Omnicell, Inc. (OMCL) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2012 Omnicell's Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Rob Seim, Chief Financial Officer. Please go ahead, sir.

Thank you. Good afternoon, and welcome to the Omnicell 2012 Fourth Quarter Results Conference Call. Joining me today is Randall Lipps, Omnicell Chairman, President and CEO. You can find our results in the Omnicell fourth quarter earnings press release posted in the Investor Relations section of our website, 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 January 31, 2013, and any 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, other duplication or rebroadcast without the express written consent of Omnicell is prohibited. Randy will cover an update on our business first today, and then I'll cover our results for 2012 and our guidance for 2013. And following our prepared remarks, we'll take your questions. Randy?

Well, good afternoon. We had one of our best years ever in 2012 and an absolutely outstanding fourth quarter. We had record orders driven by competitive conversions and other new customers, increasing year-end backlog by 16% to $155 million, well above our guidance. We had record revenues and ended the year at our goal of 15% operating margin. As well, our recently acquired Non-Acute business segment is contributing significantly to our profits. We believe our hard work over the past years and the execution of our 3-leg strategy laid the foundation for the success we had in 2012 and sets us up for growth in the future. The first leg of our strategy, which is expansion in the U.S. market through the delivery of differentiated, innovative solutions is demonstrated by our record bookings and revenue in 2012. Utilization of our systems is still growing in the U.S. as we provide solutions that we believe improve patient safety and lower the cost of delivering health care. The second leg of our strategy is expansion outside the U.S. where our systems are just beginning to be adopted. While still a small part of our business, our international team posted record orders, and we believe our strategy of targeting specific growth markets is working. And the final leg of our strategy is expansion through the acquisition of new technologies and strategic partnerships. And in 2012, we delivered on this part of the strategy with the largest acquisition in our history and a new alliance with Cerner to deliver enhanced interoperability. The continued momentum in the market is demonstrated with orders from key new accounts such as Oregon State Hospital, Regional Health in South Dakota and Martin Memorial Health System in Florida. These 3 systems represent 8 hospitals and over 1,600 beds. Our new hospital customers represent every segment of health care, from a significant order that we received from Sidra Medical and Research Center in the Middle Eastern country of Qatar to orders from regional hospitals such as Springhill Medical Center in Alabama. While these customers are geographically separated, they are all similar in their commitment to provide the highest level of patient care and safety. They all chose our Omnix (sic) [OmniRx] automated medication control solutions, a product that in 2012, won the top award from the prestigious third-party rating firm KLAS for the seventh consecutive year. At Omnicell, we strive to provide the best solutions and the best customer experience. Our G4 product line introduced in 2011 and subsequent versions of our OmniCenter software are examples of how our systems allow customers to stay current and grow their installations with minimal disruption. Our solutions are also integrated into a single database, the Unity platform, which eliminates redundant administration steps for clinicians and frees them to spend more time with patients. As I had mentioned earlier, Sidra Medical and Research Center is a groundbreaking hospital, research and education institution currently under construction in Doha, Qatar, that will focus on the health and well-being of women and children, regionally and globally. Sidra will be a fully digital facility incorporating the most advanced information technology applications in clinical, research and business functions. The high-tech facility will not only provide world-class patient care but will also help Qatar's scientific expertise and resource. Sidra is being funded by a $7.9 billion endowment from the Qatar Foundation, one of the largest endowments of its kind in the world. And after a rigorous evaluation of all the solutions available on the market and a thorough decision-making process, Sidra chose Omnicell. Sidra is implementing our medication control systems throughout their operation, including OmniRx, our operating room products and our Savvy mobile medication system. They're also implementing our supply control systems house-wide. We're proud to be partner with Sidra and excited about our momentum in the Middle East region. In our Q4, our recently acquired MTS product line of Non-Acute Care medication control solutions performed well, contributing 30% of our operating profits. We're very excited to be at the forefront of bringing in enhanced solutions for medication adherence to the market through the MTS multi-medication solutions. Although medication adherence is an emerging market today, we believe that long term, it is a significant worldwide market opportunity. And before I turn the call over to Rob to cover the Q4 and 2012 results, I'd like to just comment on how very proud I am of our team's accomplishments. In the 20 years since I founded the company, we have never lost sight that we generate value through improving health care for everyone. And on average, 4 out of 5 days in every week, a new customer chooses Omnicell as its partner. And we now count over 2,700 hospitals and 6,000 institutional pharmacies using one or more of our solutions. Every day, our products serve the caregivers of thousands of patients around the globe, saving money and improving patient safety. With that, Rob, give us some more details on Q4 and the year.

