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spk01: Ladies and gentlemen, thank you for standing by and welcome to the OmniSale Inc. fourth quarter fiscal 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Kathleen Nemeth, head of investor relations. You may begin your conference.
spk03: Good afternoon and welcome to the Omnifil Fourth Quarter and Full Year 2021 Financial Results Conference Call. On the call with me today are Randall Whipps, Omnifil 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 contain forward-looking statements, including statements related to financial projections or other statements regarding OmniCell's plans, objectives, expectations, targets, or outlooks that are 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 this forward-looking statement, please refer to the information in our press release issued today, in the on-resale annual report on Form 10-K filed with the SEC on February 24, 2021, 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. Our results were released this afternoon and are posted in the Investor Relations section of our website at omniscell.com. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP financial measures are included in our financial results press release. With respect to forward-looking non-GAAP measures, such as guidance and targets, we do not provide a reconciliation for forward-looking non-GAAP measures to the comparable GAAP measures on a forward-looking basis, as these items are inherently uncertain and difficult to estimate and cannot be predicted without unreasonable effort. I will now turn the call over to Randall.
spk07: Good afternoon, and thank you for joining us today. 2021 was another outstanding year for Omnicell, as strong customer demand for our differentiated, technical-enabled, and cloud-based medication management products and inherent solutions exceeded our expectations across all metrics. We believe our business is resilient, and our innovation growth strategy is delivering results. We delivered a record $1.22 billion and bookings for the full year compared to $1.0 billion for 2020. This was a year-over-year increase of 21%, exceeding the top end of our guidance by $47 million. Demand for our advanced services portfolio was exceptionally strong and exceeded our plan for the year. As a reminder, advanced services includes our SaaS, subscription software, and tech-enabled services. Our 2021 non-GAAP revenues of $1.13 billion were also a record for the company, increasing $241 million, or 27%, from 2020. And we are entering 2022 with a record backlog of $1.25 billion. We increased our total number of long-term sole source partnerships to 151 of the top 300 U.S. health systems, an increase of six from 2020. Many of these were competitive conversions. In addition to increasing the number of sole source partnerships, we're seeing an increase in average booking size. In fact, we booked three of the largest deals in our history in 2021. As a trusted partner, we develop solutions that we believe will continue to elevate our critical role in the pharmacy health system. To that end, we're excited to announce that OmniCell is partnering with Long Island University to launch pharmacy simulation centers that prepare the next generation of pharmacy leaders. This immersive experience goes live later this year and will provide the opportunity for more than 200 pharmacy residents and technicians to become certified in the innovative technologies, systems, and workflows that will help them navigate the challenges of medication management and shift their focus to clinical care. These centers will also be used to train and certify omni-cell pharmacy technicians as well as pharmacy students who will go on to support our customers and their technology onsite. We're excited to launch this initiative and look forward to providing updates on our progress on future earnings calls. The critical role automation and digitization play in addressing the healthcare labor shortage Ensuring access to care and improving patient outcomes is becoming recognized by our healthcare system partners and retail customers even more strongly today. The pandemic led to increased demand for care, causing heavier workloads for healthcare and pharmacy workers, which in turn resulted in worker burnout and resignations. According to the U.S. Bureau of Labor Statistics, from February 2020 to September 2021, the healthcare sector lost 524,000 workers from an already aging workforce. And with the continued high demand for administering COVID-19 vaccines, tests, and treatments, the nationwide acute shortage of pharmacy technicians has adversely impacted both hospitals and retail pharmacies. Moreover, patient volume is projected to rebound and exceed pre-pandemic levels. McKinsey and Company survey of 100 large private sector hospitals, which was conducted several months prior to the emergence of the Omnicom variant, concluded that on average, hospitals' inpatient admissions have returned to 2019 levels and predicted that inpatient admissions would increase by 4% in 2022 relative to 2019. Thus, not surprisingly, a recent American College of Healthcare Executive survey of 310 community hospital CEOs found that personnel shortages were their top concern in 2021, marking the first time since 2004 that financial challenges were not executives' primary concern. We believe we are uniquely positioned to assist our customers in addressing these labor challenges by implementing an automated and cloud-based comprehensive medication management and adherence platform, reducing the manual processes within pharmacy workflows and enabling pharmacists to practice at the top of their license. In 2019, at our Investor Day at the ASHP Mid-Year Clinical Meeting, We outlined our plan to fundamentally transform our business toward building the IoT of medication management to support the industry vision of a fully autonomous pharmacy. We believe the results we achieved in 2021 demonstrate that our strategy is working. And while we still are in the early innings of this strategy, we are very pleased with the level of customer interest, which is ahead of our initial expectations, as well as the value we find we are already creating for our healthcare system partners and retail customers. In our opinion, the broad adoption of these new services and cloud-enabled SaaS solutions validates our decision to take the path toward transforming the pharmacy care delivery model. Now, turning to how we expanded our advanced services portfolio over the past year with three strategic accretive acquisitions. FDS Amplicare, Market Touch, and Recept. We are pleased with the early momentum and progress we are making in strengthening our market position through value-enhancing M&A. In December, we announced our agreement to acquire Recept, which is a leading provider of specialty pharmacy management services for health systems, clinics, and physicians groups. This acquisition is expected to open a new market for OmniCell and will expand OmniCell's portfolio of capabilities and advanced services that are designed to address the significant need to improve access to and management of complex medications. In January, we announced our acquisition of pharmacy software solutions provider Market Touch, which will expand and deepen and liven health's footprint across key pharmacy segments. Each of these acquisitions are strong additions to our Alive & Health and 340B solution sets. Scott will speak more about how these companies have strengthened our competitive offering in just a moment. Looking ahead, we also intend to continue strengthening our market position through our robust innovation pipeline. From next-generation IV robotics to new SaaS and connected device capabilities, We are very proud of the advancements we have made. We expect to launch new next-generation IV robotics in the coming months and are very excited about the years ahead. As I noted earlier, 2021 was an outstanding year. And yet, despite the records we have set across a number of financial metrics, we are not immune to the inflationary headwinds and supply chain constraints that others are also seeing. As we indicated last quarter, we have been taking and will continue to take steps in an effort to address and offset these challenges. Despite current headwinds, we are entering 2022 with significant momentum and expect to deliver profitable growth and value creation in the year ahead. 