Good afternoon. My name is Jason and I'll be your conference operator today. At this time, I would like to welcome everyone to the Omnicell First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to our host, Mr. Peter Kuipers, Chief Financial Officer. Sir, you may begin your call.

Thank you. Good afternoon and welcome to the Omnicell first quarter 2018 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 – issued today, in the Omnicell annual report on Form 10-K filed with the SEC on February 27, 2018 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 April 26, 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, audio duplication or rebroadcast without the expressed written consent of Omnicell is prohibited. Randall will first provide an update on our business, then I will cover our results for the first quarter of 2018, and our guidance for the year. Our first 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.

Good afternoon, everyone. We're excited to update you on the company's performance for the first quarter of 2018 as the business continued to progress with great momentum and innovation, customer acquisitions and financial results. We are pleased with our advancements and innovation as we build and expand our industry leading medication management platform with the goal of achieving the fully automated pharmacy. In December last year, we announced the XR2 Automated Central Pharmacy System. The leading edge robotic XR2 is a significant step towards the fully automated central pharmacy across the full range of customer environments. Beyond upgrade potential, the XR2 represents significant greenfield opportunities. Also in December of last year, we announced the IVX Workflow powered by IVX Cloud. IVX is a significant technological advancement for IV Workflow processes, enabling pharmacies to safely and efficiently compounds and prepare IV treatments. We entered into additional non-cancellable [ph] commercial agreements for both the XR2 and the IVX Workflow products in the first quarter and continue to see a healthy build in the pipeline. As we communicated previously, the general availability for customer installs of the IVX Workflow and the XR2 products are in the second and third quarters of this year respectively, contributing to the second half 2018 revenue. Now, I'd like to discuss the momentum in customer acquisitions. In summary, it's clear that we are winning in the marketplace. During the first quarter of 2018, we had a strong new and competitive conversion rate of 27% of total company bookings. This is a good indicator of the strength of the business of around 80% where competitive conversions in the remainder where from greenfield customers who had never automated before. For the 12 months ending March 31, 2018, our new and competitive conversion rate was 28%. Omnicell XT series continues to…

Thank you, Randall. Our first quarter 2018 GAAP revenue of $183 million was up 23% year-over-year. The first quarter earnings per share in accordance with GAAP was 7% and is up from a loss per share of $0.28 in the first quarter of 2017. In addition to GAAP financial results, we report our results on a non-GAAP basis, which excludes stock compensation expense and amortization of intangible assets associated with acquisitions, one-time acquisition related expenses, the acquisition accounting impacts related to deferred revenue and inventory fair value adjustments and tax reform benefit impacts from the Tax Cuts and Jobs Act of 2017. 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 non-cash stock compensation expenses that are a component of our reported results as well as one-time events and one-time acquisition and restructuring related expenses. A full reconciliation of our GAAP to non-GAAP results is included in our first quarter earnings press release and is posted on our website. For the first quarter, non-GAAP revenue was $183 million, which is above the guidance range of $174 million to $179 million that we provided in our fourth quarter results earnings call. This strength was mostly driven by earlier timing of completion of implementations in North America as well as general momentum in the business. Revenue strength and strong cost management resulted in non-GAAP EPS for the first quarter of $0.29 per share, which is above our guidance range of $0.22 to $0.28 and above consensus. Our business is also reported in segments, consisting of automation analytics and medication adherence. Automation analytics consist of our XT and OmniRx automated dispensing cabinets, anesthesia workstations, central pharmacy, Omnicell supply, Omnicell analytics, performance center and MACH4 robotic dispensing…

Well, in summary, we had a great first quarter. We are definitely winning in the marketplace with our broader product line that’s now connected to the performance center. We continue to have great success in the competitive conversion arena. We also have momentum in replacement sales to current customers, which were in 2018, we see that and predict that there will be a doubling of the bookings from XT replacement sales that we had over 2017. And as you can see, we've been developing and beginning to deploy a lot of new product lines, like XR2, IVX and a new small retail robot in Europe as well. And so we're really proud of our financial performance and continued execution of our strategy. We're witnessing fast adoption of the latest developments on the Omnicell platform. We're leveraging the cloud and our performance center, starting to use some artificial intelligence for predictive analysis and we're really partnering with our partners to meet their KPIs together and that's a lot of moving pieces, a lot of extra efforts that we made over the last 12 to 24 months and with great execution from the Omnicell team. I want to thank them for again for another great quarter, great work and lining us up to be successful moving forward. So with that, I’ll turn it over operator to questions.

