Ladies and gentlemen, thank you for standing by and welcome to the Q3 2012 Omnicell's Earnings Call. [Operator Instructions] I would now like to turn today's conference over to Mr. Rob Seim, Chief Financial Officer of Omnicell. Please go ahead, sir.

Good afternoon, and welcome to the Omnicell 2012 Third Quarter Results Conference Call. Joining me today is Randall Lipps, Omnicell's Chairman, President and CEO. You can find our results in the Omnicell third quarter earnings press release posted in the Investor Relations section of our website at www.omnicell.com. 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 under the heading Forward-Looking Statements in our press release today and under the headings Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in the Omnicell annual report on Form 10-K filed with the SEC on March 8, 2012, as well as 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 date of this conference call is October 25, 2012, 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 Incorporated and any taping, other duplication or redistribution without the express written consent of Omnicell is prohibited. Randy will give us an update on the Omnicell business today and then I'll cover our Q3 results and our forecast going forward. Following that, we'll open the call to questions. Randy?

Good afternoon. Q3 was a record quarter for Omnicell. We had record orders, record revenues and record profits. Non-GAAP earnings per share exceeded analyst consensus by $0.07, and we achieved a significant company goal by posting non-GAAP operating margins above 15% in Q3, a quarter ahead of projections. Both the Acute Care and Non-Acute Care segments of our business are contributing ahead of the expectations we shared with you in June after the acquisition of MTS Medication Technologies. Most importantly, our 3-part growth strategy of market expansion in the U.S., focused international growth and acquisition and partnership is working. Our strategy to expand our market presence in the U.S., providing the most extensive medication and supply management solutions is being validated through continued equipment expansion and upgrades amongst some of our largest accounts. This past quarter, we announced that Partners Health, which includes such renowned hospitals as Massachusetts General and Brigham and Women's have renewed an exclusive contract with us, and will be upgrading their systems and anesthesia solutions to our G4 platform, which we believe to be the most advanced automated dispensing technology on the market. We also announced the Erie County Medical Center, a 550-bed teaching facility for the University at Buffalo, would become our largest user of Savvy medication mobile systems. Now Savvy extends both the physical and electronic control of medications from the automated dispensing systems to the bedside and as a platform to run Hospital Information Systems. Erie County chose Omnicell because of our demonstrated commitment to constantly improving technology and our superiority to other systems. Adding Savvy builds on Erie County's already extensive commitment to Omnicell automation, which includes our OmniRx G4 automated dispensing systems, anesthesia workstations and several of our advanced workflow software solutions. Focused international expansion, both in Acute and Non-Acute Care,…

Thanks, Randy. So we had an absolutely outstanding quarter in Q3 that exceeded expectations across the board. Our record order volume included 34% of our Acute Care equipment orders from new and competitive conversion customers. Of those orders, we continue to see a strong contribution from competitive conversions, with more than 3/4 -- 3/4 of the orders again being competitive conversions and the rest from new greenfield customers who have never purchased automation before. We do see fluctuation in these measures quarter-to-quarter, but year-to-date, we have 32% of our orders from new and competitive conversion customers, of which about 2/3 of those are competitive conversions. We're very happy with these results, believe they continue to demonstrate the competitiveness of our solutions. Revenue for Q3 2012 was $84.3 million, up 31% from Q3 2011, and up 12% from last quarter. Q3 2012 earnings per share on a GAAP basis was $0.20. We report our results on a non-GAAP basis also, which excludes stock compensation expense, amortization of intangible assets associated with acquisitions and any onetime costs or benefits. All the transaction costs associated with the acquisition of MTS Medication Technologies were recorded in Q2 of 2012 and were excluded from non-GAAP earnings that we reported that quarter. For Q3 there were no onetime transaction costs recorded. We use non-GAAP financial statements in addition to GAAP financial statements, and we feel it is useful for investors to understand acquisition-related costs and noncash stock compensation expenses that are a component of our reported results. A full reconciliation of our GAAP to non-GAAP results is included in our third quarter earnings press release and is posted on our website. On a non-GAAP basis, earnings per share was $0.29 in Q3 of 2012, up from $0.16 in Q3 of 2011, and up from $0.20 in…

[Operator Instructions] Your first question comes from the line of Matt Hewitt with Craig-Hallum Capital.

