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spk03: Ladies and gentlemen, thank you for standing by, and welcome to the OmniCell fourth quarter earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Kathleen Nemeth. Thank you. Please go ahead.
spk08: Thank you, operator. Good afternoon and welcome to the OmniCell fourth quarter and full year 2020 financial results call. On the call with me today are Randall Lipps, OmniCell founder, chairman, president, and CEO, Scott Seidelman, executive vice president and chief commercial officer, and Peter Kuypers, executive vice president and chief financial officer. 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 February 1st, 2021, and all forward-looking statements made on this call are based on the beliefs of OMISO 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 express written consent of OmniCell is prohibited. Randall will provide an update on our business. After Randall's remarks, Scott will provide perspective on the healthcare industry, our market momentum, and key customer wins. Peter will cover our results for 2020 and our guidance for 2021. Our 2020 fourth quarter and full year 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 omnicel.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 the call over to Randall.
spk10: Good afternoon, and thank you for joining us today. 2020 was an outstanding year for OmniCell as we continued to drive growth in our business, execute well on our strategies, and deliver tremendous value to our health system partners, their patients, and our shareholders. I am so proud of all of our employees who consistently put our health systems partners first during this unprecedented year. Our fiscal 2020 results are at the high end of or above the prelim results we announced in mid-January. We are very pleased with our performance, which exceeded our pre-pandemic bookings guidance, and the guidance we provided in October 2020 across all key metrics, including revenues, total product bookings, and non-GAAP EPS. I'm especially pleased to note that we ended the year with record product bookings of more than $1 billion. We achieved substantial increases in new customer wins, underscoring the robust and growing demand for our solutions. At year end, well over half of the top 300 health systems in the US were OmniCell customers. And we had long-term sole source contracts with 145 of them, including two new customers added in the fourth quarter. Despite the ongoing pandemic and the disruption it caused across the healthcare industry in the first half of the year, we also made strong progress advancing our long-term strategic priorities. Notably, we expanded our autonomous pharmacy portfolio with the strategic and accretive acquisition of PSG's 340B link business, now called OmniCell 340B. We also accelerated our shift to cloud-based solutions and tech-enabled services through the launches of OmniCell 1 and central pharmacy dispensing services. OmniCell 1 is a cloud-based platform that connects nearly all of our devices and is a compelling differentiator for OmniCell. This is underscored by the rapid growth we saw in 2020 in our SaaS subscription software and tech-enabled services bookings, which we significantly exceeded plan for the year. Now with a robust portfolio of tech-enabled services that complement and enhance our core hardware products, We continue to leverage our market leading position and our large installed base to further drive reoccurring revenue growth in advanced services. The rapid growth in this important category is positioned to continue for years to come. In fact, we are forecasting 50% CAGR in advanced services from 2020 through 2025. Most importantly, the pandemic has shown a spotlight on the importance of pharmacy management, highlighting the need for increased digitization and virtualization of processes throughout the healthcare system and underscoring the strategic relevance of omni-cell solutions. There is widespread and growing acknowledgement that more sophisticated automation and digitization capabilities enable healthcare providers to focus more on patient care and reduce costly errors. And we are in a unique position to enable our customers to do just that. We believe that we are indeed a category creator in that respect. The pandemic made it clear to providers that they need an entire category of solutions to effectively manage the pharmacy supply chain. we expect to continue to see demand for autonomous pharmacy solutions. Now, I also want to briefly touch on our approach to ESG matters and the actions we are taking on this front. But first, let me emphasize that we view OmniCell as a company with a social mission. Our focus on reinventing the pharmacy care delivery model is designed to dramatically improve health