[Operator Instructions] And your first question comes from the line of Mohan Naidu of Oppenheimer.

So first on the bookings side, you said 80% is coming from competitive conversions. That seems to be pretty high compared to last quarter. Can you give us a view into what you're seeing? What's driving that? And also how much runway do you see in these conversions.

Yeah. It’s a continued competitive strength of our -- the strength of our platform where more and more customers that are in RFP actually want the whole platform and not just a single point solution and that's where the strength really comes in on the competitive conversion side.

So, may not be any more deals, it may just be that people are adding more lines to get more of the platform as they make the move to convert.

Got it. And also on XR2 and IVX, so great traction to hear there. Are there meaningful expectations to add two numbers in the second half from these two lines?

Yeah. So we have some, first of all goes bookings and backlog and our revenue. We have some revenue included in the second half. So the guidance that we provide, we wanted to make sure that we ramp those numbers up and execute on them. If there's upside, if and when there's upside, we’ll just guidance accordingly, but that’s not the case quite yet.

Okay. And the reason why I ask is that, you have with the Q2 guidance, it looks like you have pretty steep ramp into second half, both on the earning side and the revenue side and I just want to see how much of that is really dependent on XR2 being online or on time and delivering?

There are some there. We remember that 2018 is much different than 2017, because IVX and XR2 are largely greenfield opportunities. Right. So, we don't really have any confirmation of backlog, et cetera.

Okay. Last question for me. So Randy, you mentioned consolidation in the industry. Are you seeing health systems that are consolidating that have older platforms or you are the ones that are there, helping them consolidate the product platforms? Like why do you think the consolidation will help you or just the competition?

Well, I think our approach is all about total view and that's a corporate view, individual Qcare view, outside the hospital view, all the way down to the patient. So, and our ability to aggregate those pieces up and look at them almost on a patient longitudinal basis gives us a unique perspective to really impact what outcomes really look like, but even just basic things like supply chain where most people, a lot of the larger groups are creating consolidated distribution centers where they're going to plough drugs into first, then foam out to the various hospitals and their geographic location. And so our ability to look at all the data to track that and help them make decisions is really important. It never had that sort of strategic view of their ability to match what's in their supply chain, what they're using and how to make sure they not only deployed efficiently, but safely and cost effectively. And so while you assume, when you get bigger that one of the biggest things you're going to exercise is your supply chain leverage, that’s just the basic assumption and many of these institutions have not achieved a lot of success of doing that and they've achieved maybe better pricing, but they have not achieved operational leverage and that's what we bring to the table because of our broad product line, you can put a large XR2 robot in the distribution center, smaller robots at the location, ADCs, we can work with their outpatient centers on med adherence and robotic packaging of drugs not just for people leaving the hospital, but people in their own hospital health plan, which needs attention. So there's just a multitude of approaches that these large groups can’t get their hands around unless they have a technological partner willing to scale, both vertically and broadly with them and I believe we're the only ones that are even attempting to do that. So I think we're pretty much the answer.

And your next question comes from the line of Jamie Stockton of Wells Fargo.

I guess maybe just a follow-up on [indiscernible] quickly, just because I'm sure there will be a focus on the second half ramp. The XR2 demand that you guys have kind of factored in. Is that going to come from deals that have already been signed or is there still an onus on you to sign more deals to deliver that?

For the revenue, those are mostly signed already, what we have included in the second half revenue.

As well as IVX. So I would just put it that I think we were conservative on XR2 and IVX contribution for the second half of the year just because our new products, but there are no more deals that need to be signed, well, there will be a lot more deals signed before the end of the year in order to achieve those numbers that are in the plan that’s helpful.

Okay. That's great. And then I've just got a couple of questions on gross margin. I guess maybe the first one, so it's definitely improved year-over-year. There was a downtick sequentially. Obviously, seasonality has, I'm sure, a lot to do with that, but specifically maybe for the services, product categories you saw that come down, some sequential expense growth on lower revenue number. Is there anything going on there that you would call out as far as putting pressure on gross margin.

No, it's mostly leverage as you pointed out. Of course, we're starting up also. We've got some startup costs in there as well for IVX and XR2 in the first quarter.

Is there any noise left around XT transition, any scrap costs that you guys are still having to deal with or are we still experiencing any inefficiencies from G4 manufacturing, just around anything like that.

