Omnicell Inc (OMCL) 2017 Q3 法說會逐字稿

Good afternoon. My name is Erica, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Omnicell third quarter earnings announcement. (Operator Instructions) Thank you. Mr. Peter Kuipers, you may begin your conference.

Thank you. Good afternoon, and welcome to the Omnicell Third Quarter 2017 Results Conference Call. (Operator Instructions) Joining me today is Randall Lipps, Omnicell Founder, Chairman, President and CEO.

This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell annual report on Form 10-K filed with the SEC on February 28, 2017, and in other more recent reports filed with the SEC.

Please be aware that you should not place undue reliance on any forward-looking statements made today. The date of this conference call is October 26, 2017, and all forward-looking statements made on this call are made 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 a property of Omnicell, Inc., and any taping, auto duplication or rebroadcast without the expressed written consent of Omnicell, Inc. is prohibited.

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

Our third quarter financial results are, as usual, included in our earnings announcement, which was released earlier today and is posted in the Investor Relations section of our website at omnicell.com. Our prepared remarks will also be posted in the same section.

So let me now turn over the call to Randall.

Good afternoon, everyone. We are excited to discuss our third quarter results as well as our continued progress of the scaling of the XT Series market introduction that is gaining momentum every day.

We are pleased with our progress and continuous innovation to build and expand the industry-leading platform for pharmacy automation.

Specifically, so far this year, we have, one, launched our new XT Series in January, which received great responses, and we experienced continued momentum from both existing and new customers.

Secondly, in April, we announced the launch of AcuDose software on XT hardware, which allows our Aesynt customers to take full advantage of the XT Series.

Last quarter, we announced the launch of the XT Series automated supply dispensing system and the controlled substance dispenser module, providing innovative, efficient and secured workflow for dispensing and administration of controlled substances.

We provided greater flexibility through new mobile capabilities in Central Pharmacy Manager to integrate automated inventory management more naturally and do pharmacy workflows. We also expanded the Medication Adherence ecosystem on the Omnicell platform with the addition of the new VBM 200F advanced automated packaging solution, which adds to the market-leading timeline meds medication synchronization cloud-based software and the proprietary SureMed multimed blister cards.

And lastly, we expanded Performance Center's core capabilities of operational improvements into clinical outcomes and regulatory compliance through internal development and the acquisition of InPharmics, positioning Omnicell as the partner of choice for health systems looking to drive improvement across all facets of medication management.

Earlier this week, we announced our Annual Innovation Day for investors and analysts, which will be held at the American Society of Health-System Pharmacists, ASHP, midyear meeting on December 4 in Orlando, Florida. At that time, we will showcase Omnicell's innovation and industry-leading differentiated platform of solutions.

As a technology leader, we regularly broaden and refresh our products lines, and we expect to have innovation announcements within annual frequency. We expect this -- that this cadence of annual product announcements and launches will drive multiple simultaneous product bookings and revenue ramp-ups within a given year.

From the business perspective, it's clear that we are winning in the marketplace. During the third quarter of 2017, we had a strong, new and competitive conversion rate of 31% of bookings. This is a great indicator of the strength of the business. And around 2/3 of those were competitive conversions, and the remainder were from greenfield customers who have never automated before.

For the 12 months ending September 30, 2017, our new and competitive conversion rate was 28%. We believe that the new account strength and installed customer base gives us a robust platform for future growth, driven by expansion, replacement and upgrade sales as well as cross-selling opportunities across our product portfolio.

Second, the XT Series is very well received and accepted by customers. As of last week, we had delivered XT to approximately 600 sites, which is up from 320 sites at the end of April. The XT Series is now live at over 330 sites, which is up from 170 sites at the end of April. Both numbers are growing every day.

Third, the scaling of the XT Series revenue is progressing well, specifically that the percentage of third quarter frame revenue doubles from the XT Series. Came in about 90% versus our earlier expectation of about 80%. We now expect this percentage to increase to above 95% in the fourth quarter.

We have also announced to customers the end of shipment of G4 and AcuDose by December of this year. This will allow us to consolidate and reduce the number of ADC frame assembly lines from 3 to 1.

