Omnicell, Inc. (NASDAQ:OMCL) Q1 2024 Earnings Call Transcript

Omnicell, Inc. (NASDAQ:OMCL) Q1 2024 Earnings Call Transcript May 2, 2024

Omnicell, Inc. beats earnings expectations. Reported EPS is $0.33, expectations were $-0.08. OMCL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen my name is John and I’ll be you conference operator for today. Please note that today’s call is being recorded. All lines have been placed on mute to prevent any background noise [Operator Instructions] I will now turn the call over to Kathleen Nemeth, Senior Vice President, Investor Relations. Please go ahead.

Kathleen Nemeth: Good morning, and welcome to the Omnicell first quarter 2024 financial results conference call. On the call with me today are Randall Lipps, Omnicell Chairman, President, CEO and Founder; and Nchacha Etta, 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, strategy, objectives, goals, expectations, products or solutions actions to streamline our international product line holistic review of the business or market or company outlook 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 in our press release issued today, and the Omnicell Annual Report on Form 10-K filed with the SEC on February 28, 2024, 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 of 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 first quarter results were released this morning and are posted on the Investor Relations section of our website at ir.omnicell.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 posted with respect to forward-looking non-GAAP measures, we do not provide a reconciliation of these measures to the comparable GAAP measures, as these items are inherently uncertain and difficult to estimate and cannot be predicted on a GAAP basis without unreasonable effort. With that I will turn the call over to Randall. Randall?

Randall Lipps: Thank you, Kathleen, and good morning, and thank you for joining us on the call today. I will walk through our solid financial performance for the first quarter of 2024 and provide an update on the current demand environment and our successful Illuminate 2024 customer event. Beginning with our results, our first quarter 2024 came in above our previously announced guidance on several key metrics. Total revenues were $246 million. Total revenues in the quarter were $4 million above the top end of our guidance range, primarily due to solid execution and timing within both Technical Services and our Advanced Services. Non-GAAP gross margin for first quarter was 39.8%, a decrease of 380 basis points from the prior quarter, primarily due to lower revenue volume leverage.

Our first quarter 2024 non-GAAP earnings per share were $0.03. First quarter non-GAAP EBITDA was $11 million. First quarter 2024 non-GAAP EBITDA and non-GAAP earnings per share exceeded our outlook due to the better-than-expected revenue as well as strong cost and operating expense management. Since our last earnings update, we have retained an external management consultant conduct a holistic review of our business with the aim of streamlining our operations and unlocking shareholder value. Today, we announce our intention to exit one international product line, which was not delivering sufficient returns on our investments. This action was already under active consideration prior to hiring the external consultant. While this was a first small step, we are indeed moving forward with determination and urgency.

Now, let’s turn to the current macro environment and industry landscape. As we move into 2024 there are some reports pointing to encouraging signs that health system finances are beginning to stabilize. Hospital finances reflect a strong start to 2024 with calendar year-to-date operating margins approaching 5%, primarily due to accelerating outpatient revenues, lower contract labor spending and lower average lengths of stay. At the same time, the interest rate environment remains challenging with forecasts for rate reductions unpredictable, and we continue to see areas of the customer base that are still facing budgetary constraints. Therefore, we are continuing to take what we believe is a prudent and cautious approach to our business planning and management.

We have begun to see market traction for some of our initial XT Amplify program offerings. The 500 plus bed academic medical center in Massachusetts is a new customer for Omnicell and is converting its automated dispensing system footprint to XT Amplify cabinets. Our CarePlus solution, which is designed to improve solution adoption and provide data driven performance optimization information supported by expert services, was identified by the customer as a pivotal differentiator that created unique value for their purchase decision and as part of a six-year extension of a sole source agreement, a Kansas-based health system is seeking to maximize the value of their XT technology through XTExtend a comprehensive console swap designed to improve a high level of security while enhancing the user experience.

