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Omnicell Inc (NASDAQ:OMCL)
Q2 2020 Earnings Call
Jul 28, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Omnicell Second Quarterly Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Chief Financial Officer, Peter Kuipers. Thank you. Please go ahead, sir.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Thank you. Good afternoon, and welcome to the Omnicell second quarter 2020 earnings call. Joining me today is Randall Lipps, Omnicell's 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 26, 2020, 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, 2020 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 and we undertake no obligation to update these forward-looking statements.

Finally, this conference call is the property of Omnicell Inc and any taping, other 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 2020, and our guidance for the third quarter of 2020. Our 2020 second quarter 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.

Additionally, we'd like to remind you that during this call we will discuss some non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most comparable GAAP financial measures are included in our earnings announcement.

Let me now turn over the call to Randall.

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

Good afternoon and thank you for joining us today. I'd like once again to start the call by recognizing all of the healthcare professionals who were on the front lines battling COVID-19. These are challenging times and your courage and resilience in the face of this pandemic continues to be nothing short of heroic.

As our healthcare partners continue to navigate the impact to COVID-19, we remain focused on our long-term strategy, which we believe is unchanged. We are committed to executing the vision of the Autonomous Pharmacy by delivering automation, intelligence and services designed to transform the pharmacy care delivery model to help drive significantly improve outcomes and lower costs. As the COVID-19 pandemic spread in different regions and the US and internationally, there were several shortages not only in ICU capacity, equipment and PPE that occurred at varying levels, but also in pharmacy. More specifically in US hospitals, we found that there was a lack of visibility in pharmacy supply of approximately 75 drugs that are critical for COVID patients.

In response to help our hospital customers, we did two things. We leveraged our analytics platform and rapidly developed specific analytics tools to better inform health systems and help them strengthen their pharmacy supply chain. And as discussed on our last call, we also developed and launched a Rapid Response XT automated point-of-care system, offering to help health systems expand bed capacity for potential patient service. Speaking with our health system customers and industry groups in recent months, we understand that COVID-19 has made them recognize how critical a sophisticated supply chain is to smooth business operations, and quickly to react to a surge in patients. COVID-19 also increased the urgency to digitize and automate processes throughout health systems, including the digitization and automation of pharmacy to reduce manual touches of medications and to enable healthcare providers to focus more on patient care.

As a result, we believe that our health systems customers are more willing to take these transformational steps, because they see the significant value in what we do. We're using this moment and time to focus on and invest in those strategic priorities that are within our control to accelerate Omnicell's transformation, and we are doubling down on the development of the vision of the Autonomous Pharmacy in the following areas. First, we are accelerating the commercialization of the professional services that we announced in December last year. Second, we are increasing the momentum of the shift to cloud-based products and services development. Third, we're speeding up the simplification, speed and efficiencies of quote-to-cash processes. And fourth, we are continuing to drive virtualize and digitized commercial implementation and engineering processes. We believe that these actions will result in a stronger and even better position Omnicell post pandemic conditions.

In terms of building out our offering, last week, we announced another key milestone on the journey to the fully Autonomous Pharmacy, Omnicell One, which will be generally available in August. Leveraging cloud-based data and predictive prescriptive analytics, Omnicell One provides real-time visibility with actionable insights and workflow optimization recommendations that will help improve clinical, financial and operational outcomes across the pharmacy supply chain. As a result of COVID-19, many of our customers have prioritized supply chain optimization in order to provide critical care to patients. We believe Omnicell rep -- Omnicell One represents a significant step toward leveraging analytics that enable our customers to meet demand in an efficient manner.

At the time of our last call, we had a little visibility into the impact of COVID-19 on our customer base. Shelter-in-place was enforced throughout the US and parts of Europe, elective surgeries had been postponed and hospital systems were ramping up to treat COVID-19 patients. As a result, our sales teams had some difficulty engaging with customers on new bookings, also some implementations from backlog were being delayed as hospitals were consumed with treating COVID-19 patients or were preparing for a potential surge in COVID-19 patient hospital admissions.

