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Edited Transcript of OMCL earnings conference call or presentation 25-Jul-19 8:30pm GMT

Q2 2019 Omnicell Inc Earnings Call

MOUNTAIN VIEW Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Omnicell Inc earnings conference call or presentation Thursday, July 25, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peter J. Kuipers

Omnicell, Inc. - Executive VP & CFO

* Randall A. Lipps

Omnicell, Inc. - Founder, Executive Chairman, President & CEO

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Conference Call Participants

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* Eugene Mark Mannheimer

Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare

* James John Stockton

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst

* Lalishwar Mitra Ramgopal

Sidoti & Company, LLC - Healthcare Sell Side Analyst

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Mohan A. Naidu

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* William Sutherland

The Benchmark Company, LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell second quarter earnings call. (Operator Instructions)

I would now like to turn the call over to Peter Kuipers, Chief Financial Officer. Please go ahead.

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [2]

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Thank you. Good afternoon and welcome to the Omnicell Second Quarter 2019 Earnings Call. Joining me today is Randall Lipps, Omnicell Founder, Chairman, President and CEO.

This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell annual report on Form 10-K filed with the SEC on February 27, 2019, 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 July 25, 2019, and all forward-looking statements made on this call are based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change.

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

Randall will provide an update on our business. After Randall's remarks, I will cover our results for the second quarter of 2019 and our guidance for the remainder of the year.

Our second quarter financial results are 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.

Let me now turn over the call to Randall.

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Randall A. Lipps, Omnicell, Inc. - Founder, Executive Chairman, President & CEO [3]

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Thanks, Peter. Good afternoon. We are pleased to share the results of another strong quarter as the health care industry continues to recognize the importance of the vision of the Autonomous Pharmacy.

As we've discussed previously, this vision of creating a zero error, fully automated and digitized infrastructure will lead to enhanced safety, control and efficiency of medication management across Continuum of Care. We have made significant strides this quarter to advance this vision and engage customers to join us on this journey. Our business is very healthy and continues to grow profitably.

Key financial results for the quarter include: record revenue of $217 million, up 15% from the same quarter of 2018; non-GAAP EPS of $0.67 per share compared to $0.46 per share in the same period last year, representing a 46% increase. Our product backlog at June 30, 2019, is at an all-time high and is growing faster than our product revenue.

During this quarter, we continued to see strong momentum of new customer partnerships that are embracing the vision for the Autonomous Pharmacy. The Autonomous Pharmacy integrates a comprehensive set of solutions powered by the Omnicell cloud data platform across 3 key areas: first, automation and solutions designed to digitize and streamline workflows; second, intelligence that provides actionable insights to better understand medication usage and improve pharmacy supply chain management; and automation of medication dispensing workflows, which includes expert services that serve as an extension of pharmacy operations to support improved efficiency, regulatory compliance and patient outcomes.

Some of our recent partnerships include Spartanburg Regional Healthcare System. An integrated health care delivery network in South and North Carolina has selected Omnicell solutions as their flagship research and teaching hospital, Spartanburg Medical Center, as well as the newly acquired Mary Black campuses. Spartanburg will make -- Spartanburg, like many provider networks, is building a centralized distribution center, or CDC, as the main hub for pharmacy supply chain management. Central to operations in this new center will be Omnicell's XR2 Automated Central Pharmacy System, a robotic system designed to automate critical workflows to maximize inventory control, help improve efficiency and increase medication safety. Spartanburg will also have the ability to better utilize health data analytics through Omnicell Performance Center.

MUSC Health, named the #1 health system in South Carolina by U.S. News & World Report, will be implementing Omnicell's robotic IV in-sourcing solution to bring sterile compounding in-house as part of the health system central pharmacy operations. This unique program combines advanced robotic technology, data and expertly trained pharmacy technician staff into a comprehensive turnkey package. MUSC Health will also implement Omnicell's XT Series in patient care areas.

