Omnicell Inc (OMCL) 2016 Q4 法說會逐字稿

Good afternoon. My name is Holly and I will be your conference operator today. At this time I would like to welcome everyone to the Omnicell fourth 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 today's call over to Mr. Peter Kuipers, Chief Financial Officer. Mr. Kuipers, the floor is yours.

Thank you. Good morning and welcome to the Omnicell's fourth quarter and fiscal year 2016 results conference call. At this time all participants are in 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 26, 2016, 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 February 15, 2017 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 express written consent of Omnicell, Inc. is prohibited.

Randall will first provide an update on our business and then I will cover our results for 2016 and our guidance for 2017. Following our prepared remarks we will take your questions.

Our fourth quarter and full year financial results are, as usual, included in our earnings announcements which was released earlier today and 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 are excited to discuss our fourth quarter and full-year-results as well as our expectations for 2017. We had a great response to our announcement at ASHP in December last year on our new XT Series from both existing and potential new customers.

Now, consistent with our long-term successful go-to-market strategy that has helped us win in the marketplace we are continuing to be committed to deliver long-term value to our customers and we are allowing customers to upgrade their G4 products, that they have already booked with us in backlog, to the XT Series to get the full benefits of the product. And this is really important in understanding Omnicell's go-to-market and philosophy in the marketplace is to allow for our customers to integrate next-generation technologies with minimal disruption. And so the conversion of our current G4 bookings to XT backlog does take some time as we offer this to our customer and it takes time mostly in re-papering, IT reviews in hospitals and in some cases even C-suite re-approvals.

Our consultants need to explain the differences and the of the XT Series. It is not usually a long process but explanation and confirmation does take some time. Now, as a result of our expected conversion of our G4 bookings in backlog to XT bookings the XT manufacturing and installations ramp-up we anticipate two quarters of transition disruption, which started earlier -- earlier than we anticipated and we saw that actually in the month of December last year.

Now we expect the backlog to revenue conversion to be normalized in more historical levels starting in the second quarter of 2017. We are in the initial stages of the XT rollout. We are shipping and installing XT every day.

In order to meet demand we are starting a second shift at our XT manufacturing site this month to meet those demands. The initial customer experience is extremely positive. We have already shipped XT to 24 sites.

One of our leading institutions in the United States recently commented in an industry journal that XT is more responsive, faster and easier to use, delivering a positive impact on patient care and staff efficiency. Now, this is exactly why we designed the XT series and it's consistent with the positive response we received in December at the ASHP tradeshow as well as at [ERAPEL] where a large number of customers were able to see and experience firsthand the advantages of the new XT Series.

Now, despite the year-end disruption in December I'm really proud of our performance in 2016 overall and our consistent track record over the past several years. To review, the full year of 2016 was a Company record for bookings, backlog, revenues and earnings. For 2016 product bookings were $541 million, up 38% for 2015 on a reported basis and up 10% from 2015 when including Aesynt for the full year and 2015 and within our guidance range provided in our third quarter results earnings call.

For the fourth quarter non-GAAP revenue was $175 million bringing total year non-GAAP revenue to $703 million. A Company record and within the guidance range provided in our third quarter results earnings call. During the fourth quarter we did experience some customers wanting to switch from a G4 install to an XT install causing a modest impact on our revenue.

Now, combined with good cost execution, non-GAAP EPS was $0.37 bringing total year non-GAAP EPS to $1.51 and within the guidance range provided in our third quarter results earnings call. Now, we finished 2016 with a strong annualized new competitive conversion rate of 30% of bookings. This is a great indicator of the strength of the business, over 75% of these bookings were competitive conversions and the remainder were from Greenfield customers who have never automated before.

We believe that the new account strength in our install 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. Now, in the last number of years we have successfully grown the business by implementing three scalable growth strategies. Growth through differentiated solutions, growth in new markets, and growth via acquisitions. For 11 consecutive years now we have received the top honors from KLAS, the prestigious third party rating organization, for 12 consecutive years we have increased our market share and gained flew thought leader customers every quarter.

Together with our customers we are consistently delivering state-of-the-art medication management automation and workflow efficiency for caregivers and better healthcare outcomes for patients. Now, in 2016 we continued to experience great wins and added notable customers to our Omnicell family under our first strategic pillar of differentiated solutions. With several large competitive conversions we estimate that we gained further market share in 2016 in continuation of the market share gain trend and momentum we have experienced for many years.

