Omnicell Inc (OMCL) 2010 Q3 法說會逐字稿

Ladies and gentlemen, this is the conference operator. Today's conference call is scheduled to begin momentarily. Until that time, your line will again be placed on music hold. Thank you for your patience. Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell third-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.

(Operator Instructions).

Thank you. I would now like to turn the call over to Mr. Rob Siem. Sir, you may begin.

Thank you, and good afternoon and welcome to the Omnicell 2010 third quarter results conference call. Joining me today is Randall Lipps, Omnicell Chairman, President, and CEO. You can find our results in the Omnicell third quarter press release posted in the Investor Relations section of our website at www.omnicell.com.

This call will include forward looking statements subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied. For 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 February 24, 2010 as well as more recent reports filed with the SEC.

Please be aware that you should not place undue reliance on any forward looking statements made today. The date of this conference call is October 27, 2010. And, all forward looking statements made on this call are made based on the beliefs of Omnicell as of this date only. Future events that are 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 expressed written consent of Omnicell is prohibited.

But, today, we have quite a lot to talk about, in addition to our quarterly earnings. We will be discussing the acquisition we just completed and other one-time events announced during the quarter. Randy's going to start the call today with an overview of the acquisition and some updates on recent Omnicell wins in the market. I'll then cover the expected financial implications of the acquisition and the results for the quarter. Followed by our guidance for the remainder of 2010, and following that we'll take questions. Randy?

Good afternoon. Thank you for joining us today. Omnicell enjoyed success in the marketplace during the third quarter with strong orders across our entire customer base. Last month, we announced that the Sentara Health Group chose Omnicell medication control systems to replace their existing installation. Sentara, an eight hospital system, with over 2000 beds and the largest integrated delivery network in Virginia, Selected our systems for their advanced features and our superb service and support record.

In August, we announced that the Wellmont Health System began their conversion to Omnicell -- OmniRx automated medication systems, SinglePointe software to manage their patient specific medications, Anesthesia Workstations, and other solutions to streamline medication management throughout its facilities. Wellmont, an 1100 bed system in Eastern Tennessee, is upgrading seven of its hospital facilities and chose Omnicell solutions based on long-term cost of ownership and the most advanced technology when compared to competing solutions.

And, in September, we were happy to report that Deaconess Health System chose to replace its current vendor with Omnicell. We are particularly honored to have been selected as Deaconess' partner of choice, as it is an industry recognized system of five acute care facilities in southwestern Indiana, whose use of electronic health records have been rated among the top 2% of hospitals in the US. Omnicell solutions are designed to be easily integrated and interoperable with Deaconess' already existing IT network. We were specifically selected for our strong reporting tools and a clear solutions upgrade that combine a solid long-term investment with a high level of efficiency and patient safety.

In addition to these wins, and others we announced in the last three months, we saw a resurgence of US Federal Government business, including orders from some of the largest Veterans Administration hospitals in the systems.

Also, during the quarter, we announced an addition to our product offering in the field of data analytics and reporting with the acquisition of Pandora Data Systems, in September. Pandora is a leading provider of reporting tools used with automated dispensing systems and a well-recognized and regarded brand among hospital directors of pharmacy. Pandora has over 700 customers using their sophisticated reporting and analytics tools in conjunctions with most brands of medication control systems. Pandora products have grown to be an integral part of meeting regulatory requirements for many hospital customers. We plan to continue the investment Pandora has made in their platform for the benefit of all users of automated medication dispensing systems, regardless of the brand of dispensing system in use. Pandora is located in Scotts Valley, California and employs 15 people. While a smaller acquisition, Pandora is another step in our strategy to offer a broad array of more advanced systems that improve hospital work flow and solve safety, efficiency, and regulatory compliance challenges for our customers. The acquisition closed in September, and I welcome Pandora's employees and customers to the Omnicell team.

