Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Third Quarter Earnings Conference 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] I would now like to turn the call over to our host, Mr. Peter Kuipers, Chief Financial Officer. Sir, you may begin your conference.

Thank you. Good afternoon, and welcome to the Omnicell third 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 October 25, 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 third quarter of 2018, and our guidance for the year. Our third quarter financial results are included in our earnings announcement which was released earlier today, and is posted in the Investor Relations section of our Web site 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. Our third quarter results reaffirm Omnicell's vision and position as the number one medication management platform that is enabling our customers to stay ahead in a dynamic healthcare environment. The business continued to scale and again further momentum in several areas. First, I'd like to give a brief update on our financial results, followed by an update on our three strategic growth strategies. The third quarter represents a record for Omnicell and strong momentum in many areas. The third quarter of 2018 is our first quarter to exceed $200 million in revenue. The third quarter non-GAAP EPS of $0.63 per share represents a company record, and gross margins are again in the 50% plus range, demonstrating the strength and scalability of our business model. The third quarter had a record number of multimillion dollar commercial agreements, with 90% plus of these deals being platform deals. And third quarter had very good momentum in bookings, and a healthy increase in product backlog, including a strong increase in the product bookings gross margin. Now, we believe that the following trends increase the strategic importance of medication management automation. First, healthcare systems continue to consolidate both horizontally and vertically, thereby driving the need for medication management automation solutions to be on one platform to improve patient and financial outcomes for both inpatient and outpatient. Secondly, spending is the fastest-growing expense category in healthcare. Pharmacy spend is the fastest-growing expense category in healthcare, and as healthcare organizations increasingly manage total cost of care, medication management across the care continuum elevates its strategic importance. Lastly, the formation of nontraditional healthcare entrants will drive the need for increased integrated medication management automation. We believe that our industry-leading medication management platform across the continuum of care very strongly aligns with these healthcare trends. Now,…

Thank you, Randall. Our third quarter 2018 GAAP revenue of $204.3 million was up over 9% year-over-year. Our year-to-date 2018 GAAP revenue of $576 million was up 11.5% year-over-year. The third quarter earnings per share in accordance with GAAP is $0.33 per share up from $0.20 per share in the third quarter of 2017. Our year-to-date 2018 earnings per share in accordance with GAAP was $0.57 up from a loss of $0.02 per share in the first five months 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 of acquisition related costs and non-cash stock compensation expense that are a component of our reported results as well as onetime events and onetime acquisition and restructuring related expenses. The full reconciliation of our GAAP to non-GAAP results is included in our third quarter earnings release and is posted on our website. The third quarter financial results were strong and demonstrate the strength and scalability of our business model. .: The non-GAAP EPS favorability was mostly driven by platform pricing strength and product mix and to a lesser extent a strong cost management and favorable tax expense. Year-to-date 2018 non-GAAP EPS was $1.38 per share and is up 60% compared to the first nine months of 2017. In addition to strong revenue and profitability growth, there are more indicators showing the momentum the business has. First, gross margins are again in the 50 plus range demonstrating leverage. Secondly, the third quarter had a record number of multimillion dollar commercial agreements, 90% plus of these deals being platform deals. Lastly, the third quarter had very good momentum in bookings, a healthy increase in the product backlog and a strong sequential increase in the product bookings gross…

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

Thanks for taking my questions. Randy, on these platform deals, is this a trend you're seeing more from existing customers or new customers and I guess, what is jumpstarting this trend now?

Well, I think it definitely is from both sets of customers. I think what we see as these provider networks morph into investing as much money and time and energy into the outpatient, they need a comprehensive platform. And so, it becomes more of a strategic decision than just workflow solution set for one area of the hospital, or one area of the outpatient clinic. So, you want to really take a total solution set towards the customers to gather all the data, so that you -- because you're responsible for the patient no matter what environment they are in. So that's pretty good trend, and we think that will continue.

And I guess I'm presuming as part of this platform, XT is core part of it?

Yes, it's part of it, but it's really multiple products on the platform that are integrated.

Okay. All right. On XR2, have you guys implemented XR2 on any new customers already beyond the beta testing customers, and do you have any scheduled for Q4?

Yes, we have more implemented, we have more scheduled for every quarter going forward, and ramping up through 2019.

Okay, got it. Bookings so far appear -- with the new bookings guidance, which implies like 14% to 18% growth for the year, should we see an acceleration going into '19 on the revenue side, I mean, I guess beyond the 8% to 12% growth rate you talked about before?