Sure. So we have a lot of records to talk about for the fourth quarter of 2012 and for the full year. First of all, orders were very strong in the quarter, topping off a year of growth and resulting in record order volumes. Product backlog ended the year at $155 million, exceeding our guidance range of $138 million to $142 million, as Randy mentioned, up 16% from the ending backlog of 2011. The backlog is almost completely comprised of Acute Care products, and so it's directly comparable to 2011. Contributing to the quarter were the Sidra order and several other sales to new customers. Orders from new and competitive conversion customers were 48% of Q4 Acute Care bookings, with approximately 2/3 coming from competitive conversions and 1/3 from greenfield customers who had never purchased automation before. For the full year of 2012, 37% of our Acute Care orders came from new or competitive conversion customers. Every year since 2005, our orders from new and competitive conversion customers have been over 1/3 of our business. Backlog and new customer measurements have been a great indicator of success in our Acute Care business. We're extremely proud of our performance. We do, however, recognize that since the acquisition of MTS, the product backlog number represents a smaller portion of our future revenues. Because of this, in addition to backlog, we are also now going to begin reporting bookings annually. Bookings are all new firm orders for our products and will now include orders for Acute Care products that typically will be in backlog for several months before installation and revenue recognition, as well as orders for Non-Acute Care products, which most frequently are shipped for revenue within 2 weeks of order. In 2012, our product bookings were $266 million, including the contribution from MTS after the May 21, 2012, acquisition. Our 2012 financial performance was very strong. Our revenues of $314 million were a record. Non-GAAP net income of $0.87 per share was consistent with our increased guidance from 90 days ago and well above our guidance range set at the beginning of the year and the increased guidance given shortly after the acquisition of MTS. We ended the year with $62 million of cash, DSOs of 56 days, no debt, and with non-GAAP operating margins at our target of 15% for Q4. Revenue for Q4 2012 of $90.2 million was at the high end of our expectations, up 43% from Q4 2011 and up 7% from Q3 2012. Q4 2012 profit on a GAAP basis was $0.16 per share, up from $0.12 per share 1 year ago. For the full year of 2012, revenue of $314 million was up 28% from 2011. GAAP earnings per share of $0.47 was up $0.17 from $0.30 in 2011. 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. We use non-GAAP financial statements in addition to GAAP financial statements because we believe it's useful for investors to understand acquisition-related costs and noncash stock compensation expenses that are component of our reported results. A full reconciliation of our GAAP to non-GAAP results is included in our fourth quarter earnings release and is posted on our website. On a non-GAAP basis, earnings per share were $0.25 in Q4, consistent with analyst expectations. Non-GAAP EPS was down sequentially from $0.29 in Q3 2012, as expected. In Q3, we had several operational benefits totaling approximately $0.04 of earnings that we did not expect to repeat in Q4. Non-GAAP earnings per share were up from $0.19 in Q4 of 2011. For the full year of 2012, our non-GAAP profits increased from $0.60 per share to $0.87 per share, an increase of 45%. Non-GAAP