Omnicell, Inc.

Good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the OmniCell First Quarter 2023 Financial Results Conference 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 1. Thank you. Ms. Kathleen Nemeth, Senior Vice President of Investor Relations, you may begin your conference.

Good afternoon, and welcome to the OmniCell First Quarter 2023 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 contain forward-looking statements, including statements related to financial projections or other statements regarding Omnifil's plans, objectives, expectations, cost savings actions, 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 these forward-looking statements, please refer to the information on our press release issued today in the OmniCell Annual Report on Form 10-K filed with the SEC on March 1, 2023, 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. All forward-looking statements speak only as of the date hereof or the date specified on the call. Except as required by law, we do not assume any obligation to update or otherwise release publicly any revisions to our forward-looking statements. Our results were released this afternoon and are posted in the Investor Relations section of our website at ir.omnicel.com. Additionally, we would 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 issued today. With respect to forward-looking non-GAAP measures, we do not provide a reconciliation of 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. With that, I will turn the call over to Randall. Randall?

Good afternoon and thank you for joining us today. Our team had a solid start to the year and we continue to advance our strategy to transform the pharmacy care delivery model and deliver mission critical medication management solutions for our customers. I'd like to begin with an update on what we are currently seeing in the overall healthcare industry and medication management space, and then walk through our high-level financial results and key highlights from the first quarter. Starting with the market environment, our customers are continuing to face challenges due to labor constraints, and they remain mindful of their capital budgets. While we are seeing some stabilization throughout the industry, we expect the labor and salary cost pressures that hospitals saw in 2022 to continue throughout this year. In our view, these trends underscore the need to automate and modernize the medication management process. And as the industry continues to navigate these challenges, we believe OmniCell is an important part of the solution. As discussed last quarter, we remain focused on taking what we think is a cautious approach to managing the business and have taken decisive action in line with this approach. In February, we announced plans to reduce our workforce across many of our functions in order to lower our cost structure. We have also reduced our real estate footprint to align with our broader hybrid work strategy and in an effort to further reduce costs. We continue to execute on our expense containment efforts, and in the first quarter, we incurred approximately $14 million of non-recurring restructuring and related charges, including $8 million of impairment and abandonment charges of operating lease right-of-use assets and other assets, and $5 million of employee restructuring. Since the inception of our cost containment plan in November of 2022, we brought our office space square footage down by 21%, and our headcount reduction is tracking to our plan, which was originally announced in November 2022 and updated in February 2023. We also continue to anticipate that the annualized savings from operating expenses will be around $50 million for 2023, which does not include the expected volume-based reductions within our cost of sales. Now, turning to our high-level financial results for the first quarter, we think our results reflect our team's operational execution and financial discipline as we navigated another quarter of macroeconomic uncertainty. We exceeded our first quarter 2023 guidance ranges for total product and service revenues, non-GAAP EBITDA, and non-GAAP EPS. We generated total revenues of 291 million, non-GAAP EBITDA of 27 million, and non-GAAP earnings per share of 39 cents. Our solid first quarter performance was primarily driven by the timing impact of revenue, cost, and expense within the year. And we expect to continue executing through the uncertain macroeconomic environment as we progress through 2023. Peter will speak to the key drivers of the quarter in his remarks and provide further details on our financial performance. Moving on to the current customer landscape. Quarter to quarter, it becomes increasingly clear to us that despite a challenging macroeconomic environment, customers continue to choose OmniCell. We are pleased to note a new central pharmacy dispensing service win which includes the XR2 robot with the University of Iowa to support central pharmacy operations. Additionally, a Southern California-based non-for-profit healthcare system signed up for CPDS, including the XR2 robot. A New York State Healthcare Enterprise plans to convert their automated dispensing system footprint across the four-hospital system to OmniCell XD cabinets I'll also upgrading to central pharmacy dispensing service and a major Illinois health system along with a Texas based medical center chose to partner with Omni cell to establish a new specialty pharmacy services program. We have also made meaningful progress on integrating our recent acquisitions and the pipeline for our advanced services portfolio remains strong. Scott will speak about these integrations shortly, and we are confident OmniCell is well positioned for growth in the future. Now, I'd like to briefly discuss our strategic alliance with Long Island University and the opening of the Center for Innovation Medication Management, or CEM, that we announced recently. As we continuously discuss, we find there is a significant burden put upon nurses and pharmacists to handle the bulk of the administrative work. This strategic alliance is intended to modernize and standardize pharmacy education as health systems start to embrace automation in order to foster a safer and more efficient pharmacy. The CIM is a state-of-the-art laboratory with a working fleet of OmniCell devices and is designed to provide an immersive pharmacy technology and analytics experience for LIU pharmacy students. Through the SIM, LIU pharmacy students have early access and exposure to OmniCell devices and should enter the workforce with a competitive edge, as well as hands-on experience with OmniCell's innovative technology. The SAM will also host OmniCell customers for product demonstrations and diligence, and will serve as a training facility for our advanced services operational teams, who will then go to implement this technology at customer sites. We're excited to invest in the future of OmniCell through this important initiative with LIU. and we believe it will bring increased awareness to OmniCell's devices. I also want to highlight that in April, we published our 2022 ESG report, which many of you have hopefully had the chance to see. If you have not yet read it, I encourage you to take a look at the full report on our website. As noted in the report, we have taken steps to bolster our internal systems in order to protect patient data, execute critical efforts to further harden our identity computing environments, and implement various human capital initiatives to foster a culture of inclusivity, wellbeing, and belonging. As we strive to build a healthier world, We are dedicated to furthering our ESG journey through purposeful action. Before I turn it over to Scott, I want to touch on our search for OmniCell's next CFO. As mentioned on last quarter's call, Peter will be stepping down at the beginning of July, and a national search for our next CFO is well underway. I want to reiterate my thanks to Peter for the significant contributions he has made to OmniCell. as well as his commitment to making this a seamless transition process. We'll provide additional updates as appropriate. Now with that, I'll turn it over to Scott.