outcomes, and lower health care costs for everyone. Our teams are motivated by knowing that our work to improve medication management has a tangible, real-world impact on health care workers, patients, and communities, and that these are not just numbers. These are our friends, our colleagues, and our dear families. We also recognize that we are accountable not only to our customers and our shareholders, but also to the global community. With this in mind, in December, we published initial ESG disclosure and performance information aligned to SASSB, GCFD, and GRI guidelines. Among other things, we are focused on innovating to drive sustainability across our business, ethically and responsibly sourcing materials by adhering to internationally recognized OECD guidance, and elevating our diversity and our inclusion initiatives. We believe there is a better way to do business. We're excited about the journey we are beginning and look forward to sharing more in the spring when we release our NARGL corporate responsibility report. Now, looking ahead, I'm confident we are very well positioned to continue to drive growth in our business and to deliver value for our shareholders as we support our healthcare partners on their journey to the autonomous pharmacy. We're excited to continue building on our momentum in 2021 and beyond. While Peter will review the 2020 results and the 2021 outlook in more detail, I wanted to highlight that we are reaffirming the 2021 guidance and long-term targets we provided last month. In terms of our 2025 financial roadmap, we are targeting a 14 to 15% compounded total annual revenue growth rate from 2021 to 2025. Over the same period of time, we are also targeting an expansion of our non-GAAP EBITDA margin from 21% in 2021 to 25% by 2025, representing a margin expansion of approximately 400 bps. Our strong position in the market, growing customer base, and focus on innovation give us confidence that we will be able to achieve these goals. Now, I'd like to turn it over to Scott to discuss the industry and some key customer engagements. Scott?
spk05: Thank you, Randy. To start, I'd like to take a step back and highlight OmniCell's significant market opportunity and our uniquely differentiated solution and position. Pharmacy is one of the largest portions of the U.S. healthcare system and delivers unquestioned healthcare value. But like other areas in healthcare, the pharmacy care delivery model has significant problems that decrease quality, increase cost, and increase provider burnout. The reason for this is that while these are really good people doing really good work, they're doing it in a very manual way. Several pharmacy leaders validated the need for greater automation in 2019 and published a framework that not only quantifies the opportunity for pharmacy to increase healthcare value, but established that the majority of providers today were early on in this evolution. Because of this significant need, we launched a new category of solutions called the autonomous pharmacy that will automate many of the workflows that prevent pharmacists, nurses, and other caregivers to focus on solving the really big clinical problems. The autonomous pharmacy is a new category that combines hardware, software, and services to enable providers to improve quality, reduce costs, and increase human efficiency. The autonomous pharmacy builds on our market-leading position in automated dispensing systems with the delivery of a portfolio of true technology-enabled services that not only create real healthcare value for our customers, but also significantly increases our market size and adds material recurring revenue streams. Today, we have over 25 years of experience helping providers solve medication management problems. And as such, we believe we have an unparalleled channel not only into our core growth market, health systems and hospitals, but also the post-acute and retail portions of the market. Because of our comprehensive product portfolio, our brand, and our unquestioned channel leadership, we are extremely well-differentiated and well-positioned to realize the full potential of the autonomous pharmacy. Now, turning to key customer engagements this quarter, we are very proud of the substantial increases in new customer wins and bookings achieved during the fourth quarter and throughout 2020. As we noted in our preliminary results announcement, we signed two new long-term sole source agreements with top 300 US health systems during the quarter. bringing the total to 145. Solution Health has signed a 10-year sole source agreement to expand OmniCell's footprint across its southern New Hampshire network. Interoperability and enhanced visibility across the supply chain were key to Solution Health's decisions. Another newly signed