First question, obviously, fantastic progress on the operating margin, and I think you touched on it a little bit as far as whether or not 17.4% was sustainable. It sounds like there were some items that impacted this quarter positively. Can you detail maybe what were those and why that would fall back? Obviously, there's mix variability every quarter, but what would cause that to fall back 100, 150 basis points to Q4?

We have a couple of items that hit during the quarter that were favorable, that were little bit unusual. First of all, we used very few relative to normal spare parts in our service process. That's not something that we expect to be normal and sustainable. I think it's just kind of an unusual blip. I'd like to think that none of our products will break in the future ever, but that's probably not the case. And it's not consistent with history. We also did a site shutdown for the first time in the company's history and a lot of people burned off some vacation, which favorably impacts the P&L. That won't repeat. And we'll do one again next year, but we won't be doing one in Q4. Then on the flip side we do have some additional expenses coming in, in Q4 as we move our facilities. I think we've mentioned before, we're moving to some new buildings in California, and there's some onetime move costs and then a little bit higher rents that come into play. So we won't see the same operating margins in Q4. And frankly, we expect our operating margins to hover, like I said, in the mid-teens. 15% was our goal, and we've always said and continue to believe that we need to reinvest in the business. 15% is a good return, and we'll take any additional profits and reinvest them in product development and market development.

Customer response since the acquisition, I know that initially there was, in particular, I believe a couple of customers that were pretty excited that you were making this commitment to the space. What have you heard since the acquisition? How are the sales teams reacting? Anything you can provide on that front would be helpful.

Well, of course, on the Non-Acute Care side, we've been able to build our pipeline or our cabinet a lot stronger because MTS Medication Technologies has a lot of relationships there. While we were selling in that marketplace before, that continued to do quite well, and we see a nice growth in pipeline. And on the Acute Care side, I think we have some opportunities in multi-dose adherence and maybe Chris, could you comment a little bit on those?

Sure, Randy. We've been able to get out into the marketplace since the acquisition and talk with some of our top IDN customers, customers like Partners, about the opportunity to integrate compliance packaging into their operations as they discharge patients. And in particular, we think that can go against the new 30-day readmittance rules. It's a new concept, and so is in very early days, but customers have reacted positively as they're seeing the future and health care change in their operations and see the opportunity for the MTS solution set to maybe have an impact on that future state.

Okay. And I guess along those lines, I think this past week, Walgreens came out and announced that they had -- it looked more like a beta test, but they were going to work with a couple of hospitals along those lines, where they were going to be providing medications for the first 30 days for discharge patients. Is that the type of opportunity that you could see yourselves in as far as maybe working with someone like Walgreens, but basically providing these blister pack dosage forms for 30 days worth of drugs? Is that kind of what you're expecting?

Well, Matt, I think everyone's trying to figure that out. And I think patients, in particular, are not viewed as just acute care patients, but now they belong to a whole system. And I think the systems all want to protect their patient flows, and that includes getting the meds after they leave the hospital because of the need to look at the patient's whole health care experience across the entire continuum. So a lot of people are running after different types of solutions and ways to do it. Some are going to partner, and I think some are going to take our technology and put it out there as a solution to meet those kinds of needs. So it's very much a new evolving market.

Your next question comes from the line of Charles Rhyee with Cowen and Company.

Just a couple of questions. A follow-up on that first one, Rob. When you said some favorable onetime -- not necessarily onetime, but some unique events in the quarter, I think you said 100 basis points to gross margin and then 150 to op margins. So you're just saying 50 basis points additional in the OpEx line?