Thank you, Randall. As Randall noted, with healthcare labor shortages persisting, our pipeline for automated and modernized medication management solutions is strong. Advanced services are a key part of our intelligent infrastructure, which is intended to help customers address problems in their medication management processes from the inpatient bed and acute care setting to the home. We are pleased to report that we have made notable progress integrating our recent acquisitions and expanding our advanced services solutions to ensure OmniCell is well positioned to meet pharmacy and hospital needs. Over the past few years, we have made three key acquisitions intended to enhance our advanced services offerings. Recept, a specialty pharmacy services management provider, FDS Amplicare, a leading pharmacy SaaS solutions provider, and Market Touch Media, a pharmacy technology solutions provider. From an administrative perspective, the integration of all three acquisitions is largely complete. and we are now actively executing our go-to-market commercial strategy. Recept has been rebranded as OmniCell Specialty Pharmacy Services and was introduced to the market in late 2022. In 2023, we plan to focus on integrating customer success functions into our broader organizational structure. FDS Amplicare and Market Touch Media are now fully functionalized within Enliven Health, and we are currently working on merging the technology platforms of all three companies into one connected experience. 340B is now part of OmniCell's inventory optimization service. We continue to further integrate the solution to provide our customers better visibility into ordering, procurement, and medication analytics at an enterprise level. We now have a robust portfolio that we believe is uniquely positioned to support pharmacy care across the entire care continuum. Now, let's walk through a few of our recent wins that we believe highlight the power of our offerings. First, a New York health system with four hospitals plans to convert its automated dispensing system footprint across its four hospital systems to OmniSelf XT cabinets while also upgrading to central pharmacy dispensing service in an effort to support enhanced patient safety and dispensing accuracy. Combining these offerings is anticipated to drive visibility and efficiency for dispensing medications across the health system. We find that health systems are choosing central pharmacy dispensing service to optimize pharmacy labor and workflows through robotics and optimization tools that are intended to help reduce the amount of time pharmacists spend on drug distribution tasks. This technology is designed to support a variety of health system pharmacy settings, as evidenced by being chosen to support central pharmacy operations for a comprehensive academic health system in Iowa, as well as a Southern California-based not-for-profit health system. Our specialty pharmacy service also continues to gain market traction as health systems seem to be recognizing the value of launching an entity-owned specialty pharmacy operation. In the first quarter, a major Illinois health system and a Texas-based medical center engaged Omnicel to establish new specialty pharmacy programs, citing our strong infrastructure and expertise in delivering speed to market for clinical and revenue goals as key drivers for their decisions. As we continue to build strong relationships in the retail pharmacy market, we are also excited to announce that a large national chain has signed a five-year agreement to implement Enliven Health advanced technology solutions in order to increase patient medication adherence. As Randall mentioned earlier, on April 20th, we were pleased to join the Long Island University College of Pharmacy and Health Sciences for the grand opening of the Center for Innovative Medication Management. OmniCell is proud of the strategic alliance we've established with LIU to launch an immersive pharmacy technology and analytics experience that should provide the next generation of pharmacy leaders early access and exposure to evolving aspects of pharmacy technology. To conclude, we believe we have made significant strides this past quarter and we are confident we are well positioned for the future. I will now turn it over to Peter.

