looking at 2017. 2017 will be characterized by two distinct different phases as revenue and profitability are impacted by the XT product introduction and ramp up. The first distinct phase is the start and ramp up of manufacturing of the XT Series product in the first quarter of 2017 as installations start. The first quarter 2017 dynamics are expected to be as follows

[Randall Lipps:]

Well I think 2016 was a water shed year for Omnicell. We had the integration of Aesynt which really helped to drive record bookings backlog, revenue and earnings and it significantly broadened our solutions portfolio, strengthened our role as a strategic solutions provider to very large health systems which really positioned us totally different in the marketplace. I’m really also pleased with our integration of Aesynt which allows us to move forward with second phase of this integration which involves mostly systems and process implementation as well as joint product development and roadmaps and of course we couldn’t be more pleased with the response and the uptake on the XT Series which we’re shipping, installing every day and trying to figure out how to put more through the manufacturing process to get more out there. And we continue to believe with what we’re seeing in Health System with both existing in new customers are truly assessing their need for improving the efficiency and the safety around their medication processes and looking across the continuum and they’re evaluating a breadth of solutions sets and breadth of solution options out there and it sure feels good that they’re choosing Omnicell. So that ends our prepared remarks and now operator, we would like to open it up for questions please.

[Operator:]

[Operator Instructions] and our first question is going to come from the line of Matt Hewitt with Craig-Hallum Capital.

[Matt Hewitt:]

Several questions from me. First, it sounds like you had a greater response from customers that were in queue to buy G4 that now want to switch over to XT, is that accurate and is that why you’re scrambling to ramp up production of the XT in adding that second shift?

[Randall Lipps:]

Yes I think that we thought that G4 would wind down and more of - add a steady pace, floor pace and that XT would ramp up and then almost from the day we announced XT, everybody said wait you guys only put out a new platform every 10 years I want to really consider putting this in. So it really pushed off decisions that would have been G4 and they wanted to get into queue for XT and particularly this quarter we did not have enough supply, the XT systems to meet what would normally be our revenue goal. So it’s not a - and so I guess you’re right the reaction to XT lot of people, we thought would have stopped with the G4 just because they’ve, they already have a lot of G4 in hospital they did, maybe they wouldn’t want all of their systems to be the next XT system but most of the people we were surprised wanted to do that and that really sucked our sales force back into particularly Q1 and now to repapering this stuff and bringing in our consultants to reconfigure based on the XT system because it is slightly different than the G4, it’s not a direct translation over. So XT I’d have to say is a booming success.

[Matt Hewitt:]

Okay, secondly your guidance Peter and I think you touched on this a little bit. Your guidance in applying another step down in gross margin either GAAP or adjusted for the first quarter and then you would think you would start to ramp up, what are the key points that you mentioned at the Analysts Day back in December was that the XT will actually carry a higher gross margin than the G4. How long until we start to see some of the benefits of that, obviously this year as you get the transition period, but is that an 2018 event?

[Peter Kuipers:]

Towards the end of the year in 2017, we’ll see some benefit already - total cost XT versus G4. So I was going to say, of course dependent on volume when you repurchase more volume you can negotiate better rates, you can run the plants and more efficiently etc., so and that will flow through the gross margins towards the first parts of that towards the end of the year in 2017, so we don’t need to wait all the way through 2018.

[Matt Hewitt:]

Okay, maybe two more from me and then I hop back in the queue. Number one, if you could touch on performance center briefly, you did mention one win there but where are you from a customer standpoint, if you don’t mind and what is the adoption curve kind of been like for that product.

[Randall Lipps:]

Well we’re getting great adoption and traction in the marketplace. I think we’re not on the exact numbers at least 10 to 15 customers we have going signed up for the product and given these contracts, these are multi-year contracts of very large institutions and we have a large pipeline of more customers lined up for, so we feel that this is - rings very true in the macro trends and healthcare and it’s just a natural combination of all the other things that we have to offer fits right in with it.

[Matt Hewitt:]

Okay, great. One last one from me and then I’ll hop back in the queue. I just want to make sure I heard you correctly. I think Peter you mentioned there was $12 million of integration expenses that were actually included or kept in your adjusted guidance, is that accurate?

[Peter Kuipers:]

That is correct.

[Matt Hewitt:]

Okay, great. Thank you.

[Operator:]

Our next question will come from the line of Mohan Naidu with Oppenheimer.

[Mohan Naidu:]

Randy, I just want to go back to the bookings questions a bit again. The book in December, do you guys see delays in new bookings as well as the customers thought about getting into XT are - is just revenue conversion that got delayed.