Since the time of the last call with parts of the US and Europe reopening, our visibility into our customer base and how they are managing their businesses through the pandemic have increased. In addition, customers have a better understanding of how to treat COVID-19 patients and adjust their capacities accordingly while returning to more normal operations. We also have greater visibility into our customers' financial scenario planning and forecast. We believe that a leading indicator for the spend environment for our products and services is the level of elective surgeries compared to pre-COVID levels. We have seen an improvement in elective surgery levels and availability a budget spend in our customer base.

A recent L.E.K. Consulting survey estimated that the levels of elective surgery versus pre-COVID levels will increase from around 40% in the second quarter to 65% to 75% in the third quarter to 75% to 85% in the fourth quarter and next year approaching 95%. While this is encouraging, overall, we believe that the drivers of a sustained recovery in elective surgeries will likely vary regionally, and may be predicated on the extent and duration of COVID outbreaks.

Turning to our results for the second quarter and our business outlook. On our last call, we discussed expected disruptions for product implementations as well as new product bookings. At that time, it was difficult to predict how significant these disruptions would be to our business. As time progressed, we gained more visibility into the environment, and I'm pleased to report that the impact to our business was not a significant as we expected. And we exceeded our own internal plans for each of the product bookings, revenue and non-GAAP EPS during the second quarter.

While the environment continues to change rapidly, we are beginning to see more positive indicators for our business. Although, we've seen some delays in new product bookings, we are encouraged by the progress made during the second quarter. In many regions elective surgeries have resumed and in areas less impacted by COVID-19 we have been able to resume some on-site sales activity. The overall level of system implementations has also been increasing. I'm also pleased that we have experienced no disruption to our supply chain and our implementation capacity, which was and has been fully available throughout the year.

At this point, knowing what we know, we believe that the second quarter bookings and revenue represents the lowest quarter in 2020. We expect that bookings and revenue will increase sequentially through the third and fourth quarter of 2020. We have implemented a variety of technology based tools to assist our customers through this difficult time. Virtual tools that enable customers to self-install certain automation products has been extremely valuable and that we've have enabled some implementations of our solutions to continue without the need for our teams to be on-site to perform these services. In addition, we have been successful in leveraging technology to transition to remote product demonstrations, which has enabled our sales team to engage with health systems in a virtual environment. We did accelerate the implementation of these virtual tools and intend to continue to use and leverage these tools post pandemic.

For many years, we have talked about our long-term sole-source agreements. Today, I'd like to go in depth on these agreements. This is a really important element to our strategy going forward, as it enables us to understand the value with the customers we've already signed on. We have been implementing and expanding this strategy successfully for the last two years. In 2018, we realigned our commercial structure to focus on the top 300 health systems in the US with dedicated customer success executives as we believe they represent the vast majority of available market we target. So as of the end of the second quarter, more than half of the top 300 US health systems as defined by definitive healthcare are current Omnicell customers, and a 141 of those have entered into long-term sole-source agreements with us, most with a duration of 5 to 10 years, with the majority of the sole-source arrangements. We have co-developed a multiyear medication management automation plan to drive increased levels of medication management automation to deliver improved accuracy, patient and financial outcomes.

So to assist with your understanding of how multiyear medication management automation plan works in practice, we have included an example for an Omnicell health system customer in the investor deck posted on the Investor Relations portion of our website. This customer example shows a 12 location health system planning to invest in medication automation in each of the next five years to deliver increased KPIs and outcomes in efficiency, compliance, safety and people.

Now moving to customer success. Some of the new customer wins during the second quarter include, Orlando Health, one of Central Florida's largest health systems serving more than 2.7 million patients, will implement Omnicell XT automated dispensing systems across it's eight hospital system to improve clinical and operational efficiencies at the point-of-care. Moses H Cone Medical Center in North Carolina will be expanding their central pharmacy IV compounding program, a comprehensive service model that combines advanced robotic technology, data intelligence and expertly trained pharmacy technician staff to insource their sterile compounding to enhance patients' safety, while reducing overall cost.

