Good day. My name is Brendon and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Second Quarter 2018 Earnings Call. 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. I would now like to turn the call over to Mr. Peter Kuipers, Chief Financial Officer.

Thank you. Good afternoon and welcome to the Omnicell second quarter 2018 results conference call. 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 27, 2018, 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 July 26, 2018, and all forward-looking statements made on this call are made based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change. Finally, this conference call is the property of Omnicell, Inc. and any taping, audio duplication or rebroadcast without the expressed written consent of Omnicell is prohibited. Randall will first provide an update on our business, then I will cover our results for the second quarter of 2018 and our guidance for the year. Our second quarter financial results are 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 very pleased to update you on the Company’s performance for the second quarter of 2018 as the business continued to gain further great momentum in innovation, customer acquisitions, and financial results. We are excited about our advancements in innovation as we continue to build and expand our industry-leading medication management platform with the goal of achieving the fully digitized and automated pharmacy. In December last year, we announced the XR2 Automated Central Pharmacy System and the IVX Workflow powered by the IVX Cloud, the leading edge robotic XR2 is a significant step towards the fully automated pharmacy across the full range of customer environments. Beyond upgrade potential, the XR2 represents significant Greenfield opportunities. IVX is a significant technological advancement for IV workflow processes, enabling pharmacies to safely and efficiently compound and prepare IV treatment. We are pleased to communicate that the general availability for both XR2 and IVX Workflow was achieved ahead of schedule in June, a little earlier than expected, and both of these products are accepted and live at our first customer sites. During the second quarter, we entered into additional noncancelable commercial agreements for both the XR2 and the IVX Workflow products and we continue to see a healthy build in the commercial pipeline. As we have stated before, the expected revenue contribution from the XR2 and the IVX Workflow products to 2018 revenue is modest, given the timing of the flow from bookings to backlog and finally, to revenue. Next, I’d like to discuss the momentum in customer acquisitions. In summary, it’s clear, we are continuing to win in the marketplace. During the second quarter of 2018, our new and competitive conversions were strong at 27% of total Company bookings. This is one indicator of the strength of the business. Over 75%…

Thank you, Randall. Our second quarter 2018 GAAP revenue of $189 million was up 4% year-over-year. Our first half 2018 GAAP revenue of $371 million was up 12.7% year-over-year. The second quarter earnings per share in accordance with GAAP was $0.16 per share, up from $0.05 per share in the second quarter of 2017. Our first half of 2018 earnings per share in accordance with GAAP was $0.21, up from the loss of $0.23 per share in the first half of 2017. In addition to GAAP financial results, we report our results on a non-GAAP basis which excludes stock compensation expense, amortization of intangible assets, associated with acquisitions, one-time acquisition and restructuring related expenses, the acquisition accounting impacts related to deferred revenue for fair value adjustments and the tax reform benefit impact from the Tax Cuts and Jobs Act of 2017. We use non-GAAP financial statements in addition to GAAP financial statements because we believe it is useful for investors to understand the amortization and acquisition related costs, and non-cash stock compensation expenses that are component of our reported results, as well as one-time events and one-time acquisition and restructuring related expenses. A full reconciliation of our GAAP to non-GAAP results is included in our second quarter earnings press release and is posted on our website. For the second quarter, non-GAAP revenue was $189 million, which is towards the high end of the guidance range of $185 million to $190 million provided in our first quarter results earnings call and at consensus. Our first half 2018 non-GAAP revenue of $371 million was up 12.4% year-over-year. Platform pricing strength and strong cost management resulted in non-GAAP EPS for the second quarter of $0.46 per share, which is above our guidance range of $0.36 to $0.42, and above consensus. Our first half…

[Operator Instructions] And your first question is from Mohan Naidu from Oppenheimer.

Hi Randy, Hi Peter. Thanks for taking my questions. First on the XR2 and IVX, great to hear about the timeline. Can you talk a little bit about the implementations on these ones? I thought these two products are a little quicker than the typical XT implementations, any color you can provide there would be great.