operating income was up from 11% to 14%, reflecting our steady program of profit improvement and capped off by 2 sequential quarters at or above 15% operating margins. Adjusted earnings before interest, taxes, depreciation and amortization, which also excludes stock compensation, amortization and the amortization of acquisition-related costs, was $16.2 million for the fourth quarter of 2012, up 54% from $10.5 million a year ago. For the full year of 2012, adjusted EBITDA was $54.4 million, an increase of 58% from $34.4 million in 2011. Our Acute Care segment, which includes everything we sell to hospitals, contributed $68.9 million in revenue and $9 million of operating income in Q4 2012, roughly 70% of the total operating income of the company. Our Non-Acute Care business consists of solutions sold outside the hospital setting, including equipment and consumables that manage medication through adherence packages and dispensing systems sold to institutions serving long-term care needs. Over 80% of the Non-Acute segment revenue is comprised of consumables used by pharmacists to make blister cards that are at the center of medication control in most Non-Acute Care facilities. Non-Acute segment contributed $21.3 million of revenue to the quarter and contributed $4.1 million of non-GAAP operating income, or 30% of the total operating income of the company. The balance sheet ended very strong. Cash was $62 million, up $7 million from Q3 2012. For the full year of 2012, our free cash flow was over $25 million. Accounts receivables days sales outstanding were 56, down 2 days from last quarter. Inventories were $27 million, roughly flat to last quarter. Our headcount was 1,089, up from 773 at the end of 2011, due primarily to the addition of 295 staff members from the acquisition of MTS. Now looking forward, we know our customers will continue to face unprecedented change over the upcoming years. We believe we can help them meet regulatory and cost challenges. We're optimistic about new emerging opportunities for medication adherence. We believe our solutions will play an increasingly integral part in making health care organizations more efficient. In 2013, we will have a full year of revenue from MTS Solutions sold to Non-Acute Care customers. We expect revenue to be between $370 million and $380 million, an increase of 18% to 21%. We expect revenue growth for the Acute Care segment, which is all organic growth, to be up 10% to 12%. And revenue for the Non-Acute segment is expected to be up 60% to 70%, reflecting the full year of the MTS product line. We expect non-GAAP earnings to be between $0.97 and $1.05 per share, up 11% to 20%. We expect steady revenue and earnings growth through the year, but we expect Q1 2013 to be $86 million to $88 million of revenue and approximately $0.19 non-GAAP EPS. We typically experience higher expense levels in Q1 due to several seasonal factors in our business. We will continue to report product backlog annually, and we will now also report product bookings annually as well. We'll provide updates to the annual bookings expectations each quarter as we go through the year. We expect 2013 year-end product backlog to be between $160 million and $165 million, and we expect product bookings to be between $305 million and $315 million. We have steadily improved our operating margins over time, and we're now operating near our goal of 15%. We expect our results to fluctuate from quarter to quarter but to average near the 15% objective for the year. And now, operator, I'd like to open the call to questions.

