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spk01: Good morning and welcome to the OmniCell Second Quarter 2021 Financial Results Conference Call. On the call with me today are Randall Lipps, OmniCell Chairman, President, CEO and Founder, Scott Seidelman, Executive Vice President and Chief Commercial Officer, and Peter Kuipers, Executive Vice President and Chief Financial Officer. This call will include forward-looking statements subject to risk, 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 24th, 2021, and in other 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 29, 2021, 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 express written consent of OmniCell is prohibited. We've refreshed and expanded the investor relations section of our website, where you can find our first corporate sustainability report and other information. On our call today, Randall will provide an update on our business. After Randall's remarks, Scott will provide perspective on the healthcare industry and our market positioning. Finally, Peter will cover our results for the second quarter, our guidance for the third quarter, and commentary on our second half 2021 outlook. Our results were released earlier this morning and are posted in the Investor Relations section of our website at onresale.com. 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 financial results press release. I will now turn the call over to Randall.
spk10: Thanks, Kathleen, and good morning. And thank you for joining us today. OmniCell continues to deliver strong results, and we are making significant progress towards the five-year outlook we outlined earlier this year. Before I dive in, I'd like to take a moment to welcome investors who may be new to OmniCell and share a bit of our history and our story. OmniCell is a healthcare IT company that was founded on the idea that innovation and technology that addressed complex medication management systems and workflows could help hospitals, health systems, and pharmacies improve patient care and health outcomes. We are proud of the pharmacy innovations we have brought to the market throughout our history, and we are humbled to be considered a trusted partner by many leading hospitals, health systems, and retail pharmacies. In 2019, OmniCell debuted the vision of the autonomous pharmacy, a zero-era, fully automated digital medication and supply management delivery platform that will enable pharmacists, nurses, and other clinicians to focus more on patients and less on non-clinical and administrative tasks. COVID has put a spotlight on the need for investment in medication management infrastructure, and the value OmniCell brings has never been more apparent. This is our purpose, to deliver a better way and it extends across all of our stakeholders and within the communities we serve. We are excited about the opportunities ahead for Amizel and welcome those shareholders that have recently joined us. Turning to our financial results, as a reminder of our previously stated five-year outlook, we are targeting a revenue CAGR of 14 to 15% from 2021 to 2025, reaching $1.9 billion to $2 billion in 2025. And we're targeting a non-GAAP operating margin of 21% and a non-GAAP EBITDA margin of 25% by 2025. Hospitals and health systems are experiencing a renaissance of importance in the health care continuum. And the role of the pharmacist in both acute care and non-acute care settings is increasing in importance. A key driver of our growth strategy is the continued customer adoption of our advanced services capabilities, which is seeing strong market interest and supports our continued competence in our long-term view. We are also executing on value-enhancing M&A. Earlier this week, we announced our intent to acquire FDS, Amplicare, a leading pharmacy SaaS solution provider that shares our mission to transform the practice and business of retail pharmacy. This acquisition will add a comprehensive and differentiated suite of financial management, analytics, and population health solutions to OmniCell's enlivened health division, broadening offerings that we believe will help pharmacies to measurably improve patient health outcomes and while enabling new clinical services and expanding their growth and profitability opportunities. Scott will discuss the acquisition in more detail, but we are excited to welcome the FDS AmpliCare team to Omnicell and look forward to their contributions as we continue to advance our vision of the autonomous pharmacy. In terms of second quarter financials, I am proud of the strong results the team delivered this quarter. We exceeded the top end of our guidance ranges for revenue, non-GAAP EBITDA, and non-GAAP EPS. Our second quarter results include record revenues of $273 million, record non-GAAP EBITDA of $61 million, and record non-GAAP earnings per share of $0.97. We believe these strong results reflect our customers' trust in OmniSale and their recognition of the significant benefits our products, solutions, and services bring to them. Our second quarter performance also reflects excellent operational execution and financial discipline, delivering the record non-GAAP EBITDA of $61 million and strong free cash flow of $58 million. Peter will review the financial results and the guidance for the third quarter and total year in more detail later in the call. Our third quarter guidance and second half 2021 outlook incorporate the anticipated effects of inflationary headwinds that many others are also facing. Over the last 29 years, we have experienced several challenging economic environments and have executed successfully within each of them. We are seeing cost inflation primarily due to semiconductor supply constraints, and to a lesser extent, freight and raw material cost increases. We have worked diligently to ensure our customers' implementation timelines remain unaffected and are pleased to note that we have high confidence in our supply of critical semiconductor and other key components through 2022. We're also taking steps to offset these higher costs. We remain very confident in our growth trajectory outlined in our five-year long-term outlook. Before I turn it over to Scott, I'd like to discuss OmniCell's ongoing efforts to have best-in-class corporate governance and our ongoing board refreshment process. We're very pleased to have announced the appointment of Edward Bosa to our board of directors. Ed brings nearly four decades of proven leadership in the financial community and a unique perspective as an early proponent of ESG initiatives. This independent viewpoint complements and strengthens our board, and we're looking forward to benefiting from his experience. With Ed's appointment, Omni Sales Board now includes eight independent directors who collectively bring a broad range of skills and experience to the board. Ed's appointment reflects our commitment to regular board refreshment and corporate governance enhancements. We are continuously focused on advancing our corporate governance standards as we work to deliver long-term value for all of our stakeholders. Looking ahead, we are excited to continue building on the momentum in our business and enabling our customers to solve the complex challenges of dedication management and adherence And in doing so, improve patient care. We appreciate your support and confidence in OmniCell. With that, let me turn it over to Scott.