Well, I think that both of these products, we are very careful about, both the development, implementation and rollout. We were not under the same kind of pressure that we were with the XT where we were swapping out a bunch of in place orders that we had in backlog with the new product line. In this case, all the orders that we have for XR2 and IVX Workflow are brand-new orders. So, the customer knows what they are expecting to get and understands. So, we didn’t have that same complexity of issue. The other thing about the IVX Cloud is an FDA product. And so, that product doesn’t roll out, no beta customers or alpha customers. It rolls out when it marks with near perfection. And so, that product is rolling out and first customers were very successful. And I think that a lot of customers want to see these products working in a few sites to get them more comfortable with putting their orders in. So we’ve got a lot of people kind of sitting on the sidelines watching. And our first XR2 original site, it picked over 50,000 doses with only three small errors that we just made an adjustment to the system. So, a pretty accurate system that can deliver large volumes of work without errors. So, we are really excited about that and customers certainly see that as a massive safety, high-production, flexible tool to really fully digitizing the process.

That’s great to hear. And I guess the growth in -- I guess, increasing bookings guidance today, is that related to XR2 and IVX?

I would say, it’s overall momentum of the business. We are seeing some great momentum.

Last question, Randy. Can you comment on the med adherence segment? The recent news on the Amazon buying PillPack is a great tailwind for you guys, I would think, given that your med adherence marks are pretty similar to PillPack. Any color there?

No, absolutely. I think, medication management is so important. It’s such a high beta in getting the equation of lowering costs in the healthcare and improving the quality. And there are also the trends as the acute care segment starts to push patients outside the hospitals, then suddenly you have to run outpatient retail operations, which are even more expensive and more complicated than inpatient in many ways because of the expense of the drugs, a lot more specialty pharma outside of the hospital. So, as we see that happening, medication management is just -- has moved from a sideshow to C-Suite, how do we make this work, both in and outside. And then, the revelation of Amazon and PillPack just reaffirms that these are going to be a significant way of practicing medication management. We see this much more prolific already in Europe. We already have over 1 million patients every day in -- for instance, the UK, using our medication solution systems and growing. And it’s just starting off here. And PillPack and Amazon, they have a great emphasis just to kind of get this market little more awake. And so, if you’re in a pharmacy related to outpatient pharmacy, you can’t just dispense drugs. You have to be involved in medication management. That’s the new world.

Your next question comes from Jamie Stockton from Wells Fargo.

Good evening. Thanks for taking my questions. I guess, maybe the first one, just if we think about the sequential uptick in revenue in Q3, is there a primary driver that you would like people to think about as delivering that, is it XR2 and IVX, which Mohan talked about a little bit, or maybe the for profits that you talked about last year, signing up, making the bigger contribution in the second half of this year or XT? I guess, maybe those are the three things that in my mind could be driving it, but is there a primary one?

So, Jamie, this is Peter. So, what we’ve done, I think we discussed this during the fourth quarter earnings call, we have increased our rigor around the planning of implementations together with customer teams as well, and the sequential increase in expected revenue for the quarter, since it reflects the plans and agreed upon implementation at customer sites for contacts that we already have in backlog months ago. And those are noncancelable agreements. And it’s really the compensation, there’s a variety of elements in there, mostly U.S. driven.

But, it’s -- I mean, would you say that it is more maybe the XT platform than it is XR2 and IVX, just based on I think maybe Randy’s comment that there was a modest expectation for those two?

So, we talked this quarter, last quarter as well, rather [ph] being bookings but over 80% of our larger deals are platform deals multiple products, so also the installations, in the third quarter are multiple products by and large, big dollar amount there is of course, XT as part of the platform and then to a smaller extent that Randy talked about XR2 and IVX, but it’s really modest for this year, like we said before for IVX and XR2.

XT is on plan or going to exceed plan, which is over double from last year. So, that certainly is a draw -- a strong conversation piece in our discussions. But, really, we quickly get to the broader platform, which is much more strategic and allows us to line up multiple implementations to address the current issues as well as lining up implementations and solution sets that span out over the years. So, in many cases, we have moved from selling, if you think of basically years and years ago -- a basic single solution, which was sort of an annual driven kind of thing to where we’re having these multiyear discussions with customers, and then actually planning [ph] up the solution sets. And that’s really driven a new type of sale for us; it’s very strategic that allows us to sign up customers for 7 or 10 years and look at the visibility on all those products. So, it’s been a good change.