[Operator Instructions] Your first question comes from the line of Jamie Stockton from Wells Fargo.

I guess maybe, Rob, first thing, is there any specific dollar amount you can tell us about the portion of the backlog that comes from MTS? Or is it just really just 0?

Almost all of the backlog is Acute Care. There's just a very nominal portion that's Non-Acute Care.

Okay. And then maybe with the deal in the Middle East, it sounds like international is becoming a more significant part of the business. I think that what you guys have disclosed historically is that outside of the U.S. and Canada, international has been like 2% of revenue or somewhere thereabouts. Can you give us any update on what portion of the business or maybe what portion of the backlog is coming from international now?

I don't have a breakdown on the backlog, and that would fluctuate because international orders, of course, are still kind of lumpy. But remember that with the acquisition of MTS, we do have more international business than we had historically. About 15% of the MTS business was international. So we're looking at our international business being high single digits -- at or around 10% of our business now.

Okay. And then, maybe just the last part, Rob, Randy, whoever wants to take this, but the MTS acquisition, from an integration standpoint, where do you guys feel like you stand there now?

We feel like the integration has gone quite well and we're on track, and I think demonstrated by MTS delivering the profits that -- and contribution to the company is another sign that, that's on track. And we see lots of opportunities in the marketplace for growth with that business, not only in the Non-Acute space, but eventually some growth in the Acute Care space. So we really feel great about the acquisition, and performance and integration are right on track.

Randy, is there anything specifically that you guys are doing to take that business into the Acute Care space? I mean, have there been any changes that you could talk about already that have occurred?

We're introducing some new products, we haven't gotten there. And so they're mostly conversations at this point, but we can see that there is a market there and that we will be successful in the future. We believe we will.

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

[indiscernible] on a number of fronts, obviously, from financial performance, but also on some of the other areas that you discussed. A couple of questions. First of all, along the lines of the MTS acquisition, some of the penalties that came in place here this past fall, have you seen any movement from hospitals looking to you as a possible solution? And where do you think you are as far as that pipeline is concerned?

Well, Matt, I think hospitals are just starting to understand what those penalties actually equate to, as one of my colleagues who runs a hospital said, we probably won't do anything until we get 2 quarters of penalties before we start implementing -- decide we need to implement a solution. So I think everybody recognizes it's coming, but it's still early on. And I think hospitals are looking for a lot of help on the playbook to help them set up to deal with readmittance. I believe you're referring to the readmittance penalties that hospitals will be paying in the future for any Medicare patients being readmitted within 30 days. And so that's just beginning to hit hospitals' P&Ls, and I think it will be another quarter or 2 before it really allows us to move more aggressively into that market.

Okay. Secondly, you had -- just going back here a number of years, I mean, it looks like you had a record performance from new customer orders at 48%. Is that the new G4 platform that's driving it? Obviously, your competitive conversions have been strong here the last few quarters, but maybe some color in what's driving those new orders. And where does the market stand from a greenfield opportunity? Where do you think the market is penetration-wise?

Well, it is -- over 90% of hospitals have some solutions today. So out of 6,400 hospitals that are in the SDI [ph] database, we're looking at somewhere in the range of 600 that have no implementation in the United States. But a lot of our greenfield is also coming from the growing international business where just about every deal is a greenfield. When you look at why customers choose Omnicell, we have a number of differentiators. And usually, it's a collection of several of them, from the 10-year cost of ownership to the ease of using our products to some of our advanced features and just the iTouch sales, service and installation relationship that we maintain with customers. Usually, when we're able to move a customer from competition or win a new account after they've done a pretty thorough analysis of all the competition, it's some combination of those things. We're obviously very proud of being able to take the number of new accounts that we have, and Q4 was a real good quarter. It bounces around a bit quarter-to-quarter. It's a long sales cycle, and often, several deals will fall in the same quarter. But the way we tend to look at it is over a full year, taking out some of those fluctuations. As I mentioned, we've been 8 years in a row now over 1/3 of our business from new customers and customers who are doing competitive conversions. So that's going real well for us.

Yes, that's an amazing metric. One last from me, and then I'll jump back in the queue. You touched briefly on the international markets. Where are you, do you think, from -- well, I guess, better way to ask this, Middle East, you've had significant amount of traction already. I think it was 17 out of 18 of the last deals that have come up in that region, you've won. Another area that you're starting to see some initial traction with is China. Maybe if you can discuss where you think you are in those 2 markets? And what kind of growth rates you are anticipating from those 2 markets in '13?

So we're happy with our progress in the Middle East. It's not the largest market in the world, but they're definitely implementing a lot of health care improvements now. And we're doing well, obviously, in that region. In China, not a lot has changed in the last 90 days that we spoke. We've got a pretty long list of hospitals there doing the first implementations or lining up to do the first implementations. But it's still early. It's major workflow changes for these hospitals to go from their completely manual systems in these very large institutions to utilizing our systems, and they tend to test it out in 1 ward or 2 wards first. Not completely unexpectedly, but we did run into some initial hurdles getting our installations done, just more learning the region and learning how the systems will be utilized there more than anything. And those are pretty much behind us. And so we've got multiple installations going right now.

