Omnicell's (OMCL) CEO Randall Lipps on Q2 2016 Results - Earnings Call Transcript

| About: Omnicell, Inc. (OMCL)

Omnicell, Inc. (NASDAQ:OMCL)

Q2 2016 Earnings Conference Call

July 28, 2016 16:30 ET

Executives

Peter Kuipers - Chief Financial Officer

Randall Lipps - Founder, Chairman, President and Chief Executive Officer

Analysts

Mohan Naidu - Oppenheimer

Jamie Stockton - Wells Fargo

Sean Wieland - Piper Jaffray

Charlie Eidson - Craig-Hallum Capital

Raymond Myers - Benchmark

Mitra Ramgopal - Sidoti

Operator

Good afternoon. My name is Holly and I will be your conference operator today. At this time, we would like to welcome everyone to the Omnicell second quarter earnings announcement. [Operator Instructions] I would now like to turn today’s conference over to Peter Kuipers, Chief Financial Officer. Please go ahead, sir.

Peter Kuipers

Thank you. Good afternoon and welcome to the Omnicell’s second quarter 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 on the press release today and the Omnicell Annual Report on Form 10-K filed with the SEC on February 26, 2016 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 28, 2016, and all forward-looking statements made on this call are made based on 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 or the duplication or rebroadcast without the expressed written consent of Omnicell is prohibited.

Randall will first cover an update on our business then I will call for our results for the second quarter of 2016. 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 the call over to Randall.

Randall Lipps

Good afternoon, everyone. We are pleased to discuss our second quarter results. I’m very proud of our performance, which continues our consistent track record over the past several years. We exceeded our revenue guidance and analysts expectations with record quarterly non-GAAP revenue of $176 million in the second quarter. Together with good cost and integrated execution, this revenue strength resulted in non-GAAP EPS of $0.38, also above analysts’ expectations.

Bookings momentum for new and competitive conversions continues to be strong, driven by our award winning differentiated products. As mentioned previously, with the acquisition of Aesynt, Omnicell has gained an additional 10% of the Automation & Analytics market. On a combined basis, new and competitive conversions accounted for approximately 30% of the second quarter Automation & Analytics bookings. Based on the year-to-date bookings strength, we believe that our combined customer base gives us a very strong platform for future growth.

As previously discussed, we closed the acquisition of Aesynt on January 5, 2016. The Aesynt business, based in Cranberry Township, Pennsylvania is a leader in enterprise medication management with specific products in IV compounding, central pharmacy automation, point-of-care solutions and enterprise software products. Our integration of Aesynt has been progressing very well. Earlier in the quarter, we integrated the sales and field teams in North America to provide one face and one contact to the customer. And later in the quarter, we realigned all other functions. As part of this integration, we have had a modest reduction in headcount in early April.

During the first quarter earnings call in 2016, we stated that we expected no significant impact on bookings and revenue in the second quarter from this sales and field integration. And I am pleased to report that to date we have had – have experienced minimal impact from the sales and field realignment on bookings, revenue or pipeline. We previously prepared a brief summary of the transaction, which was posted to the Investor Relations section of our website omnicell.com that has since been updated to reflect the closing of the transaction. We have had very, very positive responses from existing and potential customers regarding the strengths and benefits of our expanded product portfolio. Last quarter, we updated the combined portfolio product page in the investor deck to also show the estimated annual total addressable market, or TAM and our market position.

In the last number of years, we have successfully grown the business by implementing three scalable growth strategies: one, growth through differentiated product; secondly, growth in new markets; and thirdly, growth via acquisitions. In the second quarter, we continue to experience great wins and added notable customers to our Omnicell family through our first strategy of differentiated products. We had strong momentum and notable first-time customer wins and many were through competitive conversions. We estimated that we have gained further market share in the first 6 months of 2016, a continuation of a market share gain trend as we have experienced for many years.

Examples of notable wins in the second quarter through competitive conversions include Stanford Health Care, Rochester Regional Health and Heritage Valley Health. We are thrilled to announce that we have signed an agreement with Stanford Health Care in Palo Alto, California. Stanford Health Care plans to replace all of their existing dispensing systems with Omnicell products as well as to install Omnicell dispensing systems in their new hospital, which is currently under construction.