spk05: Thank you, Randy. Last quarter, I discussed how we evolved our organizational design over the last three years from one that delivered a single hardware product to one that can deliver new products and technology-enabled services built on the cloud. These changes to position on the sell for the future included transforming our sales and customer organizations, but also notably included making significant investments in our product management and software engineering organizations. All of these changes were supported by our new world-class commercial leadership team. As a result of these organizational changes and our hard work over the last three years, we feel confident in our strategy and are truly excited about our innovation pipelines. On today's call, I would like to provide an overview of progress against that strategy and some areas of opportunity for innovation. When you look at healthcare today, it is clear that the industry is at an historic inflection point in terms of how healthcare is accessed and delivered. This change is being driven by the confluence of several key factors. First, hospitals are experiencing a renaissance of importance in the healthcare continuum. After over a decade of debating whether we have too many hospital beds in the U.S., it is clear now that the hospital plays a critical role in care delivery. And because scale matters, consolidation will continue and the top 300 health systems will be larger and more important. Second, some care will move from acute care and other institutional settings to the home. And not only are new entrants serving this emerging market, but traditional players like institutional pharmacies, retail pharmacies, and health systems will play a necessary role in caring for patients in the home. Third, the role of the pharmacist, both in retail and acute care settings, is increasing in importance. And as such, the pharmacist needs tools and services to free them from the day-to-day administrative work in order to deliver care directly to patients. Lastly, the cloud is now clearly a dominant mode of technology enablement for providers. We believe that these factors are driving a transformation of the pharmacy care delivery model and OmniCell is uniquely positioned to not only define that transformation, but share in the opportunities that emerge. I would like to highlight that OmniCell's products and solutions are installed in the majority of the top US health systems, and we are notably the sole source supplier to 148 of the top 300 health systems, reflecting the confidence our customers have in us to provide them the products they need today and long into the future. We are seeing more competitive wins now than we have at any time in our history, and it is clear that our full portfolio of products makes OmniCell the dominant pharmacy automation player in the health system market. This is evident by our recent addition of Scripps Health. While we are implementing automated dispensing systems for patient care areas and operating rooms, cloud-based intelligence solutions, and tech-enabled services. As we have said previously, this win is a competitive conversion for us. Based on the strength of our competitive conversion and renewals, it is clear that our strategy is working. Core to that strategy is a comprehensive portfolio of solutions. And just this morning, we announced that Spartanburg Regional Healthcare has expanded its partnership with Omnicel to become our first customer to fully extend the end-to-end medication management platform with the addition of Omnicel One, our cloud-based intelligence service, and our central pharmacy dispensing and compounding services. This is a great example of how OmniCell's advanced services portfolio can help partners like Spartanburg achieve the vision of the fully autonomous pharmacy. Now, looking at the expansion of care delivery to the home setting, while this market will attract new entrants, we also believe that traditional players like institutional pharmacies, retail pharmacies, and health systems will play a critical role in managing those patients in the home. One example of how OmniCell is supporting these new care delivery models is through our expanded partnership with Chartwell. a leading provider of home infusion and specialty pharmacy. Earlier this month, we announced that Chartwell selected our IVX workflow sterile compounding technology to manage chemotherapy medication preparations. This will enable improved clinical and operational outcomes and allow Chartwell to lead the way to zero-error medication management as it provides home-based care. We are exploring and increasingly excited about the opportunity in the ambulatory and home care markets and expect to continue delivering innovations in the future. As health systems continue to expand in the ambulatory market through retail and specialty pharmacy offerings, the 340B program is critical to their success. As a result, we continue to see strong demand from customers for our OmniCell 340B service, and we now have an integrated go-to-market strategy and are making progress against realizing synergies across the product portfolio. turning to the increasingly important role of the pharmacist. As this shift continues, the automation of medication management is critical to free pharmacists from their day-to-day administrative work in order to deliver care directly to patients. This is especially true in the retail setting, which we predominantly serve through our Enliven Health service. Enliven Health delivered strong second quarter results as we continue to expand and deepen key customer relationships. Notably in the quarter, we expanded our relationship with Walmart, which has continued to roll out key and live and health solutions to additional Walmart pharmacies around the U.S. And we announced the new strategic partnership with WSPC, a Washington state-based cooperative that represents more than 300 independent pharmacies nationwide. In addition to strong customer momentum in the quarter, Enliven Health continues to innovate. In Q2, Enliven Health launched Personalized Interactive Voice Response, a SaaS technology solution that automates patient communications and frees up pharmacists to spend more quality time with patients. As the first release of Enliven Health's new omnichannel communications platform, Personalized IVR is an inbound recognition solution that enables patients to seamlessly engage with the pharmacy via telephone without ever having to speak to a staff member. This builds off Enliven Health's strategic partnership with Twilio, the leading cloud communications and customer engagement platform that we announced in Q1. On the clinical care side, Enliven Health just launched two new capabilities for Care Scheduler, a digital solution that automates the scheduling, communications, and reporting for vaccinations and point-of-care testing for pharmacies. The new care scheduler enhancements include an AI-driven messaging solution to increase outreach to target patients for flu vaccines and fully electronic forms for flu documentation. And last but not least, we announced our acquisition of FDS Amplicare, which adds several key capabilities to Enliven Health's platform and expands our channel reach into independent pharmacies. Upon closing the acquisition, Enliven Health will have a comprehensive SaaS platform for retail and be capable of serving the entire retail pharmacy market. Finally, the cloud is now a dominant mode of technology enablement for providers, and OmniCell is well positioned. Year to date, we have added nearly 50 cloud software engineers to our employee base, and we continue to deliver new innovations on the cloud. Later this summer, we will release for general availability a cloud-hosted version of our OmniCenter platform, which is the primary software for our core products. This is a major milestone for our customers' journey to the cloud. We are excited about the opportunity that the cloud offers, and OmniCell is well-positioned to be an innovator in this area. In summary, in light of this rapidly changing healthcare environment, OmniCell is uniquely positioned to transform the pharmacy care delivery model and enable significant improvements in quality, provider efficiency, and reductions in cost. We are solely focused on this transformation and excited about the opportunity ahead. Now I would like to turn the call over to Peter to discuss our second quarter financial and operational results and third quarter guidance and second half 2021 outlook.