So could that be an area where you see double-digit or 20% growth? Speaking o U.S., I guess, in '13? Or how should we be thinking about that?

Well, we think that overall, the region is going to be a very good market over time. It's a little hard to tell exactly what the -- how fast the uptake will be. But certainly, we're gaining a lot of traction, and we've got many, many people now involved in the selling process through our partners in the installation process. So it's a good learning experience that's going on.

But I would say international is a faster-growing segment for us than U.S., for sure.

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

Rob, maybe going back to the bookings here, it seems -- it's good to have another metric to look at. Just kind of playing around with the numbers here. Is it fair to just take bookings and then subtract out the backlog, if I assume that's pretty much all Acute Care? And is it right to think then we're saying Non-Acute bookings was around $111 million in 2012? Or is that too simplistic? I'm sorry, no, my numbers are wrong here. Obviously, yes -- isn't that about right?

No.

No? If we did $155 million in the backlog?

Yes, we -- so bookings for the Non-Acute segment is pretty much equal to revenue because there's not much time between taking an order and shipping it. We had about $50 million of revenue in 2012 in the Non-Acute segment.

Okay, so there's -- okay, I can't do that then. Okay, that's fair. Is there any reason why you -- so I guess the other question that I have then about those bookings numbers. Since there's a good portion of it -- there's a decent portion that is Non-Acute that gets recognized fairly quickly. Is there any reason why -- or is there any way that you could give us -- or would you want to give us quarterly bookings in the future? Maybe not full backlog, but does that -- is that something that we could expect maybe in the future as you got a better handle on particularly MTS side? Or does that not necessarily make sense for you?

We don't really think it makes sense to do the quarterly bookings numbers. Our -- since we are predominately capital equipment, our order rates do fluctuate quarter-to-quarter. And we look at our business on a longer-term basis. Internally, when we look at the management metrics of the business, we are really looking at the annual numbers and the forecast for the annual numbers. Because you can have a couple of deals worth multiple millions of dollars that slide from one quarter to the next or come in early, earlier than expected, that will early skew the quarterly numbers. So we intend to continue to give you backlog on an annual basis. We'll now give you bookings on an annual basis, and we'll give you guidance each quarter to where we think that's coming out.

Okay. And then where do you think -- if you look at where your original backlog guidance was for this year, where did you start really tracking ahead of your expectations? Because obviously, we didn't get a lot of backlog guidance in prior periods. Was it all sort of end of the year? Or was this slowly building in the third quarter and the fourth quarter -- third quarter as well?

Well, not unlike a couple of other years in our history, we had a lot of large deals lined up for Q4 this year. And so when we gave guidance back in October that was consistent with the backlog guidance we'd had in the past, we were looking at the possibility of quite a few deals closing, but you never quite know whether they're going to get through -- the customer is going to get through their process or not. We ended up having a very good fourth quarter, and of course, well over exceeded the expectations on the bookings and the orders.

Okay, that's really helpful. And then just last question. You gave us the Acute, Non-Acute split on revenues and operating profit. I might have missed it. Did you give it also for gross profit at all?

We did not in our prepared remarks, but that will be in our public filings. Total Acute and Non-Acute will be in there. I don't have it right here at my fingertips.

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

So it's been a while since you've beaten the backlog number like this. And I'm just trying to put my finger on exactly what were the ingredients in that? It sounds like you talked a lot about your execution. You've talked about the market. But I mean, specifically, as I look at this business year-over-year, too, it's been like 5 years since you put up this kind of beat on the backlog number. So as we look at it over that year-over-year perspective, what's changing, either in the market or your execution or whatever, to cause you to beat the backlog like this?