[Randall Lipps:]

Well I think the bookings were pretty steady through December, but as soon as we announced XT, we did see a few bookings it’s not very many that were impacted by XT and but most of the people already had the paperwork through the systems and just about signed, but there’s actually a little more disruption in Q1 where paperwork hadn’t been quite circulated all the way around and now we’re pulling it back and re-circulating it with XT as far as new bookings and then as well, we’re also working on old bookings in G4 several hundred millions of backlog we have that need to be converted to XT as well.

[Mohan Naidu:]

Okay, maybe a topical question around hospital spending environment that you’re looking at right now. Are you seeing any changes in the pace of deals closure or anything like that because hospitals are thinking about any upcoming changes from the new administration?

[Randall Lipps:]

For our market segment we have not seen any slowdown in hospital. I think hospitals continue to be very strategic about acquiring our types of systems. They want standardization, they want cost control, they want safety, they want regulatory compliance and they want it uniform across all of their provider facilities and that’s why they’re acquiring provider facilities and they want to leverage those and then a key driver is, they want to integrate that into their enterprise technology systems that they have on the health record side and so we play extremely well into those aspects of what the market needs and wants in the macro trends to be successful. So we really just not have, not seen customer saying well, we don’t want to spend the money on this infrastructure right now or on this type of project, we have not seen that.

[Mohan Naidu:]

Okay, great. Peter one quick question for you. How much are you baking in for Ateb contribution for calendar 2017 guidance?

[Peter Kuipers:]

So we’re not breaking it out specifically, what we said before though is that on LTM basis per September 30, last year Ateb LTM revenue was about $28 million. Assume that roughly to be double-digit business, it’s in the fast growing segment specifically the med synchronization Time My Meds as offer, is really gaining [indiscernible] in the market.

[Mohan Naidu:]

Okay, does this going to the medication adherence segment when you report?

[Peter Kuipers:]

Yes it is included there.

[Mohan Naidu:]

Okay, all right. Thank you very much.

[Operator:]

And our next question will come from the line of Sean Wieland with Piper Jaffray.

[Sean Wieland:]

So, if I’m an existing G4 client, right now what is my sense of urgency to upgrade to the XT platform?

[Randall Lipps:]

Well I think the issue is your next order that you’re going to get and the hospital. Right now, you’re in this window the next incremental one you want in 60% to 70% of our orders were all from current customers, you got to decide am I going to go with G4 or XT, so as I just said, most people are saying, the next incremental one I want is XT and then this set you up and I think most hospital networks and providers understand that this is the system of the future, to get the next generation of software you have to have a next generation of hardware first and so they’re trying to orient their investments overtime to make sure they get the platform eventually upgraded to XT. Now a lot of our customers, large percentage of our customers of more than half of the systems we have out in the market place are seven years or older, so their systems are old and we are eventually not going to service those just because that’s too old to service as we continue on, so it’s really a question of winding down those systems and taking them out of the market. So that would probably be the biggest driver as far as why customer is not [ph], eventually slow.

[Sean Wieland:]

So give us the sense of the magnitude if you could of the upsell of the G4 to XT versus G3 to G4. Not on a per customer basis, but you know from your perspective from the company’s perspective.

[Peter Kuipers:]

So the difference between the G4 upgrade which is the brain or the G4 console only, that’s part of the total the automated dispensing cabinet, a full fray of XT’s 456X the revenue if you will for an upgrade.

[Randall Lipps:]

And so G4 was, I think around $250 million to $300 million opportunity and this is close to $2 billion as we replace all of the equipment over the next seven-ish years because we have both the Aesynt installed base to replace and the Omnicell installed base to place. So it’s a huge opportunity for us.

[Sean Wieland:]

Okay and so what - because it’s the full frame is what you’re saying is the greater opportunity.

[Peter Kuipers:]

Yes.

[Sean Wieland:]

Okay and so what’s the visibility you got on the acceleration to 20% bookings growth starting in Q2?

[Peter Kuipers:]

We have a pipeline that we’re working, we feel pretty good about the feasibility there and the benefits of the new products. We’ve already talked about the aged equipments in the fields more than 50% older than seven years and particularly also in the Aesynt AcuDose installed base is actually ageing a little bit more, so we feel good about the opportunity there to for replacement.

[Sean Wieland:]

Okay, thanks so much.

[Operator:]

Our next question will come from the line of Steve Halper with Cantor Fitzgerald.

[Steve Halper:]

Two questions. The $12 million of integration expense that’s included in the numbers, what does that compared to in 2016?

