Omnicell Inc (OMCL) 2017 Q4 法說會逐字稿

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell fourth quarter earnings announcement. (Operator Instructions) Thank you.

Mr. Peter Kuipers, Chief Financial Officer, you may begin your conference.

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

This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied.

For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell annual report on Form 10-K filed with the SEC on February 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 February 1, 2018, and all forward-looking statements made on this call are made based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change.

Finally, this conference call is the property of Omnicell, Inc., and any taping, auto duplication or rebroadcast without the express written consent of Omnicell, Inc. is prohibited.

Randall will first provide an update on our business, then I will cover our results for the fourth quarter of 2017, our full year 2017 and discuss our guidance for 2018.

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

Let me turn the call over to Randall.

Good afternoon, everyone. The fourth quarter of 2017 was a good quarter, rounding off a successful year for the company. Although this quarter's revenue was slightly below guidance, profitability came in above consensus.

We have created a strong foundation for 2018, with a record number of multi-million-dollar deals, significant market share gains, record year-end product backlog and considerable momentum in innovation, positioning the company towards the $2 non-GAAP EPS mark.

2017 was an outstanding year for innovation and customer acquisition. We are pleased with our progress and continuous innovation to build and expand the industry-leading medication management platform, with the goal of achieving the fully automated pharmacy.

We started production of our innovative XT series in January last year, which received a great market response from customers, and we experienced continued momentum from both existing and new customers.

In April, we announced the launch of AcuDose software on XT hardware, which allows our existing Aesynt customer base to fully take advantage of the XT Series. In the second quarter, we launched 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.

In December, we announced the XR2 Automated Central Pharmacy System. The robotic XR2 is an innovative game changer and a significant step towards fully automating central pharmacy operations across the full range of customer environments. Beyond the upgrade, the XR2 represents significant greenfield and competitive conversion opportunities.

In December, we also announced the IVX Workflow powered by the IVX Cloud. IVX is a significant technological advancement for IV workflow processes, enabling pharmacies to safely and efficiently compound and prepare IV treatments.

Last year, we also expanded Omnicell's medication adherence ecosystem, with the addition of advanced automated packaging solutions to our platform that includes the market-leading Time my Meds medication synchronization cloud-based software and the proprietary SureMed multi-med blister cards.

And lastly, we expanded the Performance Center's core capabilities of operational improvements into patient outcomes and regulatory compliance through internal development and the acquisition of InPharmics. This positions Omnicell as the partner of choice for health care systems looking to strategically drive clinical, compliance, safety and financial improvements across all areas of medication management.

Health system leaders strongly affirmed the value of the new Omnicell platform offerings and our strategic road map at the ASHP meeting in December.

As the technology leader in medication management automation, we are committed to advancing our platform with product introductions annually. We expect that this cadence of annual product introductions will drive multi-simultaneous product bookings and revenue ramp within a given year.

2017 was also a great year for customer acquisition. In summary, it is clear that we are winning in the marketplace. During the fourth quarter of 2017, we had another strong, new and competitive conversion rate of 30% of bookings. This is a good indicator of the strength of the business. Around 2/3 of those were competitive conversions and the remainder were from greenfield customers that never automated before. For 12 months ending December 31, 2017, our new and competitive conversion rate was 29%.

Our industry-leading platform and our go-to-market strategy of a solutions-focused platform strongly aligns with the trends we see in health care, where hospital systems are reducing the number of vendors and instead require strategic partnerships.

In the last 7 months, 3 major for-profit nationwide hospital systems have chosen Omnicell as their strategic partner for medication management automation and signed multiyear sole-source strategic agreements.

These represent both XT swaps or upgrade opportunities and a market share gain. We believe that these 3 sole-source agreements by themselves represent between 1% and 1.5% of U.S. market share gain.

The unique enterprise features of the Omnicell platform allows these for-profit nationwide hospital systems to operate at lower costs with consistent workflows and scalable processes.

The XT Series is very well received and accepted by our customers. As of last week, we have delivered XT to over 820 sites, which is up from 600 sites at the end of Q3. The XT Series is now live at over 470 sites from 330 sites at the end of Q3 2017.

Both numbers are growing every day. We believe that these trends combined represent a great setup for the 2018 bookings growth followed by revenue growth.

In the last number of years, we have successfully grown the business by implementing 3 scalable growth strategies: growth through the differentiated Omnicell platform, growth in new markets and growth via acquisitions.