That’s great. And then, maybe just a quick one around gross margin, nice uptick during the quarter. Obviously, you got revenue ramping sequentially. If I focus on product gross margin, you’re almost back at 45% or somewhere thereabouts, which is I think maybe the high-water mark since you’ve consolidated the Aesynt business. Is there more room to go there from here as the XT upgrade cycle continues to ramp, or should we be thinking maybe that gross margins are going to stabilize in here for that product segment?

So, we see product gross margins steadily increasing throughout the year, driven by both volume leverage but also by efficiencies, but modestly, so not dramatically. But, we’re not exceeding by any means.

And your next question comes from Matt Hewitt from Craig-Hallum Capital.

Hi. This is Charlie Edison on for Matt. Thanks for taking my questions. First, related to performance center, you mentioned that it doubled in Q1 quarter-over-quarter. How does that carry over to Q2?

So, what we quoted and mentioned in our prepared remarks in the last earnings call was that the number contracts for performance center, including to be implemented, more than doubled. And to think about the revenue stream for performance center, so, it’s recurring revenue, so that will be layered upon, if you will but it will be a nice annual revenue that will go from this year into next year and then the following years. So, it’s not going to be an immediate sequential impact on revenue line.

Just in terms of people, the number, I think at the beginning of the year we were 200 some odd hospitals, and that’s not customers, because obviously you sign up customer at multiple hospitals. But, yes, I think we’re hopefully on track to get close to 300, another 50% increase. And it is a very key cog in a wheel, and people not only choosing us but getting better performance center there, pharmacy operations, and it’s almost necessary I would say.

Again related to performance center, is the sales cycle any different for that product, if hospitals are only interested in that product specifically, like can it get implemented faster?

You can but generally, best time to kind of flow decision-making through a hospital is when you’re looking at multiple decisions, so that you can get enough inertia and timing on things. But, I think that we are really honing down our ability to implement these systems faster because they have so much impact. And so, I think that our biggest challenge is -- not challenge, but opportunity is to accelerate the implementation process by enabling our technologies kind of to be performance center ready instead of actually having to install. So, I think as we improve on that technology, the turn on both the bookings and the revenue will become faster. But, we probably need to invest a little bit more in the technology, but that’s certainly key win for us. And it’s good margin for us too.

One more for me. Peter, you mentioned that there was some platform pricing strength that kind of drove the quarterly results. Can you elaborate on that? Is that product mix, are you getting more from anticipated bundled products?

It’s both really. We’re really -- if you look at the marketplace, I think, it’s fair to say that we’re really the only Company that can offer a medication automation platform. And as medication management becomes more strategic, a lot of times we’re really the only partner in the market. Therefore, it’s not a head to head single product to single product price competition. So, price is a lot lower on the list, if you will, when we negotiate a contract and develop a partnership. And so, we see that coming through. So, I think that it’s good credit to our strategy over the last couple of years to get to this point.

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

So, can you provide some updated metrics on XT penetration compared to what is there currently in your existing customer base? And maybe where you expect to see that ratio by the end of this year?

Yes. We have stopped providing that earlier this year. So, we are not breaking out the product line specifically, our focus on the platform. But the one metric that Randy earlier provided is that for bookings this year, we expect XT upgrade bookings. So, those are upgrades of prior generation systems at customer sites to more than double year-over-year.

And then, with this 14% booking increase and more products in the pipeline, how do you continue to view your long-term growth rate of 8% to 12%? Do you see any opportunity for that to move over time?

Yes. So, what we have said in the past is our longer term organic topline growth rate is 8% to 12% for the bookings and then -- but nine months later you can argue if that flows to revenue. What we also have said is that given that we now have three concurrent product introductions and ramp-ups that we over time expect to be towards the higher end of that organic growth range. And at times, we could potentially also exceed it in the coming years. We have done that before, if you look at our numbers in 2013 and 2014, that was the top years of the cycle of upgrades for G4. I think I believe we roughly have 13% or 14% organic growth rate on revenue year-over-year.