Peter? Thank you, Scott.

As we navigate through the ongoing macroeconomic challenges, I'm pleased with the results that we delivered for the first quarter of 2023, which exceeded our guidance ranges. Our first quarter performance was driven by strong execution, disciplined cost management, and revenue timing. I'm proud of our approximately 3,800 OmniCell team members that have continued to deliver for our customers particularly in this challenging macroeconomic environment. Turning now to our financial results. Our first quarter of 2023, total gap revenues were $291 million, a decrease of $7 million, or down 2%, over the prior quarter, and a decrease of $28 million, or down 9%, over the first quarter of 2022. The year-over-year decrease reflects lower point-of-care revenues as a result of ongoing health systems capital budget constraints. Services revenues for the first quarter were $105 million, an increase of 12% over the first quarter of 2022, underscoring that our digital transformation strategy is working.

Total revenues in the quarter were $8 million above the top end of our previously disclosed first quarter 2023 guidance range. primarily due to timing of revenue, mostly within investment services, and certain other phase-widens in the quarter.

Non-GAAP gross margin for the first quarter of 2023 was 44.8%, a decrease of 50 basis points from the prior quarter, primarily due to lower revenue volume leverage. As we noted on our February 2023 earnings call, we expect to see the full benefit of recent cost actions, as we move into the second quarter of 2023 and volume leverage begins to return by the fourth quarter of 2023 as revenue is projected to grow throughout the year. A full reconciliation of our GAAP to non-GAAP results is included in our first quarter of 2023 earnings press release and is posted on our investor relations website. Our first quarter of 2023 earnings per share in accordance with GAAP, were a loss of $0.33 per share compared to a loss of $0.64 per share in the prior quarter and income of $0.70 per share in the first quarter of 2022. Our first quarter of 2023 GAAP earnings per share included the impact of $5 million for severance-related expenses and the impact of $8 million for the impairment and abandonment charges of operating lease, right of use, and other assets that we continue to rationalize our office space as part of our efforts to align with our broader hybrid work strategy and to further reduce costs. Our first quarter of 2023 non-GAAP earnings per share were $0.39 per share, compared to $0.33 per share in the prior quarter and $0.83 per share in the same period last year. First quarter non-GAAP EBITDA was $27 million, an increase of $1 million compared to the previous quarter, and a decrease of $24 million when compared to the same period last year.

First quarter 2023 non-GAAP EBITDA and non-GAAP earnings this year exceeded our expectations due to revenue timing, favorable product and services mix, expense timing, and solid execution.