As announced yesterday, for 12 consecutive years, we received the top honors from KLAS. For 13 consecutive years, we've increased our market share and gained new thought leader customers every quarter. Increasingly, we're demonstrating a strategic approach in value to our customers by jointly developing multiyear strategic plan to consistently deliver integrated solutions with industry-leading medication management automation across the Omnicell platform.

In 2017, we continued to experience great wins and have added notable customers to our Omnicell family under our first strategic growth pillar of differentiated platform. With numerous large competitive conversions, we believe that we gained further market share in 2017, a continuation of the trend of market share gain 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 strategic deals with existing customers. Besides the XT Series momentum discussed earlier, we are seeing market momentum valuing and validating the entire Omnicell platform as a strategic solution.

Omnicell's XR2 Automated Central Pharmacy System, which debuted at the ASHP midyear meeting in December and will be coming generally available in mid-2018, is already gaining significant momentum in the market with a number of contractual bookings in the fourth quarter of 2017.

The XR2 is a significant step towards the fully automated pharmacy. And leading health care systems, including UPMC in Pittsburgh, Sentara Health in Virginia, St. Luke's University Health Network in Bethlehem, Pennsylvania, University Health in Georgia, and Mercy Health in Rockford, Illinois, will be implementing this new revolutionary technology that more fully automates medication inventory management, allowing pharmacies to make a meaningful shift from operational demands to clinical contributions that affect patient outcomes.

We continue to see nice growth from our IV automation solutions. A number of hospitals and health systems across North America have chosen our robotics sterile compounding technology to help enhance safety, improve therapy, reduce costs and facilitate compliance in the IV operations.

These include Penn State Health; UPMC in Pittsburgh; University Health System, Augusta, Georgia; Mass General; and Boston -- Brigham and Women's, Boston; Oklahoma Heart Hospital; and Vancouver Island Health Authority in British Columbia.

Dartmouth-Hitchcock based in Lebanon, New Hampshire has chosen the Omnicell Performance Center to develop a centralized service center within the health care system, supporting smarter pharmacy operations and helping to improve hospital financial performance by reducing the amount of wastes and unnecessary resources kept on hand.

UPMC, a leading Omnicell strategic partner, is building on their existing investment in automated hardware and workflow software solutions with the addition of multiple XR2 Automated Central Pharmacy Systems, Omnicell's new IVX Workflow compounding workflow technology powered by the IVX Cloud and the i.v. STATION nonhazardous sterile compounding robotic automation. These solutions will help further enhance control, efficiency and safety for medication management at UPMC's flagship hospitals: the UPMC Presbyterian and UPMC Shadyside.

As reported in The Augusta Chronicle, new customer, University Health Care, in Georgia has purchased Omnicell's XR2 and i.v.STATION solutions to increase pharmacy efficiency, improve medication costs and free up staff for more clinically focused activity.

Current customers in the health system is further implementing the Omnicell platform by installing XT systems, Anesthesia Workstations and additional facilities. Mercy Health has also purchased the XR2 robot to more fully automate their central pharmacy. The health system chose Omnicell in order to operate on a single platform and to leverage existing investments without sacrificing technological advancements.

We are also very proud of the industry awards we received in 2017. The Omnicell IV compounding solution and XT Series Automated Dispensing Systems were awarded a 2017 innovative technology designation from Vizient. We're also excited that Frost & Sullivan recently named Omnicell as the 2017 Global Smart Hospitals' Pharmacy Automation Vendor Company of the Year. As I mentioned previously, for 12 consecutive years, we have now received top honors from KLAS.

And our secondary pillar of expanding into new markets also fueled growth in the last several years and believe sets us up for the upcoming years. Internationally, we're excited to announce we have contracted with HCL HCA health care for both pharmacy and supply solutions for 6 hospitals in the U.K. The agreement includes automated medication dispensing systems and a new software-based analytics tool called SupplyX.

SupplyX is a web-based supply software on the Unity platform that integrates with Omnicell dispensing systems, providing supply management capabilities across their entire supply chain.

HCA chose Omnicell in order to help them implement an inventory management system across all their patient wards and more effectively drive efficiencies, improve patient safety and increase time for clinicians so they can spend it with patients.

Our third strategic pillar of expanding our presence and relevance through acquisitions has also continued to deliver great results. We are seeing very good cross-selling momentum within the total product platform and combined customer base, specifically for our IV and Performance Center solutions in both the pipeline and the bookings.

We believe that the execution of our 3-leg strategy lays the foundation for our success historically and sets us up for continued future growth and scale.

So with that, I'll turn it back over to Peter for some numbers.

Thank you, Randall. The full year of 2017 was a company record for product bookings, product backlog and revenue.