In the fourth quarter we had some great wins with prominent new customers as well as significant deals with existing customers including WellStar, DCHL System, and Inova Health System. Now, we are real excited to announce that WellStar Health System, the largest health system in Georgia, has selected the full breadth of Omnicell's automated medication management and analytics solutions for its hospital floors, central pharmacy and operating rooms throughout its facilities.

WellStar is focused on improving the patient experience across its enterprise as well as streamlining provider workflows and increasing patient safety. To accomplish this they are implementing the new Omnicell XT automated dispensing systems on hospital floors, the XT Anesthesia Workstation in operating rooms, and Controlled Substance Manager in Central Pharmacy as well as analytics tools. In addition, WellStar purchased both our IV soft semi-automated and IV station fully automated IV solutions to improve accuracy of compounded medications prepared on-site.

DCH Health System in West Alabama has also chosen Omnicell IV solutions to support their sterile compounding operation. Through advanced IV automation technology, supported by Omnicell's robotic IV and sourcing service or RIIS as we call it, DCH will be able to create a safer more accurate and ultimately more cost-effective compounding operation.

We demonstrated the IV solutions RIIS model at the ASHP mid-year and have experienced strong interest from existing and potential new customers. The IV RIIS solutions contracts are multi-year with no capital outlay for the provider system. The Inova Health System, a nonprofit healthcare system based in Northern Virginia, will incorporate the Omnicell Performance Center and integrated software and services offering to drive improved pharmacy operations and reduce costs.

Through enterprise-wide management of pharmacy operations Inova will achieve shared inventory visibility, inventory optimization through relocation of needed medications and the ability to leverage strategic buying opportunities.

Our second strategic pillar ever-expanding into new markets also fueled growth in the last several year an we believe sets us up well for the coming years. Internationally current customer Rashid Hospital, a 599-bed general medical and surgical hospital in Dubai and one of the premiere medical facilities for emergency, trauma, critical and ambulatory care, chose Omnicell's XT series automated dispensing systems to complement their previously purchased state-of-the-art robotic dispensing system.

Rashid Hospital is part of the Dubai Health Authority and is one of the first of the DHA hospitals to employ robotic technologies in its pharmacy. Our third strategic pillar ever-expanding our presence and relevance through acquisitions has also continued to deliver great results. The Aesynt integration is progressing well, the product portfolio integration is ahead of schedule and the cost synergies are as expected.

Already we are seeing cross-selling opportunities within the total product portfolio and combined customer base, specifically for our IV and Performance Center solutions. Also our medication adherence business continues to align to macro trends and is poised for growth. On December 8, 2016 we completed the acquisition of a leading retail pharmacy software provider, Ateb, located in Raleigh, North Carolina. The acquisition reinforces the commitment by Omnicell to help improve patient care and outcomes.

In this instance, by simplifying management of chronic conditions through increased access to medication adherence solutions. Ateb has more than 30 leading retail pharmacy chains and customers and increases Omnicell's pharmacy locations by 15,000. The Ateb acquisition broadens our medication adherence solution scope and now combines into one industry-leading product portfolio.

Ateb's innovative patient engagement platform, including the market leading Time My Meds medication synchronization software. This solution capitalizes on the retail pharmacy trends toward the appointment based model and medication synchronization and we believe by 2020 60% of all retail pharmacy scripts are expected to be dispensed via the appointment based model. You combine that with Omnicell's SureMed medication adherence packaging, works symbiotically with this model, add to that our broad range of related packaging automation, including the Omnicell VB M200 just announced yesterday and the M5000, and you have a complete product portfolio.

This acquisition enables pharmacists to improve patient outcomes in retail settings addressing the problem of medication non-adherence a problem that is estimated to cost more than $105 billion in US alone, with more than 32 million Americans taking five or more maintenance daily.

We believe our hard work over the years and the execution of our three leg strategy laid the foundation for successes in 2016 and sets us up for continued future growth in 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.

Let me turn the call back over to Peter for some numbers and guidance.

Thank you, Randall. I'll discuss a summary of our fourth quarter and full year financial results and our guidance for 2017.

As Randall mentioned earlier in this call, the 2016 product bookings were a record $541 million, up 38% on a reported basis an up 10% from 2015 when including Aesynt for the full year in 2015. The resulting backlog of $301 million for December 31, 2016 is up from $205 million at December 31, 2015, which is a Company record and represents a year-over-year increase of 47%.

Our fourth quarter 2016 GAAP revenue are $172 million was up 32% from the same quarter last year and down 3% sequentially. As Randall referred to earlier in this call, the announcement of the Omnicell XT series caused some delays in December and impacted our fourth quarter revenue modestly for new customers that wanted to switch to XT installs. The full year 2016 year-over-year strength in revenue was different materially on by both expansion and upgrades of existing customers, as well as by new and competitive conversion customers.

