Omnicell Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 11 speakers on the call.

Operator

Afternoon, and welcome to Omnicell's Second Quarter 2023 Financial Results Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Kathleen Nemeth, Senior Vice President of Investor Relations.

Operator

You may begin your conference.

Speaker 1

Good afternoon, and welcome to the Omnicell's Q2 2023 financial results conference call. On the call with me today are Randall Lipps, Omnicell Chairman, President, CEO and Founder And Chacha 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, cost savings actions or 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 on Form 10 ks 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.

Speaker 1

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 atir.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 financial measures to the most comparable GAAP financial measures are included in our financial results press release issued today.

Speaker 1

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?

Speaker 2

Good afternoon, and thank you all for joining us today. Today, I will walk through our performance this quarter, including our key customer wins and trends we're seeing in our business and the industry. I'll also provide an update on our outlook for the remainder of 2023. Let me begin with our results, which reflects sequential revenue growth and we believe continued financial discipline from the Omnicell team. Through strong execution, we exceeded our Q2 2023 guidance ranges for total product and service revenues, Non GAAP EBITDA and non GAAP EPS.

Speaker 2

We generated total revenues of 299,000,000 Non GAAP EBITDA of $47,000,000 and non GAAP earnings per share of $0.57 Our better than expected performance this quarter was primarily driven by higher technical and advanced service revenues, Welcome to Omnicell's CFO. We'll speak to our financial results and key drivers in more detail during his remarks as well as walk through the outlook for the second half of the year. On last quarter's call, we provided an on the integration of recent acquisitions. Recept, now called Omnicell Specialty Pharmacy Services, FDS, Amplicare and Market Touch Media, noting that integration was largely complete. Throughout the Q2 of 2023, we continued to focus on executing our go to market strategy for these acquisitions, and we are pleased with the progress we have seen to date.

Speaker 2

With this momentum underway and what we believe is a robust portfolio, We find that we remain uniquely positioned to continue to support pharmacy operations across the entire care continuum, Delivering mission critical medication management solutions for our customers globally. Now turning to the customer landscape And our recent customer wins. Customers continue to choose Omnicell solutions to maximize clinical and financial outcomes, Which we think further demonstrates the important role we're playing in automating and modernizing global medication management infrastructure. We'll start with the customer wins for Advanced Services. Following the successful implementation of inventory optimization service for a group of its hospitals, A major Southern Health System is now expanding the service to approximately 20 hospitals across its health system.

Speaker 2

The customer indicated that its increased need for visibility, insights and analytics for inventory control and cost savings led to the decision to expand this solution. In addition, with the continued challenge of labor shortages, This health system is also seeking insights on the Omnicell platform in an effort to improve pharmacy technician efficiency. Recognizing the potential value in delivering secure solutions in the pharmacy supply chain, the Florida Health System has chosen Omnicell's I. V. Compounding Service to help it as it seeks to gain better control over medications And decrease reliance on 503B Outsourcing.

Speaker 2

This customer is also expanding its central pharmacy automation footprint With Omnicell Carousels and Premium software license for their entire fleet of XT Automated Dispensing Systems. In terms of competitive conversions, a central pharmacy customer in Minnesota has decided to convert their automated dispensing system footprint To Omnicell XT Cabinets, while expanding system wide pharmacy inventory management with inventory optimization service, This combined technology strategy should increase visibility and efficiency, better aligning to the health system's patient safety initiatives. Furthermore, a current XD customer based in Southern California has chosen Omnicell's specialty pharmacy services to support the launch of a health system owned specialty pharmacy. This customer not only cited Omnicell's deep expertise as a key factor in this decision, but also recognize what it saw as an opportunity for a comprehensive technology strategy Entering the Medicaid market with a new medication synchronization partnership with a leading Medicaid plan. The partnership aims to enhance medication adherence among underserved populations by offering personalized support to patients.