Yes. Thanks for the question. We think the 8% to 12% longer term financial framework, organic growth in the top line still holds. We would say though although we don't disclose the number, we do see a healthy increase in the backlog, in the quarter that we actually exceeded, consensus in the midpoint of guidance. You should also take into account that of course with such product revenue, we have service revenue as well. So, while bookings growth year-over-year is an indication for a big chunk of products revenue. Our service revenue tends to grow at a lower growth rate, right. So, 8% to 12% holds for now, but it's definitely very positive momentum we see in the business, there are many aspects.

Got it, and one last question on the margin side, 15% operating margin target, I guess you are hitting that in this quarter. Should we think about a new updated target on the operating margin side?

Yes. So we think from a longer term perspective, the 15% target holds. You do see of course improvements in the profitability measure on non-GAAP operating margin basis every quarter this year, and that is true. Definitely leverage is up nicely. So we would expect -- we are not going to give specific guidance for 2019, of course we do that in the January call, but it's probably fair to say that you can expect modest improvements through the year, if you will, trend lines, right, through each year, bearing in mind that generally the first quarter of any given year seasonally, a lower revenue quarter for us than the prior quarter. So we will definitely see a trend line going up over time. But on the fourth quarter or the first quarter, that's probably going to be a step-down if you will, and then increase again through the year in 2019, but it should quarter performance, if you model it out, it could potentially be higher than this year.

Got it. Awesome. Thank you very much for taking my questions. Congratulations on a great quarter, again.

Yes, thank you.

[Operator Instructions] And your next question comes from the line Matt Hewitt from Craig-Hallum Capital.

Good afternoon, gentlemen. Congratulations on the improvements here in Q3. I just wanted to dig into the margins a little bit better or little bit more, specifically you saw product gross margin, you've had a nice step-up here in the last two quarters. Are you on track you think to get back to a similar level as you saw maybe a few years ago, or are you in the mid 50s, maybe even upper 50s, I'm not saying '19, but over the next three to five years, is that kind of the trajectory you are on?

Yes, I would say over time we definitely see again modest improvement almost similar to like the operating program levels, modest improvements over the quarters to come. We see an uptake over the next couple of years. We would point out that with the acquisition of Aesynt, three years ago we definitely had a mixed down on the gross margin level. It's always good to bear in mind that we have a different mix in the total base, but yes, we see modest improvements going forward.

Okay. And then shifting to the service gross margin, that's been a little bit more lumpy. Where does that stabilize or where does that kind of shake out over that same kind of three to five-year time period? Do you see that improving a little bit or is that purely a function of mix and implementation timelines and stuff like that?

Well, definitely mix, but there's probably also modestly improve as well over time here. Remember that we have a number of new product lines that are probably a little bit more service-intensive in the beginning, so we probably scale better over time there as well, but we will provide more guidance as we go along with it next year.

Okay. I think, Randy, you had mentioned that you're up to 40,000 pharmacies now on the platform. Where was that in Q2 or Q4 a year ago, I'm just trying to get a frame of reference?

Yes, so we had 32,000 retail pharmacy locations going into the quarter.

Okay, so a nice set up. Do you anticipate a similar type jump here in Q4, or was there some one-time items or one-time customer acquisitions here in the third quarter that allowed you to have that big step up?

We don't necessarily want to get into habit of forecasting, giving guidance on the number of customers. So, we track, of course, our customer base, and it's also in our company description, with our filings, so that has increased over the last months, over 40. But we're building infrastructure there, so think about it as a growing technology platform. Or as you noted maybe in the script as well, that we now also have initial commercial engagement with payers in the U.S., right, so that is a new customer base for us, and we definitely see growth going forward, so.

Okay, great. And maybe one last one from me, I think you mentioned that you're going to get back to the -- or you're implying 21% non-GAAP tax rate for the year. That implies a pretty substantial step up here in the fourth quarter. What impact could the timing of the tax payments here in the third quarter that would lead to that big jump in Q4? That's it for me. Thanks.

Yes. No, so just to clarify, the 21% effective tax rate is for the adjustments from GAAP results to non-GAAP results in the bridge. So the GAAP is actually different, and that fluctuates by quarter, if you will, based on permanent and discreet items.

Okay. All right, got it. Thank you.

Yes, okay.

Thanks, Matt.

And your next question comes from Gene Mannheimer of Dougherty & Company.

Hi, Gene.

Thanks. Hey, good afternoon. Congrats on the quarter. Let's see, I want to ask you with the rollout of Performance Center couple of years ago, and acquisitions like Ateb and some of the others, what percent of your business today would you say is software-centric versus five years ago. And similarly, how has your base of recurring revenue as a percent of total trended over the last few years?

Well, we're not necessarily going to break that out at this point. We can talk about the directions, if you will. So if you look at our products, of course, and we've talked about this before publicly as well. Most of our R&D investments actually are software-related investment. A lot of value prop from the platform actually comes from that software integration and the features and performance it delivers. So just from the nature and the reasons why the customers are investing in our products is software related. Now, we do have a pure software stream that we're considering potentially breaking out in the financial statements going forward, so we might do that starting next year. That definitely has a nice growth rate. But I would say the majority is software-based, albeit not pure software, right.