[Peter Kuipers:]

So in 2016, we had about $10 million integration cost for Aesynt and then in 2017 planning roughly little bit less than $11 million for Aesynt and around $1 million for Ateb.

[Steve Halper:]

No go ahead Peter, [indiscernible].

[Peter Kuipers:]

I was going to say that we expect to substantially complete the integration projects for Aesynt by the end of the year in fiscal 2017, right so that will then falloff be significantly reduced fairly small amount in 2018.

[Steve Halper:]

And the cost that you called out for headcount reduction and facility leases, is that $8 million, is that also included in the adjusted earnings guidance?

[Peter Kuipers:]

Yes those will be GAAP only, we would adjust those out as one-time, as those cost would not be in the non-GAAP results.

[Steve Halper:]

Okay, so the $8 million are not in the non-GAAP results.

[Peter Kuipers:]

Correct.

[Steve Halper:]

Okay.

[Operator:]

Our next question will come from the line of Raymond Myers with Benchmark.

[Raymond Myers:]

Randall and Peter, maybe you can help me to kind of walk me through what happens when a customer decides they were going to upgrade to the G4 and now you’ve introduced the XT. Do they hold back on the G4? Are most of them simply holding their orders and not moving forward with anything for the time being while they make the determination or are many of them actually signing for the XT and when that is the case? My understanding is that purchase price is several multiples higher than the G4 conversion. So if you do the math, if a large proportion of customers make the conversion the revenue opportunity to Omnicell should be much higher in the second half of the year as you convert those customers to XT and yet your guidance doesn’t quite reflect that, can you help us understand?

[Randall Lipps:]

Yes so we use the G4 console upgrade is different than the G4 frame, right? They’re both G4 versions of the product. So customer that’s expanding to adds a new hospital to their network would buy regular G4 frames and put an order within us because they’re adding this hospital to their network and so they would have an order for 20, G4 frames that’s not G4 console frame. Consoles, that’s the whole system. Those are the ones that are being converted, their whole systems that are being converted from G4 whole frames, the G to XT. There are not that many customers out there left that could use a G4 upgrade console only. So when we talk about converting the G4 in our backlog that’s the current full fledge model that we’re shipping up until the middle of January, middle of January we started shipping XT as well, so it’s a replacement of one full model for the other. It isn’t the upgrade of the G4 consoles that people are swapping out for the full frame. It’s full frame for full frame.

[Raymond Myers:]

Okay, so in the case where it’s full frame for full frame the pricing I understand is more similar, but you would have the opportunity for an upgrade cycle for all the previous G4’s that you sold it in all year history, so that’s where that the million opportunity come.

[Randall Lipps:]

That’s exactly right.

[Raymond Myers:]

So the disconnect is, when does this great opportunity flow through to your income statement because it doesn’t seem like it’s happening quite yet?

[Peter Kuipers:]

This is Peter. The second through fourth quarter phase this year we’re expected to be back in the organic growth range of 8% to 12%, so you can see your start there and then the EPS if you take the non-GAAP EPS you take the midpoint of the range that we gave, if you’re looking at 70% year-over-year, so starting to fall through there as well.

[Randall Lipps:]

Yes, so the big difference I think is that this conversion of current customer base to the new technology is somewhere between a five to 10-year process and which all the customers eventually swap out. It isn’t there - they don’t want to swap out in the 12-month frame or 24-month frame. It’s probably five to seven-ish type year timeframe and we’re just at the beginning of the cycle. In other words we just announced XT, so most of the customers who would be willing to swap out or could swap out older equipment are customers who have fiscal dollars in the second half of 2017, who we would target as replacing over equipment because it takes time to cycle the funds into the budgets and then of course as you keep moving on through the cycle 2018, 2019 it continues to build.

[Raymond Myers:]

Okay, that helps. Thank you and on the performance center I think you previously said 10 to 15 at least customer installation so far, can you give us a sense of what revenue contribution that product might be this year?

[Peter Kuipers:]

Yes, so we’re not breaking out the product line specifically, but each of the contracts on average are multi-year, multi-million dollars but you have to be fired of course, the contract amount over the number of the years that the contract runs, right. So it’s kind of layering recurring revenue the model if you will, but we’re ramping fairly aggressively there.

[Randall Lipps:]

Yes, we’ve 10 to 15 that have signed contracts, we don’t have 10 to 15 running yet and so we’re probably under 10 in the running and probably adding a few every quarter into the revenue line. But that’s recognized ratably over month-to-month, but its good margin obviously for us.