spk09: Peter? Thank you, Scott. Our strong second quarter commercial, operational, and financial results demonstrate the strength of our business model and strategic market positioning. Our healthcare system and retail pharmacy customers are clearly embracing the vision of a fully autonomous pharmacy, and the demand metrics for Omnicell remain strong. We're making strong progress toward the five-year outlook we provided earlier this year, and I'm proud of the solid execution that our over 3,000 OmniCell team members continue to consistently deliver. During the quarter, we welcomed many new team members to the OmniCell family, and our headcount increased by over 100 new employees to support our continued strong growth. Turning now to our financial results. Our second quarter 2021 revenues were $273 million, an increase of $21 million over the prior quarter, up 37% over the second quarter of 2020, and above the top end of our guidance range. The sequential revenue increase reflects continued momentum in our commercial business and strong customer implementations. The year-over-year increase was partially attributable to the lower than typical second quarter revenue levels in 2020 due to the COVID-19 pandemic. Our second quarter earnings per share in the quarter's gap were $0.42 per share compared to $0.30 per share in the first quarter of 2021 and a loss of $0.10 per share in the second quarter of last year. 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. Second quarter non-GAAP earnings per share were $0.97 per share compared to $0.82 per share in the previous quarter, and 37 cents in the same period last year. Non-GAAP gross margin for the second quarter was 51.7 percent, an increase from the previous quarter by 110 basis points, primarily due to revenue mix and favorable services gross margins. We delivered record non-GAAP EBITDA of $61 million in the second quarter. The non-GAAP EBITDA margins for the second quarter was 22.4% compared to the 20.1% for the previous quarter and 13.1% from the prior year period. Now I would like to highlight the strength of our cash flow performance. At the end of the second quarter, our cash balance was $614 million, up from $548 million as of March 31, 2021. The $66 million increase in cash was driven primarily by cash flow from operations. Free cash flow during the second quarter was very strong at $58 million, compared to $44 million in the previous quarter and $28 million for the prior year period. The increase in free cash flow was driven primarily by strong business momentum and working capital management. In terms of accounts receivables, day sales outstanding for the second quarter were 71 days, a decrease of five days over the last quarter, and a decrease of 16 days from the second quarter of 2020. Inventories at June 30, 2021 were $101 million, a slight increase from the prior quarter, and an 11% decrease compared to the second quarter of 2020. We are executing well on our global supply chain process improvements and inventory management initiatives. As Randy mentioned, our team remains confident in our supply of semiconductors and other key components, minimizing potential disruptions to our customer implementation timelines. That said, we have not seen any disruptions to date and do not expect any disruptions at this time. We have built a company that is able to adapt and scale very well and believe we are well-positioned to deliver on the 2025 targets driven by a number of factors, including improved business mix, benefits from long-term exclusive 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 third quarter guidance and second half outlook. Based on the strong commercial momentum, we are narrowing our full year 2021 product bookings guidance range by increasing the bottom end of the guidance range by $20 million. Product bookings for the year are now expected to range between $1,110,000,000 and $1,150,000,000. We're very pleased with the continued momentum in market demand for advanced services. We are also raising our expected total 2021 revenues now to be between $1 billion and $100 million and $1 billion and $115 million. We expect total 2021 product revenue to range between $785 million and $795 million. And we now expect total 2021 service revenue to be between $315 million As Randy commented on earlier, we are experiencing the effects of inflationary headwinds, primarily in semiconductors and other electronic components, as well as continued elevated costs due to trade and raw materials such as steel. As the Fed indicated, these costs are expected to be transitory in nature with potential easing beginning in 2022. We expect to offset the majority of the impact of inflationary headwinds, which, as we mentioned, is primarily due to semiconductor costs and, to a lesser extent, freight and raw materials. In the second half of 2021, three actions I will discuss in a moment. OmniCell products utilize a variety of semiconductor technology nodes. While we do use chips from 300-millimeter wafers, the majority of them are based off 200-millimeter wafers. These devices have typically been low cost, but have recently risen in price due to a variety of market factors. We have already taken steps to manage these challenges as we continue to evolve our global supply chain. We have high confidence in our supply of semiconductors and other key components through 2022 in order to support our health system customers that are critical to healthcare. We are setting the vast majority of the impact of inflationary costs to, one, higher revenue from strong commercial momentum, customer demand, and healthy backlog. Second, prudent and targeted expense reductions while maintaining our investment in research and development areas and customer teams to support a long-term growth strategy and scale our business to meet customer demand. And third, the initial benefits from pricing refinement actions. We