Good afternoon. my name is Holly and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Omnicell Second Quarter Earnings Conference Call. [Operator Instructions]. I'd now like to turn today's conference over to our host, Peter Kuipers, Chief Financial Officer; and Randall Lipps, Founder, President and Chief Executive Officer. Mr. Kuipers, I hand the floor to you.

Thank you. Good afternoon and welcome to the Omnicell Second Quarter 2017 Results Conference Call. [Operator Instructions]. Joining me today is Randall Lipps, Omnicell Founder, Chairman, President and CEO. This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell annual report on Form 10-K filed with the SEC on February 28, 2017 and in other more recent reports filed with the SEC. Please be aware that you should not place undue reliance on any forward-looking statements made today. The date of this conference call is July 27, 2017 and all forward-looking statements made on this call are made 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 expressed written consent of Omnicell, Inc. is prohibited. Randall will first provide an update on our business and then I will cover our results for the second quarter of 2017 and our guidance for the year. Following our prepared remarks, we will take your questions. Our second quarter financial results are, as usual, included in our earnings announcement which was released earlier today and is posted in the Investor Relations section of our website at omnicell.com. Our prepared remarks will also be posted in the same section. Let me turn over the call to Randall.

Good afternoon, everyone. We're excited to discuss our second quarter results as well as our continued progress of the XT Series market introduction that is gaining momentum every day. Following the announcement of our new XT Series at ASHP last December, we received great responses 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 Aesynt customers to take full advantage of XT. And this week, we announced the launch of the XT Series Automated Supply Dispensing system. And in the second quarter, we also launched the controlled substance dispenser a module-providing, innovative, efficient and secured workflow for dispensing and administration of controlled substance. Similar to last quarter's update, I wanted to summarize our progress in 3 specific areas. First, we're winning in the marketplace across Omnicell's differentiated platform of solutions. Second, we're making good progress on XT, with strong customer interest and the XT Series is well accepted by our customers. And three, progress on conversion of G4 and AcuDose quotes and backlog to XT. First, it's clear we're winning in the marketplace. During the first half of 2017, we had strong, new and competitive conversion rate of 27% of bookings. This is a great indicator of the strength of the business. Over 70% of those were competitive conversions and the remainder were from greenfield customers who have never automated before. Given the quarter-to quarter fluctuations, we will start reporting the new and competitive conversion rate for bookings on a 12-month rolling basis. So for this past 12 rolling months, ending June 30, 2017, our new and competitive conversion rate was 28%. We're also seeing momentum in replacement and add-on XT orders, with the pipeline of replacements exceeding our internal goals. We believe…

Thank you, Randall. Our second quarter 2017 GAAP revenue of $181 million was up $30 million or up 20% sequentially, driven by the product sensation and related ramp-up of the XT Series launch and is above the guidance range provided in our first quarter results earnings call. The second quarter revenue strength was driven by XT revenue and IV Solutions, some of which is timing with the third quarter. Earnings this year, in accordance with GAAP, were at $0.02 which is up from a GAAP EPS loss of $0.03 in the second quarter of 2016. GAAP gross margin was 43% for the quarter. In addition to GAAP financial results, we report our results on a non-GAAP basis which excludes stock compensation expense and amortization of intangible assets associated with acquisitions, onetime acquisition-related expenses and the acquisition accounting impacts related to deferred revenue and inventory fair value adjustments. We use non-GAAP financial statements in addition to GAAP financial statements. Because we believe it is useful for investors to understand acquisition amortization related cost and noncash stock compensation expenses that are a component of our reported results as well as onetime events and onetime acquisition and restructuring-related expenses. A full reconciliation of our GAAP to non-GAAP results is included in our second quarter earnings press release and is posted on our website. Our second quarter 2017 non-GAAP revenues of $181 million were up 20% from the first quarter driven by, again, the XT Series market introduction and ramp-up. On a non-GAAP basis, earnings per share were $0.31 for the second quarter of 2017, above consensus, down $0.08 from the same quarter last year, but up $0.26 sequentially. Non-GAAP gross margin was 45.3% in the second quarter. The second quarter non-GAAP gross margin was negatively impacted by approximately $3 million of startup costs…