long-term sole source customer is a large West Virginia-based academic medical center that has strengthened its partnership with Omnicel to optimize safety and improve workflow efficiency through a new five-year agreement that will extend Omnicel solutions throughout its four-hospital system. A large Midwestern health system and current Omnicel customer has selected OmniCell's point of care solutions to support safety and efficiency across their nine hospital locations and multiple cancer centers throughout Indiana. This was a significant competitive conversion. Other customer wins during the quarter include a major Georgia-based academic healthcare system and longtime OmniCell partner that assigned a 10-year sole source extension to leverage OmniCell's integrated platform of solutions to enhance pharmacy supply chain management across their integrated health network. Now, a few comments on our progress internationally. First, we announced during the quarter that the Southeast London Integrated Care System will expand the deployment of omni-cell automation systems across six acute hospital sites. This also includes collaboration for Omnicel and the Trust to launch a European-based technology-enabled intelligence center to deliver advanced analytics, managed supplies, and medications. This is very exciting and we believe will strengthen our market position in both the UK and across Europe. Internationally, we are also continuing to gain momentum in Asia with recent medication management automation customer agreements in Singapore and Japan. In addition to those customer wins, we are pleased with the continued momentum within our advanced services portfolio, which is a key component of our strategy. Let's walk through some of the highlights. Omnicel One, we have made good progress in the market and signed several agreements with numerous large health systems. Omnicel One is emerging as a significant competitive differentiator. Central Pharmacy Dispensing Services, also known as CPDS, combines our XR2 robot with experts and software to help health system central pharmacies reduce errors and reduce costs for oral drug distribution. We are very pleased with the positive customer feedback we are receiving on this recently launched solution and look forward to continuing to update you on our progress. Enliven Health is a service that combines software analytics and experts to help retail pharmacies provide value-added services to patients and also helps retail pharmacists and payers manage medication issues for complex patient populations. We are very proud of the important contribution Enliven Health is making to support the COVID-19 vaccine rollout. In live and launched Care Scheduler, an exclusive digital solution that automates the scheduling, patient outreach, and reporting for administering the vaccine. We have already signed up numerous pharmacy customers for Care Scheduler and are conducting advanced conversations with other partners to purchase the new SaaS technology. To date, Care Scheduler has been deployed by over 2,000 retail pharmacy and stand-up vaccine clinics. Previously, we announced that Walgreens' popular Save a Trip Refills was powered by Alive in Health's medication synchronization technology. In fact, that program is so successful that Walgreens recently launched a national TV ad campaign to promote the service. Finally, our health plan business continued to grow during Q4 as Alive in Health expanded its member adherence and value-based programs with existing industry partners. Now let's turn to Omnicel 340B. Customer reception to our 340B offering has been quite strong. The 340B team closed multiple new opportunities in Q4. These new wins include one of the largest not-for-profit healthcare systems in Texas and one of the largest in the United States. We are pleased with the strong momentum we are seeing in this business. The broad adoption of these new technology-enabled services represents a significant milestone along this journey to transform the pharmacy care delivery model. Overall, we are incredibly excited about our leading position within the healthcare ecosystem. The autonomous pharmacy and the launch of our new technology-enabled services has created a meaningful new addressable market, along with significant recurring revenue streams. This strengthens our growing leadership position across a 10-year, $70 billion total addressable market as we continue to be a leading strategic partner to those health systems that we focus on. We believe we have tremendous potential to transform the pharmacy care delivery model, in turn generating significant value for Omnicel and our shareholders. Now I'd like to turn the call over to Peter to discuss our fourth quarter and full year financial results and our 21 guidance.
