Omnicell, Inc. Q1 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to Omnicell's First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Ms. Kathleen Nemeth. Please go ahead.

Thank you, operator. Good afternoon, and welcome to the Omnicell first quarter 2021 financial results call. On the call, with me today, are Randall Lipps, Omnicell's Chairman, President, CEO and Founder; Scott Seidelmann, 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 risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell annual report on Form 10-K filed with the SEC on February 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. The date of this conference call is April 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, duplication, or rebroadcast without the expressed written consent of Omnicell is prohibited. We have 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 key customer wins. Finally, Peter will cover our results for the first quarter, our guidance for the second quarter, and our total year guidance. Our first quarter financial results are included in our earnings announcement, which was released earlier today and is posted in the Investor Relations section of our website at omnicell.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 earnings announcement. I will now turn the call over to Randall.

Good afternoon, and thanks for joining us today. Well, Omnicell is off to a solid start for the year, and I'm proud of the outstanding results delivered by the team this quarter. We exceeded the top end of our guidance ranges for revenue, non-GAAP EBITDA, and non-GAAP EPS, posting record revenues of $252 million and non-GAAP earnings per share of $0.83 for the first quarter. We believe the evolved results reflect our customers' trust in Omnicell and the recognition of the significant benefits inherent in the vision of the autonomous pharmacy. Our first quarter performance also reflects excellent operational execution and financial discipline, with a non-GAAP EBITDA of $51 million, and strong free cash flow of $44 million. Peter will review the financial results and the guidance for the second quarter and the full year in more detail later in the call. It's been about a year now since the COVID-19 pandemic fundamentally altered our society and our daily life. During this time, we have focused our efforts on supporting our healthcare partners through this unprecedented period. We successfully pivoted virtual installations at hospital sites, and like many companies, we implemented remote work practices. We've learned a lot over the last year, and we believe the industry now recognizes that medication management is a mission-critical element of their care delivery model. It's been a privilege to support our customers as they work through modernizing and optimizing their medication management systems, and we are confident that Omnicell is well-positioned to enable them accomplish this effectively and efficiently. Now turning to recent customer successes. We increased our number of long-term sole-source contracts during the first quarter with the top 300 U.S. health systems. One of the new wins is the largest single sole-source agreement in Omnicell's history. A top 10 U.S. health system has chosen Omnicell to help them design and implement complex pharmacy workload and support their journey toward the autonomous pharmacy. We now have long-term sole-source agreements with 147 of the top 300 U.S. health systems. We are honored to have been selected for this critical infrastructure initiative and believe a win of this magnitude illustrates that our strategy and our execution are working. Our second quarter results got a solid start with the addition of Scripps Health as our 148th long-term sole-source agreement. Through this new partnership, Omnicell will be implementing automated dispensing systems for patient care areas and operating rooms, cloud-based intelligent solutions, and tech-enabled services. This newest win is a competitive conversion opportunity for us and underscores the strength of Omnicell's value proposition. We believe that the power of our customer relations is unique within our industry, as we are truly strategic partners with our customers and work closely together to understand, design, and implement complex pharmacy automation workloads. This enables pharmacy staff and care providers to spend their time where it matters most, caring for patients. It is the quality of these relationships, together with our innovative products and services, that enables us to achieve market share gains and improve performance metrics. Importantly, our advanced services portfolio which includes several subscription-based technology-enabled services such as Omnicell 340B, EnlivenHealth, and Omnicell One delivered strong results for the quarter and continues to be well received by the market. As we continue to enable the vision of the autonomous pharmacy, we are evolving from a product hardware company to a technology-enabled software services business powered by the cloud. 2021 marks nearly 30 years since the Company was founded, and throughout the years, I've learned that evolving this business and undertaking a shift in strategy requires us to continue to elevate our culture. For instance, three years ago, I hired Scott Seidelmann to build out our commercial organization to realize our vision, and Scott has since assembled a great team that has been responsible for some of our recent strong execution. With this mindset, we welcomed Christine Mellon to Omnicell during the first quarter of this year, in the newly created role of Chief People Officer. The autonomous pharmacy vision requires investments in our people and culture, which is where this role is so critical for us at this time. Christine brings more than 25 years of experience in high-performing software and technology companies such as Oracle and most recently, CSG. We are delighted to welcome Christine to the team. Achievements of the years have always been driven by our people, individuals from diverse backgrounds who share a commitment to our vision and seek to make a positive impact in the world. During the last year, our employees have shown great dedication in their efforts despite the many challenges brought by the pandemic. Now before turning over to Scott, I wanted to highlight our recently released inaugural ESG and corporate responsibility report, which many of you have probably already seen. We recognize that we are accountable, not only to our customers and our shareholders but also to the global community. We are focused on innovating to drive sustainability across our business, ethically and responsibly sourcing materials by the internationally recognized OECD guidance, and elevating our diversity and inclusion initiatives. We hope you find our first report helpful and we look forward to continuing to provide updates on our progress. Now looking ahead, I remain confident and believe that we are well-positioned to continue to drive growth and add real value to the communities we serve. We're excited to continue to build on our ramp-up in 2021 and beyond, and we appreciate your support and confidence in Omnicell. And with that, I'll turn it over to Scott.