So we have consolidated the assembly line for ADCs. So that's the line, if you will. I would say scrap and cost is fairly modest, given our size. So, there's a little bit of fluctuation from quarter to quarter, but not much.

Okay. Last question for me, the medication adherence segment, Ateb was, I think, inflating kind of the growth numbers last year as you were getting the initial contribution from it, but you did continue to see a pretty solid growth rate for that now that you've anniversaried the Ateb acquisition even in Q1, any color on kind of what drove the healthy year-over-year disproportionately in that segment.

Well, we -- of course, we know have a full suite of platform now also here is between the software synchronization and messaging combined with the robotic automation of packaging, just take our packages that are used for med adherence. So we see some good momentum there. So we maybe it kind of sticks out form an external perspective, but this is what we have planned for. So we’re executing well.

Yeah. The uptake on the BBM200 has been very good and I think that's contributing to both, more consumables, more adoption of the programs and then add again the software allows those systems to work more effectively. So kind of a three way deal there.

Your next question comes from the line of Nina Deka from Piper Jaffray.

Would you say your average deal size then is increasing? I know you mentioned some notable wins and that you have an increasing number of new deals that are more than one product. Is it safe to say yet that the average deal size is going up or are we not quite there yet.

I would say they're going up over time. I think the point we wanted to make is that within those bigger deals, more and more the argument, why we get those deals is because customers want the integrated platform and not point solutions and we’re really the only one in medication management automation that can provide a full platform.

Okay. And so as they're increasingly wanting the multiple products, are you seeing any change in the timeline of pipeline conversions. Is it taking longer to close the deals?

Fairly stable to close the deals in the conversion from kind of from backlog to revenue. The products normally are kind of installed sequentially, so that balances out for the most part.

Yeah. Just in the timeline of the booking, I don't necessarily think so. I think that we generally start the conversation off nine months a year early about the total platform, so you're starting out with that. I think it goes through the normal cycle. So I feel like that's -- in some cases I feel like they've been accelerated. Occasionally, you'll get a customer just looking to buy one products and they'll buy two and then they'll accelerate the whole thing. So those are kind of one-offs, but it's a good sign.

Okay. Thanks. And then just the last one, XR2 I think was scheduled, oh, actually it was IVX is scheduled for general availability in April I believe. Is that full on schedule?

Yeah. Full schedule for this quarter. Yes.

[Operator Instructions] And your next question comes from Raymond Myers from Benchmark.

My first question is last quarter Randy, you told us that winning some very large hospital system contracts had extended the installation and revenue recognition time frame. Can you update us on that in this quarter? Are we getting that in hand? And let us know what's happening.

Yes. So the three sole sourced agreements that we mentioned in the script that we have signed in the last 12 months as the date of the fourth quarter earnings call so we receive a steady flow of implementations from those three nationwide for-profit systems and they roll out fairly steadily I would say. But it is over time.

Yeah. So it’s a long commitment and initially there may be in a few things to do, but a lot of it is more in the back half of the year where we'll see contributions from those contracts. So it's not that they're out of frame, but then sequentially for the next three or four years, we'll see even more. So I just wanted to put that in perspective last time that those large contracts didn’t immediately create revenue and earnings.

Your guidance for bookings growth is quite robust at 10% to 16% this year, but last year was a little bit light of guidance. So what gives you the confidence this year that you can attain some pretty high targets?

Well, I think of course the high beta is how many products you're rolling out and which ones you’re depending on during this year to obtain revenue out of the backlog and that's XT. And so XT has been performing really well. It's going really well, both for installing and booking new customers. I think there are, I think we need to be more prudent this year of the new products that we're rolling out. We're not building those into the plan, even though, they will hit this year and have some revenues. So I think that’s the biggest difference is that the core products that we have now that are being shipped and being in our forecast for revenue as well as what we're looking to book, our end product lines that are extremely stable and not overly optimistic about when they might get out of revenue.

So, comparing the bookings numbers expected for ’18 versus ’17, so where we see bookings numbers for XT replacements or upgrades at existing customers more than doubling, right. So that’s a big factor as well in the growth rate year-over-year.

Great. And did I hear you correctly that you were saying that the IVX and XR2 are not included in the bookings growth that you described?

Well, there are some include, but fairly modest for both bookings and, yeah.

You mentioned that in Q1, you signed contracts to more than double performance center. That's a fairly bold statement to double a product in one quarter. Can you elaborate on that?