spk02: Peter? Thank you, Scott. 2020 demonstrated the strength of our strategy and our business model. Our customers are clearly embracing the vision of the autonomous pharmacy, which is reflected in the growing percentage of high visibility and high predictability of recurring revenue. Our customers see the value in OmniCell's platform and solutions, and are partnering with us as they advance their pharmacy automation roadmaps. Turning now to our financial results. Our fourth quarter 2020 revenue, revenues were $249 million, an increase of $36 million over the prior quarter, and up 0.4% over the prior year. Our full year 2020 revenues were $892 million, a decrease of $5 million in 2019. Our fourth quarter earnings per share in accordance with GAAP were 37 cents per share, compared to 51 cents per share in the fourth quarter of 2019. Our full year 2020 earnings per share in accordance with GAAP was 74 cents per share, down from $1.42 per share in 2019. Full reconciliation of our GAAP to non-GAAP results is included in our fourth quarter earnings patch release and is posted on our website. Full year non-GAAP EBITDA was $159 million, a slight decrease of 4% compared to full year non-GAAP EBITDA of $167 million in 2019. Fourth quarter non-GAAP EBITDA was $52 million, an increase of 13% compared to $46 million in the fourth quarter of 2019. Fourth quarter non-GAAP earnings per share was $0.91 per share, compared to 77 cents per share in the same period last year, representing an 18% increase. Full year 2020 non-GAAP earnings per share was $2.54 per share, compared to $2.81 per share in 2019, representing a 10% decrease. Product bookings for full year 2020 were $1 billion and $2 million, compared to $830 million for the full year of 2019, This represents an increase of 23% despite the impact of COVID-19. Total product backlog at the end of 2020 was $924 million compared to $588 million at the end of 2019, representing a significant increase of 57% year over year. This was a record year for product bookings, which exceeded even our pre-COVID bookings guidance by over $100 million. Our guidance beat in product bookings was driven by the increased strategic importance of our medication management automation solutions, resulting in greater than expected product bookings from the 145 long-term sole source agreements and from increased momentum in advanced services. Of the $924 million in ending product backlog, $307 million or 33%, is considered long-term. This percentage is up from 20% at the end of 2019. The year-over-year percentage increase reflects the expected timing of implementations from the strong second-half bookings and represents also the growth in advanced services. Non-GAAP gross margin for the fourth quarter was 51.5%. An increase of 47.1% in the third quarter, driven by strong volume leverage and product mix. Non-GAAP EBITDA margin for the fourth quarter of 2020 was 20.7%, up from 19.3% in the prior quarter. I would like to quickly touch on our cash flow liquidity and capital structure, which positions us very well for future growth. As of December 31st, 2020, our cash balance was $486 million. Cash flow for operations during the fourth quarter was $76 million and was $186 million for the year ended December 31, 2020, representing increases of $35 million and $145 million for the comparable periods in the prior year. Free cash flow generated in the fourth quarter and year ended December 31, 2020, was $65 million and $131 million, respectively. compared favorably to $21 million and $83 million for the comparable periods in the prior year. In terms of accounts receivables, day sales outstanding for the fourth quarter were 71 days compared to 81 days for the fourth quarter of 2019. Inventories of December 31st, 2020 were $96 million compared to $103 million in the previous quarter and $108 million as of December 31st. Before turning to guidance, I would like to walk through the long-term financial framework we presented previously in our preliminary results press release and at the J.P. Morgan Healthcare Conference on January 13th earlier this year. We included a slide deck in a fourth quarter earnings release summarizing our long-term financial framework. I will walk you through the highlights. Slide three highlights how our revenue base is resilient and highly visible in nature and is differentiated by . First, a very robust product backlog. Second, our long-term sole source agreements with 145 of the top 300 US health systems. Thirdly, customers clearly value our offerings as evidenced by our strong customer retention rate of 99%. We have strong insight in annual service and maintenance revenue from our large installed base of connected devices, which is in the early stages of its upgrade cycles. And lastly, while nearly all of our revenue is highly visible, roughly 40% of our revenue base is recurring in nature, and we are focused on growing this percentage over time. Now moving to slide four. An area of our business which is driving substantial growth in high visibility revenues are SaaS, subscription software, and tech-enabled services revenue, also called advanced services. The strong upside to our 2020 bookings was primarily driven by two factors. One, general momentum from our long-term sole source partnership agreements, and then two, advanced services significantly exceeding our internal plans. This revenue type is seeing great momentum in pipeline and bookings, and we expect the revenue CAGR of