Additionally, we have secured several long-term partnership commitments with leading health care systems, including: St. Luke's University health network in Eastern Pennsylvania and Western New Jersey; plus, Northern Arizona Healthcare; and in Charlotte, North Carolina's base Atrium Health. These health systems will support medication management across their service networks through Omnicell automation and intelligence solutions, helping to improve management of the pharmacy supply chain while empowering pharmacists, nurses, clinicians and pharmacy staff to focus on patient and clinical satisfaction. These 3 health systems alone represent approximately 1% of the U.S. hospital market based on total bed count.

For the second quarter, we closed a record number of multimillion-dollar deals versus any previous second quarter in the company's history. Over 80% of these deals are anchored by long-term commitments, and over 90% of these customers will purchase multiple products from the Omnicell platform. These are examples of how our business has expanded over the years from a single-point solution to a platform of products and services, which has resulted in larger deal sizes across multiple product lines, more complex implementations and we believe, a more comprehensive and enduring relationship with our customers.

The Autonomous Pharmacy is steadily evolving from a vision to a collaborative mission being driven in partnership with our customers and industry partnerships. I'm thrilled to share this progress and look forward to our continued success.

Now let me turn the call back over to Peter for a second quarter update and the rest of the year guidance. Peter?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [4]

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Thank you, Randall. Our second quarter 2019 GAAP revenue of $217 million was up 15% over the second quarter of 2018. The increase in revenue was largely driven by: an increase in XT Series implementations from a growing base of customers; second, increases in annual service and maintenance revenue from a larger installed base of equipment; and lastly, contributions from new products introduced over the last year.

The second quarter earnings per share in accordance with GAAP was $0.37 per share, up from $0.16 per share in the second quarter of 2018. The increase in earnings per share is largely due to higher revenue in the second quarter of 2019 and achieving economies of scale over our operating expenses.

In addition to GAAP financial results, we report our results on a non-GAAP basis, which excludes stock compensation expense, amortization of intangible assets associated with acquisitions, acquisition and restructuring-related expenses, tax reform and restructuring income tax benefits and expenses, contingent gains in amortization of debt issuance cost.

We use non-GAAP financial statements in addition to GAAP financial statements because we believe it is useful for investors to understand the effects of amortization of acquisition-related costs and noncash stock compensation expenses that are part of our reported results as well as onetime events and acquisition and restructuring-related expenses. A full reconciliation of our GAAP to non-GAAP results is included in our second quarter earnings press release and is posted on our website.

Second quarter 2019 non-GAAP EPS was $0.67 per share compared to $0.46 per share in the same period last year, representing a 46% increase. Similar to the increase in our GAAP EPS, the increase in earnings per share on a non-GAAP basis is again largely due to economies of scale achieved in the context of higher revenue.

Non-GAAP other expenses and income for the second quarter of 2019 was $1.1 million compared to $2.8 million in the second quarter of 2018. The decrease primarily relates to lower interest expense as we have continued to deleverage.

Let's now move to the balance sheet and cash flow. Second quarter 2019 cash flow from operations was $27 million. Our operating cash flow in the second quarter was primarily driven by net income and adjustments for noncash-related items such as depreciation and amortization, which were partially offset by changes in working capital. During the second quarter of 2019, the company generated approximately $12 million of free cash flow. We believe our business will continue to deliver free cash flow through the remainder of 2019.

Inventories at June 30, 2019, were approximately $104 million, flat from the previous quarter and flat from June 30, 2018. We have been able to hold our inventory relatively constant over the last year despite continued growth, new product launches and larger average deal sizes.

Accounts receivable days sales outstanding for the second quarter were 87 days, down 6 days from the previous quarter and up 1 day from June 30, 2018. The decrease in DSO from last quarter is primarily driven by higher sales.

As of June 30, 2019, our cash balance was $87 million, up $10 million sequentially and up $41 million from June 30, 2018. The increase in cash is due to proceeds from our at-the-market offering and operating cash flows. During the second quarter, we utilized the -- our at-the-market offering to sell approximately 270,000 shares of our common stock at an average selling price of $82.51 per share. Total gross proceeds raised during the quarter was approximately $18 million. These proceeds were used to repay outstanding debt.