Thanks, Peter. And obviously, I'm really pleased with the quarter and the company's momentum that we have built. Of course, the XT is gaining a lot of momentum, but I don't think we should forget the Performance Center products, the IV products, the Pharmacy Central products that we have that really allows us to present a broad base of product solution sets that our larger customers want as they consolidate and not only consolidate vertically, but they consolidate horizontally into -- across the continuum of care. They need a multiple solution platform that can service all their needs in medication management and that uniquely positions us in the marketplace to win and really build a strategic relationship with our customers, not around a specific product solution but around the strategy in medication management and how outcomes can be improved, cost can be reduced and regulatory can be accomplished effectively and efficiently. So it's a lot of momentum, a lot of things have changed in the last 18 months, but it really feels good to be at this point. So with that, I'll have the operator now please, Holly, if you would open up the line for calls, please?

[Operator Instructions]. Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital.

First up for me. So it sounds like you made some progress on the implementation backlog that you noted in the first quarter. But you still have a long ways to go and I'm trying to rationalize the backlog that you're seeing as of Q2. So what you say, 170 are live out of the 320 that have -- the product delivered. So you've still got ways to go there and then I look at your guidance for Q3 and the full year, it implies a very large or a big step-up in the fourth quarter. Is that you getting caught up on that backlog? And if so, how confident are you in your team's ability to get those implementations completed?

Yes. So Matt, I'll -- this is let Pete. I'll answer that question. So yes, we definitely have good visibility in the, what we call, the installation schedules with our customers which -- for third and the fourth quarter. Of course, the visibility is greater and more detailed in the third quarter, but we also had good visibility in the fourth quarter. And you're right, so we're continuing to expect a ramp-up in revenue as a result. I'd like to point out that we're also ending shipments for G4 and AcuDose here -- hardware also here during the year, so that will help also on accelerating the focus here on XT product inflation.

Okay. And then I think you had mentioned last quarter that part of the delays of your -- or some of what was contributing to the backlog in the first quarter was some California certifications that were required. I think it was related to earthquake certification, if that's correct. Where does that stand today? And is that resolved? If not, how quickly can you get that done?

Well I think, we certainly have that issue in front of us still as it is a site-by-site issue, but we start the process immediately when we get into the account so that it's a minimal disruption. So that is some of the disruption actually in Q3 somewhat, but we've already accounted for that and we think pretty much by the end of the year or fourth quarter, that there won't be any more roadblocks in our way. So I'd say that's all accounted for and it's not going to be an issue in meeting our numbers, we don't believe.

Okay. And then maybe one last one for me and then I'll hop back in the queue. You mentioned real briefly at the end of your prepared remarks, Peter, actually, Randy, regarding Performance Center, can we get an updated customer count there and maybe what that pipeline looks like for the rest of the year?

Yes, we don't kind of break that out, but I would say that our sort of presentation and interaction with our customers has really moved quite a bit from where it has been over the years to where many of the customers are buying 2 or 3 products at a big point in time when they're either expanding or when they're adding on new hospitals or when they're replacing old equipment. And the Performance Center is becoming more and more of a standard to be included. It makes the most sense and actually when we sit down with customers, we really want to start with that product because that will give them insights on how best to deploy the automation and make sure it's effective and safe and cost-effective as we move forward. So it is a real jewel in our bag. And I think that it is one of the fastest, quickest turns on one of the fastest-growing products that we've ever deployed and developed. So we couldn't be more excited about it.

Our next question will come from the line of Nina Deka with Piper Jaffray.

So you mentioned that you are no longer going to be shipping the G4 and also the AcuDose at the end of Q4. Can you describe how this announcement was received by your customers? And whether you're expecting any level of attrition due to this announcement? And then the follow-up to that would be, what sort of efficiencies you're expecting to gain from the consolidation of the assembly lines?