Health systems across the country continue to recognize the value of Omnicell’s advanced services offering that is designed to help transform pharmacy care. In addition to adopting our Central Pharmacy Dispensing Services, a large Southern California hospital plans to leverage our IV compounding service in an effort to provide more accurate, safe and cost effective sterile compounding. Our customer base for Specialty Pharmacy Services now exceeds 400 hospitals and clinics. We’re excited to announce the opening of a new location at Good Samaritan Hospital in Indiana, which cited Omnicell’s experience and expertise in specialty pharmacy program management as key to their decision to partner with us. We expect our customer base to include an additional seven pharmacies to open in second quarter 2024.

We believe the combination of Omnicell’s 340B TPA with our Specialty Pharmacy Services program management offering is delivering growth opportunities for our customers. Our EnlivenHealth brand had a strong first quarter 2024 with a large buying cooperative choosing Enliven’s analytics solution as it works to transform its complex pharmacy data into actionable insights and outcomes focused on patient care and operational efficiency. We had multiple other wins in the quarter as well. On April 16, we announced XT Amplify innovative program intended to enhance pharmacy and nursing efficiency, reduce medication errors and waste, and ultimately maximize the value of the XT Automated Dispensing System investment. We introduced the first set of solutions in this multi-year program as part of our virtual Illuminate 2024 customer event, where healthcare and pharmacy leaders had the opportunity to learn about the potential benefits of XT Amplify.

We were joined by Jennifer Hillman, Executive Director of Pharmacy at San Antonio-based University Health, who recently completed the XT conversion project and shared her successful experience with attendees. While it’s early, we assure you that XT Amplify is intended to be just the beginning of our reinvigorated focus on new products and services, which we expect to bode well for long term growth. I hope that you can see that we are taking the necessary steps that we believe will strengthen our financial and operational performance, accelerate profitable growth, and drive shareholder value. We remain confident in Omnicell’s long term opportunities and continue to believe the company is uniquely positioned to transform the pharmacy care delivery model and ultimately help enable our customers drive better outcomes and increase their returns on investment.

Now, with that, I’d like to hand it over to Nchacha to discuss our results. Nchacha?

Nchacha Etta: Thank you, Randall. I want to thank all of our employees for delivering the results this quarter. We exceeded our guidance across all key metrics, delivered strong cash flow, and managed our expenses carefully and responsibly. While we still have work to do to strengthen our financial and operational performance we are off to a good start and I am pleased with the level of commitment and engagement I see across our company. Turning to our financial results. Our first quarter 2024 total GAAP revenues were $246 million, a decrease of $13 million over the prior quarter and a decrease of $45 million compared to first quarter of 2023. The year-over-year decrease reflects the impact of a continued challenging environment for some of our health system customers and the timing of our XT product life cycle.

Services revenue were $113 million, an increase of 8% over the first quarter of 2023, which was primarily driven by growth in technical services as we continue to see the benefits from the growing installed base and pricing actions. Total revenues in the first quarter were $4 million above the top end of our previously disclosed first quarter 2024 guidance range, which was primarily due to solid execution and timing within both Technical Services and our Advanced Services. Non-GAAP gross margin for the first quarter 2024 was 39.8%, a decrease of 380 basis points compared to the prior quarter, primarily due to lower revenue volume leverage. We expect our non-GAAP gross margin to expand in the second half of 2024 as we anticipate volume leverage from higher product revenue.

A full reconciliation of our GAAP to non-GAAP results is included in each of our first quarter 2024 and fourth quarter 2023 earnings press releases, which are posted on our investor relations website. Our first quarter 2024 earnings per share in accordance with GAAP was a loss of $0.34 [ph] per share compared to a loss of share $0.32 per share in the prior quarter and a loss of $0.33 per share in the first quarter of 2023. Our first quarter 2024 GAAP earnings per share includes the impact of $3 million for the potential wind down of the Medimat robotic dispensing system product line we announced today. Subject to local law and statutory works council consultation requirements. If the wind down proceeds, the total non-recurring costs we estimate to incur related to the wind down are approximately $15 million to $20 million, of which we have already incurred approximately $5 million.