Now for the third quarter, non-GAAP revenue was $187 million, which was slightly below the guidance range provided in our second quarter results earnings call. Non-GAAP revenue came in slightly below our guidance because of a number of small drivers. There was timing of one large install account. There was some impact from the Harvey and Irma hurricanes, which resulted in delays in specific hospital implementations in Texas and Florida. This is revenue timing as our agreements are noncancelable, and these implementations are being completed in the fourth quarter.

And there was a minor delay in annual service contract renewals, which is also timing, as we expect to catch up service revenue in the fourth quarter.

Despite this revenue timing headwind for the quarter, strong gross margin improvements and good operating cost controls resulted in non-GAAP EPS for the third quarter of $0.42, which is the middle of our guidance range and that consensus.

In the last number of years, we have successfully grown the business by implementing our 3 scalable growth strategies: growth through the differentiated Omnicell platforms, growth in new markets and growth via acquisitions. And for 11 consecutive years, we've received top honors from KLAS, the prestigious third-party rating organization. For 12 consecutive years, we have increased the market share and gained new thought leaders, customers every quarter.

Increasingly, we are becoming a strategic business partner for our customers developing multiyear plans to consistently deliver integrated solutions with state-of-the-art medication management automation and workflow efficiency across the Omnicell platform for caregivers and better health care outcomes for patients.

In 2017 to date, we have continued to experience great wins and added notable customers to our Omnicell family under our first strategic pillar of differentiated platforms. With numerous large competitive conversions, we believe that we gained further market share in 2017, a continuation of the market share gain trend and momentum we have experienced for many years. In the third quarter, we had some great wins with prominent new customers as well as significant deals with existing customers, including Hackensack Meridian Health, NYU Health and Riverside Medical Center.

Current Omnicell customer, Hackensack Meridian Health, has chosen to implement Omnicell's automated medication management solutions and enterprise services in its 5 recently acquired facilities. Hackensack Meridian Health, a national accredited health network and the first in the nation to receive the Magnet nursing recognition, is further standardizing its medication management technology across its growing health care system in order to improve clinical operations, specifically by promoting patient safety and supply chain efficiencies.

NYU Health, one of the premier academic medical centers in the United States, and named the #19 hospital in the nation on the 2017-18 Best Hospitals Honor Roll, will be implementing Omnicell's XT automated dispensing system, including unique technology developed specifically for state-of-the-art Helen and Martin Kimmel Pavilion, scheduled to open in 2018.

Riverside Medical Center, a Top 100 Hospital, performing within the top 5% of hospitals nationwide, currently Omnicell supply chain solution customer, has chosen to implement Omnicell's XT automated medication dispensing solutions in its facility's main hospitals. Additionally, Riverside will be outfitting its newly constructed central pharmacy with automation and software solutions that will provide enhanced safety, security, tracking and improved pharmacy workflow.

Additionally, this month, Texas Children's Hospital, located in Houston, has chosen Omnicell's Performance Center to improve optimization of the medication process across their health system. Consistently ranked among the top children's hospital in the nation, Texas Children's is also implementing Omnicell's technology for its automated dispensing systems.

These strategic wins in the marketplace are based on the strength of the solution in our portfolio with the differentiated Omnicell platform. We are also proud of the -- our recent received industry award, the Omnicell IV compounding solution and XT Series automated dispensing systems were awarded a 2017 Innovative Technology designated from Vizient, the largest member driven health performance improvement company in the country. We are specially excited to receive the designation as it is the result of direct feedback from health care experts who interacted with the products and understand the value this technology brings to the industry.

We are also excited that Frost and Sullivan recently named Omnicell as the 2017 Global Smart Hospital Pharmacy Automation Vendor Company of the Year. The analyst recognized Omnicell for our excellence in growth, innovation and leadership with superior performance and demand generation, brand development and competitive positioning.

Our second strategic pillar that are expanding into new markets also fueled growth in the last several years and, we believe, sets us up well for the coming years.

We are pleased to receive very positive customer feedback and are experiencing strong commercial momentum from the Omnicell VBM 200F multimed automation solution and customers adopting globally, including the U.S., U.K., Germany and China. The Omnicell VBM 200F has been adopted in a variety of pharmacy settings, serving different patient communities, including chain and independent closed-door pharmacies, retail pharmacies and specialty pharmacies. It is the only small footprint automated pharmacy solution that efficiently and accurately fills and verifies SureMed by Omnicell multimed blister containers.