Yes, great question. Because we spent a lot of time and energy and investment in ensuring there'd be minimal disruption with customers. And the way we achieve that is the G4 and AcuDose hardware, if you can think of that as -- like a hardware on a PC, is going to change. But the software is the exact same. So if you have 100 AcuDose hardware units at your location and today, you want to add one more AcuDose hardware cabinet to run with your platform, you can buy an AcuDose system, a dispensing system. But after third quarter, you can still add one, but it only comes in the form of the XT. We do not sell the previous form. But you do not have to change the software on the first 100, you can keep that software in place, but all the add-on products to that platform will be in the form of the XT hardware platform. The same is true for Omnicell G4. If you have G4 at several locations and starting at the end of the year or you want to move away from -- you can still add the XT to your G4 setup without having to replace all of your G4 in order to add on. It just means after January 1, all the add-on product will look the same, but it will either run on the AcuDose software or will actually run on the original G4 software platform, same server, same user interface. So that makes customers extremely loyal, extremely happy in that we're not forcing them to change their software platform immediately. We're only asking them to adopt the hardware platform. And of course, the hardware platform has a lot of advantages over the old platforms, so it's well received. And I don't know of any customers who have said, "Oh, I don't like that idea," or "I wasn't expecting that." So it doesn't -- it really gives our customers the ability to add on. And as they -- as the equipment ages, they flip them all out, put in the new XT hardware everywhere they don't have it already.

And then on your -- second part of the question on the cost synergies from going down and consolidating 3 Automated Dispensing Cabinets assembly lines into 1, that will definitely help the gross margin towards the very end of the year as we go into 2018, but we're not breaking that out separately.

Yes, '18, we'll have one product line for people to install. We'll have one factory build the ADCs on. So it sets us up well for '18.

And our next question will come from the line of Jamie Stockton with Wells Fargo.

This is actually Nathan in for Jamie. I guess for the first one, we've seen weaker hospital fundamentals in Q2 than expected. Have you noticed any impact on your business?

No, I don't think so. I think that the macro trends in health care, as I look at them, are the consolidation of hospitals both vertically and horizontally. That just plays more and more into our strength, the ability to run a multi -- a large, multihospital system on a single server, to have an enterprise set of products that allows you to distribute them across the horizontal platform of the continuum of care. So all of those trends -- a lot of those trends stay in place. It just continues to position us to be more effective, right? And so none of that's changed and I don't think sort of the individual hospital dynamics have that much impact on our business at all.

Okay, great. And then for a second one, does a 7-year product cycle for XT still seem like the right time period?

Yes. I think that in 7 years, that -- for sure. I mean, there might be some dribbling after that, but for sure 80% to 90%, 7 years.

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

This is Mike on for Mohan. Just wondering how prevalent are early upgrades from G4 to XT, like the Orange Regional deal at Greater Hudson Valley that we saw this week in your pipeline today?

Yes. Well, what we're seeing in the early -- remember, we only introduced XT in December, so we've only had 6 months really to build the pipeline. But the most encouraging thing we see a lot of pipeline growth around XT above our expectations, so we're going to end the year above what our -- we believe above our expectations on what the, actually, XT bookings originally were built into the plan which is all good news. But what happens is a lot of customers come to, what I call, a large event. They acquire another small hospital. They open up an outpatient center. They're doing something significant. And in the old world, they would have -- might have ordered just 10 more G4s, but they're looking at the dynamics and they're saying, "Well, if we want to go to this geographic location, we really need to replace the whole facility that's at that location with XT." So they'll up their order from 10 to 30, because they don't want a difference in the format of the hardware, even though they would work side-by-side. And then the G4 might stay G4 in a different location. So there's a lot of dynamics around what's going on in the facilities. So if you're opening up a brand-new facility, almost 100% of the time, we're seeing people even if they -- G4 isn't old enough to replace, they'll say let's just go ahead and replace it. We've got the new facility. Now is the time to put in the new technology instead of moving it over from the old facility. So there are a lot of situations where we see the early adopters jumping right in. And then as we take the program out to their customer base, sunsetting the G4 hardware and the AcuDose hardware, that just builds in the conversation about over the next 4 to 5 years, when they're going to replace each of the hardware pieces that are aging and need to be replaced. So I would just say that it's above our expectations. The customers have been really happy with it. In fact, one of the most interesting things about it is that if you have 2 units on the floor, you can't have the old and the new. The experience with the nurses is so above the other one that the people won't use the old one. And so they won't use the old G4. So they have to be very careful about where they place the units because of the nursing demand to quickly upgrade may be faster than the facility actually wants to or has to.