approximately 50%, 5-0, from 2020 to 2025 for these advanced services. With advanced services revenues expected to reach 20 to 30% of total Omnistar revenues by 2025. This is subscription-based recurring revenue with high margin unit economics, There are several key factors that enabled us to grow our advanced services revenue so rapidly. First of all, COVID clearly increased the urgency to digitize and automate processes throughout health systems, including the digitization automation of the pharmacy to reduce manual touches of medications and to enable healthcare providers to focus more on patient care. Against the backdrop of the pandemic, our solutions are more strategically relevant than ever. The increased need from health systems for outcome-based solutions also is driving advanced services growth. And then lastly, our strong and unparalleled channel and installed base of connected devices is also driving advanced services growth. Slide five underscores our commitment to drive profitable growth through disciplined execution. We are now targeting a 14 to 15% compounded total annual growth rate from 2021 to 2025, reaching $1.9 billion to $2 billion in 2025. Of course, if you measure that CAGR starting from 2020, it will be materially higher. On an organic basis, we're targeting an 11% to 12% CAGR, revenue CAGR, from 2021 to 2025, reaching $1.65 billion to $1.75 billion in 2025. The main organic revenue growth drivers are grow and expand within the existing customer base, upgrade cycles, continued market share gains, and growth from innovation as we continue to deliver on the next levels of the autonomous pharmacy. And from an inorganic perspective, we are targeting a 3% CAGR from 2021 to 2025. We have a team focused on this, and we are actively evaluating potential opportunities that will fit into our market-leading platform. We also believe that we can leverage a strong channel to drive value from potential acquisitions. In slide six, details our path toward continued margin expansion. You're targeting a non-GAAP operating margin of 21% and a non-GAAP EBITDA margin of 25% by 2025. This represents a non-GAAP operating margin and a non-GAAP EBITDA margin expansion approximately 400 basis points from 2021. We have built a company that is able to scale very well and believe we are well positioned to deliver this margin expansion in the coming years, driven by a number of factors, including improved business mix, the long-term customer partnerships, economies of scale, manufacturing savings, and process efficiencies. As we continue to scale the business, we expect to redeploy some of these savings into value-creating growth and innovation initiatives. Now moving on to our full year 2021 guidance, as we look to the rest of the year, we expect to continue a strong momentum, particularly as the healthcare operating environment normalizes. Since the third quarter of 2020, we generally have seen and continue to see our healthcare partners manage their strategic system implementations well during a pandemic surge. To that end, we expect 2021 product bookings to be between $1,090,000,000 and $1,150,000,000. We expect total revenues to be between $1,085,000,000 and $1,105,000,000. We expect product revenue to range between $770 million and $785 million. We expect service revenue to be between $315 and $320 million. We expect total year non-GAAP EBITDA to be between $228 and $240 million. We expect 2021 non-GAAP earnings to be between $3.40 and $3.60 per share. For the first quarter of 2021, we are providing the following guidance. As we noted last quarter, we continue to invest in scaling our business to support the expected increase in revenue and the timing of customer implementations. We expect total revenues in the first quarter to be between $243 million and $248 million. The product revenue is between $171 million and $174 million. and service revenues to be between 72 and $74 million. We expect non-GAAP EBITDA for the first quarter to be between 40 and $43 million, and we expect first quarter non-GAAP earnings per share to be between 64 cents and 69 cents per share. This is above the typical first quarter seasonal pattern as a result of our very strong exiting year-end backlog. In summary, we are very pleased with our financial and operational results for the fourth quarter and for full year 2020. And combined with the fact that we're still in the early stages of our journey towards the autonomous pharmacy, we're confident that Omnicel has a very bright future ahead. With that, we would like to open the call for your questions.
spk03: As a reminder, if you would like to ask a question, you would need to press star 1 on your telephone. That is star one on your telephone if you would like to ask a question. Your first question comes from the line of Iris Long with Barenberg Capital.
spk07: Hello. Thanks for taking my question. So firstly, so it's great to know that you guys have 145 sole source agreements with these top 300 health systems. I'm just curious if you can kind of talk about you know, what details are included in these agreements, and then from these agreements, do you kind of have a sense of what product offerings these hospital systems are interested in purchasing? And also, I'm wondering, like, what percentage of these customers have expressed an interest in buying things like a central pharmacy, the fencing system, like an IV compounding system, or even like an omni-cell software platform that you guys have?