Also during the quarter our population health solutions division successfully launched our first location with Walmart as part of an enterprisewide rollout of our medication synchronization platform to all Walmart locations. In our international markets, we recently announced a new software partnership with the West Yorkshire Association of Acute Trust, an innovative collaboration of NHS Trust across West Yorkshire and Harrogate, and the United Kingdom. The sixth NHS Trust in this region will be implementing our SupplyX supply chain solution to improve supply chain, help deliver consistency of care and openly share data across the collaborative. We are thrilled to partner with these organizations. We are committed to working with our healthcare partners during these challenging times providing the technology and intelligence that will help them navigate a rapidly changing landscape and deliver safe, efficient and high quality patient care.

With that, I'll turn it back over to Peter for our second quarter results.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Thank you, Randall. As Randall said and as I will discuss in more detail later. COVID-19 has had a negative impact on new bookings and has delayed implementations as our ability to access hospital systems and their staff has been restricted in certain locations. That said, we are encouraged by the results for both product bookings and revenue in the second quarter.

Our second quarter 2020 revenue of $200 million was down 8% over the second quarter of 2019. The decrease in revenue from last year was largely due to delays in implementations of point-of-care, XT Series related to COVID-19. Moving to earnings per share. The second quarter loss per share in accordance with GAAP was $0.10. This compares to earnings per share of $0.37 per share in the second quarter of 2019. The decrease in earnings per share is largely due to lower profit as a result of a decrease in revenue as well as higher operating expenses, compared to the same period last year. The impact of these factors was partially offset by lower income tax expense.

A full reconciliation of our GAAP to non-GAAP result is included in our second quarter earnings press release and is posted on our website. Second quarter 2020 non-GAAP EPS was $0.37 per share compared to $0.67 per share in the same period last year, representing a 45% decrease. The decrease in earnings per share on a non-GAAP basis is again, largely due to lower revenue, which has partially offset the lower income tax expense.

Now I'd like to quickly cover our cash flow and liquidity as we believe it is the strength of our business, particularly during these uncertain times. At June 30, 2020 our cash balance was $134 million, up from $104 million at March 31, 2020. The increase primarily resulted from free cash flow generated in the quarter of around $28 million, primarily driven by improvements in our working capital. Net cash provided by operating activities during the second quarter 2020 was $47 million, up from $27 million during the same period last year. The increase is primarily due to improvements in working capital, partially offset by lower net income. Accounts receivable days sales outstanding for the second quarter were 87 days. Unchanged from the same period last year and down 6 days sequentially. We had record accounts receivable collections in the second quarter.

Our liquidity remains strong. As of June 30, 2020, we had no debt and have access to $500 million of committed capital to the revolving credit facility that we put in place in November 2019. As we discussed on the last quarter call, we took some cost reduction actions during the first half of 2020. These cost savings actions include, one, elimination of all non-essential travel. Second, hiring delays. Third, reduction of consulting costs. Fourth, elimination of trade show and other marketing related expenses. And fifth, delays in certain capital expenditures. In addition to these actions we have delayed merit increases to 2021 and have reduced other compensation incentives.

We also restructured certain parts of our organization to ensure that we are operating as efficiently as possible as we accelerate our transformation and pursue our vision for the Autonomous Pharmacy. As a result we eliminated approximately 130 roles within our organization, primarily related to the engineering surface and manufacturing organizations. Approximately two-thirds of these reductions were a result of previously announced strategic decisions, while one-third was volume related and that enabled us to match our business to the current market. Strategically this facilitates and accelerated the shift from hardware-based and on-premise engineering development capabilities to cloud-based competencies that required different skill sets. And for services, this change accelerates a shift from traditional maintenance services to the professional services offerings that we announced last year. We recorded approximately $6.5 million of severance and restructuring costs in the second quarter as a result of these actions.