No. So 100 basis points in gross margin and another 150 basis points in the OpEx line. So we were at about 17.5% margins. Without those sort of activities that took place in the quarter, operating margin would've been more in the 15% range. Said differently, we saw a sustainable improvement from the previous quarter, where we booked about 13.3% operating margin. We saw sustainable improvement up about 15%.

Great. Okay. And going forward, I mean, I think you've stated before that you would look to reinvest beyond 15%. Is that still sort of your expectation or could we see our margin shoot back up to this 17%, 18% range?

In any one quarter, I think, as I said, we're going to hover around the 15% goal. I think some quarters we might be a little bit less and some quarters a little bit more. But over the long term, our objective will be to manage to the 15% operating margin. And to the extent that we do see more profitability through cost controls or through product mix, we will take advantage of that and reinvest it in the business.

Okay. Obviously, the results were good, and you were talking about record orders. Any reason not to raise the product backlog guidance? Is there anything different between sort of the orders that you're booking in the third quarter that wouldn't necessarily drive a higher product backlog for year end?

Well, I'll take that first, and I'll let Chris comment also since all the sales force reports to him. But these are large equipment sales. Many times, our sales can be well over $1 million into multimillion dollar sales, and it is lumpy. We had a great quarter in Q3, and we're very optimistic about the year overall. But we also plan for growth during the year, and we're kind of on our plans for our long-term perspective. So that's why we're holding our guidance for backlog in $138 million to $142 million.

It's Chris. I'll just add onto that. Q3 is historically for Omnicell a very strong quarter, and that's what we planned for and executed to. The primary driver for that is, in addition to the various core streams of business that we enjoy quarter in, quarter out, it's also our strongest quarter for government orders. And so the VA and military hospital system, we saw strong order volumes as expected from them. And then as we roll in to Q4 to finish off the year, we've got a full pipeline and are confident of being able to get to the guidance range.

Okay, great. And then rob, I think I may have missed it, but I know you're giving numbers between the Acute Care side and the Non-Acute Care side. Can you give us sort of a revenue breakdown between the 2 by product and service?

The service revenue that we have in the company, which is $16.9 million for the quarter, is predominantly in the Acute Care side. Service for the Non-Acute business is about $700,000 a quarter, and then the rest is, the $16.1 million, is all in the Acute Care.

Okay. And then on the product?

So the product revenue is the remainder. I don't have it here by segment, but we can both do the math.

Your next question comes from the line of Sean Wieland with Piper Jaffray.

I wanted to ask about the Cerner relationship and how do you think that, that's going to impact order flow going forward and if you've had any -- if that's had any meaningful impact so far?

Sean, it's Chris again. We're really excited about the new Cerner partnership, and we're not the only ones excited, I would say. I was able to get to their health conference, and we had a lot of Omnicell customers come by and indicate how enthusiastic they are for the partnership. We have work to do now that's already been defined with Cerner to get ourselves on to the iBus and be able to start delivering solutions to our joint customers as early as Q1 of next year. And then there'll be ongoing development beyond that. So nothing yet, I mean, the partnership was only just announced. So nothing yet that's booked directly attributable to the partnership, but certainly a lot of enthusiasm in the marketplace.

And a follow-up question to the line of questioning before about MTS and the 30-day readmission issue. How do you help or what kind of challenges do your hospitals face in dealing with the reimbursement process around these meds? How complicated is it for the hospitals to get paid if they do use an MTS solution to address the readmission?

Well, most hospitals already have an outpatient pharmacy operation. And so they already have a billing process for adjudicating with the PBM. So that's generally not a problem.

Your next question comes from the line of Steve Halper with Lazard Capital.

Based on the commentary, it sounds like you had a good quarter in terms of conversions. Could you just give us a little bit of color on the competitive market and what should we be looking for at the Pharmacy Show in early December?

