Omnicell, Inc. (OMCL) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Erica and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Third Quarter Earnings Announcement. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you, Mr. Peter Kuipers. You may begin your conference.

Thank you. Good afternoon and welcome to the Omnicell third quarter 2017 results conference call. At this time all participants are in a listen only-mode. Later we will conduct a 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 28, 2017 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 date of this conference call is October 26, 2017 and all forward-looking statements made on this call are made 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, auto duplication or rebroadcast without the expressed written consent of Omnicell, Inc. is prohibited. Randall will first provide an update on our business then I will cover our results for the third quarter of 2017 and our guidance for the year. Following our prepared remarks, we will take your questions. Our third quarter 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.

Good afternoon everyone. We’re excited to discuss our third quarter results as well as our continued progress and scaling of the XT Series market introduction that is gaining momentum every day. We are pleased with our progress and continuous innovation to build and expand the industry leading platform of pharmacy automation. Specifically so far this year, we have launched our new XT Series in January, which received great responses and we experience continued momentum for both existing and new customers. Secondly in April we announced the launch of AcuDose software on XT hardware which allows our Aesynt customers to take full advantage of the XT Series. Last quarter, we announced the launch of the XT Series Automated Supply Dispensing system and the controlled substance dispenser module providing innovative, efficient and secure workflow for dispensing and administration of controlled substances. We provided rate of flexibility through new mobile capabilities in Central Pharmacy Manager to integrate automated inventory management more naturally into pharmacy workflows. We also expanded the medication interference ecosystem on the Omnicell platform with the addition of the new VBM 200F advanced automated packaging solution, which adds to the market leading timeline medication synchronization cloud-based software and the proprietary SureMed multimed blister cards. And lastly, we expanded performance centers core capabilities of operational improvements and to clinical outcomes and regulatory compliance through internal development and the acquisition of InPharmics positioning Omnicell as the partner of choice for health systems looking to drive improvement across all facets of medication management. Earlier this week we announced our Annual Innovation Day for investors and analysts, which will be held at the American Society of Health-System Pharmacists ASHP mid-year meeting on December 4, in Orlando, Florida. At that time, we will showcase Omnicell’s innovation and industry leading differentiated platform of solutions. As a technology leader, we regularly broaden and refresh our product lines and we expect to have innovation announcements with an annual frequency. We expect that this cadence of annual product announcements and launches will drive multiple simultaneous product bookings and revenue ramp ups within a given year. From a business perspective it is clear that we are winning in the marketplace during the third quarter of 2017 we had a strong new competitive conversion rate of 31% of bookings. This is a great indicator, the strength of the business. And around two-thirds of those were competitive conversions. And the remainders were from Greenfield customers who had never automated before. For the 12 months ending September 30, 2017 our new and competitive conversion rate was 28%. We believe that the new account strength and installed 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. Second, the XT Series is very well received and accepted by customers. As of last week we had delivered XT to approximately 600 sites, which is up from 320 sites at the end of April. The XT Series is now live at over 330 sites, which is up from 170 sites at the end of April both numbers are growing every day. Third, the scaling of the XT Series revenue is progressing well specifically that the percentage of third quarter frame revenue that was from the XT Series came in about 90% versus our earlier expectation of about 80%. We now expect this percentage to increase to above 95% in the fourth quarter. We have also announced to customers the end of shipment of G4 and AcuDose by December this year. This will allow us to consolidate and reduce the number of ADC frame assembly lines from three to one. Now for the third quarter non-GAAP revenue was $187 million, which is slightly below the guidance range provided in our second quarter result earnings call. Non-GAAP revenue came in slightly below our guidance because of a number of small drivers or as timing of one large installed account. There was some impact from the Harvey and Irma hurricanes, which resulted in delays in specific hospital implementations in Texas and Florida. This is revenue timing as our agreements are non-cancelable and these implementations are being completed in the fourth quarter. And there was very minor delay in annual service contract renewals, which is also timing as we expect to catch up service revenue in the fourth quarter. Despite this revenue timing headwind for the quarter strong gross margin improvements and good operating cost controls resulted in non-GAAP EPS for the third quarter of $0.42, which is the middle of our guidance range and that consensus. In the last number of