During the second quarter, we repaid $21 million of debt. As of June 30, 2019, we have $80 million of outstanding funded debt. And our loan leverage, measured as outstanding total funded loan balance over the last 12 months, or LTM, bank EBITDA was approximately 0.5x.

As of June 30, 2019, we are now in a net cash position for the first time since the closing of the Aesynt transaction in early 2016.

Our headcount was 2,555 at June 30, 2019, up 83 from the end of the previous quarter and up 131 from the same quarter last year. The majority of the quarter-over-quarter increase is for manufacturing, implementation and service personnel needed to support our business as it continues to expand.

Now moving to our full year 2019 guidance. We are increasing our full year product bookings guidance. We now expect 2019 product bookings to be between $765 million and $790 million. Our previous guidance was between $745 million and $780 million. The increase in our product bookings guidance is based on strong commercial momentum, especially from expected orders for our XT Series.

We continue to gain traction in XT upgrades. And as we have mentioned previously, we're in the early years of the XT upgrade cycle.

We are increasing the midpoint of our 2019 total revenue guidance by narrowing our guidance range. We now expect 2019 total revenue to be between $886 million and $900 million. Our previous guidance range was between $880 million and $900 million. The midpoint of our new guidance range is $893 million compared to $890 million, which is the midpoint of the guidance range provided in our 1Q 2019 earnings call. Also, the midpoint of a new total revenue guidance range implies approximately 13% year-over-year growth from our full year 2018 total revenue.

This breaks down as follows: We now expect 2019 product revenue to between -- to be between $653 million and $663 million. Our previous guidance range was $652 million and $668 million. We now expect 2019 service revenue to be between $233 million and $237 million. Our previous guidance range here was $228 million and $232 million.

We are narrowing our total year 2019 non-GAAP EPS guidance. We now expect 2019 non-GAAP EPS to be between $2.65 and $2.82 per share. Our previous 2019 non-GAAP EPS guidance range was between 260 -- $2.62 and 200 -- $2.82 per share. The midpoint of our new non-GAAP EPS guidance implies approximately 31% growth year-over-year.

For the third quarter of 2019, we expect total revenue to be between $227 million and $232 million. We expect product revenue to be between $168 million and $173 million. We expect service revenue to be between $59 million and $60 million, and we expect non-GAAP EPS to be between $0.67 and $0.72 per share.

Finally, for 2019, we're assuming an average effective tax rate of 7% in our non-GAAP EPS guidance range.

As Randall mentioned, we are very pleased with the results of the second quarter of 2019, and we look forward to continuing to deliver profitable results throughout the rest of the year.

Now we'd like to open the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mohan Naidu from Oppenheimer.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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Randy, Peter, I think you guys made a comment about backlog being at an all-time high. I guess XT is probably a big part of it. Can you talk about what other products are contributing to that? And is there any change in mix in that backlog? I think as of last year, I think you guys had mix around 22% long term versus short term. Any other color would be useful.

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [3]

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Thanks, Mohan. If you look at, of course, the total revenue, product revenue so take service revenue to the side. So within product revenue, there's also product backlog. XT Series is the biggest product line. So yes, that is a correct assumption. There's one nuance there that most of the increase above the revenue increase, the increase in product backlog is really more in the short-term backlog as well. So that is an improvement, if you will, in the installation timing in the product backlog. So we're very pleased with that commercial momentum as reflected in the backlog.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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And I guess, Peter, what are the products that are contributing on the short-term side apart from XT? Are there any specific products that are gaining momentum at this point?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [5]

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There's the platform of XT Series, there's Performance Center, there's XR2, there's [med adherence] robots and services. So we're building out the platform, that will be announced in December, on the last year, [the XT]. So that's all picking up, and including IV (inaudible) forgot about that, yes.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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Okay. And maybe a couple more questions. I guess, in these last couple of weeks, there have been a lot of questions about receivables growth and revenue recognition. Maybe -- I guess, what type of terms do you normally place in your contracts for payments? It sounds like the implementations are taking longer, so there are delays in conversion there. But do you insist on a fixed payment terms? Or do you let the clients wait until the full implementation is done? And can you elaborate any of that?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [7]