2022 marks the 30th anniversary since our founding. It is a milestone we will be celebrating throughout the year. Over the last 30 years, we have successfully navigated through many difficult economic cycles and believe we will do the same in this current cycle. Our focus on creating long-term, enduring value for all of our stakeholders and transforming the pharmacy care delivery model continues to inspire and guide us. We are confident in the opportunities ahead of us and look forward to updating you on our progress. Now, before I turn the call over to Scott, I would like to say how pleased we are that the OmniCells environmental, social, and governance efforts have been recognized by Sustained Analytics, one of the largest providers of ESG research, ratings, and analytics. In their most recent report, OmniCell ranked higher than 89% of other companies in the healthcare industry for ESG risk management, which acknowledges our company's tremendous efforts and improvements in this area. Sustain Analytics also rated OmniCell number one for lowest risk among our peers. remain focused on innovating to drive sustainability across our business, ethically and responsibly sourcing materials by adhering to international recognized OECD guidance, and elevating our diversity and inclusion initiatives. Now, with that, I'd like to turn the call over to Scott to discuss the industry landscape and key customer engagements. Scott?
spk08: Thank you, Randall. As Randall stated, in our view, our results demonstrate that our strategy is working. Our shift in 2018 toward tech-enabled services and cloud-based services, which we shared with you in 2019, is gaining traction and delivering initial results. We made this shift back in 2018 because we recognized the significant need and large opportunity to transform the pharmacy care delivery model. And we recognize the unique position that OmniCell had because of its high-quality brand, significant customer base, and large channel to successfully execute a land and expand strategy. In 2018, the primary reason that the pharmacy care delivery model struggled with quality and cost problems was that its labor force was overwhelmed, overworked, and under-supported. COVID significantly exacerbated this people problem, and in 2022, we feel better about our market opportunity than we did three years ago. We find the need to automate and digitize manual processes within pharmacy workflows is now even more pronounced. We offer our customers an intelligent medication management infrastructure that equips and empowers pharmacists and caregivers to focus on clinical care rather than administrative tasks. This infrastructure is a comprehensive cloud-based platform that combines automation, analytics, and expert services. Our intelligent infrastructure provides the foundation for realizing the industry's vision of the autonomous pharmacy, a vision defined by pharmacy leaders for improving operational efficiencies and ultimately targeting zero-error medication management. Ultimately, our intelligent infrastructure will enable pharmacists and caregivers to improve patient outcomes, reduce costs, and reduce provider burnout. Now I would like to comment on some of our recent customer wins. Our intelligent infrastructure platform clearly resonates with customers. For example, we are excited to announce today that we signed a long-term sole source contract with UNC Health System in Lubbock, Texas. OmniCell was selected to support key pharmacy initiatives across acute care, outpatient, and retail care settings. This is a competitive conversion, and the partnership includes central pharmacy services, point-of-care solutions, our Omnicel 340B service, and Enliven Health patient engagement solutions. We think this is an excellent example of several key elements of our strategy and demonstrates why we are winning in the market. One, our comprehensive platform approach and long-term vision significantly differentiate Omnicel. Two, our enliven health solution will appeal to health systems as they focus on ambulatory and retail opportunities, thereby adding further differentiation. And three, our channel can successfully deliver acquired solutions such as Omnicel 340B. Similar to UMC, I am also pleased to announce that University Health in San Antonio, Texas has selected Omnicel 1 along with Omnicel Central Pharmacy and Point of Care solution to support their pharmacy care model. Our platform is aligned with University Health's goals and long-term vision for growth. Additionally, AmMed Health in Anderson, South Carolina selected Omnicel One, Omnicel's central pharmacy dispensing service, and IV compounding service as a comprehensive platform that can support their goals of supply chain control, approved efficiency, and enhanced patient safety. Lastly, an Ohio-based health system partnered with On The Cell to help them address staffing constraints while enhancing visibility and communication across the system. Again, this health system chose On The Cell 1, Central Pharmacy Dispense Service, and IV Compounding Service to help them achieve their goals to manage near-term staffing challenges and support future growth. Based on the strength of advanced services bookings and robust customer demand, in 2022, we are continuing to invest in our innovation pipeline, cloud platform, and customer experience. Now, I will comment a bit more on the acquisitions we made in 2021. SDS AmpleCare, Recept, and Market Touch are great examples of where we think retail pharmacies and health systems are going and why we are so energized by the opportunities ahead. In 2020, specialty drugs totaled $269 billion and accounted for 51% of all drug sales. Furthermore, health system-owned specialty pharmacies are generating significant patient outcomes and profits for the health system and, as such, are a strategic priority for the C-suite. However, managing a specialty pharmacy requires a different skill set, and increasingly, hospitals are outsourcing their specialty pharmacy operations to managed service organizations like Recept. Specialty pharmacy is a key part of the medication management process, and OmniCell can significantly scale the Recept solution through our channel and ultimately create new value for customers through integration with other parts of our intelligent infrastructure. It is another way we are expanding our footprint within our existing customer base. As Randall mentioned, we also strengthened our enlivened health solution with the acquisitions of FDS AmpleCare and MarketTouch. The addition of FDS AmpleCare's differentiated financial management analytics and population health solutions along with its nationwide network of more than 15,000 independent retail pharmacies, expands Enliven Health's product functionality and its market footprint. And the addition of market-touch media not only expands Enliven's customer base, but also adds critical mobile capabilities to the solution. With these acquisitions, Enliven adds critical functionality to its platform and expands its customer base. We believe COVID and the current labor market have accelerated the need for a new intelligent medication management infrastructure. OmniCell is uniquely positioned to deliver this intelligent infrastructure and ultimately enable our customers to transform a significant part of the healthcare system. We are early in this journey and we are excited by our progress to date. With that, I will turn the call over to Peter.