years we have successfully grown the business by implementing our three scalable growth strategies, growth through the differentiated Omnicell platforms, growth in new markets and growth via acquisitions. And for 11 consecutive years, we have received top honors from KLAS, the prestigious third-party rating organization, for 12 consecutive years. We have increased the market share and gained new thought leader customers every quarter. Increasingly, we are becoming a strategic business partner for our customers, developing multiyear plans to consistently deliver integrated solutions with state-of-the-art medication management automation and workflow efficiency across the Omnicell platform for caregivers and better healthcare outcomes for patients. In 2017 to-date, we have continued to experience great wins and added notable customers to our Omnicell family, under our first strategic pillar of differentiated platforms. With numerous large competitive conversions, we believe that we gain further market share in 2017, a continuation of the market share gain trend and momentum we have experienced for many years. In the third quarter, we had some great wins with prominent new customers as well as significant deals with existing customers, including Hackensack Meridian Health, NYU Health and Riverside Medical Center. Current Omnicell customer Hackensack Meridian Health has chosen to implement Omnicell’s Automated Medication and Management Solutions and enterprise services in it’s five recently acquired facilities. Hackensack Meridian Health, a national accreditation health network and the first in the nation to receive the magnet nursing recognition is further standardizing it’s medication and management technology across it’s growing healthcare system in order to improve clinical operations specifically by promoting patient safety and supply chain efficiencies. NYU Health, one of the premier academic medical centers of the United States and named the number 19 hospital in the nation on the 2017-2018 best hospital honor roll will be implementing Omnicell’s XT Automated Dispensing system including unique technology developed specifically for state-of-the-art Helen and Martin Kimmel pavilion scheduled to open in 2018. Riverside Medical Center, a top 100 hospital performing within the top 5% of hospitals nationwide currently on Omnicell supply chain solution customer has chosen to implement Omnicell’s XT Automated Medication Dispensing solutions and its facilities main hospital. Additionally Riverside will be outfitting its’ newly constructed central pharmacy with automation and software solutions that will provide enhanced safety, security, tracking and improved pharmacy workflow. Additionally this month, Texas Children’s Hospital located in Houston has chosen Omnicell’s Performance Center to improve optimization of the medication process across their health system. Consistently ranked among the top children’s hospitals in the nation Texas Children’s is also implementing Omnicell’s technology for its automated dispensing systems. These strategic wins in the marketplace are based on the strength of the solution in our portfolio with a differentiated Omnicell platform. We are also proud of our recent received industry award the Omnicell IV compounding solution and XT Series Automated Dispensing systems were awarded a 2017 Innovative Technology designated from Vizient the largest member driven health performance improvement company in the country. We are especially excited to receive the designation as it is the result of direct feedback from healthcare experts who interacted with the products and understand the value this technology brings to the industry. We are also excited that Frost & Sullivan recently named Omnicell as the 2017 Global Smart Hospitals’ Pharmacy Automation Vendor Company of the Year. The analyst recognized Omnicell for our excellence in growth, innovation and leadership will superior performance and demand generation, brand development and competitive positioning. Our second strategic pillar we’re expanding into new markets also fueled growth in the last several years and we believe sets us up well for the coming years. We are pleased to receive very positive customer feedback and are experiencing strong commercial momentum from the Omnicell VBM 200F, multimed automation solution and customers adopting globally including the U.S., UK, Germany and China. The Omnicell VBM 200F has been adopted in a verity of pharmacy setting serving different patient communities including chain and independent close-door pharmacies, retail pharmacies and specialty pharmacies. It is the only small footprint automated pharmacy solution that efficiently and accurately fills and verifies SureMed by Omnicell multimed blister containers. Recognizing the opportunity to gain control of their sterile compounding cost, Florida based Tampa General Hospital has chosen Omnicell IV solution to support in-house production of IV admixtures. In combination of IV automation technology and Omnicell’s robotic IV in-sourcing service or what we call RIIS will help Tampa General Hospital create a safer, more accurate and more cost effective compounding operation for the hospital. Our third strategic pillar of expanding our presence and relevance through acquisitions has also continued to deliver great results. The Aesynt integration is progressing well and we are seeing good cross-selling momentum within the total product portfolio and combine customer base specifically for our IV and Performance Center solutions. We believe that the execution of our 3-leg strategy laid the foundation for our success historically and sets us up for continued future growth and scale. In 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. I’ll turn it back over to you Peter for some financial updates.