now expect total year 2021 non-GAAP EBITDA to be between $231 million and $237 million, reducing the midpoint of our guidance slightly by $3 million. A full year guidance includes additional costs for semiconductors, freight, and steel given global market conditions. Using the midpoints of the updated revenue and non-GAP EBITDA guidance ranges, this represents approximately a 21.1% non-GAP EBITDA margin for 2021, up approximately 320 basis points for 2020. For total of the year 2021, we are assuming an effective blended tax rate of approximately 9% in our non-GAP EPS guidance. which is a reduction from 12% provided in the April 2021 earnings call. The change in the tax rate includes additional expected tax benefit from stock option activity and incremental benefits from certain other discrete items in the second quarter and second half of 2021. We are increasing our guidance for non-GAAP earnings and now expect 2021 non-GAAP earnings to be between $2.65 per share and $3.75 per share. We remain confident in our five-year long-term outlook to deliver, first, organic revenue growth CAGR between 11 and 12 percent to 2025. Second, a total revenue growth CAGR between 14 and 15 percent to 2025. Third, growth of advanced services revenue totaling between 20% and 30% of total revenue by 2025. Fourth, non-GAAP operating margin expansion to 21% by 2025. And fifth, non-GAAP EBITDA margin expansion to 25% by 2025. For the third quarter of 2021, we are providing the following guidance. As you noted last quarter, we continue to invest in scaling our business to support the expected increase in revenue, and the timing of customer implementations. A third quarter guidance also includes additional costs for semiconductor straight and steel given global market conditions. We expect total third quarter revenues to be between $281 million and $286 million. The product revenues between $202 million and $205 million and service revenues between $79 million and $81 million. We expect third quarter non-GAAP EBITDA of $57 million to $60 million. At the midpoint of guidance, this implies a non-GAAP EBITDA margin of 20.6%. We expect third quarter non-GAAP earnings now to be between 89 cents per share and 94 cents per share. In summary, we are very pleased with our strong commercial, operational, and financial results for the second quarter of 2021. We are taking steps to address stationary headwinds in the market, and we remain confident in our long-term outlook. We're also pleased to have announced the acquisition of FDS AmpliCare, which adds several key capabilities to Enliven Health's platform. Upon closing this acquisition, it is expected to be immediately accretive to own themselves non-GAAP EBITDA and non-GAAP earnings per share. We look forward to updating you on our progress in the coming quarters. With that, we would like to open the call for your questions.
spk01: At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that star, then a number 1. And your first question comes from Jessica Cassan of Piper Sandler.
spk03: Hi. Thank you for taking the question. Good morning. So I think on the FBS AmpliCare side, we were just interested to know if you guys could clarify whether the independent pharmacy customer base that you're acquiring is entirely incremental to your existing retail pharmacy footprint. And then just do the acquired solutions have the potential to be cross-sold into your existing retail pharmacy install base, or would they be redundant? And if redundant, who's the incumbent?
spk01: Scott, do you want to take that? Sure.
spk05: Hey, Jessica. It's Scott Seidelman. How are you? right um so the short answer is basically asking two questions so one is are the independents uh the fds customer base largely is there much overlap the reality is there may be some overlap but the vast the vast vast majority of it is a complementary market it's just not an area that enlivens focused on we've been primarily focused on Tier 1s and Tier 2s, so the large chains and the intermediate chains and FDS we've been excited about is that it's very complementary because it really brings in the independence. And yes, a big portion of the thesis here is the ability to cross-sell both enliven solutions, particularly like care scheduler, the omni-channel communications into the current FDS, those independent pharmacies, and we certainly think there's an opportunity, and it's quite complimentary, their capabilities. So we believe that there's a really good opportunity for us to cross-sell the current FDS capabilities to the current enlivened customer base.
spk09: And then, Jessica, this is Peter. Maybe specifically, we announced the signing of the acquisition earlier this week. And you can see there that we disclosed that FDS AmpliCare would bring around 15,000 independent pharmacies. And those are the vast, vast majority of those would be incremental market for us. Maybe an additional note as well is that the revenues of FDS AmpliCare are pure SAS revenue. It's also high growth, so it will help also with the total growth rate. And then lastly, of course, it's immediately accretive, we expect, for non-GAAP EBITDA and for non-GAAP EPS. And then maybe a final point as well, as far as the additional capabilities Scott referred to earlier. We're very excited also about the capabilities of the Medicare plan we've used, the automated tool there. is really a great opportunity for us as well. And it helps really. So it has the value for retail pharmacies.
spk03: Got it. That's really helpful. If I could just follow up with one, changing direction a little bit. So in 2016, I think the DOD awarded an ABC contract to your largest competitor. We know that deployment has had a bunch of issues, and then the contract expires in 2021. So are you guys anticipating a replacement RFP from the DOD anytime soon, and would you be eligible to compete in that market with the XP? Thank you.