Overall, through our cost reduction actions and this restructuring we expect to realize an additional approximate $40 million of operating expense savings during calendar 2020 when compared to the original pre-COVID 2020 guidance almost on February 6 this year. To provide additional color, we expect 2020 operating expenses now to be between $310 million and $350 million. We will continue to manage operating expenses in line with the performance of the business and we would expect the majority of these cost savings to be limited to 2020 as we begin to increase investments over time to support market demand driven future growth.

Now moving to our guidance on revenue and non-GAAP EPS. While the mid to longer-term outlook remains uncertain, we do believe that we have reasonable visibility into the nearer term. As a result, we are providing the following guidance for the third quarter of 2020. We expect total revenues to be between $204 million and $212 million. We expect product revenue to be between $143 million and $149 million. We expect service revenue to be between $61 million and $63 million. And we expect non-GAAP earnings per share to be between $0.44 and $0.52 per share.

We have taken a regional approach to our bookings pipeline as availability of resources, budget and the level of COVID-19 impact varies by region. And at times there is also variation within one region. While we do not provide guidance for product bookings at this time, we do expect product bookings to increase from the second quarter through the third quarter and from the third quarter to the fourth quarter.

Lastly we have refreshed our long-term market assessments, including our go-to-market strategy of long-term sole-source partnerships and we have updated our strategic financial framework goals. We believe that post pandemic conditions we can return to the path, toward the long-term goals of 10% to 12% organic revenue growth, 18% non-GAAP operating margin and free cash flow between 90% and 110% as a percentage of GAAP net income. While a long-term framework we made in place, we believe that this will take longer to achieve than initially expected given the uncertainty and duration of COVID-19.

With that, we would like to open the call for your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your line is now open.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Good afternoon, and thank you for taking the questions, and giving us a little bit of help at least regarding Q3. Given the current environment, maybe could you talk a little bit about how the selling environment has evolved from maybe May to June to where we're at today, as the hospitals are starting to reopen in some areas for elective procedures, how are those discussions changing and what are the customers telling you?

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

Well, I think kind of, almost on every metric, I can think of Q2 was the low dip and every month and almost every quarter we're getting more access. The discussions are continuing where they were left off. Or we've continued those discussions sort of in a virtual mode. So I just think that for sure healthcare systems have discovered that that they're going to after operate at full capacity even with COVID present, and that includes not just tactically, but continuing to make good strategic decisions like deploying more medication automation over time. So it's really good to hear these conversations and not everybody is at the full discussion point or is full level yet, but everybody has made movements toward back to normalcy. And its just -- and I think the elective surgery watermarks on the L.E.K. are sort of a good indicator of that. And -- but I just think that you've got to remember, hospitals, they're a live entity that has been running 24/7, 365 and eventually they figured out how to keep their businesses in the proper mode and making good decisions. So I don't think it's that far off.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Okay. And then maybe a follow-up and then I'll hop back in the queue. Historically you've talked about the medication dispensing cabinets in your equipment and software being a top five purchasing item for hospitals, and given the current environment and the budgets that hospitals are dealing with, I think the American Heart Association was talking about losses of $325 billion in the first half of the year and that's net of the CARES Act. But when you look at this environment obviously very challenging, how quickly can their buying behavior start to rebound as these elective procedures return. Maybe they are able to kind of get back into maybe not necessarily they are back but close enough, how quickly after that, I'm trying to think back to '08 and '09, I know there is disruption there as well. But how quickly are you expecting them to return to the table and get back to contracting? Thank you.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. So Matt, this is Peter. So I think in the past, we said that we've always considered our automation infrastructure solutions to be in the top two or top three of the priorities. So we think that's unchanged. There's a couple different views as well on kind of the profitability of hospitals. You can look at the Kaufman Hall report, a little bit more positive on the net operating margins for hospitals that they report in the -- I think the month of May. But like Randy said earlier, we see momentum, if you will in the pipeline, in the activities and also in bookings, and we believe that's sequentially through the year, that product bookings will increase from the second quarter through the third quarter and from the third quarter through the fourth quarter. So I guess from a color perspective, we're more positive maybe than we think, hearing your question.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Understood. Thank you.