Thank you, Randy. Before we discuss some of the customer highlights and our progress this quarter, I want to briefly expand on the point that Randy just mentioned regarding the organizational work that we have done over the last few years. Once we translated the autonomous pharmacy vision into a strategy, we clearly needed to evolve our organization design from one focused on delivering primarily single hardware product to one that could deliver new products and technology-enabled services built on the cloud. We significantly changed our organizational design by elevating our account management structure and nationalizing our sales and customer organization structure that has been recognized by Gartner as best in class for the market to buy. We also added professional services, product management, customer success, and software engineering functions. Through that transformed organizational design, we recruited leaders with expertise in technology-enabled services, customer experience, and software development. So today, we are fortunate to have a world-class commercial leadership team, which is largely responsible for our exciting results. The combination of our strategy, transformed organizational design, and new leadership is helping us realize the vision of the autonomous pharmacy. Practically, that progress can be seen in the continued expansion of our long-term customer partnerships and competitive conversions. As Randy mentioned, we increased the number of sole-source agreements in the first quarter, bringing our total to 147. Our 146th sole-source agreement was a top 10 health system, which selected Omnicell to deliver medication management solutions across its network of more than 65 hospitals and 560 facilities in the U.S. — the largest contract in our Company's history. Additionally, we signed our 147th agreement in Q2 with a North Carolina-based four-hospital system. Our second quarter is off to a solid start with the addition of Scripps Health as our 148th long-term sole-source agreement. Through this new partnership, Omnicell will be implementing its XT automated dispensing systems and its cloud-based intelligent solutions. This is a competitive conversion and underscores the value of our market position. Another highlight for the quarter is the competitive conversions with an Illinois-based academic medical center that will be expanding their footprint from XT automated dispensing system across their integrated health network. One of the reasons that our sole-source strategy is winning in the market is because of our unique advanced services portfolio. Let's walk through some of the highlights. Omnicell One is the cloud-based technology-enabled service that combines software, analytics, and experts to help health systems manage drug inventory, increase provider efficiency, and reduce compliance risk. We continue to see strong market demand for this unique solution. Recently, a West Virginia-based medical group subscribed to Omnicell One as part of a multi-year sole-source agreement. Central Pharmacy dispense service is the technology-enabled service that combines our XR2 robots, analytics, and experts to help health systems and essential pharmacies increase provider efficiency for oral drug distribution. We are very pleased with the positive customer feedback we are receiving on this recently launched solution and look forward to continuing to update you on our progress. In the first quarter, Aultman Health Foundation and the Christ Hospital Health Network signed long-term agreements with CPDS. Omnicell 340B is a technology-enabled service that combines workflow software, analytics, and experts to help health systems organize their increasingly complex and financially critical 340B program. We see strong market demand for this solution, and this is a great example of the power of Omnicell's channel to accelerate acquisition. Less than six months after we acquired this technology-enabled services business, we've fully integrated the Omnicell 340B capabilities into our autonomous pharmacy vision. In Q1, the largest not-for-profit healthcare system in Texas expanded its existing Omnicell relationship with the implementation of the Omnicell 340B solution under a multi-year agreement. Also, in Q1, we finalized an Omnicell 340B partnership with an integrated health system in the Midwest and one of the largest community health systems in the Northwest. EnlivenHealth is a technology-enabled service that combines workflow software, analytics, and experts to help retail pharmacies and payers increase survival efficiency, improve economics, and provide population health services to at-risk populations. We are helping retail pharmacies and health plans to improve patient outcomes while reducing costs through advanced technology solutions for patient engagement and communication. We are very proud that EnlivenHealth is deploying an important role in enabling pharmacies and other healthcare entities to efficiently manage the historic COVID-19 immunization effort. CareScheduler automates the scheduling, patient communication, and reporting for administering vaccinations, immunizations, and blood diagnostics — all increasingly important services that pharmacists interact with in their scope of service. This week, we announced a new partnership with Twilio, a global leader in cloud-based digital communications technology. The partnership will enable EnlivenHealth to accelerate the creation and launch of an omni-channel communications solution that allows customers to create a truly personalized experience for the patients and members using interactive messaging, SMS text, chatbots, email, and a Google app. Like a traditional SaaS offering in EnlivenHealth, we'll continue to frequently add new features and capabilities to this platform to increase value for retail pharmacies and payer customers. We are still early in the development of our advanced services portfolio and the realization of the autonomous pharmacy vision. However, overall, we are excited by our recent performance and long-term outlook. Our advanced services portfolio not only creates new sources of revenue growth and recurring revenue streams for Omnicell, but it's key to achieving the full economic requirements there. The powerful combination of our advanced services portfolio with our superior channel and the long-term sole-source contract strategy reinforces our confidence in the advanced services revenue targets we shared with you at the J.P. Morgan Annual Healthcare Conference earlier this year. As a reminder, we are forecasting a 50% CAGR in advanced services revenues from 2020 to 2025, which would represent 20% to 30% of total revenue by that timeframe. Now, I'd like to turn the call over to Peter to discuss our first quarter financial and operational results, as well as our Q2 and full-year 2021 guidance.