spk02: Yeah, so that's a great set of questions there. So almost without exception, the new long-term sole source agreement, these partnerships of 10 and at times even 15 years, they're really led by advanced services. So these advanced services really bring the autonomous pharmacy to life, and in most of the cases, they are included. Some of these are also market share gains. And they make up a large percentage of our, the bookings from these long-term agreements make up a large percentage of our solo company bookings.
spk05: Iris, this is Scott Seidelman. I would just add to that. I think that's all completely correct. I think you've got to remember that a significant reason why these health systems are entering into these long-term sole source agreements with us is because of the complete portfolio. Their interest lies in one or multiple of, you know, Omnicel 1, CpDS, IV. And, you know, as you can imagine from what we've disclosed about those service lines, the penetration is quite small. And so I think it should give you a really great indication of where the opportunity is in terms of, you know, our ability to upsell those customers. That's, frankly, why they're entering into the agreements.
spk07: Okay. That's very helpful. And then a follow-up question is, You guys talked about you're targeting 50% CAGR for the SaaS subscription revenue and the tech-enabled services. We're just wondering, like Scott, you have mentioned, there are so many moving pieces here. Can you kind of name a few products or services that you expect to have the highest growth in the near term, maybe like 12 to 18 months? And then I'm also wondering, is that 50% growth organic, or have you kind of baked in the assumption of acquisitions?
spk05: So I think taking those questions in reverse order, the second one is the easiest. That growth rate is organic. We're not anticipating or essentially not factoring in the upside of acquisitions to accelerate those product lines. I think your first question, breaking it down, obviously we don't disclose the individual growth rates. What I would say is that we feel that that growth, that each one of those products or services is has that opportunity for pretty substantial growth. So I don't think, well, we won't go into the details. What I would say is that there isn't one that is in the near term or even in the medium term significantly outperforming the others. It's not a weighted average calculation. It's simply that we believe this portfolio as a whole is growing like this.
spk07: Okay. Got it. That's helpful. Thanks for taking my question.
spk05: Thank you. Thanks, Darius.
spk03: Your next question comes from the line of Scott Schoenhaus with Stevens.
spk02: Hi, Scott.
spk04: Hi, Randall, Peter, and team. How are you guys? Good, good. Good. My first question revolves around your expanding and livening health and 340B link software platforms. On the Unliven Health side, I believe you mentioned you now have over 2,000 pharmacy stores signed up, which if I look back at your press releases, it's a nice increase from mid-January when you noted it was around 1,000. Can you talk about up the ramp there, given what we're seeing with vaccine distribution? I believe the total market opportunity you guys have outlined in the past is currently around 60,000 stores in your network. Is that right? And can we talk about what you're seeing with the, you know, the current state of the vaccination distribution?
spk05: Yeah. So, so care scheduler, which you have to think of as a modular, as a module on the enliven health platform, the platform as a whole is sold to retail pharmacies and does several things, right? Med synchronization, communication, care scheduler is a, is a module that they can subscribe to as a, as an enhancement to the core platform. And so I think to your point, You know, we have 2,000. That's grown rapidly. But you've got to remember that the way that the vaccine rollout has progressed is that retail pharmacies are really sort of a late channel for the vaccine deployment. And so I think that what I would infer from that is that, you know, we will continue to see a significant increase in those number of facilities as retail as a channel is leaned on more and more to help vaccinate the population, right, as certainly we get out of the the frontline health care workers and beyond the folks in nursing homes and LTACs to you and I, we're going to rely more heavily on those retail pharmacies, and we would expect continued growth there.