We're proud of our successes in the marketplace and contributions to improving health care. Now, with the addition of Pandora and their reporting tools to our product offering, Omnicell will have the ability to make an even larger impact on health care improvements. We believe there is a large opportunity for further automation at our new and existing customers. We also believe there is significant opportunity to line our business with the health care reform requirements that drive hospitals to focus on improving their efficiency and quality of their outcomes. The success we've seen throughout the year at large hospital institutions underscores the value of our systems to organizations that are on the forefront of the sweeping changes in health care. Now, I'd like to turn the call back over to Rob to cover our third quarter results and some of the financial aspects of the acquisition. Rob?

Our third quarter of 2010 was a good quarter for Omnicell. We exceeded analyst to revenue and profit expectations. We completed the office consolidation announced in July, and we settled a long-standing lawsuit. The customer wins Randy discussed coupled with a strong order rates in nearly every type of hospital segment, keep us on path for year-to-year order growth and on track for our backlog guidance. The expansion of our customer base was particularly strong, with 52% of our orders from new customers and competitive conversions. About two thirds of the new accounts were from competitive conversions and the remainder were from Greenfield accounts. This continues our consistent track record, making new accounts and competitive conversions of 40% of our business year-to-date.

Revenue for the third quarter of fiscal 2010 was $56.3 million, up 3% from the second quarter 2010, and up 4% from the third quarter of a year ago. Net earnings after taxes were $1.3 million or $0.04 cents per share for Q3 2010. This compares $0.9 million or $0.03 per share in Q3 2009.

Included in our results for the quarter are several non-routine charges and benefits which we exclude in our non-GAAP measures. Our results also include improvements in gross margins, partially offset by increases in operating expenses. The improvements in gross margins were driven by materials cost and efficiency improvements in both of our manufacturing and our customer service operations, as well as the strong product mix. Increases in operating expenses were driven by product development and acquisition related expenses. Additional expenses in research and development of more than $1 million dollars from the second quarter of 2010 were driven by the timing of prototype cycles, capitalization of software coding, and nonrecurring use of contract development resources.

Also, consistent with our discussions in prior quarters, Omnicell is actively assessing acquisition candidates and our third quarter results include higher than normal expenses for the Pandora acquisition and various other acquisition candidates in the pipeline. These expenses were consistent with our expectations and guidance for the quarter. Our headcount at the end of the quarter was 734, which is down 20 from last quarter, following the addition of Pandora employees and offset by the consolidation of our development offices from four to two. The facility consolidation, which we announced in July and completed during Q3, has already begun to meet its intended results of increasing the efficiency of operations and promoting collaboration among the Company's engineering teams. The consolidation included the closure of facilities in The Woodlands, Texas and in Bangalore, India and the expansion of a new facility in Nashville, Tennessee. We expect the consolidation to be cost neutral on an ongoing basis.

And, a charge of $1.7 million was booked in Q3 for the facility consolidation, restructuring and other related charges. Because there was some repatriation of profits from India, the after-tax charge is $1.6 million. While cost neutral on an ongoing basis, we feel the increased focus on our engineering teams will give us an opportunity to bring more products to market with even higher quality.

Also, during Q3, we saw that the long-standing intellectual property lawsuit with Flo Healthcare Solutions, now part of InterMetro Industries, which is a subsidiary of Emerson Electric. We became involved in that lawsuit as a result of our 2007 acquisition of Rioux Vision in connection with the acquisition we booked a liability for the defense of the lawsuit. The payment we made in connection with the settlements and granted licenses, totaled $2.65 million, including a cross-license of two Omnicell patents. This was less than the outstanding liability, resulting in a pretax benefit of $2.4 million. The restructuring charges and the litigation settlement benefit largely offset each other on an after-tax basis.