Thank you, Scott. Our strong first quarter commercial, operational, and financial results demonstrate the strength of our business model and that our strategy is working. Healthcare system partners are embracing the vision of the fully autonomous pharmacy, resulting in an increasing percentage of high visibility, high flexibility, recurring revenue for Omnicell. Customers see the value in our platform solutions and are partnering with us as they advance their pharmacy automation workloads. I'm very pleased with the progress we're making at furthering efficient autonomous pharmacy and am proud of the solid execution by nearly 3,000 Omnicell team members who continue to be with us. Turning now to our financial results. First quarter of '21 revenues were $252 million, an increase of $3 million over the prior quarter, up 10% over the first quarter 2020, and above our guidance range. First quarter earnings per share in accordance with GAAP was $0.30 per share compared to $0.37 per share in the fourth quarter of 2020, and $0.26 per share in the first quarter of last year. A full reconciliation of our GAAP and non-GAAP results is included in our first quarter earnings press release that's posted on our website. First quarter non-GAAP earnings per share were $0.83 compared to $0.91 per share in the previous quarter and $0.66 in the same period last year. First quarter non-GAAP EPS results exceeded our expectations due to stronger revenue driving several expense items such as travel and the timing of headcount divisions. Non-GAAP gross margin for the first quarter was 50.6%, a slight decrease from the previous quarter, primarily due to revenue mix and increased trade expense. Year-over-year, this represents an increase of 120 basis points, driven by volume leverage, supply chain initiatives, and favorable product mix. The non-GAAP EBITDA margin for the first quarter was 20.1%, expanded by 250 basis points compared to the same in the prior year first quarter, and decreased slightly from this quarter. I would now like to highlight the strength of our cash flow performance. At the end of the first quarter, our cash balance was $548 million, up from $486 million as of December 31, 2020. The $62 million increase in cash was driven primarily by $57 million of cash flow from operations. Cash flow during the first quarter was strong at $44 million compared to $65 million from the previous quarter and $11 million from the prior-year quarter. In terms of accounts receivables, days sales outstanding for the first quarter was 76 days, an increase of five days from the last quarter and a decrease of 17 days from the first quarter of 2020. Inventories as of March 31, 2021, was $96 million, essentially flat with the prior quarter, and a decrease of $70 million compared to the first quarter of 2020 due to conservative efforts and global supply chain improvements coupled with inventory management. Before turning to guidance, as a reminder, I would like to walk through the long-term drivers I mentioned, the framework we initially presented at the J.P. Morgan Healthcare Conference earlier this year, and that we reiterated in our earnings call. I will walk through the highlights now. Our revenue base, which truly is highly visible in nature, is differentiated by five key drivers. First, a very robust product backlog, which increased during the first quarter and is expected to further increase during the year. Secondly, long-term sole-source agreements with now 148 of the top 300 U.S. healthcare centers. Lastly, while nearly all of our revenue is high visibility, roughly 40% of our revenue base is recurring in nature, and we're focused on growing that percentage. As we previously discussed, an area of our business