Steve, it's Chris again. I think the competitive dynamics remain largely unchanged. We tend to see CareFusion in every account that we go for. Whether it's a competitive swap opportunity or a new business. And we continue to execute and stay right in that range of about 1/3 of our business coming from those competitive swap outs and new accounts. And we've been particularly pleased with the competitive swap performance. Of late, I think our G4 product line and our broad suite, including Savvy, anesthesia workstations, central pharmacy, et cetera, is really playing well right now in the marketplace. In terms of ASHP, we've got some exciting new stuff to launch to the marketplace and good augments to what we have in our current portfolio and our next -- you'll be able to preview our next release of the software.

Okay. And just going back to CareFusion, based on your intelligence, have they gotten any traction with ES, which I guess was announced a year ago at ASHP?

We have not seen it broadly in the marketplace.

[Operator Instructions] Your next question comes from the line of Leo Carpio with Caris and Company.

A couple of quick questions. Did the share repurchase activity have any impact this quarter on EPS?

Yes, a little bit. We did about 1/2 of the $5.6 million that we bought back towards the beginning of the quarter, and that lowered our average share count a couple of hundred thousand. The rest of it was in the end of the quarter and had little effect on the average share count.

Okay. And then regarding the big question in terms of capital spending outlook, what are the hospitals telling you in terms of -- is it still the same situation of last quarter that the large hospitals are still moving forward and small and midsize are a bit better in spending? Or is the situation a bit better?

I think all hospitals are trying to make investments to get themselves more efficient and a lot of the new products that we brought out last year helped even more. Our systems always help, and they help even more with efficiency. So we are seeing that we're still on the capital prioritization list. I think overall all hospitals, of course, are constrained, but their economic situation is changing. On smaller hospitals, we haven't seen any particular improvement in smaller hospitals over the last 3 quarters. And we saw some improvement towards the end of last year and towards the beginning of this year. But they continue to buy at about the same rate. And then the large academic centers are very active.

And in terms of the contract installation activity that you saw this quarter, were there any deal that pulled forward from the fourth quarter or was everything scheduled for third?

You're talking about orders or you're talking about revenue?

Revenue.

So for revenue, everything was scheduled in pretty early is typical with our installations after we get an order, there's a period of planning with the customer before the installation actually starts. And the installation times would be scheduled multiple months in advance. Unless it's just a small add-on to an existing installation. So our orders, our installations, which resulted into revenue were pretty much on the schedule that we expected.

There was nothing pulled down. It was just our regular run rate.

Okay. And then last question. In terms of the situation with the presidential elections, has any of your hospital customers expressed any concern looking forward to 2013 or regarding the fiscal cliff?

I don't think so. I think for the most part, hospitals kind of know what the picture looks like going forward and it's all -- the major activity going on in every hospital we see is a lean project, where they've implementing lean process. Most hospitals have selected their major HIS vendor, probably installed the first 2 phases of that, and now we're really focusing on lean projects to drive out cost as they have to get more efficient with more patients and about the same revenue and think of the future. So a lot of activity around those kinds of projects which tends to lead to our kinds of systems which are automating manual task and taking out cost and improving quality. So I don't think the presidential election or even the fiscal cliff will actually have much impact on hospital decision-making for our type of systems.

Okay. And then just sorry for last one, this one. On Meaningful Use Stage 2, I think we've talked about in the past that it's a possibility for renewed order flow and demand there, and since the regs came out in August. Have you seen any increase in demand related to it or order flow you had or it's just too early to tell?

Meaningful Use Stage 2 has some requirements about end-to-end control of medications. Those requirements do not specifically drive demand for our products. The overall system of control of medications, obviously we contribute to and as hospitals want to get better control over that overall process, there's more interest in our systems. But Meaningful Use, and no one would have to buy automated dispensing systems to meet Meaningful Use. They can do that with bedside point of control.

Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital.