Now, I'd like to cover our non-GAAP results, the adjustments to GAAP results are the exclusion of stock compensation expenses. The restructuring costs and related charges in the litigation settlement benefit. Stock compensation expense includes the estimated future value of employee's stock options, restricted stock and our employee stock purchase plan. And, since stock compensation expense is a non-cash expense, we use financial statements internally that exclude the stock compensation expense in order to measure some of our operating results. We use these adjustment statements, in addition to GAAP financial statements. We feel it's useful for investors to understand the non-cash compensation expenses that are a proponent of our reported results. We also measure our business, excluding infrequent events, such as the restructuring charge and the litigation settlement benefit. The full reconciliation of our GAAP to non-GAAP results is included in our press release. It will be posted to our website.

Our Q3 2010 non-GAAP net income was $3.6 million or $0.11 per share. Exceeding analyst consensus by $0.01 per share. Our Q3 non-GAAP net income was up $0.4 million or $0.01per share from Q3 2009.

Earnings before interest, taxes, depreciation, and amortization or, EBITDA, which also excludes stock compensation amortization, restructuring and related charges and the litigation benefit. EBITDA was $6.6 million for the third quarter of 2010, up $1 million or 18% year-to-year. EBITDA is a good measure of the operating results for the company and we're happy to continue growing this major much faster than revenue.

Cash and short-term investments were $179 million at the end of Q3. The acquisition of Pandora and the litigation settlement used $9 million of cash, which was offset by $2 million cash generated from operations.

Day sales outstanding were 74, up 10 days from last quarter. Our mix of installations was less heavily weighted to leases, which tends to drive DSOs up. Our DSO was near an all-time low in Q2 at 64. Despite the increase in Q3, we're operating in our expected range in DSO and expect to continue in the 70 to 80 day DSO range in the future.

And. our inventories were $10 million consistent with the previous quarter. The acquisition of Pandora will change our balance sheet and operating results slightly. Pandora was acquired for $6 million in cash and the transaction closed on December 29, 2010. We expect Pandora to add $2 million to $3 million of revenue annually, but because of some of the unfulfilled product promotions that expire in Q2 2011, we expect most of the revenues for the next six months to be deferred until the middle of 2011. So, there will be negligible revenue contribution from Pandora in Q4 2010 and Q1 2011.

On a GAAP basis, including the amortization of purchased and tangible assets, we expect the acquisition will be dilutive $0.02 per share in Q4 2010. Dilutive $0.01 per share in Q1 2011. And break even for the rest of the year in 2011. Our pro forma basis, excluding the amortization of purchased and tangible assets, we expect the results will be dilutive $0.01 per share in each of Q4 2010 and Q1 2011 and slightly accretive for the full year of 2011.

Pandora's financials have been incorporated into our Q3 balance sheet, but there was virtually no impact to the P&L in Q3. For 2010, the guidance we said at the beginning of the year is reconfirmed. We expect product backlog at the end of 2010 to be as toward the upper end of our previously stated range of $118 million to $125 million. We expect 2010 revenue to be between $220 million and $222 million. Our backlog gives us good visibility to the revenues to be installed in the next two quarters, and we expect there will be little change to these installation schedules.

Our guidance for non-GAAP earnings, excluding stock compensation expenses and restructuring charges for 2010, is between $0.40 and $0.45 per share. These profits expectations assume an effective tax rate of 42% on GAAP earnings. No material change in interest rates and include the consolidated results of Pandora Data Systems. These non-GAAP expectations exclude the charges for facility consolidation during Q3, the benefit for litigation settlement, and all stock compensation expenses. We feel that maintaining our profit guidance, including the initial dilution due to the Pandora acquisition and the absorption of other expenses we discussed, is a positive indicator of the underlying strength of our business. So, with that, operator, I'd like to open the call to questions.

Thank you.

(Operator Instructions).

We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Steve Crowley of Craig-Hallum.

Hi, congratulations on the good quarter. This is Matt calling in for Steve.

Hi, Matt.

First question, you guys had a particularly strong quarter on the competitive conversion side. It looks that that was your highest quarter going back to Q1 2009. Has something changed in the market that you guys are just able to continue to take share and maybe even take more share than you have in the past, or is it just, pure execution on your part?