Well, we've talked a lot about the fact that we've made investments over the last 2 years in our product line and expanding our sales force and getting in more competitive fights. And although I say it frequently, our sales cycle is long and it takes a while for that all to start getting traction. In 2012, particularly in the last part of the year, it all started getting traction. So those long sales cycles started coming -- playing out, finishing out, and we found ourselves winning quite frequently.

And I was just saying, I just think we saw a solid performance all the way around the company, international, competitive conversions, new account greenfields, the expanded sales force reaching into some more accounts, G4 upgrades. All parts of the business were contributing to the growth, and we continue to see that building in our pipeline, as with the core as well. That's because of investments we've made over the last 2 years.

Is there anything happening specifically on the competitive front, that aside from what you've done, is there anything that where the competition is stumbling that you've taken advantage of?

I don't think so. I think we are getting in more fights than we have in previous years because of our extended reach. And so that gives us more opportunity.

Okay. Was there anything you had originally forecast to come in, in 2013 that came in early?

Not really. [indiscernible] got pushed to 2013, but everything seemed to line up well and finish all in Q4.

Okay. Can you give us what the 2011 bookings were?

Yes, the 2011 bookings, of course, had no MTS in it. We hadn't acquired them. It was $189 million.

Your next question comes of the line of Raymond Myers with Benchmark.

I wanted to ask you about your revenue conversion cycle. In light of the very strong bookings we had in the fourth quarter, how long does it take to convert that to revenue?

Well, that's quite a wide range depending on the customer type. If it's an existing customer that is adding on to their installation, that tends to go pretty fast, a couple of months. If it's a new customer that's doing a -- it's a brand-new installation or it's a new hospital, like the Sidra Hospital in Qatar, that can be multiple quarters up to a year. So on average, we tend to have about 8 months of forward revenue for the Acute Care segment in backlog at any point in time.

Right. Next, let me move to the SG&A expense. There was a large uptick in SG&A expense in the fourth quarter. To what extent was that driven by bonuses related to the very high backlog in the quarter?

Certainly, there is part of those expenses that are driven by incentive payments, about $1 million. But recall also that in Q3, we had quite a few lower spending rates than we expected. And so the combination of those 2 is what drove the expenses up quarter-to-quarter.

Is that related to the gross margin expansion that you said was temporary in Q3?

Some of it was the gross margin. In Q3 we had, particularly in our service business, very low parts usage. But the main thing in the rest of expenses was we shut down for 1 week and we had extra vacation taken and burned off our accrued vacation balance. And that was throughout all the lines of the P&L.

You had roughly the same gross margin in the fourth quarter as in third. And yet in the third quarter, you guided us that, that was a temporary uptick in gross margin. And you've just repeated it.

That's right.

Where do you see gross margin headed now in light of 2 quarters in a row of high numbers?

Well, we expect our product gross margins for each line of business, the Acute Care and the Non-Acute Care line of business, to be steady. And we have a number of cost initiatives going on. And if there's no price deterioration, we could see some improvements. But the mix of products will change over the course of the year because we have more -- we have a full year of MTS now, and they carry a lower product gross margin. So the 55% range that we've been in for product gross margin will probably be pretty consistent. Service, we've been enjoying extremely high service gross margins now for 3 quarters in a row. Certainly, our objective is to keep them as high as possible, but besides the service parts, we had quite a bit of revenue in the service line associated with other revenue associated with end of term [ph], rentals and timing [ph] material on service and things like that, that tends to be kind of lumpy. The service gross margins can be anywhere between 50% and 55%.

And let's talk for a second about the MTS acquisition. You've had some time to digest that, to assess what you have. Can you talk about what you're experiencing in terms of the integration of MTS and possibly some cross-selling opportunities if it's not too early to talk about that?