Speaker 2

We are proud of the role Omnicell plays in improving patient health. And lastly, A Northeast pharmacy chain selected Enlivant Health to support personalized IVR. In just 120 days, The chain saw a notable rise in automated prescription refills, a significant reduction in pharmacy interruptions And lowered call transfers by approximately 17%. Moving on to the market environment and what we are And the overall healthcare industry, we continue to take what we believe is a prudent approach to managing the business, But as evidenced by our customer wins this quarter, we are pleased that Omnicell products, software and tech enabled services appear to be Resonating with the market. Our health system customers have faced many challenges in the last few years and are evaluating technology and innovative solutions that are designed to help them achieve their long term strategic goals.

Speaker 2

With salary cost pressures as well as labor constraints remaining key challenges for hospitals, we think Omnicell is an important part of the solution. For us, the need to automate, optimize and modernize the medication management process is becoming clearer, which should help ease the pressure on hospitals to implement the services and solutions they purchase at the outset. While these should be a long term tailwind for Omnicell, we are also seeing some near term headwinds As some customers choose to delay adopting new technologies in order to mitigate additional training requirements for the workforces. As we look ahead to the second half of the year, we expect full year bookings to trend towards the lower end of the full year guidance range We previously provided due to ongoing CapEx budget constraints and some of the factors I just outlined. Considering the strong first half performance and solid expense management, we are raising our Full year 2023 guidance for total revenues, non GAAP EBITDA and non GAAP earnings per share.

Speaker 2

As I mentioned, ChaCha will discuss our guidance in more detail. But long term trends appear favorable as we expect customers' need for automation tools and software enabled services to offset continued pressure driven by labor constraints. Now moving on to ESG. At the start of the Q2, we were pleased to publish our 3rd annual ESG report. We continue to make progress toward our goal of creating positive change and delivering innovative technologies that are intended to help our customers Build a healthier world.

Speaker 2

This entails designing our products with a view to minimize our environmental footprint while maximizing patient outcomes. We also continue to support our diversity, equity, inclusion and belonging initiatives That are intended to foster an engaging and inclusive workplace. Through our ESG efforts, we aim to ensure Before I turn it over to ChaCha to discuss our financial results for the quarter in more detail, I want to note the most recent addition to our Board and speak to some leadership changes. In July, we were pleased to have Kaushik Babi Ghoshal Join our Board as the Independent Director. As part of Omnicell's ongoing refreshment process, the addition of Bobby expands our Board to 10 members.

Speaker 2

Bobby is an established leader who brings more than 30 years of global SaaS and healthcare technology experience to Omnicell, Currently serving as the President of SaaS for ResMed Incorporated and is an important addition to our Board. He has an impressive track record leading high performance teams in software products and is responsible for the vision, Strategy and day to day operations of ResMed's rapidly expanding SaaS portfolio. We are also pleased to have welcomed Chacha As Omnicell's new CFO at the beginning of June, ChaCha is a seasoned financial and accounting executive with more than 20 years of experience leading and working in global financial organizations across healthcare and consumer products industries. It's a pleasure to work with ChaCha thus far. He is commercially focused and collaborative leader and shares our passion for improving patients' health.

Speaker 2

We find we are already benefiting from his insights, and I know he's looking forward to speaking to some of his priorities with you today. In addition to welcoming ChaCha, we also announced a number of other organizational changes designed to create a more streamlined organization with a continued focus on operational excellence. This included the appointment of new members to our leadership team as well as a number We believe we have put the right team in place to lead the next phase of our performance as we seek to continue to deliver value for our shareholders, our employees, our healthcare partners and their patients. With these changes, I want to emphasize that our strategy remains the same. We are simply moving into the next phase of Omnicell's evolution.

Speaker 2

We believe we must adapt to continue meeting the ever changing needs of the industry and our customers. This new leadership structure reflects this effort and should enable us to operate more nimbly and further We believe will transform the pharmacy care delivery model globally. Now we're laser focused on execution I'm bringing in people with the right skill sets that are keenly focused on profitable growth, and I believe we are well positioned for the future. Now with that, I'll turn it over to Chacha to introduce himself and provide further details on our performance and outlook.