Our fourth quarter 2017 GAAP revenue of $198 million was up $11 million or up 6% sequentially and 2017 GAAP revenue of $716 million was up $23 million or up 3% year-over-year, impacted by the product transition and related ramp-up of the XT Series launch.

The fourth quarter earnings per share, in accordance with GAAP, were $0.62 and includes $0.34 of a onetime tax benefit from the revaluation of the net deferred tax liability balances in the fourth quarter as a result of the tax reform.

The fourth quarter earnings per share, in accordance with GAAP, is up from a GAAP EPS of $0.00 in the fourth quarter of 2016.

Earnings per share, in accordance with GAAP, for 2017 were $0.53, which is up from GAAP EPS of $0.02 for 2016.

GAAP gross margin was 48% for the quarter or up 260 basis points from the third quarter this year, driven by margin expansion actions and increased volume and overhead cost absorption.

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, the acquisition accounting impacts related to deferred revenue and inventory fair value adjustments and tax reform benefit impact from the Tax Cuts and Jobs Act of 2017, also called tax reform. We use non-GAAP financial statements in addition to GAAP financial statements because we believe it's useful for investors to understand acquisition amortization-related costs and noncash compensation expenses that are a component of our reported results as well as onetime events and onetime acquisition and restructuring-related expenses as well as onetime tax reform benefit impact. A full reconciliation of our GAAP to non-GAAP results is included in our fourth quarter earnings press release and is posted on our website.

The 2017 financial results are characterized by 2 distinct phases as revenue and profitability were impacted by the XT Series product introduction and manufacturing ramp-up.

The first half of 2017 covered the market introduction of the XT Series and ramp-up of manufacturing and included the following dynamics: first, conversion of the AcuDose and G4 product backlog and sales quotes to the XT Series, which we sold in our commercial team spending time with customers to convert existing bookings; secondly, XT Series manufacturing ramp-up; thirdly, implementation of the XT product at launch and first adoption customers and sub-optimal cost absorption given the ramp-up; and lastly, strong cost management and cost actions.

Then the second half of 2017 was characterized by the acceleration of XT implementations and conversions and include the following factors: first, improvement of overhead cost absorption as production ramps, trending towards returning to the 8% to 12% organic long-term growth range for bookings and revenue; also, XT Series cost of sales reductions as revenue ramps; implementation of R&D and manufacturing Centers of Excellence; and then finally, the second half of 2017, we announced 2 customers began the shipment of G4 and AcuDose by the end of the fourth quarter, which did allow us to consolidate and reduce the number of ADC frame assembly lines from 3 to 1.

Full year 2017 product bookings were $568 million, up from $541 million in 2016. The fourth quarter product bookings represented high double-digit organic and reported year-over-year growth rates and included a record number of multimillion-dollar deals. The planned implementation of these multimillion-dollar deals is more weighted toward the second half of 2018 versus the first half of 2018.

Record product backlog at December 31, 2017, was $345 million or up 14% from December 31, 2016.

For the fourth quarter, non-GAAP revenue was $198 million, which was slightly below the guidance range provided in our third quarter results earnings call, driven by the timing of 2 specific large installed account delays and is up double digits year-over-year both on a reported and organic basis.

Full year 2017 non-GAAP revenues of $717 million were up 2% from the prior year, again with a difference in dynamics between the first half and the second half of the year, as described earlier.

The scaling of the XT Series revenue is progressing well, specifically the percentage of fourth quarter frame revenue that was from the XT Series came in at about 95%, in line with our expectation.

Despite the revenue timing headwind for the fourth quarter, the strong gross margin improvements to 50%, good operating expense control resulted in non-GAAP EPS for the fourth quarter of $0.54, after excluding the onetime tax benefit from the tax reform. This is at the high end of our guidance range and above consensus.

Our business is also reporting 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 branded as SureMed, and equipment used by pharmacists to create adherence packages as well as software solutions that assist retail pharmacies in medication synchronization and other appointment-based model solutions. Our acquisitions of MTS Medication Technologies, SurgiChem Limited and Ateb are included in the Medication Adherence segment.

We report certain corporate expenses that cannot be easily applied to either segment separately.

On a segment basis, our Automation and Analytics segment contributed $163 million of GAAP revenue in the fourth quarter of 2017, up from $144 million in the fourth quarter of 2016. GAAP operating income was $37 million in the fourth quarter compares to $28 million of GAAP operating income in the third quarter of 2017 and $19 million of GAAP operating income for the same quarter last year.