spk10: Yeah, this is Randy. We'd certainly be eligible to compete. We haven't seen anything yet and don't have enough to comment on it, really. But we certainly have a lot of government business in many facets, and this certainly would be one that we'd be taking a close look at when it becomes available.
spk01: Thank you. Thanks, Jeff. Next question, please. Our next question comes from Scott Schillenhoff of Stevens.
spk02: Hi, Randy, Peter, and team. Hope you can hear me. Congrats on the results and the recent acquisition. Thank you. So, Peter or Scott, I guess this question is for you. I think this is really for Peter, but on the software expansion story here in the retail pharmacy side, clearly you're growing the side of the business with Epgif and Placare. I just wanted to make sure I understand how you are recognizing the revenue and how you're charging your customers. Are these independent complementary modules that you charge, that you add on for each module to your retail customer, or do you bundle it as kind of a bundled offering? So that's actually my first question.
spk09: Yeah, these are – thank you, Scott. Good to talk to you. These are incremental revenue opportunities. These are additional modules, specifically on the financial side, the Medicare plan review side, and then also in workflow integration as well. So those are incremental revenue streams. They're pure SaaS, and we'll charge them. They are charged on a monthly basis, essentially. Okay.
spk02: Perfect. That's exactly what I wanted to hear. My second question, Peter, is on ease, shifting away from the FDS AmpliCare. How is it going with the cross-selling opportunities? You know, you have an install base of 160 large healthcare systems. What are you seeing in the market for the 340B, on the 340B side? Can you just add any color there? Thank you.
spk09: Yeah, so on 34DB, we're very pleased with the integration. We've completed most of the integration, we would say, very successfully and according to plan. We did, I think, in the first quarter mention publicly that we had a first cross-sell contract actually signed of really selling and incorporating 34DB, Omnicell 34DB, to an existing long-term sole source customer within the 148th. That pipeline is very nicely growing, and we see some really good momentum there.
spk02: Great. Thanks. That's all from me. Great quarter. Yeah, thank you.
spk10: You bet. Thanks.
spk01: Your next question comes from Steve Halper of Cantor.
spk06: Hi. Two questions. Could you just talk about some of those key capabilities of FDS, just trying to understand, you know, exactly, you know, what those are?
spk01: Scott, do you want to take this?
spk05: Yes. Yeah, I got it. Sorry. It was too many mutes. Several key capabilities. So I would say several buckets. So one bucket is really all around financial analytics. So really helping pharmacies understand You know, payment discrepancies, claims visibility, opportunities for improvement. So that's one set, one bucket of functionality to simply helping a pharmacy understand its own business and how to make it more profitable. That was on the enlightenment roadmap. So that's certainly a synergy and an acceleration. The other category On the clinical side, one that Peter mentioned was a set of tools that helps patients or helps pharmacists guide and advise patients on which Medicare plan is best suited for the types of drugs and the drug regimen. That's certainly a really interesting opportunity with the growth in Medicare Advantage and I think the increasing importance of the role of the pharmacist to really engage patients at that point of care. So that's a really interesting. And then there is some overlap, and that's an additional functionality to Enliven. And then there's some overlap with med synchronization and communications, which we believe the Enliven toolkit and – and the FDS AmpliCare capabilities can certainly add in. And the last bucket, which is less around functionality so much as technology capability, is FDS AmpliCare has a really interesting technology stack that allows you to sit on top of the pharmacy management system and so that A pharmacist wouldn't have to swivel between systems. Instead, the technology can now just engage a pharmacist with notifications. And so it's a really complementary set of functionality, a lot of which was already in the enlivened roadmap. And so we think it's a really synergistic acquisition.
spk06: Thank you. That's very helpful. And then the follow-up question was on the inflation costs issue. Could you just quantify, you know, what you think those are going to be and to what extent the, you know, can you quantify the cost saves, recognizing that you did lower the, you know, EBITDA, you know, midpoint just a bit? I'm assuming that's because of the, you know, the inflation headwinds.
spk09: Yeah, I think you see this, Peter. I'll answer that question, right? So, yeah, net-nets, right? So we have been really proactive since we see the, market economic change in the semiconductor market to really, first of all, with high confidence, secure critical supply of semiconductors that go in our products to really secure supply through our critical healthcare customers. So that was our first objective. And we're very confident that we have a surety of supply going all the way through 2022. We've placed direct orders with semiconductor manufacturers, and we've qualified also additional parts. So we feel really good about that priority. And secondly, of course, our objective is to offset the transitory inflationary cost. And we're able to do that for the second half of 21, as is in our prepared remarks. The vast majority we are offsetting with higher revenue with lower cost or cost control, if you will, while maintaining, of course, the investments in innovation and customer experience. And lastly, of course, we've also implemented what we call price optimization and price actions. And they almost net off, right? So a really great job done by the team while supporting our customers. And it will be our aim as well going forward, of course, to continue to follow this strategy. You can imagine, of course, that price actions, of course, they take some time to take hold and show up in the P&L, if you will. Then also from a cost perspective, as you know, cost goes, you know, via backlog and inventory also over time. And so we're managing the totality, if you will. And at this point, we're not breaking out kind of the different components.
spk06: And then, but is it safe to say that the net impact was primarily responsible for the lower, you know, top end of the range of the EBITDA guidance. Is that correct?