If the wind down is agreed to the RDS restructuring plan is expected to increase our annualized net operating profit and we plan to incorporate this expectation in our full year 2025 guidance. We do not expect the RDS restructuring plan to have a significant impact on our revenue and we do not expect to achieve significant cost or operating expense savings related to the restructuring in 2024. Our first quarter 2024 non-GAAP earnings per share were $0.03 compared to $0.33 per share in the prior quarter and $0.39 per share in the same period last year. First quarter non-GAAP EBITDA was $11 million, a decrease of $13 million compared to the previous quarter and a decrease of $16 million when compared to the same period last year. First quarter 2024 non-GAAP EBITDA and non-GAAP earnings per share exceeded our expectations, primarily due to revenue execution and timing, as well as strong cost on operating expense management.

As we continue to take what we believe is a prudent approach with our investment decisions. The benefits from our higher revenue and lower expenses were partially offset by higher than expected income tax expense. The higher first quarter income tax expense was the result of timing within the year and we continue to expect our 2024 non-GAAP effective blended tax rate to be approximately 19%. At the end of the first quarter of 2024, our cash and cash equivalent balance was $512 million, up from $468 million as of December 31, 2023. Non-GAAP free cash flow during the first quarter of 2024 was $38 million as we continue to see strong cash collections and working capital management. In terms of accounts receivable, day sales outstanding for the first quarter of 2024 was 94 days, an increase of four days over the prior quarter primarily due to the modest decrease in revenues.

Inventories as of March 31, 2024 were $103 million, a decrease of $7 million from the prior quarter and a decrease of $38 million from March 31, 2023. The decrease is primarily due to the strong efforts of our supply chain team as they continue to execute and make progress on our global supply chain process improvements and inventory management initiatives. For the second quarter of 2024, we are providing the following guidance. We expect total second quarter 2024 revenues to be between $250 million and $260 million with product revenues to be between $140 million and $145 million, and service revenues to be between $110 million and $115 million. We expect second quarter 2024 non-GAAP EBITDA to be between $14 million and $20 million and we expect second quarter 2024 non-GAAP earnings per share to be between $0.10 per share and $0.20 per share.

In summary, we are working with a sense of urgency to strengthen our operational and financial performance. We are pleased to have delivered the first of many expected innovations and new capabilities for our fleet of XT medication dispensing systems, and we believe Omnicell is well positioned for the future. With that, we would like to open the call for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Stan Berenshteyn from Wells Fargo. Please go ahead.

Stan Berenshteyn: Hi, good morning, everybody. Just maybe a question on the XTExtend mid cycle upgrade. Can you just walk us through how we should think about this? How much of the installed base is expected to be upgraded? What’s the timeframe expectation there? And then, how many years of life does this upgrade expect to add to the cabinets? Thanks.

Randall Lipps: Thanks, Stan. Well, we’re really excited about the XT Amplify, and it’s really more than just a console upgrade. There are a multitude of products and services we just announced that go with the amplify platform. And as we stated before, we will continue this multi-year journey of expanding the XT Amplify to include more products and services that allow us to get into areas that we don’t service today, like ambulatory and surgery centers and other areas the inpatient, that don’t have good visibility. So it is a multiyear program with multi products and services that go beyond just a console upgrade. So, I think we want to be really careful to get our customers expecting this innovation to actually solve some problems that we haven’t been able to solve.

Stan Berenshteyn: Okay, can you maybe give us a quick update on the regulatory review of the IVX robots? Are you seeing any resolution on that front?

Randall Lipps: Definitely have at the end of last year; there was some final resolution on some of the regulations going forward. So we’ve now taken that information and melded it into our customer interaction and have a more clear determination, how to classify each of the robot locations and what set of regulations they’re under as they deploy.