Non-GAAP operating income of $44 million for the fourth quarter compares to $32 million for the same period last year. On a yearly basis, GAAP revenue for the year 2017 was $590 million, down from $940 million in the prior year, driven by the lower first half 2017 revenue related to the XT Series ramp-up.

GAAP operating income for 2017 was $88 million compared to $84 million in the prior year. The Medication Adherence segment contributed $35 million of GAAP revenue to the quarter compared to $28 million in the fourth quarter of 2016.

GAAP operating income was $0.6 million compared to $0 million profit for the third quarter and compared to $1 million of GAAP operating income a year ago. Non-GAAP operating income was $3.1 million in the fourth quarter compared to $2.8 million of non-GAAP operating income in the prior year.

On a yearly basis, GAAP revenue for the year 2017 was $126 million, up $99 million from the prior year. GAAP operating loss for the year 2017 was $1.6 million compared to operating income of $6 million in the prior year.

Non-GAAP common expenses were $90 million compared to $60 million in the fourth quarter of 2016.

Now moving to operating margin. Non-GAAP operating margin, including Aesynt and Ateb integration cost, was 14.2% in the fourth quarter, up from around 11.7% in the third quarter. Excluding the integration cost of approximately $1.5 million, the non-GAAP operating margin was around 15% for the fourth quarter and in line with our long-term stated target.

Non-GAAP other income and expense for the fourth quarter was a net loss of approximately $1 million, mostly consisting of interest expense on the outstanding loan balance.

Now moving on to the balance sheet and cash flow. In the fourth quarter of 2017, our cash balance increased from $7 million to $32 million after paying down our outstanding debt by $2.5 million within the quarter.

During the quarter, we sold approximately 294,000 shares of common stock and they are at-the-market offering. The average price per share was approximately $50. We sold again approximately $40 million of proceeds received during the quarter.

During the fourth quarter, we also amended our debt facility. The amendments to our credit facility include changes to compliance covenants, specifically a change to increase the maximum permitted leverage ratio. In addition, the amendment increased the revolving loan commitments from $200 million to $350 million.

We believe that both the at-the-market offering under our universal shelf on Form S-3 and the amended loan facility give the company strategic flexibility to optimize the balance sheet for both organic growth and M&A.

The total year 2017 cash flow from operations was $25 million, which included the use of cash for building inventory for current and future implementations.

Inventories at December 31, 2017, were $96 million, up $4 million from last quarter, primarily driven by XT Series inventory build for future quarter installs as well as the first XR2 and IVX units for alpha customers.

Accounts receivable days sales outstanding for the fourth quarter were 89 days, up 3 days from the third quarter. The increase in accounts receivable days sales outstanding from prior quarter was mostly driven by invoiced shipments towards the end of the fourth quarter. Based on our customer agreements, we largely invoice upon shipment.

As of December 31, 2017, we had $270 million of outstanding funded debt, and our loan leverage measured as outstanding total loan balance over last 12 months of bank EBITDA was approximately 2.7.

Our headcount was 2,347 at the end of the year compared -- down 97 from December 31, 2016.

As discussed in previous earnings calls, it's important to note that from time to time, installation completion, timing of larger projects is going to 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.

Now let's move to total year 2018 guidance. As part of our long-term financial framework, we target organic revenue growth between 8% and 12% per year. Where we are in this organic revenue growth range depends on where we are in the product life cycles and new product introduction bell curves.

With the market introductions of the XT Series, the XR2 pharmacy robot and the IVX powered by IVX Cloud, we now have 3 concurrent product introductions that we see ramping over the years: first, in bookings; then in backlog; and then converting to revenue.

In contrast to 2017 that had the XT Series introduction, we expect the general availability and first implementations of the XR2 and IVX in the second half of 2018 to not be disruptive during the year, given that these products largely are generating greenfield revenue, which we expect will not impact current existing revenue streams.

We expect 2018 product bookings to be between $625 million and $660 million, representing a 13% organic growth rate when taking the midpoint of the guidance range. This is in line with the preliminary guidance we gave in October last year.

For 2018, we will adopt ASU 2014-9, revenue from contracts with customers, also called ASC 606, which impacts the timing of revenue recognition and requires the presentation of certain costs previously reported as selling expenses as a reduction of revenue. Both of which for the company are not anticipated to be material.

The reclassification of these selling costs, specifically GPO fees in the P&L, will result in a reduction of revenue but has no impact on operating income or net earnings.

We expect that 2018 non-GAAP revenue to be between $780 million and $800 million. This represents a slightly greater than 10% organic growth rate when taking the midpoint of the guidance range.