Thank you, Randall. Our third quarter 2017 GAAP revenue of $187 million was up $6 million or up 3% sequentially, driven by the product sensation and related ramp-up of the XT Series launch. Earnings per share in accordance with GAAP were $0.16, which is up from a GAAP EPS of $0.05 in the third quarter of 2016. GAAP gross margin was 45.4% for the quarter or up 230 basis points from the second quarter this year. In addition to GAAP financial results, we report our results on a non-GAAP basis, which excludes stock compensation expense and amortization of intangible assets associated with acquisitions, onetime 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 is useful for investors to understand acquisition amortization related cost and non-cash stock compensation expenses that are a component of our reported results as well as onetime events and onetime acquisition and restructuring-related expenses. 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. Our third quarter 2017 non-GAAP revenues of $187 million were up 3% from the prior quarter driven by the continued ramp up of the XT Series market introduction. On the non-GAAP basis, earnings per share were $0.42 in the third quarter of 2017, which is above consensus and up $0.11 sequentially. We’re seeing good gross margin expansion as non-GAAP gross margin was 47.6% in the third quarter or up 230 basis points from the prior quarter. We expect gross margin to further increase in the fourth quarter as the XT Series will rollout continues to ramp up and we gain pro skill in efficiencies in manufacturing and installation. Non-GAAP adjusted EBITDA was $28 million for the third quarter of 2017 or up $8 million sequentially. Our business is also reported in segments, consisting of Automation & Analytics and Medication Adherence. Automation & Analytics consists of our XT and OmniRx Automated Dispensing Cabinets, Anesthesia Workstations, Central Pharmacy, Omnicell Supply, Omnicell Analytics, Performance Center and MACH4 robotic dispensing systems. Our acquisitions of Avantech, MACH4, Aesynt and InPharmics are also included in this segment. The Medication Adherence segment consists of all adherence packaged consumables which are now branded SureMed, an equipment used by pharmacists to create adherence packages as well as software solutions that aid retail pharmacies in medication synchronization and other apartment-based software model solutions. Our acquisitions of MTS, SurgiChem and Ateb, Inc are included in the Medication Adherence segment. As a reminder, we report certain corporate expenses that cannot be easily applied to either segment separately. On the segment basis, our Automation & Analytics segment contributed $155 million in GAAP revenue in the third quarter of 2017 up $152 million in the third quarter of 2016. GAAP operating income of $28 million this quarter compares to $19 million of GAAP operating income in the second quarter of this year and $25 million of GAAP operating income for the same quarter last year. Non-GAAP operating profit of $35 million for the third quarter compares to $39 million for the same period last year. The Medication Adherence segment contributed $32 million of GAAP revenue to the quarter compared to $24 million in the third quarter of 2016. GAAP operating profit was zero for the quarter similar to last quarter compared to $800,000 of GAAP operating profit a year ago. Non-GAAP operating income was $2.5 million in the third quarter compared to $2.3 million of non-GAAP operating income a year ago. Non-GAAP common expenses were $60 million compared to $90 million in the third quarter of 2016. Moving to operating margins. Non-GAAP operating margin, including Aesynt and Ateb integration cost, was 11.7% in the third quarter, up from around 6% in the second quarter. Excluding the integration cost of approximately $1.5 million, the non-GAAP operating margin was around 12.5% for the third quarter. Non-GAAP other income and expense was a net loss of approximately $2 million mostly consisting of interest expense on the outstanding loan values. Finally, we’re assuming an annual average tax rate of 35% to just GAAP tax expense to non-GAAP tax expenses. Moving to the balance sheet and cash flow. In the third quarter of 2017, our cash balance decreased from $27 million to $7 million after paying down our outstanding debt by $2.5 million in the quarter. The third quarter 2017 cash flow use and operations of $18 million was driven by an $11 million built in inventory for current and future implementations and by hard of accounts receivable. The average implementation period from the time of shipments to completion varies between couple of weeks two to three months for the larger implementations. Inventories at September 30, 2017 were $92 million, up $10 million from last quarter, primarily driven by an XT Series inventory build for future quarter installs. Accounts receivable days sales outstanding were 86 days up eight days from the second quarter and down five days on the third quarter of last year. The increase in accounts receivable days sales outstanding from prior quarter was mostly driven by info shipments towards the end of the third quarter for fourth quarter revenue. Based on our customer agreements we largely invoice upon shipment. As of September 30, 2017 we had $197 million of outstanding from the debt and our loan leverage measured as outstanding total funded loan balance over last 12 months of bank EBITDA was approximately $2.7. Our headcount was 2,336 at September 30 this year down from 2,348 at June 30 this year. During the third quarter, we executed well on a number of drivers underpinning the dynamics of the XT Series product introduction. As Randall