spk04: Great. Thanks, Scott. And then on the 340B link side, I think you mentioned in your prepared comments you're seeing success in signing up clients and penetrating this market, which is great. I think that speaks to your services, the strong services guidance that you provided there. Um, can you just talk more about how, where you are in the cross-selling, um, capabilities, uh, on top of your install base? I think, you know, um, the questions I get from investors is how quickly can they ramp up this cross-selling of this software business all onto their, you know, pretty large install base. So can you talk about the opportunities in the three 40 D link market specifically and your opportunities for the year? Thanks.
spk05: Sure. Look, I think that if we step back, the thesis for the acquisition of 340B was twofold, one of which is that our vision is to help providers solve many of the complex problems that exist in pharmacy. One such problem is the ever-important or financially important and rapidly growing 340B program. It's just a very complex program to administer, let alone optimize, and the The 340B solution was a technology-enabled service that very much engages and helps providers to do that with a technology architecture and, frankly, a business model that was very sort of synchronous with the way that we were approaching our advanced services portfolio. The second part of the thesis is that given the breadth and depth of our channel and the strength of our sole source arrangement with the top 300 health systems, that we could accelerate the growth of that business. Now, we're early on in that integration process of the story, et cetera, but what I can say is that we're increasingly very bullish about our channel's ability to scale that product, and we see a lot of greenfield opportunity in the channel as well.
spk04: Great. Thanks, guys. I'll hop back in the queue.
spk03: Thanks. Your next question comes from the line of Matt Hewitt with Craig Hallam Capital.
spk09: Congratulations. A strong finish to the year, and thanks for taking our questions. Maybe the first one up, where do we sit in the XT upgrade cycle? Obviously, there was a little bit of disruption last year, and then you finished the year so strong. Where are we and how many years left do we have of that upgrade?
spk02: Yeah, so I think it's posted in the IR deck as well on our website. The upgrade cycle for just XP is at 36% if you measure it over the install days per December 16. Of course, we've grown the install days significantly since then, so 36% in that.
spk09: Okay, that's helpful. Thank you. And then a question for you on the software side. and I don't know if you'll have this handy, but maybe if just an approximation would be helpful, but what percentage of your installed base today is running Omnicel 1? And as you look out over the next couple of years, I think that Omnicel 1 is primarily related to the medication side. Is there an opportunity to roll out something comparable for the supply side? We've seen that there's a lot of interest for that, particularly in Europe, where they are managing the supplies as well. And I think a software platform might be beneficial there?
spk05: Yeah, so remember, Omnicel One is a service that combines workflow analytics and experts to help health systems in the U.S. today really do three things, which is one, manage their inventory, so literally which drugs should they buy, deploy, where should they put them, utilize them, predict, et cetera. Two is to take their pharmacy labor, which is one of the largest expense categories for a hospital, and really optimize that. Where should their pharmacy techs go? When should they go there, et cetera? And so it just gives them a tool to really help manage that more efficiently. And three is really start to avoid compliance risk, and so most notably diversion, so avoiding diversion events. And so we are very early on in the penetration of this product in the market. What I will say is that it has become a part of almost every or the vast majority of even XT products conversations with customers on the cell line, not because you could imagine it's kind of like Microsoft Office for running a pharmacy. It's become a significant portion of the conversation, but we are early on in that process or in terms of the penetration of that. As to your point or regarding, so in the U.S., drugs are obviously the significant expense and supplies are a smaller expense. Outside of the U.S., that's flipped, right? As you noted that supplies are a much larger portion of the expense and drugs are much, much smaller. So we certainly have heard that need, and we vision there could be an opportunity to build something similar to OC1 internationally to help manage supply. And I think we highlighted in the script that one of the U.K. trusts we've actually partnered with in an exploratory way to look into doing exactly that.
spk09: That's great. All right. I'll hop back into queue. Thank you.
spk03: Thank you. Your next question comes from the line of Sean Whelan with Piper Sandler.