Excluding the impact of the reclassification of GPO selling costs, the midpoint of revenue guidance range would have been slightly above 11%. Both are also in line with the preliminary guidance we gave in October last year.

We expect 2018 non-GAAP EPS to be between $1.85 and $2.05 per share, including the favorable ongoing net impact of the tax reform of approximately $0.20. This is up 40% -- 47% from 2017 when using the midpoint of non-GAAP EPS guidance. This non-GAAP EPS range includes the launch-related and start-up costs of the XR2 and IVX product introductions.

The specific guidance for the first quarter of 2018 is as follows: We expect 1Q '18 non-GAAP revenue to be between $174 million and $179 million, which includes the impact of reclassification of selling costs as a reduction of revenue. This represents a 17% organic growth rate when taking the midpoint of the guidance range.

Based on the committed implementation schedules of bookings in the December 31, 2017, backlog, including the record number of multimillion-dollar fourth quarter deals and, to a lesser extent, the new products revenue from XR2 and IVX, we anticipate a steady quarterly revenue ramp throughout the year in 2018. It's important to note that the fourth quarter revenue at any given year typically includes some seasonality.

We expect first quarter '18 non-GAAP EPS to be between $0.22 and $0.28, representing a significant increase from the $0.06 of non-GAAP EPS in the first quarter of '17, which is negatively impacted by the XT backlog conversion and product rollout.

When reviewing 2017 actuals and 2018 guidance, it's important to note a couple of items that are included. First, for 2017, our non-GAAP results include approximately $6 million of integration expenses for Aesynt and Ateb that we do not adjust for based on our non-GAAP policy. These integration costs directly impact the non-GAAP operating margin. Non-GAAP EPS mostly consists of integration-related IT expenses, integration team and project costs, costs related to the implementation of Sarbanes-Oxley and accelerated product development integration costs.

For 2018, we expect these integration expenses to be approximately $4 million, consisting mostly of IT expenses for CRM, ERP and HR systems consolidations.

In 2017, we delivered around $10 million of second year cost synergies from these acquisitions. As we have demonstrated in the past, we're confident that we will achieve a 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 2018, we expect interest expense related to the senior secured credit facility used to finance the Aesynt and Ateb acquisitions to be around $6 million or equivalent to a non-GAAP EPS headwind of around $0.15.

Finally, for 2018, we're assuming an annual average tax rate of 21% to adjust GAAP tax expenses to non-GAAP tax expenses.

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

Thanks, Peter. 2017 was a successful year for Omnicell with fantastic innovation, record bookings, backlog and revenues, setting Omnicell up for success most importantly in 2018, especially as new products, including XR2 and IVX, become generally available and installable for customers in the second half of 2018.

We're proud of the company's financial performance and the execution of our strategy. We're seeing faster adoption of our latest revolutionary solutions and services, which leverage workflow automation on a cloud data platform. We're able to use artificial intelligence for our predictive analytics and performance-driven partnerships to help our customers achieve the highest level of success.

And we're just feeling very well about 2018 as we're able to demonstrate more of our story, and the more bigger our platform has to offer. And really, it's another conversation that we're able to have with our customers at a totally different level.

So with that, that includes our prepared remarks. And I would like to open it up, operator, for calls -- questions.

(Operator Instructions) Your first question comes from Matt Hewitt from Craig-Hallum Capital.

First question, maybe you could give us an update on the implementations. It sounds like there have been a couple sticking points here the last couple of quarters. Obviously, when you've got a new platform rollout, such as XT, that's the software as well as the hardware, you would expect maybe a couple hiccups. But it seems to be these are dragging on a little bit. Maybe if you could provide an update on that front.

Well, I think there are a couple of dynamics that are changing, but one of them is the orders are getting very large. And therefore, the implementation pieces are getting very large. And so it's a little blockier, which is -- it's not a bad thing. But when somebody slows it down, it slows down a larger block of implementations. And the team has gotten better and better every quarter at setting up the installations and moving those forward. And I think that, certainly, for 2018, we have built in a plan that allows for more of these last-minute changes if we get them, just because backlog has backed up even a little more. So there's no individual reason why some of these accounts get pushed off. They're always for different reasons. But it's just that the size of some of these single installations are at the size that it does impact the revenue.

With some of those delays, is it -- it sounds like it's more on the customer side, not necessarily with your teams running into some complications. Is that accurate? And as you get more accustomed to these implementations, is there a process that you're going through with the next large customer that can maybe make those a little more seamless?