Well, I think that consistent point of what has not changed is 30% to 40% of our business is from competitive conversions, or new accounts. And, that has been in place for almost five years. The timing of by which those come is a little bit varied, because many of them are large deals. So, while we saw almost a record, probably new accounts and competitive conversions and Greenfield accounts. When you average it out for the year, it's very consistent with our -- what we have done over the past. And, I think that's the important number.

Alright. And, then, one follow up and I'll jump back in the queue. It appears that large hospitals have figured out a way, or figured out where the medication management fits into the meaningful use criteria in the stage two. What are the accounts telling you? Is that aiding some of your orders? Any color there would be helpful.

Well, Matt, at this point, we are working on how our systems may fit into the meaningful use criteria for electronic and health care records, but they haven't been identified as qualifying for being certified at all. I don't believe that we're seeing a lot of change in demands for us being included in the stimulus reimbursements at this point. That may be something that could happen in the future, or like I said, we continue to work on it, but we haven't been certified at this point.

All right. Thanks. I'll jump back in the queue.

Your next question comes from the line of Newton Juhng of FBR Capital Markets.

Thanks so much. One of the comments you made was around the government contracts. I know the third quarter tends to be a bit stronger, guys. And, I was just wondering if you could give us a little bit more detail as to how it's done relative to last year and prior years? Were you happy with where the government contracts came out? And, if there is a number that you could give, that would obviously be great, too.

Yes. We have not disclosed the particular number for the government or any one particular customer. We'll stay consistent with that. But we -- what I can tell you is last year the government really didn't place hardly any orders with us. And, we commented in our Q3 earnings release a year ago. We really did not see any strong Q3 from the government. Now, Q3 for us is the government's Q4. It's the end of their year. And, it is typically a time when they spend more of their capital budget. We did see a strong year this year, more consistent with previous years. And, it is good to see the government customers coming back. But, like all hospital customers, they expand their systems over time. Their systems with their existing providers get old or get dated. They're looking to upgrade to the newer technology. And, when they go looking for newer technologies, we fare very well.

Got you. Actually, this next question is for Randy. Randy, a comment you made earlier about the stronger orders really being across the board on a customer base. I was wondering, if you can tell us how or what you would attribute the improvement on the smaller end of the market? And, whether or not that's something that you see as sustainable going forward or is this just kind of an initial pop that you're not really ready to extrapolate going forward?

I think we're not seeing the resurgence of the smaller orders that we have noted in our earlier conference calls. The small hospitals tend to still be laggered in this market as to coming back. We still -- I think the resurgence with the government, and hospitals really starting to understand that, in order for them to deal with lower revenues or lower margin patients and more patients coming through their facilities, they have to become a lot more efficient. The only way to do that is to become totally automated and not just be halfway automated. So, a lot of people are back in the game who would kind of put some of their decision making off. And, so, we are starting to see in the larger accounts gaining a little more momentum there. It was nice to see a broad base of new customers, really across the country, and not in just in certain locations. So, from that aspect, it was a strong quarter, but the small hospitals are still lagging somewhat for us. They haven't returned to the 2008 levels.

Got you. So, still waiting a little bit on that front? And, then, just last, in terms of your -- the guidance you put out, and obviously this is really helpful to understand with all the moving parts we've got here, but $0.40 to $0.45 being a relatively wide range implying, what $0.08 to $0.13 of earnings in the fourth quarter? I'm just wondering, it seems like you guys have fairly good visibility in to what you can do the next 90 days out. Actually, at this point, it's even less than that. Can you give us an idea as to the choice to kind of keep the guidance at that level? I know you talked about the factors, but just in terms of your desire not to tighten it at this point?

Yes, we pretty much capped all of the ranges at the same level that we had been talking about all year. I think you and all the other analysts have forecasts that are appropriate to factor in that Pandora will be a little dilutive in Q4, about $0.01 on a non-GAAP basis and pretty much got where, where the company was going.

Got you. Okay, so, that's helpful. Thanks, Rob.

Your next question comes from the line of Steve Halper of Stifel Nicholas.