which is driving substantial growth and high visibility revenue is advanced services. We're forecasting a revenue CAGR of approximately 50% in advanced services by 2025, with revenues expected to reach 20% to 30% of total Omnicell revenues by 2025. This is a strategic date to grow revenue with high margins due to economies of scale. We're targeting a company-level total revenue CAGR of 40% to 50% through 2021 to 2025, reaching $1.9 billion to $2 billion in total revenues by 2025. We're targeting a non-GAAP operating margin of 21% and a non-GAAP EBITDA margin of 25%. We have built a company that is able to scale fairly well, and we believe we are very well positioned to deliver on our 2025 targets. Several factors could impact this, including increased business mix, long-term exclusive customer partnerships, economies of scale, manufacturing savings, and streamlined processes. As we continue to scale the business, we expect to redeploy some of these savings into initiatives for growth and innovation. Now moving on to our full-year 2021 updated guidance. Given a strong start to the year, we are raising our full-year non-GAAP EBITDA and non-GAAP earnings per share guidance. As a reminder, our full-year 2021 product bookings are expected to range between $1.090 billion and $1.150 billion. We expect total 2021 revenue to range between $1.085 billion and $1.105 billion. We expect product revenue to range between $770 million and $785 million, and we expect service revenue to be between $315 million and $320 million. We now expect total EBITDA for '21 non-GAAP EBITDA to be between $231 million and $243 million. Using the midpoint of the updated and increased non-GAAP EBITDA ranges, this represents approximately a 21.6% non-GAAP EBITDA margin for 2021, up approximately 380 basis points from 2020. For 2021, we're assuming an effective blended tax rate of approximately 12% in our non-GAAP EPS guidance. We now expect 2021 non-GAAP earnings per share to be between $3.50 and $3.70 per share. We believe that the margin expansion progress is on track toward the 2025 estimated non-GAAP EBITDA margin of 25%. For the second quarter of 2021, we aren't providing quality guidance. As we noted last quarter, we continue to invest in sustaining our business which supports the expected increase in revenue and the timing of customer engagements. Our second quarter guidance also includes additional freight costs given global market conditions. We expect total second quarter revenues to be between $265 million and $270 million, product revenues between $192 million and $195 million, and service revenues between $73 million and $75 million. We expect second quarter non-GAAP EBITDA of $53 million to $56 million. Using the midpoints of the second quarter guidance ranges, this represents an estimated quarter-over-quarter non-GAAP EBITDA margin expansion of approximately 30 basis points. We expect second quarter non-GAAP earnings to be between $0.80 and $0.85 per share. The team has done a fantastic job supporting our customers during these unprecedented times. As Randy mentioned, while many Omnicell employees transitioned to remote work, this was not possible for our supply chain and manufacturing force. They have remained on-site since the start of the pandemic, ensuring that our critical and strategic medication management automation systems are assembled, tested, and transported for healthcare system partners. I would like to thank them for their efforts and accomplishments. We are very pleased with the commercial, operational, and financial results for the first quarter of 2021, and we look forward to updating you on our progress in the coming days. With that, we would like to open the call for your questions.