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Yes. So it's a good question. A couple of dynamics there. So the average payment terms are roughly around 45 days, larger long-term partnerships might be more around kind of 60-day range. International has, by nature, longer payment terms, as usual, and that's business practice there. Then I would say because of the larger deals and the larger installs, it probably adds about 10 days to that average. And then I would also say because we have a configurable product we serve the customer, that probably adds another 10 days, calculates to roughly about 80-day average there. You can compare it also maybe to some other medtech companies that are also in the 80 range to up to 100 or above that. So we feel very comfortable. You should also consider that we bill -- for our main product lines, we bill upon shipping, right? So not all companies do that. So to some extent, that guides the payment cycle as well.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [8]

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And just to be clear, when you ship the product, when you put that revenue, I guess, not revenue, but that amount into receivables, you do not recognize that revenue, right?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [9]

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Exactly. Revenue falls later after installation is completed, after there's a written customer acceptance for the main product line, that is, right, [for the capital debt].

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Operator [10]

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Your next question comes from the line of Gene Mannheimer from Dougherty & Company.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare [11]

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Good job on the quarter and outlook. I just wanted to follow the other line of questioning. Do you think you can get DSOs back down to the 60s and 70s levels over time? And same for inventory days, could you bring -- could those go even lower going forward?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [12]

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Yes. We're not really going to give guidance on the specific DSO and inventory turns, if you will. Of course, we're working on both metrics. We expect to get some traction there. Again, I would refer also to other medtech companies that have DSOs in the range of 80 to 100. And not all of those have the contractual terms where you actually can bill upon shipment, right? So we have a strong contractual term there.

On the inventory side, I would say that we do have a fairly large installed base, as you know, that we need to serve from a services perspective as well. We have a marketing commitment to service equipment in the field for about 10 years. So that includes some inventory as well. Plus then, we have the new product ramp-up for XR2 and for IVX.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare [13]

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Okay. Makes sense. Could you offer, Randy, maybe some commentary around the IV line of products? What -- how is the reception there? What are you seeing -- what type of reception from your customers?

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Randall A. Lipps, Omnicell, Inc. - Founder, Executive Chairman, President & CEO [14]

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Well, I think everyone in the provider network is struggling with the cost of IV compounding. And you have a lot of choices to make, either outsourcing or buying a robot or in-sourcing and how to sell if you buy it. And the pricing in the IV compounding market shifts around a little bit. So it's a more complicated equation because how you set the robot up and you run it to get maximum efficiencies. And so that is why we see bigger uptake on the IV [buy] side. But we're really helping customers run that for them, and we could get better throughput and better productivity out of it. But this is a constant nagging problem that's caused by the compounding. And I think we have new products on the IV workflow side, and we're heavily invested in this area to constantly find ways to make this cheaper, faster and better. And so I think everybody recognizes about what strategy they want to take and how comfortable they are in having us come in and help them run some of those pieces, or whether they want to try to take some of those on themselves. I think some of the earlier customers who took these products on themselves, I think it's harder for them to keep up with the configuration changes as much as they should. So we think we've got the better working models in the pool.

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Operator [15]

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Your next question comes from the line of Matt Hewitt from Craig-Hallum Capital.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [16]

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Just a couple for me. I guess, first off on -- And I'm going to hit some of the areas that have been hot button items here recently. But on the receivables and the DSOs -- and I appreciate what you put out in the press release, but I'm wondering if you could discuss a little bit how the business has changed over the past, call it, half dozen years. Are you seeing more system-wide adoption, maybe 10, 12 hospital systems purchasing the product versus single hospitals or even divisions within a hospital? And how does that change? Or how do those bigger contracts, how do those change how you collect on those receivables?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [17]

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Yes. That's a great question. So we talked in this script and in earlier scripts about the long-term sole-source or long-term commitment, if you will, multiyear, those are -- these will be 5-, 7- or 10-year commitments where we become -- [also] become partner for that health system to provide all medication management, automation products and services, right? And that then is substantiated, if you will, as you go through the partnerships, you build the next level of pharmacy within that health system by purchase orders of bookings every year or 6 months, as you build that out. The deal sizes are also becoming bigger, so those deals are becoming bigger. The installs are becoming bigger as well.