Yes, hello. So, for next year when you report, are you going to back out that amortization expense and show it as adjusted earnings?

The amortization, the acquisition related amortization?

Yes.

For Pandora?

Yes.

You know, we'll probably note it, it's not a lot of expense through next year. But, we have other acquisitions than those -- as acquisition related expenses start mounting, we will definitely make that adjustment.

So, based on the order momentum that you saw in the third quarter, is it fair to say that 2011 will be a better year than 2010?

Well, we intend to give our guidance for 2011 on the Q4 earnings call, at the beginning of next year. I think the overall -- we've said for several quarters is the economy is coming off the bottom. Next year's growth rates are really dependent upon the order rates through this year, and we still have the fourth quarter in front of us.

Okay. And, the -- one other question. This pickup that you saw from government, were you expecting that? Was that built into the -- into your forecast?

Like Randy said, we have -- had some large VA institutions that were buying from us. And, usually, a large hospital will be going through a pretty large, or a long sales cycle, so we certainly were working with those customers for some time and saw them in the forecast. Like all large customers, it is just a little unclear when they're actually going to sign that contract, but the government has a little bit of a forcing factor in their own Q3. What we were really pleased about is that there were several other systems, several other hospitals in the VA system that also ordered during the quarter, that we weren't tracking as closely. So, there has definitely a resurgence.

Right. So, I guess last year was more of the anomaly and this year sort of returned to normal? Yes, this year was -- returned to normal and maybe a little bit of a catch up, too. Okay, great. Thanks.

Your next question is from the line of Leo Carpio of Caris Company.

Hello, good afternoon. A quick question regarding back on the hospital capital spending environment. It sounds like you're describing it as a situation where the large hospitals are still providing the bulk of your activity, including the mid-size hospitals, but it seems like the small hospitals are still lagging. Is that a correct statement?

Yes, that's a good characterization.

Okay. And, then turning over to Pandora, just a housekeeping item, I kind of missed the numbers. What did you indicate was going to be the dilution effect in the fourth quarter of 2010 and then in the first quarter of 2011?

On the non-GAAP basis, the dilution will be $0.01 in each of those quarters.

Okay.

And, on a GAAP basis, the dilution will be $0.02 in Q4 this year and rounds to $0.01 in Q1 of next year.

And, lastly, in terms of the M&A activity, in the past, we've talked about priority targets or segments you are interested in. Looking at Pandora, does Pandora mark a different direction, or are your priorities still the same?

No, the priorities are still the same. In fact, Pandora fits right into those priorities. Pandora produces a product that helps the hospital work flow. It's sold to the same call point that we sell to today. It is an established product. It's been around for a number of years. It is well-regarded. Both the brands and their service and how they go about their business is very consistent with how we go about our business. So, we thought if it is the type of acquisition that fits right in, with all the criteria that we've been talking about before. And, it is -- you know, once we get through a little bit of this amortization and transition costs, it's accretive to the business.

Okay. Thank you.

Your next question is from the line of Gene Mannheimer of Auriga.

Thank you. Nice quarter, guys. A couple quick ones. Just as we look at the numbers, certainly, the best gross margin that we've witnessed in quite a long time. Notably, on the services line. Is this a run rate that we can model going forward, or would you expect much variation from that? Thanks, Rob.

Well, I have to give some accolades. Our service team has really being doing a great job. And, I think you'd probably noticed that the margins have been growing for several quarters. There is always the potential for some fluctuation in the service margins. They're a little sensitive to relatively small changes in the revenue, but I think this is kind of a high point that we've had for a while in the trend. You should look for service margins to continue in the range that we've had over the last three quarters.

Okay. Sounds good. And, one more, if I could? With respect to your product line, and I understand that you are not going after certification, per se, but have your -- have conversations among your customers heated up regarding their strategies for closed loop medication administration and how your products can play a role in that?