We have continue to see particular strength of the combined solutions portfolio that enables strategic tailored (inaudible) solutions for our customers. Earnings-per-share in accordance with [cap] were $0.00, which is down were $0.21 in the fourth quarter of 2015. GAAP gross margin for the quarter was at $43.2%. 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, one time 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 aromatization related costs and non-cash stock compensation expenses that are a component of our reported results as well as one time events such as the gain on the (inaudible) investment in 2Q 2015 and one time acquisition-related expenses. The full reconciliation of our GAAP to non-GAAP results is included in our fourth quarter earnings release and is posted on our website.

Our fourth quarter 2016 non-GAAP revenues of $175 million were up 34% from the same quarter last year and down 2% sequentially. On a non-GAAP basis earnings-per-share of $0.37 in the fourth quarter of 2016 down $0.03 or 8% from the same quarter last year and down $0.03 sequentially. Non-GAAP revenue of $703 million for full year 2016 was a Company record, representing an increase of 45% year-over-year.

Non-GAAP EPS of $1.51 per share for full year 2016 was also a record. Non-GAAP gross margin was 48.1% in the fourth quarter and 50.0% for full year 2016. The non-GAAP gross margin was negatively impacted in the fourth quarter of 2016 by lower overhead cost absorption as we entered into the product launch phase of the XT Series and also less overhead costs could be absorbed by lower G4 volume in the quarter when compared to prior quarters.

The negative impact of lower gross margins on non-GAAP EPS was approximately offset by our R&D tax credit settlements benefit for the years prior to 2015 of around $2 million. Non-GAAP adjusted EBITDA was $23.3 million for the fourth quarter of 2016 and was $103 million for total year 2016 or up [19%] from total year 2015.

Our business is also reported in segments consisting of automation analytics and medication adherence. Automation analytics consists of our XT AcuDose and Omni RX Automated Dispensing Cabinets, Anesthesia Work Stations, [sample] pharmacy , Omni Self Supply and Omnicell analytics and Mach4 robotic dispensing systems. Our acquisitions of Avantec, Mach4 and Aesynt are included is this segment.

The medication adherence segment consists of all adherence packaging consumables, which are branded as SureMeds and equipment used by pharmacists to create adherence packages. Our acquisitions of MST Medication Technologies, Surgichem Limited and Ateb Inc. are included in the medication adherence segment. As a reminder, we now report certain corporate expenses of can not be easily applied to either segment separately.

On the segment basis our automation and analytics segment contributed $144 million in GAAP revenue in the fourth quarter of 2016, up from $106 million in the fourth quarter of 2015 or an increase of 36% driven by the acquisition of Aesynt and organic growth, $18.6 million of GAAP operating income this quarter compares to $29 million for the same quarter last year, $32.4 million of non-GAAP operating income in the fourth quarter of 2016 compares to $31.3 million last year in the fourth quarter.

The medication adherence segment contributed $28.4 million of GAAP revenue to the quarter compared to $24.4 million in the fourth quarter of 2015. GAAP operating income of $1 million compares to $1.3 million a year-ago. The weaker Great Britain Pound exchange rate impacted medication adherence operating income by around $700,000 compared to the same quarter last year, as most of the medication adherence product sold in the United Kingdom are manufactured in the United States. Non-GAAP operating income was $2.8 million in the fourth quarter compared to $2.6 million of non-GAAP operating income in the fourth quarter a year-ago.

Non-GAAP common expenses were $16.5 million compared to the $13.4 million in the same quarter last year and the increase is mostly driven by the Aesynt acquisition. Non-GAAP operating margin was 11.6% for full year 2016 including the Aesynt integration costs. Excluding the Aesynt integration costs non-GAAP operating margin was 13% for 2016.

In the fourth quarter of 2016 our cash increased from $47 million to $54 million, primarily driven by strong cash flow from operations. Total year 2016 cash flow for operations is $48 million, up from $34 million in 2015. Our strong cash flow in the year enabled us to repay approximately $35 million of the outstanding loan balance during the year, as of December 31, 2016 we had $260 million of outstanding funded debt and our loan leverage measured outstanding total from this loan balance over the last 12 months of EBITDA was [2.4].