spk06: Thank you, Scott. I'm pleased with the strong results for our fourth quarter and full year 2021. Our healthcare system and retail pharmacy customers continue to partner with Omnicell to realize the industry vision of the fully autonomous pharmacy and the overall demand metrics for Omnicell remain strong. I'm especially proud of the solid execution that our over 3,500 Omnicell team members continue to consistently deliver. During the quarter, we welcomed 429 employees to the Omnisol family, 93 of whom joined us via the reset and marketplace acquisitions. Throughout the pandemic, Omnisol employees have demonstrated their unwavering commitment to ensuring our frontline healthcare heroes receive the critical medication automation management systems and expertise they need to deliver the best patient care possible. Before I dive into the specifics of our financial results, I would like to highlight that despite the challenges from the pandemic, 2021 was a record year for bookings, backlog, revenue, non-GAAP EBITDA, non-GAAP EPS, and free cash flow generation. Record product bookings for full year 2021 were $1,217,000,000 compared to $1,002,000,000 for the full year 2020 and were $67,000,000 above the midpoint of our full year guidance range and an increase of 21% over the prior year. Total product backlog at the end of 2021 was $1,254,000,000 compared to $924,000,000 at the end of 2020. a significant increase of 36% year-over-year. Of the $1,254,000,000 in ending product backlog, 439 million, or 35%, is considered long-term. This percentage is up from 33% at the end of 2020. The year-over-year percentage increase primarily reflects the growth in advanced services. We believe the strong 2021 product bookings are an indication that our healthcare system and retail pharmacy customers continue to turn to Omnicell to realize the inner situation of the fully balanced pharmacy. We saw specific strength in the 10 services, as well as the strength in our key customer partnerships, including long-term sole source agreements with 151 of the top 300 US health systems. Out of these 151, 50% have not booked at least one expense service. We have partnered with the majority of the HMNF 51 long-consultant partners to create no-career assessment plans for medication management automation. These plans provide significant visibility into future bookings. We are continuing to see strong momentum with expense services in engaging with our health system and retail pharmacy customers. With the larger deals, we find that advanced services are a clear differentiator and one of the main reasons these partners do business and own themselves. Turn to our financials. A fourth quarter of 2021 revenues in the quarters with GAAP were $311 million, an increase of $15 million over the prior quarter. A fourth quarter of 2021 non-GAAP revenues were $312 million, 25% over the fourth quarter of 2020, and approaching the top end of our guidance rates. The strong year-over-year non-GAAP revenue increase reflects continued strong demand for OmniSelf medication management, adherence automation solutions, as well as the contribution of revenue from the FBS AmpleCare acquisition in the third quarter of 2021. A full reconciliation of our GAAP and non-GAAP results is included in our fourth quarter earnings press release and is posted on our website. We delivered record GAAP and non-GAAP revenues in 2021, reflecting strong customer demand and strong commercial execution. Our full year 2021 GAAP revenues were $1,132,000,000. are non-GAAP 2021 revenues for $1,133,000,000, an increase of $241 million or 27% in 2020. As a reminder, the year of the increase was partially actually moved to the lower than typical GAAP and non-GAAP revenue levels in 2020 due to the COVID-19 pandemic. Non-GAAP close margin for the fourth quarter of 2021 was 49.8%. a decrease of 140 basis points from the previous quarter, primarily due to the mix of customer and product implementations in the quarter, as well as modestly higher inflationary costs. Included in the fourth quarter gross margin is the impact of approximately $5 million of inflationary costs compared to cost paid for semiconductors, other materials, and freight in 2020. excluding approximately $5 million in inflation costs, the gross margin percentage would have been 160 basis points higher. A fourth quarter of 2021 earnings per share in the quarters of GAAP, with $0.28 per share compared to $0.61 per share in the previous quarter and $0.37 per share in the fourth quarter of 2020. Fourth quarter 2021, non-GAAP earnings per share were $0.92 per share compared to $1.08 per share in the previous quarter and $0.91 per share in the same period last year. Fourth quarter non-GAAP earnings per share were near the midpoint of fourth quarter guidance, inclusive of a favorable tax benefit and stock compensation of $0.10 per share, offset by the impact of incremental expenses related to compensation from significantly stronger product bookings, M&A related expenses, and certain key investments. Our full year 2021 earnings per share in accordance with GAAP were $1.62 per share. Our full year 2021 non-GAAP earnings per share were $3.81 per share, an increase of $1.27 per share, or 50% for 2020. The year-over-year increase is mostly driven by higher battery volume and gross margin expansion, partially offset by the impact of inflationary costs in 2021, as well as the impact of higher share counts. We delivered non-GAAP EBITDA of $52 million in the fourth quarter of 2021, resulting in a record full-year non-GAAP EBITDA of $230 million. In comparison to guidance, Fourth quarter and total year non-GAAP EBITDA includes the impact of additional variable compensation from significantly stronger product bookings, M&A-related expenses, and certain key investments. Cooling 2021 non-GAAP EBITDA margin to 17.3%, an increase of 240 basis points from the previous year, despite the stationary headwinds of approximately 100 basis points. Moving to cash flow. In the year 2021, free cash flow of $173 million was a record, and it reflects the overall increased demand in the business, strong cash collections, and working capital management. At the end of the fourth quarter of 2021, the cash balance was $349 million, down from $482 million as of September 30, 2021, The $133 million decrease in cash is the result of financing activities related to our recently completed acquisitions of Recept and MarketTouch, partially offset by operating cash flow in the quarter. Pre-cash flow during the fourth quarter of 2021 is $42 million compared to $27 million from the pre of this quarter and $65 million in the fourth quarter of 2020. In terms of accounts receivables, day sales outstanding for the fourth quarter of 21 were 70 days, excluding the impact of reset and market purchase