I think we've had MTS over 7 months now. And we're certainly very diligent about getting all of the things that need to be run from a corporate standpoint, on the administrative side done, and we feel very good about where we are and are on plan. And we've already -- and as soon as we made the acquisition, we made some organizational change on the selling side that really allowed us to take some of our -- traditionally our small portion of our Non-Acute Care business that Omnicell did pre-acquisition, moving it over to the Non-Acute Care side to give us more leverage in the Non-Acute Care market. And we've seen that performing quite well for us. And I think, as we had hoped, we're investing more money in R&D to work on products that will serve us not only in the Non-Acute Care market but will cross over into the acute care market. And we haven't delivered on those yet, but those are in the plan and on schedule. So we feel really good about the acquisition. It's been relatively few bumps in the road. And it's performed really well, and we're really excited -- I mean, it's just been a great acquisition for us. And it's a business that fits really well with where health care is going today, which is it's mixing the Acute Care and Non-Acute Care. And if you talk to most of these hospital IDNs, it's about all their outpatient business that's growing, it's not their acute care. So having a facility and a function that can eventually service that group in these IDNs is really important.

Great. And then maybe my last question would be about the new products that you see on the horizon, when you might -- could you give us a little detail as to when we might see some new products? Particularly, I'm interested in the multidrug packaging business.

We're always developing new products, and you know our history has had new software out just about every year to 18 months. We come out with new hardware modules periodically. We certainly are developing more packaging solutions, and I'm talking about automation equipment solutions and software solutions for the multi-med business. We, today, really just have one piece of automation, which is a large machine that's used by organizations that need to pack many of those multi-med cards. And we have in our development stream other products and software that help customers of varying sizes. We haven't announced anything on when those would be delivered yet.

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

What is the implied tax rate in your guidance for next year?

40%.

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

Just a couple of follow-ups for me. First, that 40% on a GAAP or an adjusted basis?

40% on GAAP earnings.

Okay. And then I just want to circle back on the SG&A line. Obviously, the Q3 was light, and you talked about that. Even taking that into account, it still was considerably higher than earlier in the year. And you mentioned there was an additional $1 million or so for bonuses. But was there some additional hiring that occurred? Or was there something else that maybe popped into the equation in the fourth quarter?

Well, we've expanded our staff a bit through the year, but we do have other expenses that come up quarter-to-quarter. And so you see fluctuations. Everybody knows that in our business, the big trade show is the ASHP show in December, and so we put a lot of effort into that. It's a good sales opportunity for us. So those sort of things will drive seasonal expenses and drive fluctuations.

Okay. And then I guess...

And then one other thing, I've almost forgotten it now, we did move our -- all of our facilities in Mountain View, our headquarters facilities, and so we incurred all the expenses to make that move in Q4.

Okay, that's it. Lastly from me, the G4 upgrade, it's been almost a year, a little over a year. Maybe how far are you through that process? The expectation was that it would take a few years. Are you still very early on in that? Or maybe where does that sit? And along those lines, correct me if I'm wrong, but shouldn't those or don't those orders typically flow through the backlog at an accelerated rate versus a normal system order?

Yes, Matt, this is Randy. They do flow through pretty quickly. And about -- I think we're not quite up to 15% of our customer base has done the upgrade, so about 85% still has to go. And we've seen a nice acceleration of those upgrades come along from last year, and then we even see, even expect better, bigger pipeline, better results even into this year. So we feel really good about it. It's been well received. And almost any customer who is doing a significant expansion order, because they acquired new hospital or new area of the hospital, is also throwing in the upgrade. So it's a nice value-add product that almost any significant project, expansion project, gets put into the pipeline.

We have reached our allotted time for questions. I would now like to turn this conference back over to Mr. Randy Lipps for any closing remarks.

Well, thank you, Susan, and thanks to all of you for joining us today. It was such a great year in 2012. We believe 2013 will be another great year for Omnicell. We've got so much to do. We're excited about international and our upgrades, our competitive wins, our new customers, and just the 1,100 Omnicell employees who make it all happen. Congratulations on a great 2012, and we look forward to a wonderful 2013. See you next time.

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