Speaker 3

Thank you for the warm welcome, Randy, and thank you to the entire Omnicell team for the support through my onboarding over the last several weeks. I am excited to be here with all of you today, and I am looking forward to meeting many of you in the weeks I believe in the company's mission and vision, and I am thrilled To be leading Omnicell Finance and IT organization, which play a key role in enabling the overall strategy And driving operational excellence. Since joining in June, I have been working closely with the executive team And others to enhance Omnicell's mission to continue to be the health care provider's most Trusted Partner for Medication Management. My time here so far has reaffirmed why I joined Omnicell. Omnicell has a differentiated strategy to transform the pharmacy care delivery model Along with incredibly strong customer relationships and impressive brand recognition.

Speaker 3

The talented team here at Omnicell is mission driven and fully committed to improving patient care and ensuring positive health care outcomes. These are just a few of the reasons why I believe the Company is well positioned for long term success. Now before I discuss our financial results, I would like to share with you my immediate priorities in the second half of the year and going forward. First, I intend to leverage data analytics and insights to strengthen our financial performance And improve the predictability of our business. 2nd, I will seek to ensure that we are strategically deploying Capital to support innovation and fuel sustainable profitable growth.

Speaker 3

And third, I will work to ensure that we continue to operate with financial discipline as we work to improve operational efficiency throughout the organization. I have really enjoyed my first few weeks at Omnicell, and I look forward to working with the team as we move the company's strategy forward and continue to deliver long term value to our stakeholders. Now turning to our financial results. Our Q2 2023 Total GAAP revenues were $299,000,000 an increase of $8,000,000 or 3% over the prior quarter And a decrease of $32,000,000 or 10% compared to the Q2 of 2022. The year over year decrease reflects lower point of care revenues primarily as a result of ongoing healthcare systems Capital budget constraints.

Speaker 3

Services revenue were 111,000,000 An increase of 13% versus the Q2 of 2022, primarily driven by growth in Advanced Services. Total revenues in the quarter were $11,000,000 above the top end of our previously disclosed second quarter which is not expected to reoccur in the second half of the year. Non GAAP Gross margin for the Q2 2023 was 46.8%, an increase of 200 basis points from the prior quarter, Primarily due to higher services revenues and the result of our prior cost containment actions. In addition, we saw lower cost for semiconductors, steel and freight compared to the prior quarter. A full reconciliation of our GAAP to non GAAP results are included in our Q2 earnings press release and is posted on our Investor Relations website.

Speaker 3

Our Q2 2023 earnings per share in accordance with GAAP We're $0.08 compared to a loss of $0.33 in the prior quarter, an income of $0.20 per share in the Q2 of 2022. This improved performance compared to the Q1 of 2023 Reflects the absence of impairment and abandonment charges for operating lease right of use assets and other assets, Profit from higher revenue as well as the full benefit of prior cost containment actions. As we have previously shared with you, sustained GAAP profitability is a key objective for the company. Our Q2 2023 non GAAP earnings per share was $0.57 compared to $0.39 in the prior quarter and $0.84 in the same period last year. Our 2nd quarter non GAAP EBITDA was $47,000,000 an increase of $20,000,000 compared to the previous quarter And a decrease of $9,000,000 when compared to the same period last year.

Speaker 3

Our 2nd quarter 2023 non GAAP EBITDA and non GAAP earnings per share exceeded guidance primarily due to higher services revenue, Customer and product mix timing within this year and strong cost management. The operational favorability in the 2nd quarter non GAAP earnings per share was offset by higher than expected 2nd quarter income tax. The impact from the income tax expense reflects timing within the year and is expected to be favorable in the second half of the year. At the end of the Q2 of 2023, our cash balance was $399,000,000 up from $340,000,000 as of March 31, 2023. As of June 30, 2023, we had 418,000,000 of availability under our revolving credit facility, and there was no outstanding balance.

Speaker 3

In terms of accounts receivable, days sales outstanding for the Q2 of 2023 was 85 days, A decrease of 17 days over the prior quarter, primarily due to strong cash collections as well as timing of invoicing within the quarter. Inventories as of June 30, 2023 were $131,000,000 a decrease of $11,000,000 from the prior quarter, Reflecting continued strong progress, our global supply chain team is making on key process improvements And inventory management initiatives. Free cash flow during the Q2 of 2023 was 58,000,000 driven by strong cash collection. Now moving on to our full year and Q3 2023 guidance. As Randall mentioned earlier, we continue to take a prudent approach to managing the business.