[Raymond Myers:]

Okay, good and then maybe just clear up one final point. As we look at your guidance in December and in early January as compared to now, it seems to be a little different particularly as we look at Q1, was it the change in the last so many weeks that made your Q1 outlook a little different than it was before.

[Peter Kuipers:]

Yes, so what Randy talked about earlier in the call so we were expecting two quarters of sensation - we do actually see that already in - we saw that already in December, so looking at the month of December plus into first quarter and a little bit in the second quarter as well. So the six month kind of shifted a little bit forward in our minds if you will, so that’s the difference. We’ve got good visibility starting into the second quarter as well [indiscernible] so we feel actually a little bit more confident than we were before instead of first half, second half we feel that at first quarter versus last nine months distinction is actually, is more reasonable for dynamics that we’ve seen.

[Raymond Myers:]

Okay, so most of the impact has been now accelerated into Q1, do you have visibility from customer purchase agreements that this delay in purchases is abetting and they’re actually moving forward with a XT purchase decision and that simply is weighing [ph] entirely.

[Randall Lipps:]

Yes, the backlog was being converted to XT, so we have really good visibility and we’re of course lining up the XT conversions to line up with the installation expectation, that’s why we feel really confident about Q2 and moving forward is we have excellent visibility there, as we’ve gotten folks to sign up and sign on the line for XT, but that was too late to get it manufactured, shipped and installed in Q1 but obviously it sets us up well for Q2 and beyond.

[Raymond Myers:]

Okay, thank you that’s a really important point. Thank you very much.

[Operator:]

And our next question will come from the line of Gene Mannheimer with Dougherty. Gene your line is open. Okay and we’ll go to the next question and that question will be from the line of Mitra Ramgopal with Sidoti.

[Mitra Ramgopal:]

Just a couple of questions. First, in the past you’ve mentioned you expected the gain maybe 1%, 2% market share. With the success you’re having in terms of customer interest for the XT, you still hold to that or you think it could even be faster?

[Peter Kuipers:]

Well looking at 2016 reducing that we gained one or two points off additional market share as we’ve done in the last couple of years especially notable of course is WellStar which is about full point of market share in the US. So we’re expecting to continue to competitive wins in 2017 as well. I think for now maybe Randy comment as well, but for now we’ll continue to assume that we keep gaining one to two points of absolute market share this year as well, if it’s higher then we’ll adjust but for now we’re assuming that.

[Randall Lipps:]

The XT really is a game changer for us, it’s an advantage and the thing that I was trying to explain in the beginning of the call, the way we’re introducing this technology, the way the options that we’re giving our customers even though it’s caused some disruption here is what really drives them to choose us because we’re allowing them to get the technology integrated into their current platform and take advantage of it, in a very meaningful way now without having to convert everything at once but start the conversion now, knowing that over the next few years they’ll fully convert. So this is grand promise that Omnicell has created in the marketplace and is what’s driven this 1% to 2% and this is just another clear commitment that Omnicell is making to their customer base that you’re going to be able to get long-term great return value with the best automation in the marketplace because we’re able to deliver the next generation of hardware and software with minimal disruption in the institution and that’s meaningful to people.

[Mitra Ramgopal:]

Okay, thanks. And just quickly on the cost side, obviously you’re closing Tennessee facility. I think the Slovakia facility etc.

[Peter Kuipers:]

Slovenia.

[Mitra Ramgopal:]

Slovenia sorry, should we expect pretty much 2017 all the closures to be completed or do you anticipate this?

[Peter Kuipers:]

All right, the group [ph] close to Tennessee office will be in the first quarter, the Slovenia plant will be closed by the end of the third quarter, this year.

[Mitra Ramgopal:]

And in terms of additional closures etc. I guess, it’s probably a little too early for that.

[Peter Kuipers:]

None plans at this time. None at this time.

[Mitra Ramgopal:]

Okay, thank you.

[Operator:]

Thank you. I’ll now turn the conference call over to Randall Lipps for closing comments.

[Randall Lipps:]

Well again, thank you for joining us today. I know we had a lot of numbers and assessments for you guys to go through, but the momentum in the business is strong and volume bases are excited. I want to thank them for their hard work and getting this XT launch and the Aesynt integration, it’s really changed the dynamics of our company and sets up for a continued success with a great platform to reap many benefits over the many years to come. So thanks for joining us today and we’ll see you next time.

[Peter Kuipers:]

Thank you.

[Operator:]

Once again, we’d like to thank you for participating on today’s Omnicell fourth quarter earnings conference call. You may now disconnect.