Accounts receivable days outstanding were 82 for the fourth quarter, down nine days from the third quarter. The decrease in DSO was driven by record cash collections in the quarter. For context, our customer agreements specified that for equipment sales the Company typically invoices 100% of the contract value at shipment date. We review the collectability of our receivables regularly and we do not believe the fluctuation DSO are indicative of a change in our rate of our bad debt.

Inventories at December 31, 2016 were $69 million and down $5 million from last quarter. Our headcount was 2,444 by the end of the year with the increase from last quarter driven by the acquisition Ateb in December last year. Let me now move to guidance for 2017.

During the last year we introduced the XT Series to a number of customers under nondisclosure agreements for first launch purposes. We gave these customers the opportunity to mover from G4 to XT and the vast majority of these customers are indeed moving to installing XT starting in the first quarter of 2017 and ramping through the year in 2017. We do see some timing delays of the conversion of G4 bookings and sales quotes to XT bookings and revenue, as Randall talked about earlier in the call, this is mostly driven by paperwork and approvals taking longer than expected and timing of the scheduling of implementations.

Stepping back and looking at 2017, 2017 will be characterized by two distinct different phases as revenue profitability are impacted by the XT product introduction and ramp up. The first distinct phase is the start and ramp up of manufacturing of the XT Series product in the first quarter of 2017 as installations start.

The first quarter 2017 dynamics are expected to be as follows. First of all conversions of the G4 product backlog and sales quotes in the field to XT bookings. Secondly, the XT manufacturing volume is ramping up and we are starting the second shift in our XT manufacturing plant this month.

Thirdly, we have the first installs at launch customers this quarter and we also have the dynamic of XT manufacturing ramp-up costs as we start production. In the first quarter of 2017 we are taking the following actions to drive offsets. The Company today announced 100 positions reduction in force including the closure of our Tennessee office.

We will also have general hiring delays to contain costs. As part of the next phase of the integration of the acquisition of Aesynt the Company's creating the following Centers of Excellence of COEs for product development, engineering, and manufacturing.

First, the point of use COE in California, second, the Robotics and Central Pharmacy COE in Pittsburgh, Pennsylvania, and, third the Medication Adherence Consumables COE in St. Petersburg, Florida. The majority of the reduction in force of around 100 positions over various locations is expected to be completed in the first quarter of 2017 and enable the creation of these Centers of Excellence and also enables the achievement of the cost synergies contemplated in the acquisition of Aesynt.

This reduction in force includes the closure of the Company's Nashville, Tennessee office. We're also planning to move the manufacturing of IV machines for the non-US customers from our Slovenia plant to the Pittsburgh Robotics and Central Pharmacy COE in the third quarter of 2017 to consolidate the IV manufacturing globally. And we will close the Slovenia plant after this transition.

The Company expects to incur approximately $8 million of severance-related costs and facilities restructuring costs in connection with this reduction in force and the two location closures. For the first quarter of 2017 we expect non-GAAP revenue to be between $150 million and $155 million. We expect the first quarter 2017 non-GAAP earnings to be between $0.00 and $0.04 per share.

Let's now mover to the second phase of the year. The second distinct phase is the acceleration of installations of XT product and converse into backlog into revenue during the second through fourth quarter of 2017. The second through fourth quarter of 2017 dynamics are expected to be as follows, we will launch the AcuDose software OMXT platform. We expect to see improved XT production costs. We expect to see bookings growth year-over-year, organically and on a reported basis, to be greater than 20%.

We also expect return to 8% to 12% organic revenue growth. During the second through fourth quarter of 2017 we're planning to take the following actions. XT cost of goods sold reductions as revenue ramps, continued cost actions and we're also implementing the development and manufacturing Centers of Excellence. as mentioned before.

For the second through fourth quarter 2017 we expect total non-GAAP revenue to be between $590 million and $605 million, representing a return to the 8% to 12% organic revenue growth long-term target. For the second through fourth quarters of 2017 we expect total non-GAAP earnings to be between $1.32 and $1.38 representing a 17% growth in earnings when using the mid-point of the $1.35.

For 2017 we expects product bookings to be between $570 million and $590 million, also consisting of two distinct phases. First, a year-over-year bookings decline in the first quarter of 2017 as teams are working with customers to convert committed existing G4 contract and sales quotes to XT bookings. And the second phase is the second quarter through the fourth quarter of the year and we expect there, as mentioned before, an above 20% growth in product bookings, both on a reported and organic basis.

We expect non-GAAP revenue for full year to be between $740 million and $760 million. We expect 2017 non-GAAP earnings to be between $1.32 and $1.42.