acquisitions, which were completed in the last few days of 21 and therefore did not contribute significant revenue over the quarter. Today's sales outstanding in the fourth quarter of 2021 reflect a decrease of three days over the last quarter and a decrease of one day from the fourth quarter of 2020. Inventories as of December 31, 2021, for $120 million, an increase of $16 million in the prior quarter and an increase of $24 million in the fourth quarter of 2020. It's important to note that the inventories as of December 31, 2021, include approximately $10 million of advanced purchases and receipt of semiconductors that we believe will help reasonably secure supply for future customer implementation timelines. We continue to execute very well on our global supply chain process improvements and implementing management initiatives. Now, moving on to our full year 2022 guidance. Full guidance includes our recently announced acquisitions, including FES Entercare, Reset, and Market Touch. As we look to the rest of the year, we continue to expect strong revenue growth in customer demand and a record backlog. Our record 2021 product difference reflects strong market demand, including momentum in advanced services. We continue to have high confidence that we have secured supply for semiconductors and critical components to 2021 in order to deliver our mission-critical systems and connected devices to our healthcare customers. The global supply chain and procurement teams have done a great job addressing these challenges and minimizing potential disruptions to our customers. We expect 2022 product bookings to be between $1,370,000,000 and $1,430,000,000. We expect total GAAP and non-GAAP revenues to be between $1,385,000,000 and $1,410,000,000. We expect GAAP and non-GAAP product revenue to range between $950 million and $965 million. We expect GAAP and non-GAAP service revenue to be between $435 million and $445 million. At the midpoint, this reflects an increase in total non-GAAP revenue of $265 million, or 23% over the prior year. We expect the Fed services revenue as a percentage of total revenue to increase from 10% in 2021 to approximately 15% in 2022. We expect total year 2022 non-GAAP EBITDA to be between $242 million and $255 million. This non-GAAP EBITDA guidance reflects, one, the expected impact of inflation, And secondly, integration costs for recent acquisitions. As we noted for the last two quarters, we are experiencing the impact of inflationary headwinds. This continues to be primarily due to semiconductor and other component costs, and to a lesser extent, freight and steel and other raw material costs. The total year non-GAAP EBITDA guidance includes the impact of approximately $30 million to $35 million of cost inflation in 2022, as compared to cost paid for semiconductors, other materials, and trade in 2020. The 2022 long-term EBITDA guidance also includes $8 million of integration costs for the SDS Entercare, RESEC, and market project positions. As we have noted, we have had a particularly active year in terms of M&A. As expected, there are integration expenses associated with this activity. Generally, the majority of integration expenses are incurred in the first year after acquisition. We have a strong balance sheet, which we believe positions as well for future growth, and we look forward to continuing our plan to execute on a value-enhancing, disciplined M&A strategy. Now, I'll provide some color to the growth margin outlook for 2022. We are working through product backlog and pipeline prior to pricing actions. As a result, we expect that the pricing actions we have put in place will begin to have a greater impact near the end of 2022 and as we move into 2023. Included in our non-GAAP EBITDA guidance is the favorable impact of these pricing actions. We expect those margins to modestly expand in the second half of 2022 as compared to the first half of 2022. We expect 2022 non-GAAP earnings to be between $3.75 and $3.95 per share. This takes into account a higher expected blended tax rate in 2022 and the expected share count increase from employee stock plans. Hopefully in 2022, we are assuming an effective blended tax rate of approximately 6% in a non-GAAP EPS guidance compared to 4% in 2021 actuals. For the first quarter of 2022, we are providing the following guidance. We expect total first quarter 2022 GAAP and non-GAAP revenues to be between $312 and $318 million, with GAAP and non-GAAP product revenues between $216 million and $219 million, and GAAP and non-GAAP service revenues between $96 and $99 million. We expect first quarter 2022 non-GAAP EBITDA to be between $45 million and $49 million. And we expect first quarter non-GAAP earnings per share to be between $0.65 per share and $0.72 per share. In 2021, we made the decision to secure what we believe is an adequate supply of semiconductors and other key components via direct buys and pre-buys from brokers and OEMs to support our customers. We're confident in our supply of some of the inductors and other key components through 2022 to support our health system customers that are critical to healthcare. We are anticipating supply chain challenges and inflationary cost impacts, particularly for freight and steel, with the stock markets, to continue throughout 2022. As I noted earlier, the majority of our current product backlog and pipeline reflects pre-inflation pricing. As a result, we expect that the pricing actions we've put into place will begin to have a greater impact near the end of 2022 and as we move into 2023. We believe that we have built a company that's able to adapt and scale very well and believe it's well-positioned to deliver over 2025 global revenue growth targets, driven by a number of factors, including growing event services revenue, benefits from long-term sole source customer partnerships, including multi-year co-development plans, and increased average yield size. We continue to have line of sight and are committed to our 2025 profitability targets. However, it's important to note that we issued these targets prior to the current stationary environment. We continue to execute pricing actions, manufacturing savings, and process efficiencies. As we continue to scale the business in the coming years, we expect to invest and redeploy some of these savings into value-creating growth and innovation initiatives. In summary, we're very pleased with our commercial, operational, and financial results for 2021 and the forward visibility and resilience of the business. We continue to take steps to address inflationary headwinds and supply chain disruptions in the market, and we remain confident in a long-term outlook. We look forward to updating your progress in the coming quarters. With that, we would like to open the call for your questions.