Stanford Health Care has also purchased our Controlled Substance Manager solutions and intends to add Omnicell’s Anesthesia Workstations in the next few months. Of course, Stanford is nationally ranked in 13 specialties and named the top hospital in California by U.S. News & Report. They are included in the honor roll as one of the top 15 hospitals in the nation with 6 specialties achieving high honors.

Rochester Regional Health, a 5-hospital health system in Western New York, has selected the Omnicell Medication and Automation solutions to support their long-term goals as they consolidate 5 facilities into 1 cohesive health system. The interoperability between Omnicell’s Medication Automation solutions and Epic’s EHR, the primary electronic health record used in Rochester Regional’s health system, will standardize care across the facilities, which has previously been using disparate systems. Rochester Regional is currently installing Omnicell’s solutions in 2 of the 5 hospitals that collectively have over 1,300 beds, with plans to implement Omnicell automation in all 5 facilities by 2018.

Heritage Valley Health System located just west of Pittsburgh, Pennsylvania will be converting to Omnicell Automated Dispensing systems, Anesthesia Workstation, Controlled Substance Manager and implementing Omnicell Analytics. Heritage Valley chose Omnicell for our innovative approach to medication and management, especially to focus on streamlining nursing workflow and integrated delivery network serving Western Pennsylvania, Eastern Ohio and the of Panhandle of West Virginia.

Heritage Valley Health System has been recognized for the third consecutive year as one of the nation’s most wired hospitals by the American Hospital Association’s Health Forum. Our second strategy of expanding into new markets also fueled growth in the last several years and we believe sets us up well for 2016 and beyond. In a notable sale in the United Arab Emirates, we will be installing both our Robotic Dispensing System and our Automated Dispensing Systems together at Saudi German Hospital. It is a significant win that Saudi German Hospitals Group is the largest private healthcare company in the Kingdom of Saudi Arabia. The hospital in Dubai is one of the group’s first non-Saudi investments underscoring their strong growth potential. Saudi German Hospitals Group selected Omnicell due to superior technology in bundling with products that accommodate needs in both the inpatient and outpatient settings. In South Africa, we have started installations of robotic dispensing systems in partnership with non-government health organizations to reduce waiting time that are a significant impediment to medication access in underprivileged areas. Steve Biko Academic Hospital in Pretoria and Helen Joseph Hospital in Johannesburg, are both the first among the orders installed.

Our third strategy of expanding our presence and relevance through acquisitions has also delivered great results with the acquisition of the Aesynt business that was announced in 2015 and closed in the first week of January this year. In the second quarter, the University of Pittsburgh Medical Center or UPMC, Western Pennsylvania’s largest healthcare provider and a long time legacy Aesynt customer, signed a 10-year sole-source agreement for AcuDose-Rx cabinets, Aesynt Rx medication systems, narcotic vaults and enterprise medication manager, our pharmacy supply chain management solution.

As an integrated global health enterprise closely affiliated with the University of Pittsburgh, UPMC has been named to the elite honor role as one of the America’s best hospitals by U.S. News & World Report’s annual guide. In addition, UPMC is nationally ranked in 14 medical specialties. This continuing partnership supports UPMC’s goal to leverage technologies to support their care model, enhance integration between pharmacy and nursing floors while strengthening their central pharmacy services through ROBOT-Rx and MedCarousel. UPMC also provides a strong foundation for the future implementation of enterprise medication manager.

This is yet another proof point of the strategic value of the broadened product portfolio resulting from the acquisition of Aesynt earlier in the first quarter. We remain very focused on our mission to change the practice of healthcare with solutions that improve patient and provider outcomes. Our second quarter results, again demonstrate the strength and the broad product portfolio that bolsters our role as the strategic partner to the health systems.

Let me turn it back over to Peter for some financial updates.

Peter Kuipers

Thank you, Randall. I will discuss the summary of our second quarter financial results and our guidance for the third quarter in 2016. Our second quarter 2016 GAAP revenues of $173 million were up 53% from the same quarter last year and up 1% sequentially. Strong demands and revenue was driven by both expansion and upgrades at existing customers, as well as by new and competitive conversion customers. We continue to see particular strength of the combined product portfolio to enable strategic, tailored and scalable solutions for our customers.