Yes. So we signed multiple contracts in the first quarter of ‘18. We think the role of strategic importance of performance center is definitely increasing. We actually have opened an executive briefing center in the Pittsburgh area, who we actually started off for customer services with the performance center, demonstrating how to manage medication, how do you use savings, et cetera. And then we also show of course the full suite and we end again in the performance center analytics room. So that -- we see really good uptake from a performance center perspective and is really an integral piece of our platform.

So what changed in Q1 that you were able to double?

That’s a matter of the pipeline and the deals got signed to the first quarter. Right.

Yeah. I think there has been a little bit of a transition. I think people would kind of looked at it as, well, you buy our systems and then you put a Capstone software product on later and I think we have swapped that around. Now people come in and say, look, first thing you know is you put in the platform that's going to drive all the results and then you feed the systems and connect to manage you go over time and so it's not a sort of a post after market large system sale. It's an upfront piece and that's been a pretty big shift in the way we go sell and present and help customers really get results right off the back whatever systems they have.

Yeah. That’s great. Is there any way that you can quantify the contribution expected from performance center this year.

We’re not breaking out product lines, but we are – I think we discussed before looking at potentially disclosing the financial statements, the pure software revenue and the recurring revenue that we have. So we might choose to do that in the future.

And your next question comes from the line of Matt Hewitt from Craig-Hallum Capital Group.

Yeah. This is Lucas Baranowski on for Matt Hewitt. And my question is, last quarter, you mentioned that you made some changes to your contracts to encourage customers to keep implementations on schedule. Have you begun to see a benefit from those changes?

Yes. Definitely, you can see that we exceeded the revenue in the first quarter from guidance, what we've initially thought and the rigor around both the contracts and also our operating rigor, the way we handle and manage implementations together with our partners is definitely improving, so that is showing in our results.

Okay. That's helpful. And then maybe just an update on international markets. You recently attended a European conference, so maybe you could just update us on the prospects you see in Europe, the Middle East and the Asia Pacific?

Well, I think there's some of the same issues, consolidation and in many cases, there are large provider networks there. And so again, we're a little bit further behind where we are in the US, but bringing a platform solution to these environments yields the same kinds of results because they have the same kinds of problems over supply chain visibility, proper drug handling and good choices to make. And so we feel like that strategy is going to continue to help us in both the Middle East, the UK and Europe. We also mentioned we just released our latest RDS small retail robot that we think is really going to make a difference for us being able to penetrate higher levels in the market, because our robot was really designed for larger scale operations and many pharmacies and retail pharmacies in Europe are small. And so this allows us to dress the full market.

And your last question for the day comes from Gene Mannheimer from Dougherty & Company.

So just building on that last comment, Randy, on the I guess you call it the RDS essential, the small robot for the European pharmacy. Is that -- just to clarify, is that something you've developed yourselves or is there -- are you partnering there with the third party on that and what's the addressable market like?

That's something that we have fully developed in the European market sort of on a just, there is probably close to 10,000 to 15,000 small retail operations and just in Germany, France, UK maybe and it's not even, it's like 20% penetrated. So it’s a fairly small penetration of automation for these retail pharmacies and they're becoming pretty much a standard operating piece of equipment and many of them in order to address the ability to scale without adding additional labor in these retail situations. So we feel like it was a good move for our business.

Sounds like a good addition. And then with respect to your sales force and how that’s aligned now with all the new products you’ve introduced like XR2 and IVX as examples, have either augmented the headcount or are you -- have the specific dedicated groups of sales forces charged with selling particular solutions, how is that looking?

Yeah. Obviously, as our customer base has changed, we've had to -- more of our sales force and our whole customer engagement with customers is totally different and that's all about platform selling So it's really key that as we approach customers and understand about what their total needs are, not just the specific solution, you'll always need the specialist, if you will, but the evolving contact with the customer is really about getting at a very high level and really driving KPIs that the organization has and then sending both your people and the customers’ organization along those same alignment. And so we're seeing really good traction from taking on that prospect and so we’ll be morphing our sales force and our all go to market as we see more of these transitions come out.

And I would now like to turn the call back over to Mr. Randall Lipps for closing remarks.

Well, thank you for joining us today and it was really great to have a just a really solid quarter, back in the groove and I really want to thank the employees and our customers for really helping us to improve healthcare for everyone. See you next time.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.