Yes, I would say, definitely, it does impact the average collection timing as well. Sometimes hospital systems wait until the very last (inaudible) that's installed for the last facility. Those are becoming a lot more strategic as well. If you look at our bad debt expense in the last 5 years, it's been less than 0.5%. So the hospitals do pay, also the bigger health system including as well, but it just might be a little follow-up guidance as well.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [18]

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Okay. And then shifting to the inventories. And you just provided a little bit of detail there as far as making the commitment for 10 years to support the programs. But if you look back, there's been some comparisons to the last upgrade cycle, the G4 upgrade cycle. Maybe if you could describe a little bit some of the differences between the G4 upgrade cycle and the full equipment platform upgrade cycle with XT and some of these other product lines.

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [19]

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Yes. So the G4 upgrade was different. That was a console upgrade, which is the computer console in the frame, on the existing frame, if you will. Therefore, the parts are really common so both for upgrades and install the complete product, right, so the requirements for inventory for service was definitely was really the same parts, if you will. Now move forward now to the current period today, we now have the largest installed base specifically by ADCs in the U.S., consisting of AcuDose and G4 Omnicell ADCs that we will support for the economic life for our customers up to 10 years after purchase. And of course, those service parts are not used in the XT Series because that's a new frame and a new console. So -- and then, of course, we'll get (inaudible) our inventory based on demand from both a current product perspective and also from a service perspective and we feel comfortable there.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [20]

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Got it. All right. And then maybe one last one for me, regarding adjusted operating margin. 14.8% in the quarter, that's a really good number. And it's the highest we've seen since Q2 of '14, which was a little bit of an anomaly due to some recognition of vacation. But I'm wondering, 14.8% in Q2 implies that you're going to get higher than that as we get into the back half of the year. Have you had a chance to look at maybe a 3- or a 5-year target for that? I know that you've kind of historically stuck to that 15%. But as you look at the model shifting to more software, do you envision an opportunity for that to maybe lift at times to something north of 15% on an annualized basis?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [21]

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Yes. As far as looking at 2019, if you kind of back into our guidance and use the midpoints of the provided guidance range, you're going to [end] calculating at roughly at 14.5% for the year. So the math shows that for third quarter and fourth quarter estimated to be slightly higher than the 2Q '19 non-GAAP operating margin. I would say we're not ready at this point to provide longer-term guidance. We are transforming the company to more of a service-oriented company. Also, with the Autonomous Pharmacy. So there's a -- the market we see, the TAMs are growing with our evolution, I would say, so more to follow.

And then the last point maybe just looking at the data that we disclosed. So the growth of the multimillion-dollar deals, if you will, if you look at the top 10, for example, the top 10 deals in the fourth quarter of '18, they were on average $10.3 million each. Compare that to the fourth quarter of '15, that was $2.7 million on average. So I think you asked about the last 6 years as well as 4 years gives you a good indication of the average PO size for the top 10 in the quarter, so almost 3, 4x bigger for the (inaudible) those quarters.

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Operator [22]

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Your next question comes from line of Jamie Stockton from Wells Fargo.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [23]

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I guess, Peter, I think you said that -- and obviously, you guys have gotten into a slight net cash position here. How are you thinking about M&A at this point? It's been, I think, a little over 2 years since you did your last acquisition. Piggybacking on Matt's question earlier about kind of margin thoughts, historically, it feels like every time you guys have bumped up against 15%, you've kind of backed yourself down a little bit from that by buying interesting businesses. Anything there would be great.