Yes. I think we're trying to set down a little bit higher expectations and even putting in contractual content that really sets up the customer to meet certain deadlines because there aren't any reasons we can't install. It's generally driven by the customers' last-minute idea that something else changed, not having to do with our systems or anything, but they have another project in the hospital they decided to focus on. But I think that we are getting more, I would just say, acute at dealing with the larger installs and making sure we're committed as they follow through.

Okay. Maybe one last one for me, more on the demand side. Has there been any changes that you've seen either from competitive dynamics where BD has maybe fixed some of the problems that they're having on interoperability or whatever or from the customer financial side that has maybe impacted demand from your vantage point?

Thanks, Matt. This is Peter. So we get this question every quarter. So also this quarter, we haven't really seen any differences in the kind of demand dynamics or patterns. In the script, I think we pointed out that we had signed 3 sole-source agreements with leading nationwide for-profit hospital systems. We see -- definitely see a dynamic there that we're scaling up into bigger accounts as well because they need a consistent interoperable system. So also in that perspective, it's a little bit of a newer segment for us, but we're definitely winning in that part of the market also. So from a demand perspective, that maybe is a little bit different than it was in prior periods.

And your next question comes from Jamie Stockton with Wells Fargo.

I guess, maybe just on revenue with your Q1 guidance. I was wondering if there was anything that's changed from a seasonality standpoint. Obviously, last year, we had the issues transitioning from G4 to XT that caused a fairly significant sequential dip from Q4 of '16 to Q1 of '17. Your guidance implies seasonality is going to be pretty weak again sequentially this year. It feels like maybe the dip in seasonality is a little stronger than it used to be in prior years. I'm just curious if you're sensing anything that's going on that would explain that, maybe especially if there was some business that got pushed out from Q4?

Yes. I mean, there's always some seasonality. I think we're a lot more confident this year in the steady ramp-up of the revenue because we essentially planned for the year by quarter based on the committed implementation plans, which strengthened the relationships and contractual language with customers as well to make sure the implementation start on time and as best as possible it gets finished as planned. So the first quarter is really based up and the other quarters as well is really based on those committed contracts. That's kind of how the revenue falls for the quarter and builds up. The second half of the year has some revenue for XR2 and for IVX as well. So you'd see a little bit of skewing towards the back half. So it's all inclusive, we would say.

Okay. And then my other question, the SG&A ticked up a fair amount sequentially, not materially above the levels that you saw in the first half of the year. I assumed that, that was just a stronger commission quarter because you had some pretty good bookings.

Yes and also some of the big marketing trade shows. ASHP is also in the fourth quarter, right? So there's always a little uptick in business in the fourth quarter.

And your next question comes from Sean Wieland with Piper Jaffray.

So these for-profits that you mentioned that you're making some headway in, what kind of runway is left? Like the initial term of the contract, what percent penetration does that represent in that? Is there still room for additional penetration within those large accounts?

Well, the -- these are multiyear sole-source contracts. The estimated bookings and then followed by revenue are mostly in the first 2 to 4 years. I would say most of what we target besides kind of the automated dispensing systems, and also there's opportunity for other systems from our platform like IV systems, Performance Center and also -- then also the XR2.

Substantially, most -- I think that this is your question, Sean. Substantially, most of the bookings are not -- have not been booked. We have the agreement signed and some initial small bookings. Most of the bookings for these 3 groups will be coming in '18 -- from a '19 -- '18 and '19.

Got it. That's exactly what I was asking. And the 820 sites, I think, you mentioned for -- that are now running XT, can you give us ballpark, roughly what kind of penetration is that in your base? I know you talk about number of hospitals in your K, but you don't talk about number of sites?

Well, I would just say that on the adoption curve, we're still very early on, on the front of that. And I think we're going to see some nice growth from this year to last year, which was above the plan and XT replacements to be over double this year. And so I would say the pipeline and what we expect in the adoption curve over the next 5 years is right on schedule and that there may be even some room for upside there.

Okay. So just to try to maybe nail it down a little bit more. Is 820 sites, is that less than or greater than 10% penetration?

It's probably a little bit higher than 10%. But that's all -- and that 820 -- be aware that, that 820 sites also includes add-ons or expansions of an existing customers, where G4 and XT can work side by side and over time will be upgraded.

Okay. That makes sense. And then one more quick one. What is the GA of XR2 and IVX?

So XR2, its general availability or GA date is July of 2018 and IVX on IVX Cloud GA is April of this year. And I think we mentioned in our prepared remarks, the proposed new products, we're actually very pleased with the commercial momentum. We actually have received multiple commercial noncancelable contracts for both new products even before GA, which is somewhat exceptional given...