Recognizing the opportunity to gain control of their sterile compounding cost, Florida-based Tampa General Hospital has chosen Omnicell IV solution to support in-house production of IV admixtures. In combination of IV automation technology, and Omnicell's robotic IV in-sourcing service, or what we call RIIS, will help Tampa General Hospital create a safer, more accurate and more cost-effective compounding operation for the hospital.

Our third strategic pillar of expanding our presence and relevance through acquisitions has also continued to deliver great results. The Aesynt integration is progressing well, and we're seeing good cross-selling momentum within the total product portfolio and combined customer base, specifically for our IV and Performance Center solutions.

We believe that the execution of our 3-leg strategy laid the foundation for success historically and sets us up for continued future growth in scale. In today's evolving health care environment, we remain focused on our mission to change the practice of health care with solutions that improve patient and provider outcomes.

I'll turn it back over to you, Peter, for some financial updates.

Thank you, Randall. Our third quarter 2017 GAAP revenue of $187 million was up $6 million or 3% sequentially, driven by the product transition and related ramp-up of the XT Series launch.

Earnings per share in accordance with GAAP were $0.16 per share, which is up from the GAAP EPS of $0.05 in the third quarter of 2016. GAAP gross margin was 45.4% for the quarter or up 230 basis points from the second quarter this year.

In addition to GAAP financial results, we report our results on a non-GAAP basis, which excludes stock compensation expense and amortization of intangible assets associated with acquisitions, onetime acquisition-related expenses and the acquisition accounting impacts related to the deferred revenue and inventory fair value adjustments. We use non-GAAP financial statements in addition to GAAP financial statements because we believe it is useful for investors to understand acquisition-, amortization-related costs and noncash stock compensation expenses that are a component of our reported results as well as onetime events and onetime acquisition and restructuring-related expenses. A full reconciliation of our GAAP to non-GAAP results is included in our third quarter earnings press release and is posted on our website.

Our third quarter 2017 non-GAAP revenues of $187 million were up 3% from the prior quarter, driven by the continued ramp-up of the XT Series market introduction.

On a non-GAAP basis, earnings per share were $0.42 in the third quarter of 2017, which is at consensus, and up $0.11 sequentially.

We're seeing good gross margin expansion as non-GAAP gross margin was 47.6% in the third quarter, or up 230 basis points from the prior quarter. We expect gross margin to further increase in the fourth quarter as the XT Series rollout continues to ramp up and we gain further skill in efficiencies in manufacturing and installation.

Non-GAAP adjusted EBITDA was $28 million for the third quarter of 2017 or up $8 million sequentially.

Our business is also reported in segments, consisting of Automation and Analytics and Medication Adherence.

Automation and Analytics consists of our XT and OmniRX Automated Dispensing cabinets, Anesthesia Workstations, Central Pharmacy, Omnicell Supply, Omnicell Analytics, Performance Center and MACH4 Robotic Dispensing Systems. Our acquisitions of Avantec, MACH4, Aesynt and InPharmics are also included in this segment.

The Medication Adherence segment consists of all adherence packaged consumables, which are now branded SureMed, and equipment used by pharmacists to create adherence packages as well as software solutions that aid retail pharmacies in medication synchronization and other appointment-based software model solutions.

Our acquisitions of MTS, SurgiChem and Ateb are included in the Medication Adherence segment. As a reminder, we report certain corporate expenses that cannot be easily applied to either segments separately.

On a segment basis, our Automation and Analytics segment contributed $155 million in GAAP revenue in the third quarter of 2017, up from $152 million in the third quarter of 2016.

GAAP operating income of $28 million this quarter compares to $90 million of GAAP operating income in the second quarter of this year and $25 million of GAAP operating income for the same quarter last year. Non-GAAP operating profit of $35 million for third quarter compares to $39 million for the same period last year.

The Medication Adherence segment contributed $32 million of GAAP revenues to the quarter compared to $24 million in the third quarter of 2016.