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Randall A. Lipps, Omnicell, Inc. - Founder, Executive Chairman, President & CEO [24]

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Yes, Jamie, if I could take that question for you. There's a lot of momentum in the business. And so it really -- we're actively sorting through M&A potential always. And particularly anything that can fit into that platform that will enhance the big pipeline, the big connection to these customers that can tie into the platform to enhance and make it more valuable. So as we have sort of evolved from the single solution to platform play, it makes a lot of sense to try to find the right kinds of tuck-ins just to leverage that platform. So -- but there's a lot of things out there. And some of them are not -- just got to find the right one at the right time. But there's no particular timing. But we're active. We're looking, and we want to make it make sense, but it's not particularly timed to earnings or anything else other than finding the right ones at the right time in the process.

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [25]

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Yes. It's probably fair to say also that the last big acquisition, Aesynt, if you will, we commented earlier on the XT upgrade cycle, the early years, right, I think the potential of the upgrades cycle for the customers that came with Aesynt actually those products of ADC. That's also in the early years. So there's more to come there. So -- but [we're already far]. Yes, we always look at acquisitions; doesn't mean that we need to close 1 or we'll close 1 every year or every other, every 2 years. In effect, it needs to fill a framework, needs to be at least an adjacency, it needs to be contributing as well to revenue growth there. And to profitability -- maybe nearly to 15%, at least to contribute [I would like to] make sure deals are accretive on a non-GAAP basis -- non-GAAP EPS basis from day 1.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [26]

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Okay, that's great. And then maybe just an update. I know you guys consolidated the business, and you don't report the 2 segments anymore. And I realized you kind of changed the way things are run internally, so that made sense. But if we think about maybe the nonacute settings, retail pharmacies, institutional pharmacies, can you just give us an update on how things are going there? Is there any traction in trying to build out a broader offering with deals like the Ateb platform?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [27]

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Yes. I mean, that business is evolving. [Done it there], we have -- I believe we have a fairly large customer base and a partner network (inaudible) population health. So solutions side, medication therapy management, the comprehensive medication review. We have some really good early results commercially, not big enough to break out by any means on the front of the P&L. So the benefits are that we have a large customer base, plus also that we have some good early successes, but we need to continue to work with that (inaudible). Randall can you add to that?

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Randall A. Lipps, Omnicell, Inc. - Founder, Executive Chairman, President & CEO [28]

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Yes. I think it's still sort of in the embryonic stage, but good early success stories, and we need to leverage those up and continue to see some bigger growth there. I mean, we had a nice growth, but it's off a small base. And it fits with the whole story of when you go to these provider networks. I mean they're looking at both inpatient and outpatient, and you got to have solutions that work in both. And the same thing for institutional pharmacies, they're evolving as well. I think our business there is still strong. We just want to continue to develop some of our population health products that -- to get to a bigger size, more scalable.

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Operator [29]

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Your next question comes from the line of Bill Sutherland from Benchmark Company.

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [30]

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Hi, Bill.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [31]

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Actually, -- hey, Peter. My question got pretty much answered in the last 2. So good quarter. I'll leave it there. Thank you.

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [32]

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Yes. Thank you, Bill.

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Operator [33]

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Your next question comes from the line of Mitra Ramgopal from Sidoti.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [34]

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Just wanted to follow up on the record backlog you're seeing and get a sense as to -- if it's coming more from, say, new customers versus upgrades or competitive wins. Any color on that would be great.

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [35]

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Yes. All of the -- it's all of the above. We're in the early cycles or years for the XT upgrades. We continue to gain market share. We believe that the first 6 months this year, we have product gains, market share as well, and then, the growth also comes from expansion, right? Remember that these big health systems that we have long-term partnerships with, they expand as well, and they might implement our products and services at the next facility and then the next facility. So it's a combination of all. So we're seeing good traction on all of those tracks for revenue drivers.