spk01: At this time, I would like to remind everyone, in order to ask a question, please press star, followed by the number one on your telephone keypad. Your first question comes from Jessica Testan with Piper Sandler. Your line is open.
spk11: Hi, thank you so much and congratulations on a great 2021. So I think we were just curious if you could maybe help us understand how the price increases work within the context of either GPO contracts or under your sole source contracts. And specifically, is price flexibility based into the sole source contracts or do you have to negotiate each of those on a kind of one-on-one customer by customer basis? Thank you.
spk08: Thanks. Hey, it's Scott Settleman. So I think a couple of questions there. Your first one was really how the GPO pricing impact long-term sole source agreements. How does pricing in the long-term sole source agreement? I think for the latter point, typically the sole source agreement will have a price block of maybe a first couple of years, one or two years. And then after the fact, pricing can adjust, sometimes tied to CPI, et cetera. But after that initial price block, it can adjust. GPO pricing really doesn't come into any kind of effect in a long-term sole search agreement. It's outside of that. So long-term sole search agreements are negotiated directly with the system.
spk11: No, I think that's actually helpful on that. And I guess this one is for Peter, just What explains the improvement in adjusted EBITDA margin expansion over the course of the year? Is that mostly owing to cost of goods, or is that integration cost concentrated in the first task? Any comment would be helpful. Thanks again.
spk06: Yeah, great question, Jessica. I'm going to go back to the additional pricing action. We do have flexibility on service pricing. That was a pricing action that we talked about in the last race call. So that is starting to build up. and flow through as well. We've also talked about in the prepared remarks in the last call that we have increased the margin approval levels as well. So that's your question around the improvement of gross margins through the year. We delineated in the prepared remarks between the first half and the second half. So the way to look at this, there's really two factors there. One is the pricing action. So the majority of our product backlog and also a portion of our quotes are from before pricing actions. So the pricing actions kicked in in the quoting process, the sales process, and we expect that to go through the backlog into revenue and to offset a larger portion of the inflation near the end of 2022 and as we move into 2023. And we expect now that pricing actions will fully offset inflation beginning in the first half of 2022. So you see that dynamic. And then from an inflation perspective, we had initiated pre-buys initially via brokers and then directly also via OEMs. And so we see that pricing and the cost easing over time, starting probably really near the end of 2022 and then flowing into 2023. So those two factors drive a lot of the gross margin mods and improvements that we currently see. From the first half to the second half of 2022.
spk11: Got it. Thank you.
spk01: Your next question comes from the line of Stan Berenstian with Wells Fargo. Your line is open.
spk09: Hi. Thanks for taking my questions. Maybe a couple on bookings. I guess first, how much of the bookings guidance is coming from M&A? Could you quantify that number for us?
spk06: Yes, the bookings guidance and also revenue is a couple of points from the four-year impact of M&A compared to last year.
spk09: Okay. I guess one thing I would ask, just in the context of your bookings guidance, can you give some insight into the conversations you're having with sales reps You know, are sole source clients expressing any notable changes, maybe in the product or services roadmaps that they're contemplating, or perhaps in the pacing of product implementations over the coming year? Can you comment on anything along those lines?
spk06: We'll probably comment here. So what we see, really, a couple of factors that I was having to prepare remarks on. So we really see the strong momentum in advanced services, and that is a clear differentiator, and very often, the vast majority of all deals are really that makes the choice for us, for Omicel, for Omicel to be the partner. We have not seen any change in implementation timelines related to COVID or changing demand. Demand is very strong from our perspective, what we see in the field. Maybe Scott, do you want to comment as well?
spk08: We're not seeing from an implementation perspective, we're not seeing any impact from COVID.
spk06: Okay. Did you have a second part of your question as well, unless it will be fully answered?
spk09: No, I think that gives me some color. I guess maybe just switching gears, I'd like to maybe ask a question on the 340B cells that you're generating. You know, qualified hospitals already have point solutions in place. I'm trying to understand what's really driving the incremental growth for that business. Is it mainly tech-enabled services, or are you also displacing existing point solutions as you're generating these incremental sales?