GAAP operating profit was 0 for the quarter, similar to last quarter, compared to $800,000 of GAAP operating profit a year ago. Non-GAAP operating income was $2.5 million in the third quarter compared to $2.3 million of non-GAAP operating income a year ago. Non-GAAP common expenses were $60 million compared to $90 million in the third quarter of 2016.

Moving to operating margins. Non-GAAP operating margin, including Aesynt and Ateb integration cost, was 11.7% in the third quarter, up from around 6% in the second quarter. Excluding the Aesynt integration cost of approximately $1.5 million, the non-GAAP operating margin was around 12.5% for the third quarter. Non-GAAP other income and expense was a net loss of approximately $2 million, mostly consisting of interest expense on the outstanding loan balance.

Finally, we're assuming an annual average tax rate of 35% to adjust GAAP tax expense to non-GAAP tax expenses.

Now moving to the balance sheet and cash flow. In the third quarter of 2017, our cash balance decreased from $27 million to $7 million after paying down our outstanding debt by $2.5 million in the quarter.

The third quarter 2017 cash flow used in operations of $80 million was driven by an $11 million built in inventory for current and future implementations and by higher accounts receivable. The average implementation period from the time of shipment to completion varies between a couple of weeks to 2 to 3 months for the larger implementations.

Inventories at September 30, 2017, were $92 million, up $10 million from last quarter, primarily driven by an XT Series inventory build for future quarter installs.

Accounts receivable days sales outstanding were 86 days, up 8 days from the second quarter, and down 5 days on the third quarter of last year. The increase in accounts receivable days sales outstanding from prior quarter was mostly driven by invoiced shipments towards the end of the third quarter for fourth quarter revenue. Based on our customer agreements, we largely invoiced upon shipment.

As of September 30, 2017, we had a $197 million of outstanding funded debt and our loan leverage measured as outstanding total funded loan balance over last 12 months of bank EBITDA was approximately 2.7.

Our headcount was 2,336 at September 30 this year, down from 2,348 at June 30 this year.

During the third quarter, we executed well on a number of drivers underpinning the dynamics of the XT Series product introduction. As Randall mentioned earlier, as of last week, we have delivered XT Series to approximately 600 customer sites. And the XT Series is live at over 300 sites. Both numbers are growing every day.

As part of the next phase of integration of the acquisition of Aesynt, we are progressing well on the creation of the centers of excellence for product development, engineering and manufacturing, which we expect to substantially complete in the fourth quarter.

During the remainder of 2017, we continue to focus on the following areas: First, accelerating bookings momentum; secondly, laying the foundations for XT cost of goods sold reductions as revenue ramps and we consolidate; three, automated dispensing cabinet assembly lines into one to drive further gross margin expansion and continue cost management.

Moving to the fourth quarter. For the fourth quarter of 2017, we expect GAAP and non-GAAP revenue to be between $201 million and $207 million. We expect the fourth quarter 2017 non-GAAP earnings to be between $0.49 and $0.55 per share.

As discussed in previous earnings calls, it's important to note that from time to time, installation completion timing or larger projects can impact revenue and earnings in a given quarter, but we don't expect such quarterly fluctuations to impact the growth rate measured over multiple rolling quarters.

Let's now move to total year 2017 guidance. We expect 2017 product bookings to be between $570 million and $590 million. We're narrowing the 2017 revenue range through our feasibility into our customers' expected implementation timelines and schedules. We now expect both GAAP and non-GAAP revenue to be between $720 million and $726 million in 2017.

Despite lowering the top end of the 2017 revenue guidance, we are raising the midpoint of our 2017 non-GAAP EPS guidance range, and we now expect 2017 non-GAAP earnings to be between $1.27 and $1.33 per share.

Given the ramp-up of the XT Series revenue and related gross margin, the company's profitability has increased through the year in 2017, and we expect the non-GAAP operating margin, including integration cost for Aesynt, Ateb and InPharmics to be around 14.5% in the fourth quarter, using the midpoints of guidance and, hereby, demonstrating increase every quarter this year or around breakeven in the first quarter to 6% in the second quarter and about 12% in the third quarter.