Yes. Most of these XR2 and even IVX, in some cases, are multiple product lines. People want to buy a bigger section of the platform right off the bat. And so it may include upgrading to XT and IVX and 3 or 4 things. Almost always includes Performance Center, which we have a contractual obligation and it has been installed in over 200 hospitals. So that's been a very big success. The reason why a lot of customers obviously want to get into our platform, they want to gather the data and then execute on the data, and the Performance Center is the enabling tool that lets you do that.

And your next question comes from Raymond Myers with Benchmark.

Let me first ask you about the Centers of Excellence program. Can you describe how that's been progressing and whether the 3 cabinet lines have finished their integration into one?

Yes. So it's somewhat fairly straightforward, right? So Center of Excellence for robotics will be centered in Pittsburgh, Pennsylvania. Essentially, we had some people movements geographically, and that is substantially complete. The Center of Excellence for point of care solutions is in California. That move essentially also has been completed. And the Center of Excellence for med adherence consumables in St. Petersburg, Florida was already there, so that's also completed. And then on the second part of your question on the consolidation of assembly lines for automated dispensing systems essentially is also complete, with the shutdown effectively of the ADC line for AcuDose in Pittsburgh, Pennsylvania and then in California. In our plants, we now have moved essentially to only the XT assembly line, and we consolidate effectively the G4 and XT lines in the California plant to just the XT assembly line.

That's great. We've been talking about Performance Center for about a year now. How do we measure the contributions of Performance Center to Omnicell and get a sense for how that's progressing?

Yes. So we don't break out separate product lines. I would say also that -- Randall talked about earlier, we're more and more selling a platform now, where -- especially for the more strategic and bigger deals. Performance Center is almost always included. The characteristics, if you kind of carve it out, the way we look at it is still on a kind of a stand-alone basis. Of course, it's higher gross margin because it's a software solution. And it's become increasingly profitable also, specifically in this year and the years after that.

Okay. Can you talk a bit about the multi-med strategy, particularly the VBM 200 that was launched in Q3? How is the multi-med program ramping?

Well, I think that it's not the -- only the hardware, but the combination of the software and the hardware and the packaging is really striking a rhythm with the market because it's -- they want to be able to solve syncing the medication. Once you have them synced and you want to package them in a way that you sync the meds together. So it allows for quite a unique solution set, so you can find specialty pharma groups and different employee-based groups that really want to go after some of their higher-cost patients where medication adherence is so key. And so it takes both the software and the hardware and the packaging piece to put it all together. And I would say, we've succeeded our expectations as we've actually taken the Ateb web-based products and laid it on top of the hardware and the packaging pieces. This presented a really nice solution set. And so that momentum continues to gain quite a bit.

Good. Just a couple more. Does guidance include acquisitions? And what is your outlook for the acquisitions?

So this is Peter. So it's an organic outlook. There's no acquisitions included in our bookings revenue or EPS guidance.

And what is your outlook?

Yes. Well, we -- I think we've talked -- we've commented on it before. So we have a dedicated and very qualified M&A strategy team that constantly looks at opportunities in the market. And we probably look at 10 to 15 potential acquisitions a year. We probably do due diligence on 3 or 4 potential acquisitions. We put in bids on 1 or 2. And then effectively we close roughly 1 acquisition a year. And then over the longer term, part of our strategy is to grow fee acquisitions roughly about 5% of revenue over the longer term, 5% per year.

So we should think of this guidance as the base with potentially 5% on top of that?

Yes. Yes, that's right, fee organic. Yes.

Yes, yes, very good. Last question. Entering 2018, what are Omnicell's greatest challenges to reaching the high end of guidance or potentially exceeding guidance?

Yes. I would say it's -- of course, we're driving potential upside for some of the newer products or we would say we're fairly conservative in our estimates there. I would say also implementation timing, the topic that Randall talked about a little bit earlier, especially on the bigger implementation. So that can be both positive and negative. But I think we -- overall, we've got a really nice setup for '18 here to manage through the year and then create momentum for '19 and beyond also.

And your next question comes from Mike Ott with Oppenheimer.

The bookings guide was a little higher than we expected with a 10% to 16% growth. We're just curious, where is the strength coming from?