That's very helpful, Randy. And then wondering how is customer interest in the new Med Adherence solutions launched back in February, I think, the M5000, VBM 200F?

I'd say that's going extremely well above our expectations as well. I think this is still an embryonic market, but you can see it developing quickly as both people want to differentiate in the retail space and the assisted living space with solution sets that can serve large groups of people and you cannot do that without automation. And so the actual offering of the automation is driving certain customers to actually develop a plan to offer the product that they hadn't offered before. So it's a new market, a new solution set. It allows our customers to bring adherence packaging to a whole new market that they had never had the capability to. And we have gotten a lot of interest. It's still early on, but it took the automation piece to make the market viable.

Our next question will come from the line of Gene Mannheimer with Dougherty & Company.

Two questions from me. I guess when you characterize the XT opportunity previously at roughly $2 billion, is that inclusive of the supply business that you just launched on XT as well as the anesthesia station? Or are those markets incremental to that $2 billion number?

This is Peter. They're included in the $2 billion number. Now remember that, so the point also was in the prepared remarks to point out that we're now close to fully addressing that installed base and opening that up for replacements by bringing out these products [indiscernible].

Okay. Yes, now we can talk about the full line because we have the full line. So we couldn't, obviously, swap anything or book anything until we had something to offer.

Okay, good. Makes sense. And where do we stand with the group of customers that never did make the migration over to G4? How much of those customers are so-called low-hanging fruit to migrate to XT?

Those will be the G3 customers then and prior, fairly minimal number of customers there.

Yes, a few of them at the end of the year and I think at the beginning of the year took the leap into G4 upgrade just to get up the runway before they are ready for XT. But I would say there are not many customers in that mode, particularly on the pharmacy side, because you really need to have all of the feature set on the pharmacy side to be safe and efficient and beat regulatory compliance. So I'd say on the pharmacy side, there are very few people running G3.

And our final question for today will come from the line of Mitra Ramgopal with Sidoti.

Two questions also. If you can give us a sense in terms of on the international front where you're seeing the most interest on XT? And also, regarding Canada, an update on the transition with McKesson, if that's pretty much over?

This is Peter. The first part of your question, we're seeing the biggest increase in our kind of our biggest ADC markets internationally which are -- then also for XT which are the U.K. and the Middle East. So we see some good traction there. And then your last -- sorry, the second part of your question was, Mitra?

In Canada.

In Canada.

Yes, we just announced -- yes, I'd still say -- yes, just this April, we basically...

We took over the accounts essentially.

We took the AcuDose accounts that were in the McKesson. That was an exclusive agreement that Aesynt had with McKesson before we acquired Aesynt. And now we've taken over those accounts from a selling point of view. They are still servicing the accounts. So there's a transition over the 6 months to a year, where we will take full account control, if you will. But I think in Canada, we're really set, because we have Aesynt. AcuDose products has a good reputation. Omnicell has a great reputation and I think the combination of the 2 really puts us in a really strong place to continue the great, great momentum we've had there over the last several years actually.

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

Well, really appreciate everyone joining us again today and continuing here the XT -- the story. But as I said, the story is a lot larger than that and it's a great time to be in health care. It's a great time to be taking technology and introducing an end to the world health care and really changing peoples lives, really changing what takes place with the medication management. And it truly is a way to bend the cost curve and just -- we -- our passion around it and our ability to change people's lives is probably the most exciting part of what we do every day. And as always, thanks for the Omnicell team for driving all the hard work and going through this last few quarters, where we had so much going on. We still got a lot more going on, but I'm always grateful for the great things you do. We'll see you guys next time.

Thank you.

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