For clarity we have summarized our 2017 guidance two distinct phases on a specific table included in the press release 8-K, issued today, as well as in the Investor Presentation posted on the IR section on omnicell.com. We expect non-GAAP operating margins for 2017 to be approximately 11% including integration costs for Aesynt and Ateb. Excluding the integration costs for Aesynt and Ateb acquisitions we inspect non-GAAP operating margin for 2017 to be sightly above 12%.

Given the ramp-up of revenue and profitability through the year in 2017, described earlier in this call, we expect non-GAAP operating margin for the fourth quarter in 2017, after excluding integration costs for Aesynt and Ateb, to be approximately between 15% and 16% in line with our long-term financial model.

When reviewing 2017 it is important to note a couple of items included in 2017 guidance. First of all, for 2017 our non-GAAP expected results include approximately $12 million of integration expense for Aesynt and Ateb that we do not adjust for based on our non-GAAP policy, these integration costs directly impacting non-GAAP operating margins and non-GAAP EPS mostly consist of integration related IT expenses, specifically sales CRM and financial ERP implementations.

It also inclusion integration team and project costs, costs related to implementation of (inaudible), costs related to tax restructuring and costs related to accelerated product development integration costs. In 2017 we are expecting cost commerical for around $10 million, as we have demonstrated in the past we are confident to achieve our 50% non-GAAP operating margin over time after integrating the acquired businesses and getting 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 of around $0.11 impact.

Finally we're assuming an annual average effective tax rate of 38% on GAAP earnings on a combined basis. As discussed in previous earnings calls, it's important to note that from time to time installations completion timing, on specifically bigger projects, can impact revenue and earnings in a given quarter but we don't expect those quarterly fluctuations to impact the growth rate measured over multiple rolling quarters.

To round out our update I will hand the call back to Randall.

Well, I think 2016 was a water shed year for Omnicell. We had the integration of Aesynt, which really helped to drive record bookings backlog, revenue and earnings and it significantly broadened our solutions portfolio and strengthened our role as a strategic solutions provider to very large health systems which really positions us totally different in the marketplace.

I'm really also pleased with our integration of Aesynt, which allows us to move forward with the second phase of this integration which involves mostly systems of process and implementations as well as joint product development and road maps. And, of course, we couldn't be more pleased with the response and the uptake on the XT Series, which we are shipping and installing every day and trying to figure out how to put more through the manufacturing process to get more out there.

And we continue to believe with what we are seeing in health systems, both existing and new customers are truly assessing their needs for improving the efficiency and the safety around their medication processes and looking across the continuum and they're evaluating a breadth of solution sets and a breadth of solution options out there and it sure feels good that they're choosing Omnicell.

So that ends our prepared remarks and now, Operator, I would like to open it up for questions, please.

(Operator Instructions). And our first question is going to come from the line of Matt Hewitt with Craig-Hallum Capital.

Good afternoon, gentlemen. Several questions from me. First, it sounds like you had a greater response from customers that were in queue to buy G4 that now want to switch over to XT. Is that accurate and is that why you're scrambling to ramp-up production of the XT and adding that second shift.

Yes. I think that we thought that G4 would wind down in more of a -- at a, you know, steady pace, slower pace and that XT would ramp-up and then almost from the day we announced XT everybody said wait, you guys only put out a new platform every ten years. I want to really consider putting this in.

So it really pushed off decisions that would have been G4 and they wanted to get into the queue for XT and, particularly this quarter, we did not have enough supply of the XT systems to meet what would normally be our revenue goal. So it's not -- and so I guess you're right. The reaction to the XT a lot of people we thought would have stuck with the G4 just because they already have a lot of G4 in their hospital, maybe they wouldn't want all of their systems to be the next XT system..

But most of the people, we were surprised, wanted to do that and then that really sucked our sales force back into, particularly Q1 and now, to re-papering this stuff and bringing in our consultants to reconfigure based on the XT system because it is slightly different than the G4. It's not a direct translation over. So XT, I have to say, is a booming success.

Okay. Secondly, your guidance, Peter, and I think you touched on this a little bit. Your guidance implied another step down in gross margin, either GAAP or adjusted, for the first quarter and then you would think it would start to ramp-up. One of the -- the key point that you mentioned at the Analyst Day back in December was that the XT will actually carry a higher gross margin than the G4. How long until we start to see some of the benefits of that? Obviously, this year you get the transition periods, but is that an 2018 event?

Towards the end of the year in 2017 we will see some benefit already.

Okay.

Total cost XT versus G4.

All right. And then maybe -- (Inaudible - Multiple Speakers). Go ahead.