Earnings per share in accordance with GAAP were a net loss of $0.03, which is down from $0.24 of earnings per share in the second quarter of 2015. The second quarter 2015 GAAP net income included a $3.4 million gain on business combination of an equity investment. GAAP gross margin was at 45% 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, one-time acquisition related expenses and the acquisition accounting impacts related to a number of items including deferred revenue, inventory fair value adjustments as well. We use non-GAAP financial statements in addition to GAAP financial statements because we believe it’s useful for investors to understand acquisition and amortization related costs and non-cash stock compensation expenses that are a component of our reported results as well as one-time events such as the gain on Avantec investment in 2Q ‘15 and one-time acquisition 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 first quarter of 2016 non-GAAP revenues of $176 million were up 56% from the same quarter last year and up 1% sequentially. On a non-GAAP basis, earnings per share of $0.38 in the second quarter of 2016, up $0.10 or 37% from the same quarter last year, and up $0.03 sequentially. Non-GAAP adjusted earnings before interest, taxes, depreciation, amortization was $25.9 million for the second quarter of 2016, up 40% from $18.5 million a year ago.

Our business is also reported in segments, consisting of Automation and Analytics and Medication Adherence. Automation and Analytics consist of our OmniRx automated dispensing cabinets, Anesthesia Workstations, Central Pharmacy, Omnicell Supply, Pandora Analytics and MACH4 Robotic Dispensing Systems. Our acquisitions of Avantec, MACH4 and Aesynt are also included in this segment. The Medication Adherence segment consist of all adherence package consumables, which are now branded SureMed and the equipment used by pharmacists to create adherence packages. Our acquisitions of MTS Medication Technologies and SurgiChem Limited are included in the Medication Adherence segment. As a reminder, we now report certain corporate expenses that cannot be easily applied to either segment separately.

On the segment basis, our Automation and Analytics segment contributed $148.7 million in GAAP revenue in the second quarter of 2016, up from $88.7 million in 2Q ‘15 or an increase of 86%, mostly driven by the acquisition of Aesynt. $20.5 million of GAAP operating income this quarter compares to $23.3 million the same quarter last year, $35.7 million of non-GAAP operating income in 2Q ‘16 compares to $21.8 million last year. The Medication Adherence segment contributed $24.2 million of GAAP revenue for the quarter compared to $24.1 million in 2Q ‘15. GAAP operating income of $2.0 million compares to $2.3 million a year ago. $3.6 million of non-GAAP operating income compares to $2.7 million of non-GAAP operating income in the second quarter a year ago. Non-GAAP common expenses were $90.3 million this quarter compared to $11.1 million in the second quarter of 2015. The increase is mostly driven by the Aesynt acquisition. Non-GAAP operating margin was 11.4% for the second quarter. And year-to-date, we are ahead of plan driven by the strength in revenue and cost under-runs.

In the second quarter of 2016, our cash balance decreased from $53 million to $41 million, primarily due to the use of cash in accounts receivables, inventories and an increase in prepaid income taxes. Year-to-date, cash flows from operations were $16 million. Our strong cash flow in the first quarter enabled us to repay $20 million of the outstanding balance on the credit revolver in March. On June 30, 2016, our loan leverage ratio measured at outstanding total loan balance over last 12 months of EBITDA was slightly below 2.0. Accounts receivable days sales outstanding for the combined business were 85 days, up 2 days from the first quarter in 2016. The increase in DSO was mostly billing timing driven. We received a collectibility of our receivables regularly and we do not believe the fluctuation in DSO are indicative of the change in our rate of bad debt.

Inventories were $74 million, up around $2 million from last quarter, mostly for our built-in inventory for installs and deliveries in the third quarter. Our headcount was 2,264, it’s down 29 from last quarter, driven by the reduction in headcount related to the sales and field alignment in April this year. We are reconfirming our 2016 total year guidance. As discussed on our fourth quarter and full year 2015 earnings call, for 2016, we expect product bookings to be between $540 million and $560 million. We now expect 2016 non-GAAP revenue to be at the higher end of the range of $695 million to $750 million. We expect 2016 non-GAAP earnings to be between $1.50 and $1.60 per share. Lastly, we expect non-GAAP operating margins for 2016 to be approximately 12.7%. As discussed in prior earnings calls, we consider 2016 to be a transitional and transformative year as we integrate Aesynt and gain momentum from our expanded product portfolio.