spk08: Right. So our existing Omnicel 3.0 business is a tech-enabled service that's a PPA that includes Bitcoin software and and expert services that advise the hospital on how to manage the 340B program and how to optimize it. We are displacing other vendors, and we're doing that because as part of the portfolio, it is an element of the portfolio that health systems engaging us in a much broader relationship. The 340B solution is only one of many services and products that that health system is acquiring from us. And we've got a we've got a thoughtful uh vision for how you can integrate the 340b split billing software into other aspects of our software and other synergies between 340b and opportunities such as ip and so that's something that health systems are keenly aware of and again i'll point you back to the the health system that we recently announced the sole source agreement with UMC and Lubbock, Texas, which engaged us, both the 340B, central pharmacy, points of care, and enliven. And the general impetus there was not only from a health system, which I think is a great example of health systems generally, focusing on optimizing inpatient, but also this health system, like most, is very much engaged and focused on optimizing ambulatory and outpatient. And when you start to do that, then services like 340B and patient engagement programs like in Hive and Health become incredibly important to the health system.
spk09: Got it. Got it. And then can you comment at all on the trajectory of growth in that segment?
spk06: Yeah, this is Peter. I would say it's in line with the general growth of the business.
spk07: Yeah, and just that RCEP, of course, allows us to have a different angle. Our current 3.B product uses contracted pharmacies. RCEP would use the pharmacies of our provider. And so that allows an additional option for three, four customers in the provider world to use either one. So we're really happy with that acquisition, and it really broadens our specialty pharma offering and really allows us to meet, I think, both the demands of providers and pharma.
spk09: Okay. And then maybe just a clarifying question, I think what Jess was asking earlier, earlier on the pricing adjustments. So when you're commenting that towards the end of 2022, you're going to see everything kind of back to normal from a pricing standpoint. Are we thinking about from the perspective of now bookings by the end of 2022 will be priced accordingly? Or is the mix of bookings still going to have some kind of a drag where when we're thinking about next year, you're still going to have a margin impact coming from like inflationary pressures, maybe not as much as you're seeing now, but we should still factor some kind of an impact going into next year because not the entire full-year bookings have that pricing adjustment. Is that the correct way to think about?
spk06: Yes, I think there's two questions there. So from a ledger impact perspective to the financial results, we estimate that the pricing actions will offset a larger force of inflation towards the end of 22 and into 23. And we expect these pricing actions to fully offset the inflation starting in the first half of 23. So that's the way to think about that. And we have, of course, analyzed, estimated our quotes in the pipeline. A portion of those are, of course, pre-pricing actions. And when they book, if you will, they will be kind of net negative from a inflation and pricing exit perspective, but more and more, of course, newer quotes since we started the pricing exit. And in the third quarter, we'll absorb, offset most of the inflationary costs. But we continue to manage, of course, inflation as well. We do see, what we see in the industry, and what we also are looking at in the industry reports, we see inflation continuing also to an extent into 2023, but to a lower extent.
spk09: Scott, thanks so much.
spk01: Your next question comes from the line of Scott Schoenhaus with Stevens. Your line is open.
spk05: Hi, team. Happy Valentine's Day. So, Peter, I think you said there was a $35 million impact to margins from inflationary cross-pressures, and then was it $15 million from integration costs? What was the second number you provided to the bridge?
spk06: Yeah, so thank you for the question. So inflationary cost, we estimate to be in the range of $30 million to $35 million. And then the second is the market rate, and the market rate is $8 million of acquisition integration costs, with the idea that most integration costs we model and execute on integration of strategic acquisitions is in the first year, so in 2021. 2023, that number should be significantly lower, if you will. One other element, talking about acquisitions, is that the acquisitions that we've done, the free acquisitions, in general or in total, are of an average lower EBITDA percentage than the core total business, right? So that's also a headwind in 2022, which you can also factor in.
spk05: Yeah, that was actually – That was actually what I was getting to and where you really see leverage on the SG&A side, I'm assuming.
spk06: Over time, yes, over multiple years.
spk05: Well, that helps me get to the bridge. So just another question. So services revenue, you got it to about 31% of your total overall mix for 2022. That's a healthy increase from the end of even this past year. Should we expect that kind of momentum to continue annually going forward, Peter?
spk06: Yeah, thank you. The answer is we should not expect that, absent any additional acquisitions. The most of the difference between the organic revenue growth and total revenue growth is, of course, inorganic, and most acquisitions, most of the revenue is All the three acquisitions we did in the last year are actually being recorded as service revenue. So it's quite a bit of growth there on an organic basis as well.
spk01: Thank you.
spk06: Yeah.
spk01: Your next question comes from the line of Ann Samuel with JPMorgan Chase. Your line is open.
spk02: Hi, guys. Thanks for taking the question. You spoke to increased booking size and was hoping maybe to talk a little bit about, you know, what you would attribute that to. And are you seeing any benefit yet in those numbers from some of the labor shortages that you noted?
spk07: Well, I think most of the booking size is because people have underinvested in infrastructure, particularly around medication management. And the real desire as these large providers want to create a standard and make a strategic investment, just not answer some of the problems, but put an entire platform to digitize their whole network. And so once that sort of presentation gets to the right level, usually the C-suite, People want to invest strategically over many years to automate and deliver on the relief of not only labor shortages, which have become even more acute these days, but also accuracy. And some of the labor shortages have to do with some of the most difficult people to find, like an experienced pharmacy technician who is compounding IVs. Well, moving to an automated robot to compound IVs really just doesn't relieve some headcount, but it relieves some headcount that people that are the most difficult to find and also in an area that is a problem. It could be a problem with danger if you're not doing it properly. So, you know, it really means that you take a strategic approach to the total partnership with OmniCell in a broader spectrum.