mentioned earlier, as of last week, we have delivered XT Series to approximately 600 customer sites and the XT Series is live at over 300 sites, both numbers are growing every day. As part of the next phase of the integration of the acquisition of Aesynt, we are progressing well on the creation of the Centers of Excellence for product development, engineering and manufacturing, which we expect to substantially complete in the fourth quarter. During the remainder of 2017, we continue to focus on the following areas. First, accelerating bookings momentum; secondly, laying the foundations for XT cost of goods sold reductions as revenue ramps and we consolidate; three, automated dispensing cabinets assembly lines into one to drive further gross margin expansion and continued cost management. Moving to the fourth quarter. For the fourth quarter of 2017, we expect GAAP and non-GAAP revenue to be between $201 million and $207 million. We expect the fourth quarter 2017 non-GAAP earnings to be between $0.49 and $0.55 per share. As discussed in previous earnings calls, it’s important to note that from time to time installation completion timing on larger projects can impact revenue and earnings in a given quarter, but we don’t expect such quarterly fluctuations to impact the growth rate measured over multiple rolling quarters. Let’s now move to total year 2017 guidance. We expect 2017 product bookings to be between $570 million and $590 million. We’re narrowing the 2017 revenue range through our feasibility into our customers expected implementation by management schedules. We now expect both GAAP and non-GAAP revenue to be between $720 million and $726 million in 2017. Despite lowering the top ends of 2017 revenue guidance, we are raising the midpoint of our 2017 non-GAAP EPS guidance range and we now expect 2017 non-GAAP revenues to be between $1.27 and a $1.33 per share. Given the ramp up of XT Series revenue and related gross margin the company’s profitability as increased through the year in 2017, and we expect the non-GAAP operating margin, including integration cost for Aesynt, Ateb and InPharmics to be around 14.5% in the fourth quarter using the mid points of guidance. And hereby demonstrating increased every quarter this year of around breakeven at a first quarter to 6% in the second quarter and about 12% in the third quarter. Excluding the integration cost for Aesynt, Ateb and InPharmics acquisitions, we expect non-GAAP operating margin in the fourth quarter to be slightly above 15%, and in line with our long term financial model. Again, when reviewing 2017, it’s important to note a couple of items included in the 2017 guidance. First of all, for 2017, our non-GAAP expected results includes approximately $8 million of integration expenses for Aesynt and Ateb that we do not adjust for based on our non-GAAP policy. These integration costs directly impacting non-GAAP operating margin and non-GAAP EPS, mostly consist of integration-related IT expenses, integration team and project costs, costs related to the implementation of Sarbanes-Oxley and accelerated product development integration cost. Secondly in 2017, we’re expecting and are tracking to the second year cost synergies from these acquisitions of around $10 million annually. As we have demonstrated in the past, we’re confident that we will achieve our 15% non-GAAP operating margin target overtime after integrating the acquired businesses and getting the full benefit of the scale of the combined business. Lastly, for 2017, we expect interest expense related to the senior secured credit facility used to finance the Aesynt and Ateb acquisitions to be around $7 million or equivalent to a non-GAAP EPS headwind year-over-year of around $0.11. Reviewing 2017, the 2017 financial results are characterized by two distinct faces, as revenue profitability are impacted by the XT Series product introduction and manufacturing ramp up. First half of 2017 profit to market introductions XTM ramp up of manufacturing for the XT Series and included the conversion of the AcuDose and G4 product backlog of sales growth to XT Series it also included the XT Series manufacturing ramp up and included the implementation of XT product at launch and first adoption customers. It also has sub optimal overhead cost absorption given the ramp up and we have continued cost management in the first half. And then in the second half of 2017, which included acceleration of XT implementation and conversions included first of all improvement of all that cost absorption as production ramps. To return to the 8% to 12% growth rate for both bookings and revenue also includes XT Series cost of sales reductions as revenue ramps. And finally in the second half we are implementing the Centers of Excellence mentioned before. Moving now to the long term financial framework. Our long term financial framework remains unchanged. Our long term financial framework first of all consistent of 8% to 12% annual organic revenue growth; and two, 5% in organic revenue growth on average over the longer term; and thirdly, 15% non-GAAP operating margin. For 2018 onwards and onwards we expect to be in the long term 8% to 12% organic growth range. Our preliminary view of Product Bookings growth for 2018 is at the high end and potentially above the 8% to 12% growth. Our preliminary view of revenue growth for 2018 is also in the long term 8% to 12% range. However, at this point we have feasibility to the middle of this 8% to 12% range with potential upside towards the higher end of the range. The Company will provide more specific 2018 guidance during the 2017 fourth quarter earnings call. To round out our update, I will hand the call back to Randall.