A couple of follow-up questions. First, you mentioned the Erie as a big adopter of the Savvy mobile carts, and I'm curious, given that the product's been out for a little while now, what can you tell us as far as adoption from a bed count to cart ratio? I think originally it was, we're going to try it out in a couple units, see if we like it, and then maybe expand. Are you starting to see that expansion? Any color there would be helpful.

The Savvy mobile medication system is configurable, and you can have anywhere from 2 medication drawers on and up to 12. And so it can be used in any sort of ratio like that. We tend to see the ratio typical of a nurse-to-patient ratio, in the 5 to 6 range. The Erie County installation, it's a 550-bed hospital, and they're buying about 100 carts. So that ratio is, I think where it's going to come out over the long run, but there is a variety. Every hospital's a little bit different. It has to use it in various different parts of the hospital as applications for a very high ratio to patients and lower ratios to patient.

And then internationally, it sounds like you had a nice win in France. Is Europe maybe coming back or are they still challenged economically and therefore, it's maybe a little bit less of a priority versus maybe China or even Australia, as it sounds that's becoming an opportunity for the Non-Acute Care?

We have great partners in Europe. Europe obviously is challenged economically, as we all know. We have had some of our largest installations in Europe, like the Karolinska Institute that we talked about in the past and the Guy's and St Thomas' Hospital in London. This win in France is a great win with us. We've got some pretty large installations in France already. This is a great opportunity for us to sell into that organization without them having to go through the whole tender process. Our focus does remain in the Middle East where there's a lot of new health care organizations and facilities being built. And the clinical workflow tends to be somewhat similar to what is in the United States. And so our systems apply very readily. And in China, where of course there haven't been any automation systems like ours, there's very large hospitals and there's a great opportunity to bring our efficiency and medication control to that environment. But certainly, we still have our partners in Europe that are working there on sales process and have opportunities now and then.

I guess, speaking to the China opportunity, and I know it's very early there. But I think initially, and it sounds like you've got a great partner. But initially, as it was going to be with the trials, maybe 5 or 6 cabinets. It's obviously a big change in workflow for them. How has that continued to evolve and are you seeing more and more interest from some of the larger hospitals there?

Well, it's going well, and it's going pretty much like we expected it to. As we said, and you just repeated, we expected those hospitals to initially implement in a small portion of their facility, try it out, see how it works, test the changes in workflows and of course, in any hospital when you change a workflow, it's a pretty big deal. So once they've got all the bugs worked out, then they would deploy it further in their facilities. That's exactly what we see. We've got a great pipeline of hospitals there in different stages of implementation and planning for implementations. And we're working out initial bugs with each one of them with their unique aspects of their individual workflows. But it's going pretty much as we expected and really meeting all of our expectations.

I guess one last from me. Do you have a breakdown for international versus domestic, particularly I guess on the Acute Care side scenario where you've talked about it maybe only being 5% to 10% penetrated, but a very similar sized market for the domestic business? Where does that sit today versus maybe the long-term aspirations?

Well, our International business, our business outside of the United States and Canada, let me put it that way, is still less than 5% of our overall revenues. And what we said in the past, and we still believe is there is a path as medication control and automation of medications and supplies becomes more prevalent. The path to get closer to 20% of our business overall. The numbers I'm talking about here are for the Acute Cares because that's what you asked about. In the Non-Acute side, and we already have about 20% of the business outside the United States, and that's where most of the multi-medication packaging exist, those adherence packages, primarily in U.K. and in Germany and Australia.

There are no further questions at this time. I would now like to turn the conference back over to Mr. Randall Lipps for any closing remarks.

Well, thanks, everybody for joining us. And really a great shout out to the Omnicell team for all the records they produced this quarter to get us to the 15% operating margin to great orders record and profits. It's a significant milestone for us as we look to continue that momentum as we move forward. Thanks, everyone, and see you next time.

Thank you for participating in today's conference. You may now disconnect.