Let me now move to guidance for the third quarter of 2016. For the third quarter of 2016 we expect non-GAAP revenue to be between $176 million and $183 million and expect that non-GAAP EPS is between $0.38 and $0.42 per share. As discussed in previous earnings calls, it is important to note that from time-to-time, installation completion timing on specifically bigger projects could impact revenue and earnings in a given quarter, but we do not expect such quarterly fluctuations to impact the growth rate measured over multiple quarters. We are assuming an annual average tax rate of 38% on GAAP earnings on a combined basis. This assumption includes the benefit of the R&D tax credit impact as it has been permanently approved by the government.

As discussed in the last two earnings calls when comparing 2016 to 2015, it is important to note a couple of items that are new for 2016. First, for 2016, our non-GAAP expected results include around $10 million of integration expenses that we do not adjust for based on our non-GAAP policy. These integration costs directly impacting non-GAAP operating margins and non-GAAP EPS, mostly consist of retention costs, integration related IT expenses, costs related to the implementation of Sarbanes-Oxley, costs related to tax restructuring, accelerated product development integration costs and costs of the integration team.

It’s also important to remember that in 2016, we are expecting modest first year cost synergies between $5 million and $10 million. As we have demonstrated in the past, we have confidence in our ability to achieve our 15% non-GAAP operating margin target over time and after integrating the acquired business and getting full benefit of the scale of the combined business. With the sales and fields related re-org that we executed in early April as well as other cost actions, we are on track for the first year cost synergies between $5 million and $10 million and are tracking more towards the upper end of this cost synergy’s range. Lastly, for 2016, we expect interest expense related to the senior secured credit facility used to finance the Aesynt acquisition to be around $6 million. Compared to 2015, this is a headwind to non-GAAP EPS of around $0.10.

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

Randall Lipps

Thanks Peter. Once again, Omnicell’s second quarter was marked by record revenues bolstered by the strength of our expanded portfolio that delivers our customers unmatched innovation and flexibility. Already in the last 180 days, we have completed the first phase of the Aesynt integration and all departments are now realigned with their respective organization. And this really allows us to move forward with the second phase of the Aesynt integration, which involves mostly systems and process implementations as well as joint product development. So I am pleased that we are seeing health systems, both existing and new customers, assessing their needs for improved efficiency and safety, evaluating the breadth of our solutions and then choosing us. And so it’s really been a lot of hard work by a lot of folks, so hats off to the Omnicell people for moving quickly through the integration allowing us to move forward with our customers to make a difference.

With that, I will now open it up for calls. Operator, please help me out here.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Mohan Naidu with Oppenheimer.

Mohan Naidu

Thanks for taking my questions and congratulations on a great quarter here. Randy, maybe on the deal flow we are seeing great deal flow so far this year, plus can you update us on the competitive landscape and win rate you are seeing in the market especially now that you have a full suite of products with the Aesynt in there?

Randall Lipps

Well, I think our competitive conversion rates that we talk about are 30%, so it’s a little less because now we have taken one of the competitors in the – at least the NA market is now in our combined total, but it’s still 30%. Competitive conversion rate is strong and we are seeing that being helped out by the fact that we have products now that can go into almost any account, whether we have the core business or not, like IV, like our enterprise medication management products. These products can be kind of wedge products that start out a relation at a lot new organizations. And so I think the competitive landscape is very strong for us. Not only that we continue to take market share, but now that we can approach new markets with new market share in a different way by going to accounts where we don’t have core products and starting to deliver on some new products that are the best in the marketplace. So that’s very helpful.

Mohan Naidu

That’s great. Maybe a quick one for Peter, how should we think about your exposure to the weakness in British pound as we go into the second half, if at all there is anything?

Peter Kuipers

Yes. I would say the exposure from Brexit is fairly limited. So if you kind of dissect Brexit for our business, so our business in the UK and we are the market leader in Automation and Analytics and in Med Adherence. Most of our customers there are funded by the NHS when it comes to hospitals. Our understanding is that the NHS has fairly limited funding from the EU, so we expect the impact to be there very small, if any, from an FX perspective, exchange perspective, the rate is down I think about the 8%. But we also of course, do have costs in also the Great Britain pound. So the net-net impact is fairly small. We do intend to put a foreign exchange hedge in place on our P&L exposure there. So overall, it’s all included in our guidance and it’s a small impact, if any.

Mohan Naidu

Okay. One quick question around gross margins, on the Automation segment, is it just the mix coming in from Aesynt that dropped them – sequential drop in gross margin?