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Randall A. Lipps, Omnicell, Inc. - Founder, Executive Chairman, President & CEO [36]

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And I would just add to that. The XT Series certainly is the -- in some cases, it's the entry point for the big discussion, which then broadens out into a longer and broader type agreement. I think a couple of our deals we announced, Spartanburg, I know, was a new customer for us that we believe brought other ones with as well. We don't really track those things, but it just speaks about how important it is to have these kinds of systems in a large system in a programmatic way. And I think that the big systems are scaling up and standardizing. And most of them have our older systems or the legacy systems from where we acquired. So eventually, they've got to make a bigger movement towards standardizing and putting in more pieces of the product line. You're just starting to see that.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC - Healthcare Sell Side Analyst [37]

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Okay. No, that's great. And then just following up on that. Any constraints in terms of being able to handle the increased business you're seeing? And in terms of whether it's needing to add personnel and sort of to handle the implementation? Or are you comfortable that you have enough [persons] onboard?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [38]

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Yes. In our prepared remarks, we talked about the headcount increase. So sequentially, we're up 83 heads or headcount from the end of March. And the majority of the increase is from manufacturing, implementation teams and service teams. So we're definitely scaling up. You have to be always just a little bit ahead of the revenue increase, just do a lot of training, et cetera. So yes, we are doing that. And we don't see really an emphasis on manufacturing capacity. So for the XT Series, we've got a really efficient (inaudible) invest plant, if you will, where we can run a second shift also.

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Operator [39]

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Your next question comes from the line of Matt Hewitt from Craig-Hallum Capital.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [40]

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Yes. Just 1 follow-up for me. During the prepared remarks, I believe you were talking about the 3 wins with St. Luke's, Northern Arizona and Atrium representing 1% market share from a bed count perspective. I know historically, you've talked about gaining 1% to 2% a year. And you obviously hit those numbers, and that's what's allowed you to become the market leader as of last fall. But I'm just curious, does that -- do the 1 -- does the 1% to 2% still hold? Or are you seeing such momentum that you think that you could actually take more than 2% share over the next couple of years as you get into the XT cycle, in particular?

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [41]

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Yes. So there's a couple of nuances there. So Northern Arizona, that was a competitive conversion. So that's a new customer. Atrium is a renewal, I believe, a platform renewal, sole-source contract. So think about bigger platform, more products, if you will. And St. Luke's is also an existing customer but that's a new sole-source agreement, multiyear agreement.

Yes, So only part of that (inaudible), but it's anchored, if you will. So that definitely is our strategy. And then smaller locations and health systems that we don't disclose that don't make it to the level of a press release, we're chipping away at those, and we're getting that first year of the quarter, we take away -- we have that competitive purchase in our favor. We don't necessarily want to give guidance on market share increases. But we believe that 2 out of the first 6 months of the year that we had further gains. Market share in the U.S., and the 1.5% to 2% has been mostly historic rates over the last couple of years. It might have been higher in some of the years, but I think that's fair enough for now to assume. And the real expansion also [our revenue sites] compared to the preferreds is really the whole platform and then the upgrade cycles, so.

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Operator [42]

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And there are no further questions at this time. I will now turn the call back over to Randall Lipps for closing comments.

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Randall A. Lipps, Omnicell, Inc. - Founder, Executive Chairman, President & CEO [43]

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Well, thanks for joining us today. I -- as we enter the second half of 2019, I'm thrilled to see our Autonomous Pharmacy vision coming to life. Together, our health systems and retail pharmacy partners are helping to create value for the industry by transforming pharmacy care delivery model. And this is really freeing up the pharmacists. It's getting them out of the basement, from behind the counter and getting them connected to clinicians and the patient, so that we can improve the outcomes for everybody.

And I especially want to thank our customers for partnering with us, especially the Omnicell team, for executing on our strategy as we deliver our vision of the Autonomous Pharmacy and really improve health care for everyone.

Thanks, everybody. See you next time.

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Peter J. Kuipers, Omnicell, Inc. - Executive VP & CFO [44]

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Thank you.

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Operator [45]

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Goodbye. This concludes today's conference call. You may now disconnect.