Well, it's obviously the second year rollout of XT. So we've had the first full year to get XT in the pipeline. Last year, we launched XT, but budgets -- some of them had budgets, or could move budgets. It's more difficult to get XT. And that's typical of the first year of a sales cycle that you've got to get at least a year to get products in pipeline. So a big uptick obviously in XT, over-doubling what we did in 2017, and that's pretty much already -- I mean, you can see it in the pipeline. That's pretty obvious. And that's just the sales process had longer room to run. And then we launched the sales process of the XR2 before it's ready, so we're starting to build backlog there as well and customer momentum there as well as the IVX. And so that gives us a lot of confidence about -- particularly the back end of the year because we just have more products flowing through the bookings, top line. But it's not all going to go be revenue because it's -- it takes 6 to 9. I mean, newer customers take longer. And the IV, particularly XR2, we're going to be very conservative in how many of those are going to install this year because it's more complicated.

Plus -- and also I would add also that, first of all, of course, bookings from the 3 sole-source agreements that we signed in the last 7 months with leading nationwide for-profit hospital systems.

Great, very helpful. And can you quantify at all how much of a contribution you're expecting from IVX and XR2 this year?

We're not breaking that out, but it typically will have a kind of a bell curve also, and it's a nice addition to our platform.

Good. If I could squeeze one last one. With all the various Washington issues in flux, 340B cuts and the like, how is the hospital spending environment in general looking here in 2018?

Well, I think those are always questions that providers have to figure out. I think when they look and think strategically, they're still trying to figure out how they operate now these massive conglomerations. They want to really execute standardization, get rid of the variability, be able to look at the data across systems, across states and then make qualified decisions. And so strategically, to gather the data, to be able to make those kinds of decisions and really gain the operational efficiencies and the safety and the best practices, they need a strategic partner that they can get them there. So really the cost of our systems are just a minute piece in the whole strategic rollout of how you're going to manage pharmacy management across your provider network. And so this is really what's kind of driven the for-profits to not look at our system at a cost, but how much money they're going to save or how much money -- or how can they improve the flow and the control of their different individual hospitals with a standardization of a process. And that's what we enable. We're enabling that, and that's one of the most important things in order for health care to figure out is standardization.

Your next question comes from Gene Mannheimer from Dougherty & Company.

I wanted to just piggyback off a previous question. It sounds like you're not breaking out per se the bookings from XR2 and IVX in your guidance. But can you share with us if you expect more of your bookings this year to come from XT than XR2 and IVX combined? Can you share that one?

Yes. That's absolutely the case.

I would say most of the growth is going to be from XT second year curve growth. And then some basic assumptions on the other 2 new products, put some upside there because they obviously have a lot of momentum.

And they're also only partial years for those 2 new products, right? So that would then ramp mostly in '19.

And your next question comes from Steve Halper from Cantor Fitzgerald.

One question, just in terms of the outlook and then a couple of housekeeping items. So first, we've seen 2 quarters in a row where you've had this issue with implementations. Understanding that it's difficult to sort of get the customer to move in the larger implementations, but do you think relative to your guidance for 2018, you've factored in some of these issues -- do you think you adequately reflected some of these implementation, if you want call them, challenges that you've had the last couple of quarters?

Definitely. We've shifted both our strategy with our customers, the way we've positioned particular Q1 to make sure that -- to be conservative in case something happens. I just think -- I'm like you. The last 2 quarters, I said, "That's enough of this." And so this year's plan is built on not doing that anymore.

So build on specific committed implementation start dates and...

He said the official thing. But Steve, you know what I'm saying.

And then just turning to the margin, for the housekeeping items. The -- you mentioned that the guidance includes $0.20 of benefit from tax rate. So just moving up, up to the operating line, where do you think you came out relative to your guidance for your -- the cost structure or cost growth relative to where you might have been 6 months ago or 3 months ago before tax? Did you decide that you're going to take some of the tax savings and invest it? Because the -- I would have thought the earnings numbers before the tax -- with the tax rate would have been higher, right? But did something change in the operating margin assumptions?

No, not really. We wanted to make sure that the plan is achievable from a profitability perspective on EPS. Yes, we do have some startup costs for XR2 and IVX, but we really built up the plan so it's executable and achievable.

And then what did you say the tax rate assumption was implied in the guidance?

21%, the federal tax rate, GAAP to non-GAAP adjustments. Yes.

So is that your effective tax rate? Or is that just your federal tax rate?

That's the effective tax rate for GAAP to non-GAAP adjustments.

Okay, 21%. Okay. And then you said you sold -- and I didn't hear it fully. How much stock did you sell in the '18 program?

About $40 million worth and then a 94,000 shares both at $50 a share approximately.

And there are no further questions at this time. Mr. Randall Lipps, you're closing remarks, please.

Well, thanks for joining us for the call, and we'll be excited to continue to report back on our new innovations, new customers. And thanks again to the Omnicell employees for setting us up for such a great year in 2018. We'll see you guys next time.

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