Peter Kuipers

Yes. It’s some mix. There was a one deal where we honored the commitments from prior to the acquisition. We do think that we will see an up-tick in the second half in gross margin and the A&A segment.

Mohan Naidu

That’s great. Thank you very much for taking my questions.

Operator

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

Jamie Stockton

Hi, good evening. Thanks for taking my questions. Randy, the international deals that you talked about, it sounded like maybe there was a little stronger central pharmacy automation component, maybe I was just making that up, I don’t know, but if there was, can you talk about whether you are getting traction with either the Aesynt solutions outside the U.S. which is something that I think you talked about as an opportunity when you did the deal or if maybe some of the solutions when you got MACH4, you are able to take in to other geographies internationally?

Randall Lipps

Yes. The MACH4 opportunity is the one that I referred to as a robotic dispensing opportunity, both with Saudi Arabia and South Africa. And there is a good worldwide market, particularly outside everywhere outside the U.S. for this product. And because we have a bigger platform to offer that on and that’s usually used in the outpatient setting and so many countries such as Saudi Arabia, you see that they have both an inpatient and outpatient provider mandate that they are working through. And so being able to offer both is important and I think it helps us in those cases. And then I think in South Africa where you still see the impact of AIDS and a lot of NGOs, they are trying to figure out how to solve the problem, which is medication availability and medication compliance, the two things that we are focused on. It’s refreshing to see our solutions impacting those areas there. So – and we believe there is a market for the same product in China and Australia, literally around the world. So we are picking our markets and taking that product strong to the market and it’s a great product. And we think it will help us expand our ability to automate medication management.

Jamie Stockton

Okay. And then maybe just one follow-up on the same topic, when you think about the U.S., are you seeing many hospitals interested in sticking with the relatively robust medication dispensing cabinet, but then also at the same time wanting to kind of beef-up the central pharmacy automation such that you might be able to cross-sell some of the Aesynt solutions under your legacy base, specifically around central pharmacy or is this still a situation where hospitals are kind of going one path or the other?

Randall Lipps

Yes. I would say today that we don’t see any big uptake in that market. We don’t see any shrinkage ease at the hospitals that have decided to go with the ROBOT-Rx. They are looking for modifications and improvements to the product, which I think make a lot of sense. And as we focus on the future, we want to deliver the next generation of products that allows us to not just answer the solution set that exist today, but expand that solution set. And the best way to think about it is robotics is impacting every industry worldwide to improve efficiency. We know hospitals need a lot of efficiency and a lot it needs to take place in the central pharmacy. So as we come out and develop from that basic infrastructure that we acquired in the Aesynt acquisition, we will be able to modify and expand that platform to be more meaningful to more hospitals as we move forward. And so that part is a little more down the road than we are currently today. The current customers who have those products are upgrading them or if they may buy a hospital, they might expand on the same system or buy a new system. But we do believe there is a market for an expanded product line that really automates more of the pharmacy central in a broader application.

Jamie Stockton

Okay, that’s great. Thank you.

Operator

Our next question will come from the line of Sean Wieland with Piper Jaffray.

Sean Wieland

Hi. Thanks so much. So can – can you get my headset on here. Could you talk at all about organic growth in your core business for – with Aesynt, if not, could you?

Peter Kuipers

Yes. So you have seen – this is Peter. You have seen the 75-day 8-K that we have filed earlier this year. And you got to back up to the number, we don’t disclose it necessarily, separately. In the 10-Q, you will find a footnote. If you do the calculation there, you can see that our organic growth, apples-to-apples, including Aesynt, last year as well, is in the high single-digit around 8% year-over-year, so strong business performance.

Randall Lipps

I would add to that Sean, that in our guidance, if you look at that, we are forecasting double-digit growth in our bookings growth and very strong growth there. And the first two quarters we are on or above plan for that, so we are feeling confident about the year based on that.

Sean Wieland

Okay. How about the organic growth within the Aesynt business then?

Peter Kuipers

Yes. So like we have discussed earlier, it’s really one business, right. So we have now the accounts are merged, the sales and field teams are merged, it is one business and we are selling both products, if you will, but the choice is to the customer. We have great wins on both the central product lines, if you will, but we are merging to and developing one consolidated product portfolio set.