Stan Berenshteyn: Thank you. Maybe just to backtrack the first question, for clients that are just doing the console upgrade. So once they do the upgrade, can you just share with us how many more years of life does the cabinet get once they do that upgrade?

Randall Lipps: Well, it’s probably customer dependent, but I think that the key is in order to get the next versions of software and hardware, you eventually have to do the upgrade, or to get access to the new product lines, you have to do the upgrade. And I think the future of Amplify includes both hardware and software changes. But it isn’t really about overly focusing on those piece, but the solutions we’re delivering to the market.

Stan Berenshteyn: Great. Thanks so much.

Kathleen Nemeth: Thanks, Dan.

Operator: The next question comes from the line of Matt Hewitt from Craig-Hallum. Please go ahead.

Matt Hewitt: Good morning. Thank you for taking the questions. First up, regarding the health of the customers. Randy, it was nice to hear that you’re starting to see some improvement there. Are you seeing a change in the discussions? Obviously, last year was really tough, but are you hearing from your customers that, okay, we’re feeling better with our financial position; we’re feeling better about our staffing positions. Now, we’re ready to come back to the table and proceed with the plans that we had maybe thought about last year, but now we’re ready, or is it still kind of touch and go and you have the conversation and there’s still kind of, I don’t want to say standoffish, but holding back a little bit?

Randall Lipps: Well, I think it’s really depends on the account. There’s some accounts that just seem to be doing well, but there are many that are not. And there seems to be a lot of sensitivity around capital equipment deployment at these institutions, particularly around inpatient. So, I think we’re having good discussions. People want these products. It’s really about the timing of returning of the health of the capital equipment environment in these accounts. And I would just say they’re pretty prudent and cautious about it. But for the long term, I think we’re in a good position.

Matt Hewitt: Got it. And then maybe a separate question regarding XT Amplify. How should we be thinking about, I guess, the adoption curve of the full XT Amplify platform? Does that change the traditional kind of model, if you will, the bell shaped curve? Or I guess another way to look at it is with these incremental capabilities with the services, how does that change the revenues from XT as we look out over the next few years? Because it seems to me at least that there’s more of a services component to that. So does it change the rev rec as we look out over the lifetime of Amplify?

Randall Lipps: Well, there’s still, the connected devices are generally still mostly capital. We do have some connected devices that are not. But yes, I think what’s going to drive our customers to move to the Amplify platform, which we just launched, and it does take a while to get into the pipeline and get decision moving. It won’t be just to upgrade the console; it’ll be these other areas that they want to access these new innovations. And we did say that we were going to have not only a multiyear roadmap of Amplify innovations, but even this year, we’re planning to announce more innovations by the end of the year.

Matt Hewitt: Got it. All right, thank you.

Operator: The next question comes from the line of Scott Schoenhaus from KeyBanc. Please go ahead.

Scott Schoenhaus: Hey, team. Good morning. Thanks for taking my question. I guess first on the end markets, did you see any change in your behavior from your customer base during the change healthcare disruption? And then now post into April and May, have you seen any impact either operationally from a labor perspective as they had to focus on getting the billings and claims file? Did you see any impact from your customers on your business or forward demand? Thanks.

Randall Lipps: We have not seen any impact on our business, but to be sure, we’re cautiously monitoring it and looking for any impact. But to this point, we haven’t seen any disruption in our business.

Scott Schoenhaus: Okay, thanks, Randy. And then on the XT Amplify side, I think you noted last quarter that some of the bookings guidance for this year included this upsell. Given the traction that you’ve clearly seen so far, does this change the amount of bookings baked into your full year guidance for the XT Amplify? Thanks.

Randall Lipps: No, I think we’re comfortable with our position and on our outlook and in our guidance on product, which I believe was slightly higher this year than it was last year. And that did contemplate the launch of Amplify.

Scott Schoenhaus: And then if I could just sneak one last one. Sorry, Randy. The RDS divestiture. Does this signal to us that you’re going to be divesting from international markets going forward? How should we read into the RDS divestiture?