Operator

Your next question comes from the line of David Larsen from Verity Investment. Your line is now open.

David Larsen -- Verity Research -- Analyst

Hi. Can you talk a little bit about your ability to deploy your various solutions in a remote manner. I mean your product revenue beat our estimate and I think consensus as well. I mean, so obviously you're deploying some products. I mean, how much of these can be done on-site versus virtually please? Thanks.

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

Well, I think it's really almost the majority of the XT point-of-care systems can be deployed virtually if it's -- particularly if it's not a first time customer. There is new technologies, including setup wizards that customers or technicians can employ that almost make it impossible to make a mistake when they do these last steps to bring a system live. So -- and these kinds of technologies and deployments of wizards and the like have just been done in most recent quarter. And the Rapid Response deployment of our systems, we found that out right away that in fact that was our only choice was to deploy these things in a virtual manner. So that's quite a bit a few. But every single product we are reviewing more of the activities that can be done pre-shipment or pre-go live without our people being there. And it's gaining, now some of the hardware installs actually haven't had people come in and set up a robot or set up some carousels, you can't avoid having those people there. But most of the software or most of the installation time on our side and even the customer side is software. So, and I think we have a lot of flexibility there.

David Larsen -- Verity Research -- Analyst

Okay. And then just one more. I mean it seems like your cash flow was actually very good this quarter. It's a little bit counter intuitive given that occupancy rates in hospitals were low, like very low. Just any thoughts on what drove that? And I mean would you expect that trend to continue or not?

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. So there are three questions there, David. So the cash collections were very strong this quarter. We believe we have a very strong and healthy customer base overall. So that's good to see. From a admission perspective, we understand from our partners and providers actually that currently, hospital admissions are within 5% of pre-COVID level. So it is not that down much anymore for prior levels. Cash flow going forward, we expect to have strong collections going forward without giving specific cash flow guidance. So we're -- we had a good result in the second quarter and believe we'll continue to deliver cash flow.

David Larsen -- Verity Research -- Analyst

Okay, great. So even though it's going to take a little bit of time for elective procedures to ramp back up, I think I just heard you say that admissions themselves are at 95% of pre-COVID levels, that's what you're seeing.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. Depending on who you talk to. We talk to providers and health systems. From some of the providers we hear that admissions what they can see roughly at 100% versus pre-COVID, and then maybe down to 5% is what we've heard. But some hospitals are above capacity as well above the 100% that they normally had. So.

David Larsen -- Verity Research -- Analyst

Okay. Great. Thanks. Congrats on a good quarter.

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

Thank you, David.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Thank you David.

Operator

Next question comes from the line of Steve Halper from Cantor Fitzgerald. Your line is now open.

Steven Halper -- Cantor Fitzgerald -- Analyst

Hi. Could you just provide some additional details on the Walmart relationship that you mentioned during the call. And what you're doing there specifically?

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

Yes. So our PHS platform connects side by side with a retails on-premise platform and the -- our platform is designed to enhance the revenues of retail pharmacies. And in this case Walmart has some of our other platforms that they use, particularly the IVR systems and some other options, but most recently they did the med synchronization where you go through your patient list and find appropriate patients that should really just get their meds once a month, get them filled and really reduce the contact or need to come into the pharmacy or have it delivered once a month all at one time. And so, we've had this capability with other large medium sized retail customers before and now we're rolling it out to Walmart, which I think will take over at least probably six months to maybe a little longer to rollout to all Walmart customers.

Steven Halper -- Cantor Fitzgerald -- Analyst

So the intent is to get into all Walmart pharmacy?

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

Yes. They -- they are managing and controlling it. So, yes, one, that's already been approved. I believe enterprisewide. So it's just a matter of actually the rollout.