I was going to say of course it's dependant on volume. You know, when you repurchase more volume you can negotiate better rates, you can run the plant more efficiently, et cetera. And that will flow-through the gross margin towards the first parts of that so the end of year here in 2017. So we don't need to wait all the way to 2018.

Okay. Maybe two more for me and then I will hop back in queue. Number one, if you could touch on performance center briefly. You did mention one win there but where are you from a customer standpoint, if you don't mind, and what is the adoption curve kind of been like for that product?

Well, we're getting adoption of traction in the marketplace. I think we're, I don't know the exact numbers, at least ten to 15 customers we have going signed up for the product and given us contracts. These are multi-year contracts at very large institutions and we have a large pipeline of more customers lined up for it.

So we feel that this is -- rings very true in the macro trends in healthcare and we just -- it's just a natural combination of all the other things that we have to offer, it fits right in with it.

Okay. Great. One last one for me then I'll hop back in the queue. I just to make sure I heard you correctly, I think, Peter, you mentioned there was $12 million of integration expenses that were actually included or kept in your adjusted guidance. Is that accurate?

That is correct.

Okay. Great. Thank you.

Our next question will come from the line of Mohan Naidu with Oppenheimer.

Thanks for taking my questions. Randy, I just want to go back to the bookings question a bit again. The booking in December, do you guys see delays in new bookings as well as the customers thought about getting into XT or is it just a revenue conversion that got delayed.

Well, I think the bookings were pretty steady through December, but as soon as we announced XT we did see a few bookings, not very many, that were impacted by XT and -- but most of the people already had the paperwork through the systems and just about signed, but there's actually a little more disruption in Q1 where the paperwork hadn't been quite circulated all the way around and now we're pulling it back and recirculating it with XT. As far as new bookings. And then, as well, we're also working on old bookings in G4, you know, several hundred millions of backlog we have that need to be converted to XT as well.

Okay. Maybe a topical question on the hospital spending and you're looking at right now. Are you seeing any changes in the pace of the old closure or anything like that because hospitals are thinking about any upcoming changes from the new administration.

For our market segment we have not seen any slow down in hospitals. I think hospitals continue to be very strategic about acquiring our types of systems. They want standardization, they want cost control, they want safety, they want regulatory compliance and they want it uniform across all of their providers facilities and that's why they're acquiring provider facilities and they want to leverage those.

And then a key driver is they want to integrate that into their enterprise technology systems that they have on the health record side and so we play extremely well into those aspects of what the market needs and want in the macro trends to be successful.

So we really just not have not seen customers saying well, we don't want to spend the money on this infrastructure right now or on this type of project. We have not seen that.

Okay. Great. Peter, one quick question for you. How much are you baking in for Ateb contribution for 2017 guidance?

We're not breaking out specifically. What we said before, though, is that on a LTM basis per September 30 last year that Ateb LTM revenue was about $28 million.

Okay.

We can assume that roughly to be double-digit business. It's in the fast growing segment. Specifically the med [criteriaization], Time My Meds software, is really gaining traction in the market.

Okay. Does this go into the medication adherence segment when you report?

Yes it is included there.

Okay. All right. Thank you very much.

Yes.

And our next question will come from the line of Sean Wieland with Piper Jaffray.

Thanks. So if I'm an existing G4 client right now, what is my sense of urgency to upgrade to the XT platform?

Well, I think the issue is your next order that you're going to get in the hospital. Right now you're in this window. The next incremental one you want, and 60% to 70% of our orders are all from current customers, you have to decide am I going to go with G4 or XT. So, as I just said, most people are saying hey, the next incremental one I want is XT and then this sets you up and I think most hospital networks or providers understand that this is the system of the future, to get the next-generation of software you have to have a next-generation of hardware at first. And so they're trying to orients their investments over time to make sure they get the platform eventually upgraded to XT. Now, a lot of our customers, a large percentage of our customers, probably more than half of the systems we have out in the marketplace are seven years or older. So their systems are old and we, you know, are eventually not going to service those just because its too old to service as we continue on. So it's really a question of winding down those systems and taking them out of the market, so that would probably be the biggest driver as far as why customers must eventually swap.

So the -- give us a sense of the magnitude, if you could, of the upsell of G4 to XT versus G3 to G4. Not on a per customer basis but from your perspective, from the Company's perspective.

So the difference between the G4 upgrade, which is the brain or the G4 console only, that's part of the total automated dispensing cabinets. The full frame of XT 4, 5, 6 X the revenue if you will for an upgrade.