Yes. And still I’d say it’s relatively in the XT cycle, we are still early…

Fairly early still. Yes.

Inning two of nine innings or something like that. If we have got some…

And just to be clear, the 14%, if you take the midpoint of the product bookings range, that’s 14% of product bookings, we also have service revenue. So, it doesn’t translate one on one to total revenue.

Just one more on the Cleveland Clinic, the M5000. Was that a competitive RFP process?

I don’t believe so.

So, we don’t believe so. The Cleveland Clinic is a long time Omnicell customer. So, they are really looking at specific populations, both of their employee days and outpatient. So, we manage medication adherence.

And some of our basic multimed card products, but they don’t have anything fully automated, the program was on our smaller scales, having very success. And they wanted to scale it up significantly. So that’s the M5000 allowed them to.

And your next question is from Bill Sutherland from Benchmark Company.

I was interested in getting a little color on your M&A thoughts at this moment in terms of where you want to focus and kind of the level of activity in your pipeline there.

Yes. So, Bill, this is Peter. What we said before is that we have a dedicated to M&A and strategy team that is very focused on looking at the market and at opportunities. So, nothing to announce at this time. We look -- we’ve mentioned this before, we look at finding 20, 30 companies a year, probably visibility just on a handful. And on average we have acquired about one company per year, and that’s roughly the way we look at it. We’re probably more focused on the medication adherence part of the business, probably more softer focus. This is definitely a lot of growth areas there that we can either develop organically or we’re rapidly developing additional med adherence software solutions, but we can also acquire some of those. So, it could be either.

And I would say, they’re more -- I wouldn’t call them tuck-ins but they are all more roll up into our current platforms and massive platform acquisition outside of the pieces that we’re already in, inpatient, the outpatient, so augmenting what we have. So, we’ve got a lot it in place now. And I think there’s a lot to do. So, find the right ones and we will, but I don’t -- nothing dramatic.

No, I understand there’s no schedule to it, but I did notice that it’s been about a year, so thought I’d ask that question. I am not too familiar with your RDX Essential that you sell internationally. I think, it’s just been released, maybe you can just tell me about the significance of that product. Thank you.

Sure. The RDX Essential is a very small robot with a very small ASP for really small pharmacies in Europe, and they’re usually bought one at a time by small providers that have their own pharmacy where they see the tradeoff between labor and adding on people. And since all the format of pharmacy retail in Europe is in boxes, you can simplify the robot process just to pick boxes of different size and deliver those. And so, we have a more high-end robotic product that sells well into hospitals that we sell in Europe for managing their pharma central pharmacy. But we didn’t have a small robot to work with the individual pharmacies. And so, this was an attempt, not an attempt, this was entrance into the smaller markets. So, it’s smaller ASP, smaller market, smaller value. And so, I don’t think it’s -- it’s not as -- it won’t be a significant mover of the needle for our overall business, but does help our robotic European based markets continue to grow.

Is it such a small ASP that even indirect sales approach?

Indirect sales, I think that we do have some of that in Europe because it’s really hard to call on. So, we go through some partnerships there to deliver those. And I think that’s generally the way to do. It’s really hard to sell these one at a time to individual retail locations. This is only -- that product is only for small retail locations in Europe.

And it’s only Europe, and this wasn’t from Aesynt, was it?

No, it’s own development.

Your next question comes from Gene Mannheimer from Dougherty.

The comment earlier on doubling of the XT bookings through upgrading the base. Is that skewed more toward your AcuDose base or pretty broad based throughout the customers?

It’s pretty broad. And I think that it just it really has to do with sort of the age of the equipment and timing of other things, but a lot of the equipment is on the older side. But I’d say, both customer bases are very engaged in the process.

And with respect to the XR2 sales that you’ve shipped or actually some of those have gone live so far, are those primarily robot RX replacements, Greenfield, and can you maybe quantify the pipeline for XR2 as well as IVX for us?

They are both. One is the replacement; one is green -- one or two are Greenfield. And I would say the pipeline is 50-50 at this point. First time robot users, they’ll probably run a robot…

Really opens a new market, all the capabilities of the XR2 opens the full new market we believe.