Excluding the integration cost for Aesynt, Ateb and InPharmics acquisition, we expect non-GAAP operating margin in the fourth quarter to be slightly above 15% and in line with our long-term financial model.

Again, when reviewing 2017, it's important to note a couple of items included in the 2017 guidance. First of all, for 2017, a non-GAAP expected results includes approximately $8 million of integration expenses for Aesynt and Ateb that we do not adjust for based on our non-GAAP policy. This integration cost directly impacting non-GAAP operating margins and non-GAAP EPS mostly consist of integration-related IT expenses, integration team and project cost, costs related to the implementation of Sarbanes-Oxley and accelerated product development integration cost.

Secondly, in 2017, we are expecting and are tracking the second year cost synergies from these acquisitions of around $10 million annually. As we have demonstrated in the past, we're confident that we will achieve our 15% non-GAAP operating margin target 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 the equivalent to a non-GAAP EPS headwind year-over-year of around $0.11 per share.

Reviewing 2017. The 2017 financial results are characterized by 2 distinct phases, as revenue and profitability are impacted by the XT Series product introduction and manufacturing ramp-up, the first half of 2017 profit and market introduction of XT and ramp-up of manufacturing for the XT series and included the profusion of the AcuDose and G4 product backlog and sales quotes to XT Series. It also included the XT Series manufacturing ramp-up and included the implementation of XT product at launch and first-adoption customers. It also had suboptimal overhead cost absorption, given the ramp-up, and we have continued cost management in the first half.

And then in the second half of 2017, which included acceleration of XT implementations and conversions included, first of all, improvement of overhead cost absorption as production ramps. Two, we've turned to the 8% to 12% growth rate for both bookings and revenue. Also included, XT Series cost of sales reductions as revenue ramps. And finally, in the second half, we are implementing the Centers of Excellence mentioned before.

Moving now to the long term financial framework. Our long-term financial framework remains unchanged. Our long-term financial framework, first of all, consist of 8% to 12% annual organic revenue growth; and two, 5% inorganic revenue growth on average over the longer term; and thirdly, 15% non-GAAP operating margin.

For 2018 onwards -- and onwards, we expect to be, in the long term, 8% to 12% organic growth range. Our preliminary view of product bookings growth for 2018 is at the high-end and potentially above the long term range of 8% to 12% growth.

Our preliminary view of revenue growth for 2018 is also, in the long term, 8% to 12% range. However, at this point, we have visibility to the middle of this 8% to 12% range, with potential upside towards the higher end of the range.

The company will provide more specific 2018 guidance during the 2017 fourth quarter earnings call.

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

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

So that concludes our prepared remarks. Let's open it up for questions, operator.

(Operator Instructions) And your first question has come from Matt Hewitt from Craig-Hallum Capital.

Two for me. First of all, I'm wondering if you could quantify what the hurricane impact was in the third quarter? It sounds like you had one customer, in particular, a large customer, that was pushed to Q4. If you could quantify that. And then the follow-up question relates to the growth rate that you're stating for next year, your longer-term plan. As we look at next year, 8% to 12% growth and then, obviously, the potential for M&A. But if you exclude that, 8% to 12% growth next year, historically, you've talked about your bookings translating into revenues in 6 to 9 months. You're exiting this year at a much faster rate than 8% to 12%. I'm just trying to figure out or rationalize the delta here why the growth rate wouldn't be faster next year. I'll hang up and listen.

Okay. Thank you, Matt. So if you look at the revenue performance in the third quarter, there was about 1/3, 1/3/ and 1/3 for those 3 drivers kind of compared to the midpoint of consensus. So about $1.5 million for each of those factors, roughly, for the hurricane, specifically, was your question.

And on the outlook, the preliminary outlook for 2018, we definitely have a lot of momentum in our pipeline, that convert into bookings. So we think we'll be at the very high end of the 8% to 12%, EI at 12%, and potentially, above that range, right? So that will be the bookings growth as we can see it today, which is preliminary, and will solidify, of course, the visibility over the next couple months. And then what we can see now for revenue growth, what we said earlier is that for now, we see -- we're also in that 8% to 12% long-term range. And for now, visibility is to the middle of that range, so EI close to 10%, with potential upside as well. And it's all about revenue timing, backlog timing and how that converts it to -- into revenue.