Steven Halper -- Cantor Fitzgerald -- Analyst

Great. Thank you.

Operator

Next question from Sean Wieland from Piper Sandler. Your line is now open.

Sean Wieland -- Piper Sandler -- Analyst

Hi. Thanks very much. So on the outlook for the bookings, I just want to better understand what gives you the confidence to say that Q2 was a low watermark, considering that these COVID numbers aren't getting any better and the uncertainty in all of our lives right now for the back half of the year?

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

Yes. I think it's just the levels of activity in the pipeline at the various stages have heightened quite a bit, and we carefully track every customer where they are with capital spend, likely to spend, likely to shut down and so I think with our sophisticated model and with our inputs, we feel pretty confident about it and you got to remember a lot of the bookings that are coming in, in a quarter are really things that we've have been in discussion for 9 months to 12 months. And so they may have been delayed bookings from second quarter or maybe even first quarter. And so a delay of two or three quarters is a pretty long time if -- in some of these cases for these decisions. So we have pretty high confidence that we can continue to accelerate.

Sean Wieland -- Piper Sandler -- Analyst

And if you care to comment will bookings for the full year 2020 be up, down or sideways versus '19?

Peter Kuipers -- Executive Vice President and Chief Financial Officer

What we said on our last call, is that it's going to be below the original guidance for the year.

Sean Wieland -- Piper Sandler -- Analyst

Right, below the original guidance, but I'm just looking at year-over-year?

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. We're not giving the bookings number at this time for the year.

Sean Wieland -- Piper Sandler -- Analyst

Okay, Thank you.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Or directionally. Yes. Okay.

Sean Wieland -- Piper Sandler -- Analyst

Thank you.

Operator

Next question comes from the line of Gene Mannheimer from Colliers. Your line is now open.

Gene Mannheimer -- Colliers -- Analyst

Thanks. Good afternoon. I wanted to just raise the issue of competitive conversions. I imagine that in this environment, there is a fair amount of hesitancy regarding hospitals appetite to make changes here. So can you talk about how much of an impact you are seeing from that, I think historically competitive swap outs have been about 20% to 25% of your bookings. How is it trending now? Thanks.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. So we believe we've got a good pipeline on competitive conversions also this year. We've had some competitive conversions earlier this year as well. Maybe just a little more color on the historical bookings growth I think that the December 10 Investor Day, we did state that actually in point-of-care, the biggest bookings drivers actually expansion with current customers, and then we also have the upgrade cycle. Competitive conversions, of course, are important to us to be able to have new customers on the Omnicell platform as well, but it's not the number one revenue driver for quite some time now.

Gene Mannheimer -- Colliers -- Analyst

All right. Okay. Fair enough. And thank you for that Peter. And if you could just talk a little bit more about the reduction in force you implemented where there are certain product lines that were impacted more than others, whether that's IV or med adherence as a couple of examples. Thanks.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. So we had in the prepared remarks about two-thirds of the realignment there are really strategic right. So last December, we announced that we're accelerating the transformation of our services from maintenance service, operate fixed services to professional services. So that's about one-third of the realignment there. The other third -- the second third is really the engineering skill sets, where we move more from a hardware on premise capabilities to cloud based skill sets, if you will. So about a third is volume related and that's over various locations.

Gene Mannheimer -- Colliers -- Analyst

Okay. Yes. Perfect. Thank you.

Operator

Next question comes from the line of Mitra Ramgopal from Sidoti. Your line is now open.

Mitra Ramgopal -- Sidoti -- Analyst

Yes. Hi. Good afternoon. Thanks for taking the questions. First, Peter, I know you had talked about the long-term growth of 10%, 12% and based on the conditions you're seeing in going forward, I think we've talked about Walmart etc. How do you see the point-of-care relative to central pharmacy and retail institutional, as we look at those buckets in terms of where that growth is coming from?