spk08: I'd answer that. That's obviously absolutely correct. I'd add to that that the strategy has been explicit on two fronts, which is one, focus on the large health systems and engage those large health systems with a comprehensive portfolio, namely the advanced services. And where that's been really working for us over the last couple of years, and namely last year, is that we have been winning those larger health systems on the strength of the differentiation provided by the advanced services, And I think what we're seeing is that I think over the last 14 large competitive conversions, 11 of those have had at least one advanced service in addition to the point of care. So these health systems are engaging, and because of the strength, they're engaging quite heavily with us.
spk02: That's really helpful. Thank you. And then maybe just one, I apologize if I missed it, but was wondering, given some of these near-term inflationary headwinds that you're seeing, you know, does that impact your 2025, you know, profitability targets at 400 basis point expansion that you had called out?
spk06: Yeah. Yeah, so it's a great question. In the prepared remarks, we commented on the 2025 framework, right? So from a From a revenue perspective, we feel very confident on being able to achieve that. From a profitability perspective, of course, there's a caveat on inflation. However, we have live upside via execution of pricing actions, productivity, profit improvement, and cost-efficiency leverage.
spk02: Great. Thanks very much.
spk01: Our next question comes from the line of David Larson with BTIG. Your line is open.
spk10: Hi. Can you provide a little more detail around the $30 million to $35 million in inflation pressure for next year? What portion of that is coming from semiconductors versus freight versus steel? And then it sounds to me like quotes were provided, but then after those quotes were provided, the prices of the materials increased, which is why there's a margin headwind here. I mean, why can't you just sort of go back to the customers and be like, hey, inflation popped up. We've got to adjust the quote. Is that possible to do or not? Thanks.
spk06: Yeah. So, great question. So, on the first part of the question, so the $30 to $35 of inflationary costs, you should think about roughly half of that is semiconductor-related, and the second half is roughly equally defined between freight cost inflation and steel cost inflation. And on the second part of the question of going back to customers with quotes in hand or orders in backlog, there is limited flexibility to do so, in terms of not to do that. Again, we're focused on the long term, focused on the customers. Part of that's also, of course, a pre-buy of semiconductors, which gives us a high level of confidence that we can supply uh all right customers but it does come at a transitory inflation cost here in 22 and you see somewhat equity in 23 as well okay that's helpful thank you and then assuming that prices um do cover these inflationary costs in early 23 then for your 2025 guidance for earnings
spk10: It seems to me like maybe, worst case scenario, that could get pushed back by one year, right? Because, I mean, the prices are going to offset the inflation a year from now. So maybe it could get pushed back a year, worst case scenario. Is that reasonable or not?
spk06: Yeah, I think that's a great follow-up question. So we're working for the inflation, so there's uncertainty there. And, of course, we have been aware of testing here also incrementally, year-over-year, in the advanced services and cloud, given the strong demand. At DevTet, like we said earlier in the call, we are executing all these pricing actions. We believe that those pricing actions will continue or stick, if you will, on an ongoing basis, also in the out-of-years. And then we're working cost productivity, manufacturing settings, and leverage.
spk07: Yeah, leverage on the advanced services as well. Many of the advanced services are early stages where the margins aren't as leveraged up as they will be as they gain scale. So certainly as we go on through 2023 to 2025, these will scale and deliver much better gross margins. Yeah.
spk10: Great. And just one more, if I can squeeze one in. For the $8 million in integration costs, are those one-time in nature, or will they recur in 2023? And if they're one-time in nature, I mean, can't we think about them as being kind of one-time in nature and exclude them from adjusted EBITDA? What are the $8 million?
spk06: What's the $8 million box? That's a good question. They are one-time in nature, just to be clear. We have not excluded those costs. We've not adjusted for that cost in our EBITDA guidance. So they are a drag on EBITDA earnings in 2022. For our integration plans, we like to integrate strategic acquisitions for the majority in the first year. So the integration cost in 2023 is significantly lower. So think about maybe $1 or $2 million compared to the $8 million in 2022.
spk10: Okay, thanks very much. Sounds like it's sort of a temporary headwind here that will be overcome in 23. Thank you.
spk01: Your next question comes from the line of Matt Hewitt with Craig Callum Capital. Your line is open.
spk04: Good afternoon. Thank you for taking the questions. A couple different fronts here. Maybe first up, and sorry to keep asking about the inflation, but Peter, you specifically talked about the semiconductors, trade, steel. I'm curious, you're also seeing it on the wage side as well, particularly as you get more and more ingrained in the services business. Are you seeing it on that side as well?
spk06: Yeah, that's a great question. We believe we were a very attractive employer. We've been able to hire a great talent. As you've seen in the last couple of quarters, we haven't seen quite any significant labor inflation. So that's probably too early to tell. We do think our compensation is good compared to market.
spk04: Okay, great. And then separately, I'm curious, and this is maybe a little bit out there, but over the past couple of years with the pandemic, procedure volumes are down, patient visits to their doctors are down, all of that, unless it was tied to COVID. And I'm curious how that is, you know, that if you want to call it a headwind has impacted like the 340B and some of the markets that you've moved into here recently. And as we come through the pandemic, Is it your expectation that you'll actually start to see increased growth in those markets, which you will now be the beneficiary of?