Randall Lipps

Yes. So it’s hard to break out. But I would say the Aesynt customers are continuing to order the product whether it’s the legacy product of Aesynt or the Omnicell product, we are seeing good growth from them, that’s been expected. And we have – so I don’t see it. But we can’t really break it out by product line because we are indifferent to the product line.

Sean Wieland

Okay. Do you have an update on the M5000 product?

Randall Lipps

Yes. The update is there is no update until we release it.

Sean Wieland

And then do you have a scheduled timing to release it yet or is there any update on how the development work is going?

Peter Kuipers

Like we said on the last call Sean, we will announce it when it’s ready and then we will announce it. We are still working on it.

Randall Lipps

We are still progressing.

Sean Wieland

Thank you so much.

Randall Lipps

You bet.

Operator

Our next question will come from the line of Matt Hewitt with Craig-Hallum Capital.

Charlie Eidson

Hi guys. This is Charlie Eidson on for Matt. Just a couple of questions, first I guess, not to harp on it, but last quarter you guys delayed the launch of the M5000, is – from like a corporate strategy perspective, is there any – can you reveal any like, tendency to either focus on the product development or are you kind of waiting for the merger to progress through final stages before you kind of use both product development teams to work on the product?

Randall Lipps

Well, it’s a very big strong initiative to focus on the automation of the multi-dose solution set. So that’s core to where we want to go. We know there is a market for it. We think there are several ways to get to different types of solutions that we want to offer to the market. It’s important for us to figure that out. M5000 was one of those. We are not projecting when that project is going to be completed until we are finished. We are working on it. And – but automation, it’s very difficult thing to do to automate the multi-dose products, no one else in the world has really done it. And so we think we are still furthest ahead and plan on having a successful market when we are ready. But as I have said on the last call, we – it’s not much of an impact this year and it’s something we will probably be talking about next year.

Charlie Eidson

Okay, that makes sense. And then just kind of from an international perspective, I know you said you have kind of merged the – you have integrated to two companies and they are kind of taking a joint approach as you go out to sell to clients, is that across all countries internationally or are your prioritizing the U.S. first and going from there or how does that work?

Randall Lipps

Well, most of the products that we acquired in Aesynt aren’t domestic or North American base and focused on North America. The one exception is the IV robotics, which is both a U.S. and non-U.S. worldwide product that we have rolled out. So we have particularly been focusing on the IV product line, taking that into some new markets or joining that with our platform where we are outside the U.S. but that’s primarily the outside U.S. product line that we acquired from Aesynt. Most of – all of the other products that we acquired are North American based.

Charlie Eidson

Okay, well. Thank you.

Randall Lipps

You bet.

Operator

[Operator Instructions] Our next question comes from the line of Raymond Myers with Benchmark.

Raymond Myers

Yes. Thanks. Randy, my first question is related to your early discussion on the call were some really impressive competitive wins, Stanford, Rochester, Heritage, Saudi Arabia, etcetera, very impressive, but still only 30% of your revenue is from new and competitive conversions, which is generally in line with historical average, so can help us to understand the impact of those competitive wins, was that – would they just happen to be ones that you announced?

Peter Kuipers

So I will take the question, Ray. If you look at the combined business, right, so the Aesynt business is mostly generating revenue from existing customers and half of that business is actually service revenue as well, right. So there is a good set of recurring revenue stream there. What we said on the last call is that we expect the competitive conversations on a combined basis, that is just how the math works, to be in the 30% range. And it continues to be strong, like we have said. We have taken market share as well in the second quarter. What we said in the past, if we do mention a competitive win, they are normally one of the larger ones, we don’t disclose the dollar amount, if you will. So hopefully, that helps.

Randall Lipps

Yes. So just to clarify, before the Aesynt integration, we would have probably has these same competitive wins that are within – and our competitive conversion rate probably would have been 40-plus percent, that would have been a lot higher, right. And now that we have a larger base of business and we don’t count the Aesynt accounts that we used to convert as competitive wins anymore, both those two factors make it look smaller. Actually, the activity of the business is just as vibrant and strong as it has ever been.

Raymond Myers

Okay. So I am right to take away from this list of wins that this is a greater proportion of wins in that business than you have had for the last several quarters?

Peter Kuipers

No. The dollar amounts are roughly the same or a little bit bigger, but what Randy and I are saying is that, if you define that roughly, same dollar amount over a bigger total revenue base, you get a percentage that’s more on the 30% range.