spk09: Yeah, the biggest driver for inflationary, transitory inflationary cost is semiconductor. Yeah, that's the biggest driver.
spk10: Just to answer your question directly, the whole drop is just the inflation for the additional cost of, it's the only impact at the midpoint there. Right. Got it. Thank you.
spk09: Yeah. Thank you, Steve.
spk01: Our next question comes from Matt Hewitt of Craig Hallam Capital Group.
spk07: Good morning. Congratulations on the strong quarter. A couple questions on FDS first. You know, I think in the press release and even today you've mentioned a high growth rate for that business. Can you give us what the, you know, percentage growth was maybe over the last 12 months and what the margin profile is for that business?
spk09: Yeah, so it's a high growth business. Again, it's fast solutions. You know, think about the growth as, you know, mid-to-mid double-digit growth directionally and maybe a tad higher. Maybe a reminder, we haven't closed the acquisition yet, right? So we signed it and announced it. So we'll provide more guidance once we close the acquisition as well. Really good gross margin as well. You know, as you would expect, it's pure SaaS solutions. So it's accretive to, on the gross margin level as well, to only sell total gross margin, yeah?
spk07: Thank you for that. And then I guess as we think out, if you look back in the early 2000s, your product gross margin was 58% plus. Once this acquisition is completed and you start getting active on the cross-selling front, Can gross margins on the product side maybe get back to that level over time, or are you more focused on the EBITDA margins? So some incremental costs here and there on the cost of goods side is more than offset by leverage in the operating lines, and therefore your EBITDA margins start to approach that 2025 target.
spk09: Yeah, I would say the primary goal is, of course, the EBITDA margin expansion that we feel very, very confident on, and we think it's more or less linear through the five-year period. Gross margins, we have talked about publicly before, we see increasing through the years sequentially, also on the product side. So that probably is the largest driver over time, and there's going to be some cost leverage as well, specifically on STNA.
spk07: Got it. And if I could just take in one more, just out of curiosity, of the 148 sole source agreements that you have with the top 300 hospitals, how many of those are currently using Omnicel 1, and how do you anticipate that growing over the next couple of years? Thank you.
spk09: Yeah, so Omnicel 1 is in the early days of early adopters, if you will. The pipeline is growing very nicely there. We would expect, you know, a large portion of our large healthcare top 300 system customers to use only cell one solution. But that's over time, right? So, again, the pipeline is really strong, advanced services, bookings, if you will, right? Only cell one is part of that. Is there a plan actually here today? So that's going well. But then, of course, you know, you go from, of course, to implementation planning and roll out and you train more users, if you will. So that's, you know, it's a nice recurring SaaS revenue that we'll build up over time.
spk07: That's great. Thank you.
spk01: The next question comes from Ann Samuel of J.P. Morgan.
spk00: Hi, guys. Congrats on the quarter and thanks for taking the question. Scott, you talked about the renaissance for hospitals coming out of COVID. I was hoping maybe you could talk a little bit about the pace and appetite of incremental purchasing and just maybe how that will impact timing of when we'll see that start to come through the P&L.
spk05: Sure. I mean, look, I think my point there was what COVID has really done is that clearly, I think, from a societal perspective as well as from a health care policy perspective, cemented the role of the hospital and certainly the large health system and its value as a quaternary tertiary care facility and what that means in the overall sort of health care delivery model. In terms of what we're seeing, I think we've said several times that one benefit of of COVID or certainly a tailwind of COVID for us has been it really shined a light on managing medications to treat that and more broadly, just the importance of pharmacy and medication management to the health system. As a result, I think what we reported and what we saw last year and what we're seeing this year is really strong demand, not only for the core products, but the newer services as well. And so that's translating into really strong bookings growth across the portfolio And I think Peter will give you a better sense of how that may flow through the P&L, but I think the short version is we're seeing really strong demand, and that's certainly flowing through bookings.
spk09: Yeah, I think that's certainly the case. And, you know, with the FBS dental care acquisition, we're also really bolstering our presence and platform offerings across the team of care, right? So the The pharmacies outside the hospital are not necessarily fully separate from the larger health systems as well. So we really look at it more and more in totality also.
spk00: That's really helpful and really great to hear. Maybe just one on the quarter specifically. You saw some really nice expense savings this quarter. I was just wondering, is that related to some of the cost savings actions that you're anticipating taking? Or is there something unique to this quarter? Thanks.
spk09: Yeah, thank you, Annie. No, there wasn't really anything specific in the third quarter. Maybe a little bit of the cost actions we're taking in the fourth quarter. But I would say that that's really a small, small piece of it.
spk01: Great. Thanks, guys.
spk09: Thank you.
spk01: The next question comes from David Larson of BTIG.
spk04: Hi, congratulations on a very good quarter. Can you please talk a little bit about your sales force? It's my understanding that the products that you're selling into the healthcare industry, they're complicated, these are long sales cycles, they're expensive. And what that ultimately means, in my view, is that your sales force has a lot of value in the relationships they've built and their knowledge levels. Did I hear something about a, you know, sort of a realignment or something like that with the Salesforce earlier or not? Just any color there would be very helpful.