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. So, what we don't want to provide specific numbers kind of the breakout of that 10% to 12% composition. But they are directionally roughly in the same direction as we presented on December 10 last year. So where the growth in Central Pharmacy is a couple of points higher than in point-of-care. And then retail institutional is kind of roughly in between the two. That's unchanged.

Mitra Ramgopal -- Sidoti -- Analyst

Okay, thanks. And then obviously the cash continue or has been building nicely. I was wondering if there are any objectives or goals you have right now in terms of Pan use or just let it keep building?

Peter Kuipers -- Executive Vice President and Chief Financial Officer

We'll keep building. M&A is also part of our strategy, that remains part of our strategy. So depending if there is an attractive strategic potential acquisition that could be a use of cash as well.

Mitra Ramgopal -- Sidoti -- Analyst

Okay. Thanks again for taking the questions.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Next question comes from the line of Scott Schoenhaus from Stephens. Your line is now open.

Scott Schoenhaus -- Stephens Inc -- Analyst

Good afternoon, guys. Thanks for taking my question. I apologize if I missed this, but did you comment on what your -- the percent of your legacy installed base with your automated dispensing was for the quarter. I know you usually give that out.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. So we didn't have it in the prepared remarks, but we're at 26% now program-to-date. And it's in the Investor deck. You can find on our website.

Scott Schoenhaus -- Stephens Inc -- Analyst

Thank you, Peter. And as I guess as a follow-up to that, do you see that more as less risk as you commented earlier in the call, I believe that the installation with in regards to upgrades is easier to do remotely in virtual. Is that the case, so that you should continue to see that percentage stable or tick up going forward?

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yeah, I mean, I think that was Randy that made -- Randall that made the comment. But yes, we expect a steady upgrade cycle there. What we said in the past that it's a nine-year upgrade cycle with the curve, if you will. And then from our perspective, what we believe that this more a when not an if, if you will. We expect to be in the mid 90s percentage as far as the customer to upgrade, because it also has benefits also just from a speed and capacity perspective on Windows 10 and the narcotics functionality as well. So yes, we strongly believe that that will increase over time here.

Scott Schoenhaus -- Stephens Inc -- Analyst

Great. That's it. Thank you.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Thank you Scott.

Operator

Your last question comes from the line of Bill Sutherland from The Benchmark Co. Your line is now open.

William Sutherland -- The Benchmark Co -- Analyst

Thanks everybody. Randall you -- in your comments talked about four initiatives. I'm not sure if this touches on Gene's question or not. I couldn't quite hear the answer, but maybe go through those a little more detail, where you're doubling down on some development activity in those four areas?

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

Yes. I think what's important is that as we move our customers to more sophisticated operations of the pharmacies. We, particular need to get them more involved in the workflow process, the analysis of the workflow process. So getting our customers to have professional services upfront to do that analysis, to understand how much road map do they have to gain in safety, efficiency and clinical, and setting up a really what I would call up a sophisticated supply chain operation, which generally includes consolidated service center, which is becoming more of a -- more the standard. And because of that, because there is so many locations, so many places for equipment and technology that exist, we've got to move more of the functions to the cloud. And the cloud gives us unlimited storage capacity, compute power, almost unlimited bandwidth. And so that can do so much more for us. And the Omnicell One is a great example of that, because it's doing all the calculations on several of the things that would be normal operations for these groups to do manually and now are done automatically.

And then just internally the simplification and the speed of quote-to-cash, the way we invoice, the way we charge, the way we collect, the way we ship, when we build product, when it lands, how long after lands does it get turned on. We're really shrinking that cycle down and collaborating throughout the company to really get this whole process with a big backlog and being able to arrange when the install can land, we've got room to shrink that cycle. And then, that's just the digitization of everything commercial, whether it's service calls on our XT cabinets. Now we've launched predictive maintenance on anything major before a door fails or door fails, this predictive technology now allows us to send people out when it's at the convenience of the hospital and to us, enabling us to officially lower our costs and over time more and more of our service calls will be predicted and be resolved as opposed to an acute situation where someone has sent out immediately. So we went ahead and launched that in just July and huge success, huge success instantly, both with customers, both with our service people and both with the -- and lastly, with the results. And that's just example of One.