Well, we definitely play a role in the closed medication loop. We're tracking the meds from the time it enters the hospital through the pharmacy up to the bedside and eventually via a route through the patients. So, we play a big part of that. And, it's mostly been discussion points about stage two of meaningful use. That's going to be a hurdle for hospitals to get through. I think, while that is kind of fuzzy and is kind of out there, I don't see people particularly making decisions about that.

I think they're more concerned about being able to get rid of manual processes that create inefficiencies of patient safety issues. And, then, how they interface with their electronic medical record systems to make sure they stay updated with accurate information. As well as, I think there's some new pressures on precise billing and precise dispensing of meds, because of the RAC audits. The folks who come in and look at how Medicare is billed. These audits are very -- zero in on high-priced runs. And, if you don't have good, accurate records for these billing processes, the RAC audits will reverse these charges. And, so, hospitals are very concerned about precise accuracy of their processes so that they can make sure they meet all the requirements in order to get reimbursed properly from the government.

Makes sense. Thanks, Randy.

You bet.

Your next question comes from the line of Mohan Naidu of Piper Jaffray.

Thanks a lot for taking my questions, guys. Any updates on the international [Inaudible] and are you seeing any fraction in there?

The international business is, like we said before, it's a great opportunity for us. It is lumpy. And, it's kind of start up business in a lot of the countries we are in. We're doing well and continue to do well in the UK and Spain, where we've been more established for awhile and in the Middle East. But, it's still kind of lumpy.

Okay. One more question. Are you guys seeing any impact of [Inaudible] relationship with one of your competitors in the market?

We haven't really seen an impact on our pipeline, but I think they're still working through what the offer is for customer base. I think we have a good track record with dealing with all of the vendors and being able to deliver good value there.

Okay. One last question. Rob, I think you were talking about the guidance on the tax -- effective tax rate for the full year. Was it like 40% you were talking about, I missed that?

42% is what's assumed in our guidance for the full year.

For the full year. Okay. Thanks a lot for taking my questions, guys.

You bet.

Your next question is from the line of Steve Crowley of Craig Hallam.

Hello guys, this is Matt again. One quick follow-up, on Rioux. Is that one still on track for late in the first half of next year? How is the form factor for that product evolved from its initial form to what your plans are for the go to market? And, have the opportunities changed at all, or are they similar to your existing products? Any color you could provide would be great.

All right. So, just a recap on the Rioux acquisition. We acquired a company that made mobile carts. Our objective was to use that base of hardware technology, coupled with our software to bring out a new product in the marketplace. As I said last quarter, that product is in beta testing, and it did take us much longer than we anticipated to flush out exactly what the customer demands would be for this product. It is brand-new type of technology in the marketplace, but what it does is it couples the controls we provide around drugs with a mobile environment so a nurse can -- and the pharmacist can have complete control of the drugs right to the bedside, both from a software standpoint and from a physical standpoint. And, some of the comments we were talking about earlier about closed loop medication control, this is the product that fits right in with that, because it closes the loop in every respect, all the way to when the drug is consumed by a patient.

We're happy with how those trials are going. We've set up our whole manufacturing supply chain, and that product is in the process of rolling out. But, like I said, it's brand new in the marketplace. We're going to make darn sure it works really well and meets every need of our customers before it's out and going. I don't think the needs have really changed, but we certainly have gone through processes of defining what they are. And, we're really happy, now, with the results that we've got.

All right. Thank you.

(Operator Instructions).

Your next question is from the line Glenn Garmont of Thinkequity.

Thanks. Good afternoon. Rob, I apologize if you provided this and I missed it. What was the headcount at the end of the quarter?

The headcount was 734. And, that was down about 20. We completed our facility consolidations which lowered our headcount, but then we added on Rioux, excuse me, we added on the Pandora folks, excuse me, and that left us with 734.

Okay, 734 is inclusive of the employees you picked up from Pandora?

Yes.

Okay. And, then, are there any opportunities remaining on the efficiency front, either offshoring, outsourcing, consolidating of facilities? Any additional opportunity there?