Your first question comes from the line of Sean Wieland with Piper Sandler.

Hi. Thank you, guys, so much. This is Jess on for Sean. I think we're interested to know just how exactly the COVID vaccine management solution was developed? And if you could talk just a little bit about the innovation process for your customers asking you for this? And how was this rolled out? Was it more a new customer driver? Was it an incremental revenue driver for existing customers and any details on that would be helpful?

Sure. I'll take that. The question focused really on the innovation process around the development of our COVID vaccination solution, which we launched as CareScheduler. CareScheduler is part of our EnlivenHealth platform and is helping retail pharmacists automate their workflows, allowing them to focus on treating patients instead of administrative tasks. Clearly, one of the things we heard loudly from our retail pharmacy customers was that with COVID, the scope of practice for pharmacists had expanded significantly, and pharmacies needed to start handling vaccinations. They simply did not have the tools to manage that in the past. So we moved quickly — over about a six-month period — to develop the software. Regarding your question about rollout to customers, the short answer is both — we see it as a new customer driver and an incremental revenue opportunity for existing customers. We can charge an additional amount for this module and as they upgrade, we believe it enhances existing customer relationships. So we're very proud of our team's ability to develop and deploy this product quickly during a time of great need.

Yes. That's helpful. Can I just quickly follow up on that? So, how is EnlivenHealth driving patient engagement and communication pre-Twilio, or are they essentially going from nothing to a comprehensive omnichannel solution?

So, we might be automating workflows for pharmacy performance including the patient engagement side of things. One of those workloads enables pharmacies to engage patients through IVR, voice, and text message follow-up communication. We were providing basic capabilities prior but the partnership with Twilio enables us to upgrade the quality of our communication across multiple channels — chat, email, and more. We're positioning ourselves to solve more complex problems rather than just delivering basic communication tools.

Hi, guys, thanks for taking my question. So a follow-up on the EnlivenHealth questions. I'm wondering if you guys can talk about how big the retail pharmacy business is as a percentage of your total revenue right now and then as we think about the guidance and as you add more features to the platform. What growth assumptions do you have embedded in the guidance?

Yes, this is Peter. The retail pharmacy segment is a smaller part of our overall business when compared to the hospital side. However, it is growing in line with the company's plans. Right now, we are approaching that segment with a variety of software solutions. In terms of growth assumptions, we expect to see alignment with overall company growth as we continue to enhance engagement and drive delivery there.

Got it. And then the pricing model there, is it just a subscription model based on the number of modules? Is that the right way to think about it?

Yes, it's a combination of the subscription model with services. We can generate revenue through multiple streams there.

Okay, great. And then the other question I have is regarding Omnicell One. You guys are seeing strong customer interest. Can you compare it to some of the other software solutions on the market?

Certainly. The unique positioning of Omnicell One ties together analytics and workflow. Rather than being a pure analytics offering, Omnicell One integrates predictive insights directly into customer workflows. If there's a potential stock shortage, the system proactively notifies pharmacy staff and generates action steps instead of just creating dashboards that may go unnoticed. The depth of our offering is a critical differentiator as we provide solutions that optimize inventory, compliance, and provider efficiency.

Great. If I may add one more question, regarding competitive conversions. What do you think is driving that, and how has it changed compared to last year?

The driver for competitive conversions today is very different from a few years ago when it was more product-based. Now we focus on delivering comprehensive solutions. We help our customers digitize their operations which allows for better performance outcomes. The pandemic has heightened the urgency for automation in pharmacy operations and we are positioned to meet that demand with our offerings.

Hi, Randall, Peter, and team. My first question is on the results and guidance. You beat the top line driven by product revenue, which was about $4 million above the top end of your guidance. But you didn't change your full-year product revenue guidance. Was this just a timing pull forward?

Yes. Our backlog at the end of December 31, 2020, was up 57%. The revenue guidance references customer timing and engagements which may shift during the year. While we achieved the upper end of the guidance range in the first quarter, we're still looking to update our full-year guidance as the year progresses.

Thanks. On the service side, can you talk about 340B opportunities and any traction? You mentioned last quarter that 340B had multiple opportunities in Q4. Any updates?

We are very pleased with the addition of 340B to the Omnicell platform. There is strong momentum in cross-selling among our existing customers. We have already announced the first cross-sell within our top 300 U.S. healthcare systems. We are optimistic about further expansions and will continue to look for opportunities as we move forward.

Good afternoon, and congratulations on a good start to the year.

Thank you.

I have a question regarding the competitive landscape. Are your peers trying to match your strategies or have they stepped back?

There is always competition in the market, but the focus is shifting to strategic partnerships and long-term collaborations in medication management. Customers are increasingly recognizing the value in having a partner committed to delivering ongoing innovations.

I would add that we frequently engage with our customers about their strategic needs and are positioning ourselves to meet those effectively.

Thank you for taking the questions.

Thanks. Peter, did you address the service gross margin in the first quarter? It was different than expected.

On the service gross margin, we are currently investing in scaling our service offerings. We anticipate that both product and service margins will improve as the year progresses.

Is there potential for sole-source deals with existing customers as it relates to 340B?

Absolutely, we are actively exploring opportunities to broaden our customer base through our existing partnerships and the strong demand for integrated solutions.

Thank you for all your questions today. Overall, we are excited about the strong start to the year. As the need for increased automation and digitization of processes grows, our solutions are more strategically relevant than ever for these customers. Our robust and continued momentum underscores that Omnicell remains the customers' choice, and we are excited to continue to build on our platform as we advance the vision of Omnicell. Thanks for joining us today. See you next time.

Thanks, everyone.

This concludes today’s conference call. Thank you for your participation. You may now disconnect your lines.