spk09: Yeah, thank you, Dave. Let me first maybe comment on that one perspective. So we realigned really the commercial organization. That's about two years ago. That really, you know, we've seen the impacts now. I think we talked about before publicly that. For our top U.S. health system customers, the 148 that we have long-term sole source agreements with, we have a customer success executive that works with the health system to develop a multi-year medication management automation investment plan. So that's where the investment is. These are really deep relationships, if you will, really good understanding of the health systems of their needs and really helping them to get to the next levels of automation pharmacy. So that's what Scott was referring to. And we're seeing the benefits of that. And we're seeing larger and larger deal sizes. If you look at it from a trailing perspective, our deal sizes are increasing. We announced, I think, the last earnings call, our largest deal, if you will, multi-year deal as well, with an undisclosed national leading health system also. So it's paying dividends. So it's definitely working.
spk04: Okay. Fantastic. That's great. Thank you. And then just on the retail and the home health side, it sounds to me with the FDA, like with the FDA's AmpliCare solution, you have all of the software solutions that a retail pharmacy might need in order to basically run their practice, billing, AR, everything, communications, is that true or not? And if not, what other components would you need to buy? And then can you maybe just touch on the home health piece? Like as folks start delivering these medications next day or real time or same day to the home, is there any sort of opportunity there with all of these telehealth vendors seeking to close gaps in care at the last mile? Thanks a lot.
spk05: Yeah, I can help with that. So the first question, which is really around the software needs for a retail pharmacy, I'd really break it down into two buckets. One is the pharmacy management system itself. So that's a piece of software that's been around for a very long time. And that is the sort of primary tool that a retail pharmacy uses to fill scripts and to kind of manage their day-to-day. We do not have that software today. What we have is really the second bucket, which is really many of the complementary capabilities above that PMS that helps pharmacists engage patients, follow up with those patients on managing adherence, communicating with those patients, with the potential FDS AmpliCare acquisition, we would add to that financial capabilities, financial analytics capabilities, the ability to have pharmacists help engage patients around which Medicare plan they might need to be on. And so that certainly would be, that combination would certainly enable us to have a much more comprehensive software solution for those value-add capabilities, which we certainly think are the the more interesting area, but we do not have a pharmacy management system today. I think your second question around home health and mail order delivery, was your question really there in terms of what capabilities could we or do we potentially have to enable that?
spk04: Yeah, it's more like if you're a telehealth vendor and you want to have a script delivered to the patient at home, technologies are needed to basically make sure that happens, track it, make sure they're adherent to their formularies and so forth.
spk05: Right. So that's really an emerging market, and I think it's an interesting one that we're exploring. you know, really don't have capabilities today that supports them in theory. I think what's an interesting potential opportunity is that some of the enlivened tools, I mean, they are a pharmacy. And so you still need pharmacists to engage those patients, to do medication adherence, to do follow-up. And so that's an area of really keen interest for us to understand as a potential emerging market for enlivened capabilities.
spk04: Okay, congrats on a great quarter, and congrats on the FDS deal. Thank you.
spk01: Your next question comes from Iris Long of Bering Bird.
spk06: Hello, Iris.
spk01: Hi, good morning, team. Thanks for taking my question. So my first question is on the SDS and put care. So I understand that the acquisition will give you additional capabilities like financial management, analytics, and population health. I'm just wondering from customers' perspective, so how important are these new added capabilities to your existing tier one pharmacy customers? And then maybe how should we think about the integration timeline? When do you expect to finish integration? And then what would the go-to-market strategy look like?
spk05: We believe there's, as you mentioned before, we believe that in both those segments, both on the independent segments and the typical, which is the FDS AmpliCare core market, as well as the core market for Enliven, which is the Tier 1 and Tier 2s, the functionalities, the respective functionalities of Enliven Health and FDS are very synergistic. And so we believe there's strong demand both in the independent side for the Enliven Health capabilities and the Tier 1 and the Tier 2s for the FDS Amplicare. So that's really why we're so excited about the potential acquisition. Post-close, and I won't speak to how long that process might take, but from an integration perspective, Really, from a go-to-market perspective, it's very complementary. They have a sales channel that is very good and adept at targeting independent pharmacies. That's not a channel or a capability that Enliven Health has today, and vice versa. We do have very strong relationships with the customer base in Tier 1 and Tier 2, so the channel is very complementary. From a branding perspective, we think the mission, vision, And the capabilities are very complementary, and so we'll roll this under the Enliven Health brand, but we haven't worked that through yet. And then lastly, from a product integration perspective, again, that will take longer, as it always does. But like I said, the capabilities are so synergistic that we're really excited about getting those integrated.
spk01: Okay, good. And then I guess my second question is on the inflationary comment. I'm wondering to what extent is this inflationary headwind kind of reflected already in the Q2 results? And then, Peter, I'm wondering if you can talk a little bit about the pricing refinement that you mentioned. Kind of what's the scope of that? How much pricing change are we talking about? Anything there will be helpful. Thank you.
spk09: Yeah. Great question, Iris. Thank you. So, yeah, there's some transitory inflationary cost in the second quarter. For the third and then for total year and then implied, of course, for the fourth quarter, we have included a forecasted number for those inflationary costs. So that's embedded in there, right? And we disclosed in the prepared remarks that we are almost offsetting. So the vast majority all these inflationary costs we're offsetting via higher revenue and then cost actions and then also pricing actions. So we have increased, if you will, minimum margin requirements for deals, right, given our market strengths as well. We've increased separately also use CPIs, if you will, and some charge-throughs as well. So there's a variety of actions there. really holistically, it's really a pricing optimization strategy.