Well, you know, Glenn, we are always looking for how to run our business more efficiently. We do, as you know, a lot of work that is very customer intimate. We spend a lot of our resources making sure we got many people that are with the customer, the high-tech sales service and installation process. At times, we find things that -- opportunities to make those more efficient. I think on the manufacturing side, we've got a pretty good supply chain set up now that we feel is quite efficient, from a cost standpoint. But, there's always opportunities through design and other changes to get crossed out, and we continue to work on those.

Okay. And, given the current sort of, the current headcount, how should we think about the revenues that can be generated here without having to start adding to headcount again? I think, clearly, we are at an inflection point. I think somebody made the comment earlier that given some of your recent sales successes, 2011 could shape up to be a better year than 2010. Certainly, this was a better year than last year. How should we think about, on a go forward basis, how you're staffed right now to deal with maybe a resumption of growth in the market?

Well, consistent with what we've said before, we will be able to grow our revenues up to around the $240 million range, without a lot of addition to our headcount. We'd be only adding in the directly variable areas. There will be some pockets and some departments that we'll want to bolster and grow as we grow revenues, but we should be good up to that level, and see some fairly good leverages when we get to that point. Then we'll start have to adding headcount at a little more consistently, but it is our long-term goal to get the 15% operating margins on a non-GAAP basis. That hasn't changed. We've been there before, and we see a pretty quick path to get there again.

Okay, great. Thanks, Rob.

Your final question is from the line of Ernie Segundo of Pandion Capital.

Hello. Sticking with the growth theme, how do you see the growth being distributed between some of the competitive wins that you demonstrated in the past quarter versus some of the government growth versus M&A going forward?

Okay. So, Omnicell has three components of the growth strategy. The first component of the growth strategy is further penetration of our existing customers in the market, in general. We have consistently had competitive wins and new customers that are between 33% and 40% of our business. And, then, the rest of the business, the other 60% to 65%, call it, of our business comes from existing customers expanding their installation. And, from our near -- best we can tell, our nearest estimates are most customers are penetrated around the 60% range. They have about 60% of what they could have, if they were keeping all the drugs that they eventually will, on our systems. So, that's a good component of our growth.

Now, augmenting that would be the growth in their international markets, which are pretty new. And, for the most part, Greenfield. And, we can see the international markets expanding from where they are today, which is about 5% of our business to about 20% of our business in the course of five, six years.

And, then acquisitions are on top of that. Acquisitions, of course, are very dependent upon what type of company you buy and what type of business they're in at the time.

So, do you see any shift in that growth outside of the international increase?

I think most of our growth has been organic. It will continue to be from our current account base and new account acquisitions. There's a lot to grow within our current accounts, and our continued acquisition of market share is the hallmark of the Company and will continue.

Great. Thanks. If I could just ask one last question. Could you give us an update on the Hanger relationship and the revenue that that's generating for you?

Well, Hanger is a customer of ours and we sell them product. And, with that product, they put it out in the marketplace, but we don't disclose individual numbers on that relationship.

We [inaudible - multiple speakers]

[Inaudible - multiple speakers] -- going forward?

I'm sorry. What was the question?

It's that a business model that you see going forward? As a potential growth strategy?

We have several customers that are OEM type of customers and non -- I call it, nontraditional customers, meaning they aren't a hospital buying our systems and putting them in place for their own use. They are potentially a new mediary, utilizing our systems for other types of deployments. They have not been a large part of our business, but, as I said, we don't disclose what any particular individual customer is.

Yes, I understand. Thank you.

And, there are no further questions. I'll turn the call over to Mr. Randy Lipps.

Well, thanks for joining us today, everyone. Just to recap, our financial results exceeded expectations. We had a strong order quarter with good success with a new accounts category, but certainly the Pandora acquisition adds to our data analytics capabilities and our market presence. Overall, it was a very strong quarter for the Company and sets us up well for the future. Thanks for joining us.

Thank you for your participation in today's call. You may now disconnect.