Randall Lipps

Probably, the one other issue on the reporting basis is some hospitals will not allow us to publicly report it. So each one of these has to be improved by them and so we are going to have some great wins, but we can’t announce it on the call because the customer will not allow us to have it happen. This particular call, we got a lot of customers who agreed to allow us to announce it, so – and it was some great wins as well.

Raymond Myers

Okay, great, that helps. Thank you. Next question is regarding the consolidation that happened in the second quarter, the Aesynt business, does that affect the expense structure here in the second half?

Peter Kuipers

Can you repeat the consolidation of what business?

Raymond Myers

You talked about – there is some consolidation in the Aesynt business in Q2, so I am trying to understand, if you look at Q2 P&L and you look forward to second half P&L, should we see some delta there for the consolidation?

Peter Kuipers

Well, we combined the business on January 5 and we did the sales and field re-org and quota setting and regional setting and accounts assignment, if you will, we did that in the first to second week of April. And we did also have a modest reduction in force.

Randall Lipps

And that was at the beginning of the quarter.

Peter Kuipers

Yes. At the beginning of the quarter…

Randall Lipps

And we really see a big difference in the expense in Q2 versus Q3. That would be the biggest difference.

Peter Kuipers

Yes. So overall, we are on track for our cost synergies between $5 million and $10 million total year and we are trending to the higher end for that range.

Raymond Myers

Okay, great. So we already felt that in Q2, it’s not that there is incremental benefit in Q3?

Peter Kuipers

There will be some, but not going to...

Raymond Myers

Okay, so that helped. And then when it is – did you say the proportion of customers that are currently converted to the G4?

Peter Kuipers

We actually did not, I believe. It’s at 81% now.

Raymond Myers

81%. And then lastly, I just wanted to touch on – asking you generally what are the management’s growth priorities now that Aesynt is six months in and it seems to be progressing well, what are your priorities for the next 12 months or so?

Randall Lipps

Well, I think in the long-term and that’s the way I look at the business, long-term is 15% top line, 8% to 12% organic, 5% on average inorganic, of course Aesynt is a bigger piece of that. We don’t see anything slowing us down there. Aesynt is a big, big acquisition to take, probably we wouldn’t do something as big as that in the near-term, but we are always opportunistic. We think we have got a great platform and particularly now with the Aesynt product line, if there is something that’s available at the right price, we would probably look at that. But we think we are in a good spot to acquire great technologies and products to put on our platform and roll out. And yes, as you can see, we moved quickly with this integration, continuing the execution of company and we will finish the year strong. So it’s – we are not going to slowdown.

Raymond Myers

That sounds great. Thank you, gentlemen.

Operator

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

Mitra Ramgopal

Yes. Hi, just one quick question. Randy, I know you talked about organic growth, about 8%, I was wondering if pretty much all of that is volume driven or are you getting some additional pricing now?

Peter Kuipers

Well, it’s a combination of both. So this is Peter actually. So Mitra, if you look at our products right, so we have been winning for 10 years in a row now best products in Automation and Analytics. And customers see definitely the product differentiators, so we are able to get premium pricing, so we do have that. We have also of course have a portfolio component as we grow and grow every year, so I would say, it’s both.

Mitra Ramgopal

Thanks. And then again and this is more longer term, based on the wins, for example and the business you are seeing more outside of the U.S., how do you see the mix changing over the next couple of years in terms of U.S. versus ex-U.S?

Peter Kuipers

Yes. So international revenue as a percentage of total revenue in the second quarter was 15%, we have as a kind of a first step goal to get to 20% at the total. Now, as you can see from our prepared remarks and from the release that we issued, we are growing domestically also really well in total. So it’s a nice growth, especially to increase that share of the pie, but we are trying to get to 20% internationally.

Mitra Ramgopal

Okay. Thanks for taking the questions.

Operator

Thank you. And that will conclude today’s question-and-answer session. I will turn the conference call over to Randall Lipps for closing comments.

Randall Lipps

Well, thanks again for joining us today. Another shout out for the Omnicell team has superbly executed the last 180 days to again put us in line for great results that we have had and then the great results, we believe we are going to have going forward. I know it’s been a lot of work by folks and a lot changes, but we have done it and we are off to the races. Thanks for joining us today.

Operator

Once again, we would like to thank you for your participation on today’s conference call. You may now disconnect.

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