Okay, all right. No, very helpful. Thanks, Peter. And were there any notable M5000 sales or other med adherence packaging sales notable during the quarter?

None to specifically call out, I mean maybe it's good to remind -- a good reminder of the customer names that we actually mentioned in the earnings scrip is only a subsection. We do have many wins in the quarter, also with existing customers. So we don't disclose, of course, all our customer wins. But every quarter we have med adherence automation wins in bookings and also installations in revenue.

Right. So the Cleveland Clinic announcement from Q2, was that something that would've installed in Q3 or what can you share about that?

Yes, so that's a longer-term agreement. That one is running live. I think it actually was live at the end of the second quarter, yes.

Okay, all right. Great, thank you.

And your next question comes from the line of Mitra Ramgopal of Sidoti.

Yes, hi, good afternoon. Randy, I know you talked about the IV Robotics market in South Korea. And I was just wondering with robots settling down in March, if you can give us a sense for the strategy as you look to grow the business overseas, if there's going to be any changes or pretty much just to continue as is?

Yes, so if I understand you right, we've mentioned the IV initial sales in South Korea on the IV platform, and just kind of what our strategy is on IV as we go forward, particularly overseas. And I think that compounding is an issue worldwide. It's a pharmacy fraught with safety issues and dosing issues that require a lot of attention, and as well as exposure to toxic pharmacy drugs. So having a robotic solution set makes a lot of sense for a lot of reasons, and so each of these countries, outside of the U.S., have a little bit different viewpoint of it. But I think that we've been mainly focused on the U.S. and I think as we continue to develop products we will look at the solution set for pan Europe a little more intently and some of the other smaller markets, so great solution set to take to almost any first-world healthcare system.

Okay, thanks. And again, I know it's probably coming up to almost two years since the Ateb acquisition, I was just wondering your appetite on that front, and are there any areas in particular you might be interested in? And I know there's only so much you can say on that.

Well, I think the most important part is we made a big investment over the last two years to consolidated the platform to a single platform that allows all of the pharmacies in the network to access different solution sets that are medication therapy management, MTM it's sometimes called. So while you can get med synchronization you can also get comprehensive medication reviews, you can get access to IVR, some other pieces of the solution set that you need to run through an outpatient pharmacy directly. And so this simplifies the proposition to the pharmacy who doesn't want to have several systems to go to. To get these solution sets they can go to a single cloud vendor that's got very advanced, very interactive, easy-use systems, engage with patients that really allow them to be engaged over time, and make them very sticky and engage in the whole process, just not the dispensing of medications. So, we think it adds tremendous value to improving patient healthcare for everyone, and it particularly adds a lot of -- makes a lot of sense for retail pharmacies, but also outpatient pharmacies that are located in these large providers another natural win for them.

Okay, thanks. And then finally as you look at investments in terms -- clearly, you're brining on a lot of new products and a much bigger platform for your customers. As it relates to the sales force and in any investments there, et cetera, are you pretty much in good shape as it relates to not necessarily needing to hire or expand?

Yes, I think the sales force has evolved as our company has evolved. And so if you look at our go-to-market strategy, they're really around more the platform positioning and selling and sort of an ongoing relationship day-to-day with the customers, opposed to event-driven. And so that also means we have to change and retool our sales force with different types of either people or a retraining of them to get really connected to these really important large customers that we have in order to work with them over the next five to 10 years. To get the fully digital pharmacy it really takes a lot of work and influence to get there. So our whole mindset toward this has changed. And really I think that as consolidation has happened, it's allowed us to move our cost of sale around a little bit to match where customers are today, which is very large entities.

Okay. Thanks again for taking the questions.

Yes.

And there are no further questions in queue. I would now like to turn the call back over to Randall Lipps for closing remarks.

Well, I'm really proud of the first nine months of the year, and really represents a validation of both our strategy and the hard work that Omnicell team has been working on for several years to, not only create this platform, but to begin to deliver it in earnest. And as we see healthcare evolving and really providers really bearing more of the payer look, if you will, we know that medication management is strategic and to being able to win and improving healthcare for everybody. So I think that this evolution of both our customer and our platform is now meeting the market and resonating with them in a really positive manner. And I just see it over and over again as I touch these customers. And it's really a great shout-out to the Omnicell team who has spent really countless days and weekends and hours putting this platform together so that we can really solve the industry issues at large scale, with significant savings and significant improvements in patient safety around the medication use area, so thanks to all of them. And we'll see you next time. Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Thank you for your participation.