Yes. So G4 was I think around a $250 million to $300 million opportunity and this is close to $2 billion as we replace all of the equipment over the next sevenish years because we have both the Aesynt install base to replace and the Omnicell install base to replace. So it's a huge opportunities for us.

Okay. So what -- multiple follow-up because it's the full frame is what you're saying it's a greater opportunity.

Yes.

Okay. So what's the visibility you got on the acceleration to 20% bookings growth starting in Q2?

We have a pipeline that we're working with. We feel pretty good about the visibility there and the benefits of the new product. I've already talked about the aged equipment in the field, more than 50% older than seven years and particularly also in the Aesynt AcuDose install base is actually (inaudible) more, so we feel good about the opportunity there, too, for replacements.

Okay. Thanks so much.

Yes.

Our next question will come from the line of Steve Halper with Cantor Fitzgerald.

Hi. Two questions. The $12 million of integration expense that's included in the numbers, what does that compare to in 2016?

So in 2016 we had about $10 million of integration costs for Aesynt and then in 2017 we're planning roughly -- a little bit less than $11 million for Aesynt and around $1 million for Ateb.

And then --

We expect - go ahead.

And then -- no. Go ahead, Peter. Finish your.

I was going to say that we expect to substantially complete the integration projects for Aesynt by the end of the year in fiscal 2017 so that would then fall off, be significantly reduced to a very small amount in 2018.

And the costs that you called out for headcount reduction and facility leases, is that the $8 million -- is that also included in the adjusted earnings guidance?

Yes. But those would be we would adjust those out as one-timers. Those cost would not to be in the non-GAAP results.

Okay. So the $8 million are not in the non-GAAP results?

Correct.

Okay.

Yes.

Thank you.

And now -- our next question will come from the line of Raymond Myers with Benchmark.

Great. Thanks for taking the question. Randall and Peter, maybe you can help me to kind of walk me through what happens when a customer decides they were going to upgrade to a G -- to the G4 and now you have introduced the XT so they hold back on the G4.

Are they -- are most of them simply holding their orders and not moving forward with anything for the time being while they make the determination? Or are many of them actually signing for the XT and when that is the case, my understanding is that that purchase price is several multiples higher than that G4 conversion. So if you do the math, if a large proportion of customers make the conversion, the revenue opportunity to Omnicell should be much higher in the second half of the year as you convert those customers to XT and yet your guidance doesn't quite reflect that. Can you help us understand?

Yes. So we use the G 4 console up grade is different than the G4 frame, right? They're both G4 versions of the product. So a customer that's expanding to add the new hospital to the network would buy regular G4 frames and put an order with us because they're adding this hospital to their network and so they would have an order for 20 G4 frames. That's not G4 console frames. The consoles that's the whole system.

Those are the ones that are being converted. Their whole systems that are being converted from G4 whole frames to G -- to XT. There are not that many customers out there left that could use a G4 upgrade console only.

So when we talk about converting the G4 in our backlog that's the current full-fledged model that we're shipping up until the middle of January. Middle of January we started shipping XT, as well. So it's replacement of one full model for the other.

It isn't the upgrade of the XT -- of the G4 consoles that people are swapping out for the full frames. It's full frame for full frame.

Okay. So in the case where it's full frame for full frame the pricing, I understand, is more similar, but you would have the opportunity for an up grade cycle to all the preach G4s that you sold in all your history. So that's a -- that's where that big million opportunity comes.

That is exactly right.

So the disconnect is when does this great opportunity flow-through to your income statement because it doesn't seem like it's happening quite yet.

Well, the, this is Peter, the second through fourth quarter phase this year we are expecting to be back in the organic growth range of 8% to 12%. So you can see you start there and then the EPS, if you take the non-GAAP EPS you take the mid-point of the range that we gave, if you're looking at 70% year-over-year so starting to flow-through there as well so.

Yes. So the big difference, I think, is that this -- this conversion of current customer base to the new technology is somewhere between a five to ten year process and which all the customers eventually swap out. It isn't -- they're not all going to swap out in the 12 month frame or 24 month frame.

It's probably a five to sevenish type year time frame and we're just at the beginning of the cycle. In other words, we just announced XT so most of the customers who would be willing to swap out or could swap out over equipment are customers who have fiscal dollars in the second half of 2017 who we would target as replacing their equipment. Because it takes time to cycle the funds into the budgets.

And then of course as you keep moving on through the cycle 2018, 2019, it continues to build.

Okay. That helps. Thank you. And on the performance center I think you previously said ten to 15, at least, customer installations so far. Could you give us a sense of what revenue contribution that product might be this year?