And then the Wizard like for installing used to take about 9 to 15 minutes to go through 70 different menus to set up a unit. Now it takes less than 90 seconds through a Wizard and as well as the consistency of setting up these systems when they land the appropriate way. So all of these things are being done to -- that I guess we're on the road map, but during this moment in COVID, has been a time to really push them forward to keep our people out of the hospitals and to be able to deliver stuff more quickly and efficiently to the customer.

William Sutherland -- The Benchmark Co -- Analyst

So as far as the benefits I see, obviously there's lots of benefits here for the customer. I'm wondering about for you all, is this going to be additional mainly to margin? Or do you see it as a way to accelerate growth as well?

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

Well, I think over time it will be a benefit to margin just cutting down the cycle, right. And as well as the cost of sending people out. It has been a pretty big component of the gross margin line. And so when you don't have to send people out or when you don't have to be there at present, when you can just plug it in and starts to play, if you will, it certainly makes a big impact over time. One of the things that helped us a lot of having the customer have the mindset to ready to accept and do more of a self-install, because now it's so easy they can do it, and they don't need to have us there at present. We might be virtually present over the phone or something. But we don't have to be there physically which has definitely easier for the customer and easier for us.

William Sutherland -- The Benchmark Co -- Analyst

Got it. And then Peter just quickly on cost of sales for products. Can you -- what would you highlight is the main impacts on -- as a percent of revenue or percent of sales going up?

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes. The main driver there is less volume leverage in the second quarter compared to the prior quarter, right. So that's the biggest impact and like Randall and I called it earlier, we expect the second quarter to be the lowest quarter for bookings and revenue in this year. So we expect some modest increases in gross margin as well through the quarters this year, and of course, related to volume leverage as well resulting in lower cost of goods sold as a percentage of revenue.

William Sutherland -- The Benchmark Co -- Analyst

Okay. That's what I figured. Thanks.

Peter Kuipers -- Executive Vice President and Chief Financial Officer

Yes.

Operator

I don't see any questions in the queue, I will turn it back over to Randall Lipps for closing remarks.

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

Well, thanks again and thanks for joining us today. Just in summary, we do believe Q2 is the low for us. We do believe hospitals are figuring out to run their hospitals full. They can't be in a position where they're not full, whether it's of COVID patients or elective surgery patients. They know how to operate in this environment. And so I think that is the driver for the uplift in the strategic decisions hospitals need to make and they're making with us as they move forward with the digitization and deployment of our systems.

I hope too that today the more explanation on the long-term sole- source partnerships that we have really gives you a good understanding of the strength of our business and the future growth that we talk about the 10% to 12% organic growth, that we believe we will return to after COVID and helping us a little bit during the COVID time is the importance now of the pharmacy supply chain, seen as critical as we were engaged in the Northeast as the first apex roll through and the shortage of the 75 drugs that were necessary to treat COVID patients. The supply chains were breaking down. So we use that information to help our other clients move forward. And I think it just really continues to position the company well with strong cash flow, we -- our liquidity position is strong and we have constantly been retooling for the future. And I think -- and we're not wasting our time as we move forward. So with that, I'd like to thank again to the Omnicell team for continuing to do great work during these challenging times and making a difference for everyone in their healthcare as they move forward. Thanks very much.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Peter Kuipers -- Executive Vice President and Chief Financial Officer

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

Matt Hewitt -- Craig-Hallum Capital -- Analyst

David Larsen -- Verity Research -- Analyst

Steven Halper -- Cantor Fitzgerald -- Analyst

Sean Wieland -- Piper Sandler -- Analyst

Gene Mannheimer -- Colliers -- Analyst

Mitra Ramgopal -- Sidoti -- Analyst

Scott Schoenhaus -- Stephens Inc -- Analyst

William Sutherland -- The Benchmark Co -- Analyst

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