Well, in summary definitely pleased with our execution in the third quarter and the continual ramp of XT. And as well excited about the new product introductions that we’ll be talking about and demonstrating at ASHP at or innovation day. And really I think the most exciting thing we’re seeing in the marketplace is just the adoption of the more systematic approach to medication management across all the venues both in hospitals and across post-acute and non-acute areas. And it’s just a lot of excitement because we really feel like as a company we’re grabbing hold of our mission to really impact healthcare in a significant way to bend the cost curve to improve outcomes in a real significant manner. And it’s very satisfying and it is satisfying for me and I think it satisfying all our employees who put their heart and soul into this company. So that concludes our prepared remarks. Let’s open it up for questions operator.

[Operator Instructions] And your first question does come from Matt Hewitt from Craig-Hallum Capital.

Two for me. First of all, I’m wondering if you could quantify what’s the hurricane impact was in the third quarter. It sounds like you had one customer in particular a large customer that was pushed to Q4. If you could quantify that and then the follow-up question relates to the growth rate that you’re stating for next year, your longer-term plan. As we look at next year 8% to 12% growth and then obviously the potential for M&A. But if you exclude that 8% to 12% growth next year historically you’ve talk about your bookings translating into revenues in six to nine months. You’re exiting this year at a much faster rate than 8% to 12%. I’m just trying to figure out or rationalize the delta here. Why the growth rate wouldn’t be faster next year? I’ll hang up and listen. Thank you.

Thank you, Matt. So if you look at the revenue performance in the third quarter, there was about a third to third to thirds and there was two drivers kind of compared to the midpoint of consensus. So about $1.5 million of each of those factors roughly, for the hurricane specifically which is your question. Then on the outlook, preliminary outlook for 2018, we definitely have a lot of momentum in our pipeline for the bookings. So we think we’ll be at the very high end of the 8% to 12%, EI at 12%. And potentially you are above that range, right? So will be the bookings growth as we can see it today, which is preliminary, it will solidify of course the visibility over the next couple of months. And then what we can see now for revenue growth what we said earlier is that’s for now, we see – we’re also in that 8% to 12% long-term range. And for now visibility is to the middle of that range, so EI close to 10% with potential upside as well. And it’s all about revenue timing, backlog timing and how it converts into revenue.