We're not break he can out the product line specifically, but the contracts on average are multi-year multi-million dollars, but you have to divide, of course, the contract amount over the number of the years that the contract runs, right? So it's kind of a layering recurring revenue model if you will but we're ramping fairly aggressively there.

Yes. We have ten to 15 that have signed contracts. We don't have ten to 15 running yet.

So we're probably under ten in the running and probably adding a few every quarter into the revenue line, but that's recognized ratably over the month to month, but it's good margin obviously for us.

Okay. Good. And then maybe just clear up one final point.

As we look at your guidance in December and in early January as compared to now, it seems to be a little different, particularly as we look at Q1. What was it what changed in the last so many weeks that made your Q1 outlook a little different than it was before?

Yes. As to what Randy talked about earlier in the call, so we were expecting a two quarters of transition of actually -- we do actually see that already in -- we saw that already in December. So looking at the month of December in the first quarter and a little bit in the second quarter as well so six months kind of shifted a little bit forward in our mind, if you will.

So that's the difference. We've got good visibility starting into the second quarter as well and ramping so we feel -- I feel a little bit more confident than we were before in the first half, second half. We feel that the first quarter versus last nine months distinction is actually more reasonable for the dynamics that we've seen.

Okay. So most of the impact has been now accelerated into Q1. Do you have visibility from customer purchase agreements that this delay in purchases is abating and they're actually moving forward with a XT purchase decision and that it simply (inaudible) weighing entirely.

Yes. (Inaudible). We the backlog is being converted to XT so we have really good visibility and we're of course lining up the XT conversions to line up with the installation expectations.

That's why we feel really confident about Q2 and moving forward is we have excellent visibility there as we have gotten folks to sign up and sign on the dotted line for XT, but that was too late to get it manufactured and shipped and installed in Q1, but obviously it sets us up well for Q2 and beyond.

Okay. Thank you. That's a really important point. Thank you very much.

And our next question will come from the line of Gene Mannheimer with Dougherty. Gene, your line is open.

Okay. We'll go to the next question and that question will be from the line of Mitra Ramgopal with Sidoti.

Yes, hi. Good afternoon. Just a couple of questions. First, I believe in the past you mentioned you expected to gain maybe 1%, 2% market share.

Yes.

With the success you are having in terms of customer interest with the XT do you still hold to that or do you think it could even be faster?

Well, looking at 2016 we do think that we gained one or two points of additional market share, as we have done in the last couple years especially notably of course is WellStar, which is about a full point of market share in the US. So we're expecting to continue the competitive wins in 2017 as well. I think for now, maybe Randy can comment as well, but for now we'll continue to assume that we keep gaining one to two points of actual market share this year as well.

If it's higher then we'll adjust but for now we're assuming that --.

The XT really is a game changer for us. It's an advantage and the thing that I was trying to explain in the beginning of the call, the way we're introducing this technology, the way the options that we're giving our customers, even though it's caused some disruption here, is what really drivers them to choose us because we are allowing them to get the technology, integrate it into their current platform and take advantage of it in a very meaningful way. Now, without having to convert everything at once but start the conversion now knowing that over the next few years they'll fully convert.

So this is kind of a brand promise that Omnicell has created in the marketplace and it's what's driven this 1% to 2% margin. And this is just another clear, you know, commitment that Omnicell is making to their customer base that you're going to be able to get long-term great return value with the best automation in the marketplace because we're able to deliver the next-generation of hardware and software with minimal disruption in the institution and that's meaningful to people.

Okay. Thanks. And just quickly on the cost side, actually, your closing the Tennessee facility, I think Slovakia facility, et cetera. Should we -- Slovenia. Sorry. Should we expect pretty much 2017 all the closures to be completed or do you anticipate this --.

So to close the Tennessee office will be the first quarter. The Slovenia plants will be closed by the end of the third quarter this year.

In terms of additional closures, et cetera, I guess it's probably a little too early for that.

None planned at this time.

Okay. Thank you.

Thank you.

Thank you. I'll now turn the conference call over to Randall Lipps for closing comments.

Well, again, thank you for joining us today. I know we had a lot of numbers and assessments for you guys to go through, but the momentum in the business is strong, our employee bases are excited. I want to thank them for their hard work and getting this XT launched and the Aesynt integration has really changed the dynamics of our company and sets us up for a continued success with a great platform to reap many benefit over the many years to come.

So thanks for joining us today and we'll see you next time.

Thank you.

Once again, we'd like to thank you for participating on today's Omnicell fourth quarter earnings conference call. You may now disconnect.