And just one more, the William Beaumont win, nice win there. I’m assuming that part of that decision was your new products, particularly in the IV side. Can you maybe also just characterize what were the drivers of that decision, how you came out on top there?

Well, I think, this is one of the examples where performance center was a key driver of the decision. And the ability to rationalize the movement of meds and pharmacy, both from a corporate level all over William Beaumont Hospitals down to an individual location in the hospital, down to an individual site and ability to really get a handle on, some of the basics that pharmacies have not been able to do without having something like performance center to do that. So that tends to -- it tends to -- when you make these decisions, it really amplifies the value of what Omnicell can bring to our customers. So, performance center and the broader platform, and when I say that, this is the type of customer that signs up with two or three products that has every intention, probably buying three or four more products on a major scale down the way. And these are the kinds of customers we can sign up today that really are changing I guess the feel for us as we move to this heavy strong medication bench, as well as having the outpatient products on PMAP to help someone with med synchronization and multi-medications -- multi-card medications that you need for outpatient operations. All of these things are reinforcement of -- these large providers really need the platform capabilities, not point solutions.

Your next question comes from Mitra Ramgopal from Sidoti.

Randy, I was just wondering, I know in the past I think you feel comfortable in terms of getting maybe close to 2% market share annually. Given the success you are having now with XR2, do you think that could be even faster?

Well, it’s interesting, as we get closer to 50% of the market, I think market share gains are still important, but I think more importantly, the -- for us, the solutions to deploy for our own customer base become significantly larger. So, we need to become a lot more adapt at continuing to broaden our platforms in the customers’ base that we have and that’s what I think XT, that XR2 and the IV product lines that all make a lot of sense for people. But as we continue to be in the marketplace, people obviously bring us in often and our story just resonates really well with them. So I’m not trying to -- I’m not saying I don’t want to continue to grow the market, but probably the inside potential for us now with our new product lines is a huge opportunity that if we just execute it on our existing customers and the rollout of the products that we have, it’s something will just continue to have huge success. So, it’s almost like the competitive conversions are at this point are as sort of cherry on top I guess.

And then, obviously, I’m sure you are aware there has always been a lot of talk in terms of cost of drugs now, you are seeing some of the big pharma companies under pressure not to raise prices for the -- given they are already considered higher. Are you seeing this debate or conversation helping you in terms of more customers coming to you in terms of seeking ways where you can help them?

Yes. Well, I think that it kind of refers to my other comments where it’s just the whole amount of increase and the dollar spend on medications and inpatient and outpatient is just becoming such a huge topic at all these providers. It’s just not the price of a few drugs, it’s just the total aggregate spend. And that drives C-Suites and decision makers to look at their pharmacy medication management from a strategic standpoint, which is not what’s my inpatients spend or my outpatient but how do I longitudinally manage this medication management across all my institutions through transitions for a single patient, and not just these episodes of different locations. And I can’t always say, if you are going to manage -- if you are going to drive outcomes and as a provider you have to manage the risk, you no longer can manage the risk if you cannot manage the medication. And a lot of these institutions and payers alike are realizing that the key driver is making sure people get the right meds and they get their meds and then they take their meds. And so, that’s becoming a big driver in the medication story.

And now, I would like to turn it over to Randall Lipps for closing remarks.

Well, thanks again for joining us on the call. A great solid half of the year execution really puts us to great data points of continued momentum and the business really looks strong for the second half of the year. Again, the platform is winning, our new product introductions speak to new markets with new growth. People want solutions that drive in and outside of the hospitals. And whether it’s new entrants into the market, new kinds of pharmacies and new entities, medication management is becoming central to their success. And it gives me great satisfaction to know that Omnicell has aligned our strategies and our technologies and our investments, and I know they’ve been heavy over the last two or three years, and acquisitions to get us to this point. But it really has positioned us quite well for the future. And I really want to give a strong shout out to the Omnicell team again has launched two new successful products, got them into the marketplace and is making a difference in healthcare, improving healthcare for everyone. Thanks again, we’ll see you next time.

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