And your next question comes from Mohan Naidu from Oppenheimer.

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

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

Okay. Got it. One quick follow-up on the 15% margin target. Will you be able to reach that in calendar '18? Or if you have a different time frame to get to that, that would be useful.

Yes. So like we said in the prepared remarks, so we think it will be at that 15% long-term goal in the fourth quarter. We continue to interest in the business. If you look at our Omnicell platform portfolio, really the only innovator in the space with an integrated portfolio. And there are opportunities both in the segments where we are in today to refresh and come out with new products, but also come out with greenfield products. So from an R&D cost perspective, we would likely expect it to be roughly at the same percentage of R&D expenses that we've done over the last couple of years. There might be a little bit of leverage over time on SG&A. But if you look at our market opportunities, and we want -- like what Randall said earlier on the call, we definitely want to have maybe a lot of significant XT, but we do want to have multiple simultaneous new product launches that impact both bookings growth and revenue growth. So that, of course, requires also investments and R&D and, to some extent, in SG&A.

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

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

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

And also what comprises the 5% long-term inorganic growth target? What -- if you could give us a more insight on your M&A strategy?

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

Yes. And I would add is that as we build out these large existing approaches to go across the continuum of care, a lot of the acquisition targets including the one we just it with Ateb and InPharmics are all software. Right? We've got these ecosystems of workflows. How do you enhance those workflows? You put on cloud-based or software-based solution sets that enhance those or tie them together, and that -- those generally drive higher margins on the software side.

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

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

And maybe the last comment, just on the non-acute stage. If you look at hospital systems, they are more and more, of course, integrating and centering into outpatient and non-acute facilities as far as their own system. So we definitely see a lot of growth there because we are, virtually, the only company that has an integrated solution across, what we call, continuum of care from both acute to non-acute in different settings. So that market dynamic is actually really positive for us.

I would add one other comment today on our recent announcement. As you've seen, CVS and Walgreens building a network to help with medication adherence and provide a large network to payers for medication adherence. We have some sort of solution almost in every chain, and that really bodes well for us in our med adherance marketplace. And we don't know exactly what that opportunity would mean for us, but it's certainly exciting. It validates the fact, the reason we got into med adherance almost 5 years ago because we knew that it would be a big game changer for health care. And as you see in today's action, it definitely is.

(Operator Instructions) And your next question does come from Gene Mannheimer from Dougherty & Co.

Congrats on all the good progress. Let's see, I wanted to ask some non-XT questions. The VBM 200 traction, you're seeing very positive. What does that mean for the M5000? Are those substitute products or complementary?

They're actually a complementary, right? So the M5000 is a bigger footprint fully automated solution. And close does -- can do a PV2 pharmacy check, fully automated, does the printing of the labels and the packaging and the sealing. So that's a bigger machine. And we actually will announced, probably later this year, the first installation at a show site at one of -- I would say, 1 of the top 10 U.S. hospital systems. So we have some traction there. And then the PBM is a smaller machine for chains, retail pharmacies and specialty pharmacies that is what we call highly automated. It's a smaller footprint. It doesn't do the sealing and the printing. That's still a manual step there, but it has many benefits as well. So we see some really good momentum on the PBM machine, both in the U.S. and Europe and in China.

Okay. Great, Peter. And the progress with the VDM, is that going to drive more consumable sales? And will that change that growth rate there?

Yes, yes. That will help consumable revenue as well.

And on the IV side. I don't know -- I don't recall if you talked about any new wins there. But how would you characterize your growth in that product line?

It's definitely a growth area for us. We don't really see a reason for a hospital system not to have an IV robotic solution in their system. It makes a lot of sense from efficiency and safety perspective. And then as you kind of look at the growth for IV, about half is capital purchases and then half is this in-sourcing solution that we've put to market, which we mentioned a couple of times in the prepared remarks as well. So...

We're seeing really nice tracking from the IV, in particular, because it's -- we're now on our second year of the [Assant] acquisition, which has really allowed that product to get down in the pipeline of our sales reps and get them accurately presenting and selling that product. And so that product has just continued to grow every year, and it's going to grow a lot more next year. So I feel really good about that product.

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

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

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