spk07: Well, I think for sure, as I said in my prepared remarks, we do expect volumes of big providers, particularly hospitals, to go up. I think it was about 4%. Many of it was delayed. But that really hasn't slowed down the buying from – from what we've seen. So I think it is just going to be more healthy for our customers as we move forward because there will be more volume to go through. And I think it's, you know, and not just in, you know, the acute care, but also in outpatient areas. So just like Scott was talking about UMC. So I think people have all deferred. many of the attention to some items in their health care that they should have done in the pandemic. And I think, as you say, as the Omicron is moving away, some of the volumes should be increasing.
spk04: That's helpful. Thank you.
spk01: Your next question comes from the line of Dev Lurysuria with Birnberg Capital Markets. Your line is open.
spk03: Jeff, are you there? Can you hear us?
spk00: Hey, good evening. Can you guys hear me?
spk03: Yeah, we can.
spk00: Okay, great. Thanks for taking my questions. So just to kick it off on this inflation, hopefully circle this out, I just want to confirm, I think you mentioned on wage inflation that it wasn't maybe considered in, you know, 2022, 2023 in regards to your inflation, $35 million impact. I just want to confirm that. I guess that doesn't include any kind of wage inflation in there.
spk06: Well, we always, you know, we always plan, of course, we plan for, you know, good bear increases, but, you know, it's tied to inflation as well. If you say $5 million in 21, that's
spk07: Nothing extraordinary about that.
spk00: Okay, great. And then maybe just jumping to kind of the top line, on the revenue side, just trying to get some more color around, you know, these tech-enabled SaaS services and maybe, you know, disaggregated by the end market. You know, where are you maybe seeing more momentum? You know, for example, I guess OmniSell 1, you know, maybe – kind of an easier sell with, you know, sole source agreements that already have, you know, ADS, you know, versus maybe, you know, going after new retail customers or payers. So just any color on kind of the momentum, more disaggregated on that side would be helpful. Thank you.
spk08: Yeah, I think, Mrs. Scott, in terms of markets, I mean, the focus of the business and the channel has largely been the large health that's not exclusively acute the large health systems are increasingly a expanding through other hospitals and increasingly expanding an ambulatory outpatient and now even a hospital at home or home health care and i think when you look at that i mean that's driving a lot of demand to automate potential pharmacy not only to fill the acute care beds but to support a large geographic enterprise institution on the cell one is linking that entire health system up to help them in effect, act as an air traffic control function to make sure that the right drugs are in the right locations, both inside the hospital and outside the hospital. Things like 340B, Recept, now are helping that hospital grow the top line, whether that's through retail meds, management of the 340B business, that's certainly on the outpatient side. And then in Levin, as we mentioned with UNC Lubbock, we're seeing more and more demand from health systems to actually utilize tools and solutions like the Enliven Health Portfolio, which is now pretty comprehensive because we've added FBS AmpleCare and Market Touch capabilities. That's showing there's real demand for the health systems. Again, the primary market for those are the more traditional retail pharmacy, but we're certainly seeing the vision for the strategy with the whole way that the world would certainly start to intertwine and that we will be well-positioned with a fully comprehensive solution, so.
spk00: Okay, that's helpful. I guess maybe taking like a customer, for example, on N11 Health, you know, Walmart as an example, just in regards to recurring revenue growth and also maybe also on like the gross margin side, a double-edged question here. So on the revenue side, after you, you know, do the implementation on the SaaS side, what kind of growth drivers are there, you know, after you roll it out, I guess, you know, And then on a gross margin side, you know, I would assume there's some implementation, you know, costs in the first couple of years. Would you expect that to improve, you know, I guess at what rate would you expect it to kind of improve on an economic basis per client just on the advanced services and tech side? So thank you.
spk08: First point, which is really around where it's growth from an enlivened customer. So very traditional fast, really on two dimensions. One dimension is that the subscription product, that subscription is tied to, call it number of stores, number one, and number two, what services are within that subscription. You know, any large and live and customer revenue would scale in two dimensions, one of which is how many stores am I adding into the platform, and then how many services am I subscribing within the platform, right? And so, you know, the customer you mentioned, you know, may be rolling out all the stores on one of the platform, on one of the subscription or one of the services, call it, you know, scheduling or IVR, et cetera, et cetera. The growth comes really with that inside sales notion of engaging that customer to add more of the services. So maybe I started with IVR, and now I want to add MedSync and financial analytics and scheduling and then ultimately participate in some of the payer marketplace and activities. So that's how you can see that growth dimension. Gross margin, we really have never commented on the particular gross margin. I've been alive and know how it would scale.
spk00: Okay. But I guess just generally, would you expect the gross margin to kind of increase over time after you win a customer?
spk08: For sure, right? Even a fast business has a fixed cost associated with a given customer that would scale over time as you add more money through it, for sure.
spk00: Okay, great. Thank you.
spk01: There are no further questions at this time. We'll turn the call back to Randall Lipps for closing remarks.
spk07: Hey, look, everyone. Thank you so much for joining us today. I mean, Army sales have all been about growth over the last few years, and yes, there's some headwinds in the inflationary places and some M&A costs and integration costs. But we've got a good game plan. And most importantly, we're going to get these systems installed for our customers so that they can improve health care for everyone. And we'll get back to our normal growth sport as we go down the road. Thank you so much. We'll see you next time.
spk01: This concludes today's conference call. Thank you for joining. You may now disconnect.
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