spk01: Okay, great. Um, I guess if I can squeeze in one last question, um, I'm wondering if you can talk about the, uh, Spartanburg expansion a bit. So, um, it seems that the extension includes the adoption for the central pharmacy, advanced services, and OmniCell One. Um, and they have been a customer with you guys. I'm wondering what, how, how long, how much time have they been a customer with you and what kind of triggers their interest for this expansion?
spk05: I don't know the exact number. I know that they've been a customer for multiple years on the cabinet side. I think why we're so interested in this account is I think it really, it's a great example of where we see the market and the customer base going, which is that Spartanburg is and has been a great customer of ours on the point of care side of things. As they've looked That health system has grown from, like many have, from one large hospital to multiple ambulatory acute care hospitals spread across the region. They've been acquiring physician practices. And so what that's done is it's not only changed their, from a pharmacy perspective, the pharmacist is not just focused on how do I make sure that the meds are getting to the right floors above me. Now suddenly I've also got to be aware of observing that entire geographically distributed footprint. And so some of the things that they're looking at there is really centralizing some of that central pharmacy capabilities and scaling it up to really support that much broader both acute care but now also ambulatory care as well. And so as a result, what they've done is now they're investing in both our central pharmacy dispensing, so that's oral solids, but also IV compounding service as well. And then because now you've got both point-of-care automation as well as central pharmacy automation, and you've got a widely distributed or geographically distributed footprint, the use of OmniCell 1 to create visibility and control end to end throughout that organization from central pharmacy to point of care across that geographically distributed. It's really, you know, I think we call it out because it's really where we see, going back to the point about the renaissance and the ever-changing role of the hospital is that we think that it's a really great example of where health systems are headed and really how the full portfolio of our capabilities can really help that health system manage what is becoming an increasingly complex air traffic control problem for them.
spk01: Thank you. The next question comes from Bill Silverland of Benchmark Company.
spk08: Hey, Bill. Hey, thanks. Good morning. Hey, guys. I thought I'd just change gears here because most of my questions have been asked. And I know you changed leaders or you expanded leadership in the international group last year. So maybe there's – is there any developments there that we should know about?
spk09: Yeah, thank you, Bill, for the question. So, yeah, we hired Cheryl DeMosso from GE Digital Healthcare last year. She has really reformed her team and – really focused on the platform strategy. I think the initial win that we talked about from a platform perspective was the platform deal at Southeast London, right? That we, I think we did a press release in January. And we see more platform type deals evolving specifically in the pipeline for the UK and then also the Middle East. So more to come there. The business is growing nicely, but again, first has to go your pipeline and then, of course, bookings and the ones that we can announce. We will, of course, and then it will flow into revenue. But we're pleased.
spk08: Great. I think I'll stop there. Great job, guys. Thanks. Thank you very much.
spk01: And your next question comes from Gene Manheimer of Collier's Securities.
spk11: Hey, thanks, guys. I thought you dropped me. Congrats on the great quarter. I just had another question on FBS. I'm just thinking about the growth trajectory you're talking about, but I'm a little bit torn because, I mean, I see that the product looks to be penetrating in about two-thirds of the independent pharmacy market, and it's a market that's flattish to declining. So would the growth that you're talking about come more from net new business within the Indies or cross-selling into your existing and live-in-base things?
spk09: Well, it's both, right? So specifically on the independent, so especially with what we see and we also see in the industry is that we believe that the role of the retail pharmacy and specifically independent pharmacists as well as a primary caregiver and provider, that seems to be tracking to be expanding, right? There's two bills, we believe, in Congress that have some traction as well. So for the independent market from a revenue perspective, You know, we definitely see, if you will, more revenue per independent on the, you know, over the years, if you will. And then, you know, there's also a component of, of course, the FDS AmpleCare additional value-adhancing capabilities that we can cross-sell to the current and life and health T1 and T2 customer base. So it's both. Gotcha. Okay, thank you.
spk05: The only other thing I'll add there, which is important, is that, is that some of the FDA sample care products are penetrated broadly net independent, but their newer products, which is really predicated on Medicare Advantage growth, there's a lot of opportunity for growth, right? So simply as the Medicare Advantage program continues to expand at a very high rate, then that will grow as well. So even within the existing FDA sample care customer base, there's opportunity for growth, and that's before we even get to the cross-sell opportunities. Got you.
spk11: Thank you.
spk01: Operator, we have time for one more question. At this time, there are no further questions. If you wish to ask a question, please press star 1. Okay. Thank you very much. Randall?
spk10: Well, thanks, everybody, for joining us today. I want to give a special warm welcome to our new shareholder base. If you've recently joined us, welcome. I want to thank also Ed Bosa for joining us on our board as a new member. It's great to have you. If you're some of the new OmniCell employees who've joined over the last 90 days, welcome to this team. And if you're a new customer with us, we're so grateful that you've entrusted us with helping you reinvent the pharmacy in all of us. as we move forward to reinvent the pharmacy, to really change the pharmacy care delivery model so that we can improve healthcare for everyone. Look forward to the journey. See you next time. Stay safe. Cheers.
spk01: This concludes today's conference call. You may now disconnect.
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