At the end of the first quarter of 2023, our cash down was $240 million, up from $330 million as of December 31st, 2022. As of March 31st, 2023, we have $500 million of availability under our revolving credit facility. The amount of credit availability is dependent on certain financial components, such as total leverage ratio, and secured net leverage ratio. Free cash flow during the first quarter of 2023 was a $1 million use of cash as a result of timing of cash collections and restructuring related employee compensation payments. We expect free cash flow levels to return positive as we progress through the year. In terms of accounts receivables, day sales outstanding for the first quarter of 2023 was 102 days, an increase of nine days over the prior quarter, primarily due to the timing of enforcing within the quarter. Inventories as of March 31st, 2023 were $141 million, a decrease of $6 million from the prior quarter, reflecting strong inventory management. This is in part due to the strong efforts of our team, as they continue to execute and make progress on our global supply chain process improvements and inventory management initiatives. Now moving on to our full year and second quarter 2023 guidance. As Randall mentioned earlier, we remain focused on taking what we believe is a cautious approach to managing the business. We are pleased to reaffirm our full year 2023 guidance for bookings, revenues, non-GAAP EBITDA, and non-GAAP EPS, reflecting our view of a healthy backlog and our expectations for sequential revenue growth from the first half to the second half of the year and prudent cost management. As we noted earlier in the call, our solid first quarter performance was primarily driven by the timing, impact of revenue, and expense within the year, and we expect to continue executing through the uncertain macroeconomic environment as we progress through the year. Given the ongoing macroeconomic uncertainty, we are managing expenses in a manner that we believe is prudent while continuing to invest in innovation. As noted on the February 2023 earnings call, the majority of the approximately $50 million of anticipated annual operating expense savings expected to be derived from the recent reductions in force and other expense containment efforts is from functions included in SD&A. The expected 2023 operating expense annual savings will be largely offset by the impact of year-for-year inflation in employee salaries and increases in expected performance-based compensation, trend of cost increases, and investments in research and development. We expect non-GAAP operating expenses in total to be flat to down year-for-year with non-GAAP SDNA down, modestly offset by a slight increase in non-GAAP R&D, which reflects our focus on cost savings while continuing to invest in our growth agenda. For the full year of 2023, we are assuming an effective blended tax rate of approximately 6% in our non-GAAP earnings per share guidance. For the second quarter of 2023, we are providing the following guidance. We expect total second quarter 2023 revenues to be between $278 million and $288 million. Your product revenues to be between $181 million and $186 million. And service revenues to be between $97 million and $102 million. The second quarter revenues guidance reflects a moderate decrease from the first quarter performance due to the timing shift of revenues into the first quarter and non-recurring items which benefited the first quarter of 2023. We expect sequential revenue growth from the first half to the second half of the year. We expect second quarter 2023 non-GAAP EBITDA to be between $22 million and $28 million. And we expect second quarter 2023 non-GAAP earnings per share to be between 25 cents per share and 35 cents per share. In summary, we are pleased with our results for the first quarter of 2023 and believe we're executing well and will continue to be a challenging macroeconomic environment. We remain confident in the opportunities we see ahead as we aim to deliver long-term value for all of our stakeholders. We look forward to updating you on our progress in the coming quarters. With that, we would like to open the call for questions.

At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the question and answer roster. Your first question comes from the line of Stan Berenstein from Wells Fargo. Your line is open.

Hi, thanks so much for taking my questions. First, I'd like to maybe start with your point of care xt product line um you know it seems like you're still kind of the same replacement cycle friend of life products i'm just wondering if we're thinking about demand from end of life upgrades you know over the next couple of years we just think about that cohort of just end of life um do you expect any choppiness in that demand over the next couple years that maybe could create demand surges or or demand slowdowns from these upgrades thanks

Hey Stan, this is Peter. So for the upgrade cycle for DXP series, we are in the second half of the upgrade cycle. We have some choppiness during the pandemic in demand for bookings, but we expect going forward a relatively stable continuation of the upgrade cycle.