Great. Thank you.

Okay.

And your next question comes from Mohan Naidu from Oppenheimer.

My questions – Randy, Peter how should we bridge the growth rates over the long-term as you think about the various segments, if I think about the XT versus your Adherence and Performance Center, fluid robotics segment as you bridge from where we are right now to that 8% to 12% range?

Yes. There is specifically a breakout that we don’t provide specific product line guidance on kind of where revenues, we can give you a feel where we see the revenue growth. So of course, as expected I would think, so the dollar-wise the biggest driver in bookings is of course the XT Series upgrade cycle. But we definitely have order cycle as well. And please make sure you are at ASHP where we always now going forward, we’ll have product introductions. But for 2018 XT bookings will be the biggest compound. But we have nice and healthy growth also on other product lines like the multimed automated small footprint packager like PBM and associated software. Those also show a nice run rate. So all together if you will, our XT itself I would say that average up the growth rate overall. That’s kind of where we – we’ll leave it for now. But that can accelerate it further that as always.

Okay. Got it. Maybe one quick follow-up on the 15% margin target. Then you will be able to reach that in calendar 2018 or if you have a different timeframe to get to that. That would be useful.

Yes. So what we said in the prepared remarks, we think it will be at that 15% long-term goal in the fourth quarter. We continue to interest in the business. If you look at our Omnicell portfolio really the only innovator in the space with a integrated portfolio and there are opportunities both in segments where are in today. So refresh and come out with new products but also come out with Greenfield product. So from a R&D cost perspective, we likely expected to be roughly at the same percentage of R&D expense as we’ve done over the last couple of years. There might be a little bit of leverage over time on SG&A. But if you look at our market opportunities and we won’t – Randall said earlier on the call we definitely want to have maybe another significant XT. But we do want to have multiple simultaneous new products launches that impact both bookings growth and revenue growth. So that of course requires also investments in R&D and to some extend in SG&A.

Okay. I’ll leave it there. Thank you very much.

Okay. Thank you.

And your next question comes from Nina Deka from Piper Jaffray.

Hi, thanks for taking the question. Can you please provide some insight on what comprises the potential upside for next year to be above the midpoint and toward the higher end of the range? Or in other words, what would have to happen to get toward that 12%.

Well, I think traditionally we talk about next year 90 days from now. And so I think that probably has – we are just thought about the visibility we see now and so we’ll evaluate that again in 90 days and refine those statements later on. But XT is probably the biggest data in equation I would say. But there is a lot of upsides in the new growth. We have a lot of momentum in IV and Performance Center both, feel really good about those. Those do take a little longer in the backlog cycle, the backlog to revenue then maybe an XT would, but the biggest driver obviously is XT is just every customer has a reason to buy an XT from us just about. And we’ve already shipped to 600 sites, which is a large portion of our customer base in just 12 months adopted the product, and I just think that momentum is going to continue to go up and not go down as we move forward.

Thanks. And also what size of the 5% in long term inorganic growth target, if you could give us some more insight on your M&A strategy?

Yes, so this has unchanged from the last many years. So when we do acquisitions and we – we’ve talked about publicly before that we’ve prepared strategic five year growth plans. And in those growth plans we aim to achieve 8% to 12% organic revenue growth and then we supplement that for a strategic acquisitions. If you look at a multi-year path contributing 5% to the CAGR over those five years, of course, the timing of when we do those acquisitions and how they got to fit in into the segment. We’ve got to add to profitability. We’ve to got to add to going to be accretive as well. So it’s just a calculation if you will, so over the longer term to be roughly at 5%.

And I would just to add that, as we build out these large system approaches to go across the continuum of care. A lot of the acquisition targets including the one we just did with Ateb and InPharmics are all software, right. We’ve got these ecosystems of workflows, how do you enhance those workflows. You put on a cloud based or software based solution sets that enhance those or tie them together and you know that that’s generally drive higher margins on the software side.