spk01: Hi, thanks for taking the question. It's actually just on for Sean. So congrats on the quarter and the end of the year. I think our question, just interested to know if you guys could kind of describe the life cycle of a sole source customer. So from cabinets to maybe IV compounding or centralized autonomous pharmacy, how long does that installation take? take and what is kind of the revenue progression of a typical sole source customer?
spk02: So maybe we have posted also in our IR deck on our website a real example of one of the 142 long-term sole source agreements. I think that example of that particular customer has 12 locations on the left side, and you see implementations of point-of-care, central pharmacy software, robotics every single year, if you will, driving the KPIs on the right. So the vast majority of the 145 long-term sole source agreements, we have these multi-year co-developed dedication management automation plans. So, of course, they're just by customer, but by and large, for the large ones, they are implementations every single year. It kind of depends on what their KPIs are and what their roadmap is that we develop with them.
spk05: And I would add to that that I think when you look at the so-called journey of a sole source customer, I'd really break it into two phases. Phase one is they haven't entered into sole source agreement with us yet. Maybe they were a G-series customer and they're ready to do an XT upgrade. They've become very interested and it's very clear to them that the strength of the portfolio that they know at some point in the future they want to explore IV, they maybe want to explore analytics. But it's because of that strength of that portfolio that they enter into the sole source, at which point they enter into that. Maybe that comes along with a booking for cabinets. Maybe that's a bookings for OC1 as part of that. The second phase of that journey, which you could imagine, is every one of these products, it's health care. The life cycle, the sales cycle is long. It's 12 months, 18 months, et cetera. The challenge with selling anything into a health system, and certainly in this case, is really working with that customer to develop a strategic plan to roll out over X number of years. And so what the sole source agreement affords us is really a commitment on both sides to partner to understand, not if you're going to buy IV or if you're going to buy OC1, but really to work with that customer almost on the same side of the table for the first time, not as a vendor but a true partner, to identify, hey, when does this make the most sense? whether it's in your capital budgeting cycle or whether or not that's the change management, whether or not that's, you know, you're changing your strategy. And so, you know, that second phase is varied, but it really does allow us almost in a unique way to develop almost a sense of, you know, frankly, a recurring revenue stream over the next five years with these partners. Yeah, certainly a high possibility.
spk01: That's extremely helpful.
spk10: Yeah, and I just want to add to that, and certainly as you add on products, it's not one plus one. Obviously, it's a network effect of all the products that come together, and the value that's delivered and produced is much higher. So the returns actually get higher. So there's a motivation to get through the platform in a reasonable speed.
spk01: That's very helpful. Thank you. And just to follow up, I think you guys mentioned that the advanced services portfolio is recurring revenue, much higher margin, and it's obviously going to grow pretty quickly over the next few years. Is there another driver on the OpEx side that we should be looking at to contribute to the EBITDA margin expansion, or is it primarily coming from gross margin?
spk02: Yeah, most of it's for gross margin. You can expect a little bit of leverage on the SD&A in kind of the outer years, if you will.
spk01: Got it.
spk02: Thank you again. Okay, great.
spk03: There are no further questions. Oh, I'm sorry. You have one last question from the line of Mitra Ramgopal with Siddhati.
spk02: Yep. Thank you, Todd.
spk03: Mitra, your line may be muted.
spk02: Okay, why don't we move on maybe to a closing statement here as well?
spk10: Great. Well, this is Randy Lips. Obviously, we're extremely pleased this year with the strong financial and operational performance in 2020, albeit the year of the pandemic, the year that we understood what COVID-19 did mean to the healthcare system. But most importantly, it really elevated the needs of pharmacy supply chain, digitized solutions to help solve very difficult problems. And it's really launched the company into this next phase of momentum. It's very exciting to go in and connect with customers, just not about some product replacement, but about a vision to get their pharmacy management up to places they never imagined they could get it before. And that's exciting for me and drives me every day, including the first day I was driven by this 30 years ago. Sarah Lipps. was born and started this company. So happy birthday, Sarah. We'll see you next time.
spk03: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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