Okay, and then maybe a quick follow-up here. So you've implemented cost cuts, it seems like you're still doing that. But going forward, is there any change in your philosophy in terms of how you're going to be adding headcount going forward? Are you planning to rely more on a 1099 workforce as opposed to a full-time? Any type of insight you can give us here?

Well, I think we, of course, are cautious about adding permanent headcount as we move forward. We want to be careful about that. But I think we We have used some flexible workforces as we add on for demand, particularly in the implementation area. We'll continue to use those where they fit best. But I think for the most part, we're not seeing a big increase in our workforce for this year.

Thank you.

Thanks, Jeff.

Your next question comes from the line of Scott Schoenhoff from KeyBank. Your line is open.

Hi, team. Congrats on the strong quarter. So you had really nice growth in services revenue this quarter. Can you talk about what the biggest contribution was? Was it mostly from the XR2 robot? Thank you.

Hey, Scott. It's Peter. Well, a variety of drivers really in the services, plus the friend services, not necessarily specifically only the XR2 robot or CPDS as we market it now.

I think as I mentioned, this is Scott, as I mentioned in my script, we're seeing very nice demand from health systems regarding setting up and operating in-house specialty pharmacies, and that's been driving some nice growth for our specialty pharmacy services.

Great, thanks. And then just as a follow-up, what are you seeing in your Enliven Health platform? Are you seeing any areas of strength or weaknesses versus last quarter or prior expectations? Thanks.

Sure. Scott, again, I think we are. We're very enthusiastic about Enliven and the demand there. The general thesis is that as healthcare shifts outside of the hospital to the home, and the importance of managing the total cost of care, the pharmacist has to get much more engaged, and they're going to need tools regarding digital engagement, and they're going to need tools around medical billing. And the Enliven platform is very uniquely positioned with a full complement of those tools to really enable pharmacists to deliver care in that type of setting.

So we're really excited about the demand there. Thank you.

Your next question comes from the line of Matt Hewitt from Craig Holland. Your line is open.

Good afternoon. Congratulations on the strong start to the year. Maybe first up on the specialty services side, could you update us on the pipeline for the specialty pharma and kind of where things sit with the 340B opportunity?

Sure. Hey, Matt. It's Scott Sutland. Yeah, so we closed the Recept acquisition at the very end of 2021 and spent 2022 really focused on integrating that acquisition. We rebanded the product or the platform as OmniCell Specialty Service. And in addition to the back office types of things around integration, the real key there was integrating it into our go-to-market and channel functions because the real demand is coming from health systems and hospitals Given some of the changes that manufacturers have put in place regarding use of contract pharmacies, that's created a nice tailwind of demand for hospitals and health systems to want to stand up and operate specialty pharmacies. The challenge for them is doing so with a very different skill set and it's difficult to do. It's a natural fit for us given the comprehensive nature of the medication management infrastructure that we provide to offer that as a service. We really got that integrated in 22, and now we're seeing a really healthy growth on top of the funnel pipeline and demand, so we're really excited there.

Great. And then maybe a follow-up. Regarding the large retail win, congratulations on that. So it's a five-year agreement. Maybe walk us through the process, the courting, if you will, with that customer, and then Is this more of a hunting license, or is this entire chain going to be adopting the platform? Thank you.

Yeah, in general with Enliven, I'll talk generally with Enliven, those relationships are not hunting licenses. Enliven is a SaaS platform that has various modules, and the business model for that is, generally speaking, you pay for each of those modules X dollars per store per month, like a very traditional SaaS platform. And so when a customer enters into that level of contract, they're committing for utilization of the platform across X number of stores. And in this particular case, it is a commitment to deploy some of the modules across the breadth of their store.

Well, congratulations. Thank you.

Your next question comes from the line of Jessica Tasson from Piper Sandler. Your line is open.

Hi, thank you guys so much. Appreciate the questions and congratulations on the quarter. So I think first off, we were just interested if you could help us understand the implied sequential decline in adjusted EBITDA margins. Is that conservatism or what's driving that 50 basis points or so of sequential margin degradation?