Okay. And also, can you describe a little bit more to that point. What type of demand you’re seeing in the non-acute care setting in U.S. and also internationally. And how do you expect this to continue to trend overtime?

Well, I think as we said in the call, the VBM 200 is doing really well for us as it really is an enabler to take and package medications and a way that makes it very easy for patients to comply, as well as it brings patients and to particular providers and make it sticky, because they want to use that particular form of medication packaging. And if you’re going to ramp up and do that as either a single pharmacy or a large pharmacy, you need automation to enable that to happen and that’s why VBM 200 is such a popular product that we’ve started. So we’re – we’ve launched that and we’re seeing some big growth for next year in that product line. So as we just launched it this year. And I don’t know I guess – I’d say the UK market is a big market for us continues to be strong both on our broad based products, Germany, France and the Middle East continue to provide additional growth for us.

Maybe a last comment just on the non-acute space, if you look at hospital systems, they are more and more force integrating and centering into outpatient and non-acute facilities as part of their system. So we definitely see a lot of growth there, because we are firstly the only company that has an integrated solution across – what we call it, continuum of care from both acute to non-acute in different settings. So that market dynamic is actually really positive for us.

Great thanks.

I will add one other comment today on our recent announcement as you’ve seen. CVS and Walgreens building a network to help with medication adherence and provide a large network to payers for medication adherence. We have some sort of solution almost in every chain and that really goes well for us in our med adherence marketplace. And we don’t know exactly what that opportunity will lean for us, but it certainly exciting. It validates the fact the reason we got into med adherence almost five years ago, because we knew that it would be a big game changer for healthcare. And as you see in today’s action it definitely is. Next question please.

[Operator Instruction] And your next question does come from Gene Mannheimer from Dougherty & Co.

Thanks, good afternoon. Congrats in all the good progress. Let’s see, I wanted to ask some non-XT questions. The VBM 200 traction you’re seeing very positive. What is that mean for the M5000, are those substitute products or complimentary?

There are actually a complimentary, right. So the M5000 is a bigger footprint fully automated solution and close thus can do a PV2 pharmacy check fully automated. Just to printing of the labels and the packaging and ceiling, so that’s a bigger machine and we actually will announce probably later this year, the first installation at a show site at one, I would say, one of the top 10 U.S. hospital systems. So we have some traction there. And then the CBM is a smaller machine for chains, retail pharmacies and specialty pharmacies that is what we call highly automated. It’s a smaller footprints, it doesn’t do the ceiling and the printing the seal [ph] manual step there. But it has many benefits as well. So we see some really good momentum on the CBM machine both in the U.S., in Europe and in China.

Great. Peter in the progress with the VBM is that going to drive more consumable sales, and it will have to change that growth rate there?

Yes, that will help consumable revenue as well.

Okay. And then on the IV side, I don’t know, I don’t recall if you’ve talked about any new wins there, but how would you characterize your growth in that product line?

It’s definitely a growth area for us. We don’t really see a reason for hospital system, not to have an IV robotic solution into a system, that makes more sense from a efficiency and safety perspective. And if you now look at the growth for IV, about half is capital purchases and half is in sourcing solution that we put in market, which you mentioned a couple times in the prepared remarks as well.

So now we’re seeing really nice traction from the IV in particular, because it’s we’re now on our second year of the Aesynt acquisition, which is really allowed that product to get down in the pipeline of our sales reps and get them accurately presenting and selling that product, and so that that product is just continue to grow every year, and it’s going to grow a lot more next year. So feel really good about that product.

Okay, great. Thank you.

And there are no further questions at this time. We’ll go to Mr. Randall Lipps for any closing remarks.

Well, I hope to see everybody at our Innovation’s Day roll about changing the world for our innovation for healthcare. If you just figure out how everybody can get their meds and take their meds and whatever continuum they are in we’re going to win in healthcare. So hope to see there and be excited to talk about the things that we have to show the market and how it’s going to impact healthcare for the long term. Thanks for joining us today.

Thank you. And this does conclude today’s conference call. You may now disconnect.