Speaker 3

We expect the full year bookings for 2023 to trend towards the lower end of the previously provided range of 1,000,000,000 to 1,100,000,000. Customers are showing signs of caution implementing new workflows That stress already stretched nursing and IT labor, which is continuing to impact the timing of new capital And software projects. We are pleased with our strong first half performance, Underscoring our solid execution and prudent cost management. Considering the strength in our advanced services and technical services As well as continued strong execution, we are raising our full year 2023 total revenues to range between $1,160,000,000 to $1,200,000,000 an increase of $10,000,000 from the top And bottom end of our previously provided guidance range, we are reaffirming our full year 2023 product revenues to range between $740,000,000 to $760,000,000 Due to the solid execution in the first half, We are raising our full year 2023 service revenues to range between $420,000,000 to 440,000,000 An increase of $10,000,000 from the top and bottom end of our initial guidance. We expect Advanced Services revenue to be between $205,000,000 215,000,000 An increase of $5,000,000 from the top and bottom end of our original guidance.

Speaker 3

This reflects a 13% increase at the midpoint compared to 2022 and approximately 18% Of 2023 total revenues, we expect technical services revenues to range between 2 $15,225,000,000 in 2023, an increase of $5,000,000 from the top And bottom end of our original guidance. This represents an increase of 6% at the midpoint as compared to 2022. Please refer to the Slide 14 in our earnings presentation published on our Investor Relations website For a summary of the total year revenue guidance components, we expect total year 2023 non GAAP EBITDA to range between $130,000,000 $145,000,000 an increase of $10,000,000 from the top and bottom end of our initial guidance, which reflects the incremental profit from higher expected services revenue for the year and prudent cost management. We expect 2023 non GAAP Earnings per share to be between $1.75 $2 per share, an increase of $0.20 from the top And bottom end of our initial guidance. The full year non GAAP EBITDA and non GAAP earnings per share guidance Includes the impact of the previously disclosed $50,000,000 of annual operating expense savings Derived from the recent reduction in falls and other expense containment efforts, primarily within SG and A.

Speaker 3

We continue to expect 2023 operating expense annual savings will be largely offset By the impact of year over year inflation in employee salaries and increases in expected performance based compensation, Vendor cost increases and investments in R and D. We expect non GAAP Operating expenses to be flat to down year over year. Included in these numbers is a higher Expected blended tax rate in 2023 as a result of the increased profit expectations. For the full year 2023, we are now assuming an effective blended tax rate of Approximately 11% in our non GAAP earnings per share. For the Q3 2023, We are providing the following guidance.

Speaker 3

We expect total Q3 2020 We expect product revenues To range between $185,000,000 $190,000,000 and services revenues to range between $105,000,000 100 and We expect Q3 2023 non GAAP EBITDA to range between $31,000,000 $37,000,000 and we expect Q3 2023 non GAAP earnings per share to range between $0.42 $0.52 The 3rd quarter non GAAP EBITDA and non GAAP earnings per share guidance includes the expected impact of product and customer mix And planned investments in innovation and advanced services as well as seasonal third quarter expenses. Additionally, the Q3 2023 non GAAP earnings per share guidance reflects the income tax timing benefit compared to the Q2. In summary, we believe the long term opportunities for Omnicell are compelling, And we are committed to delivering strong financial and operational performance. With that, We would like to open the call for questions.

Operator

Your first question comes from Scott Schoenhaus with KeyBanc. Your line is now open.

Speaker 4

Hi, team. Congrats on the very, very strong results and outlook. My first question is really on the operating expense line. Seeing SG and A coming down 17% sequentially from last quarter is a nice Operating leverage there, what's driving that? Is that mostly headcount, on the point of care side?

Speaker 4

Or is there other cost efficiencies that we should be Aware of. Thanks.

Speaker 3

Thank you, Scott. There are definitely other cost efficiencies that you need to be aware of. As we previously announced, a reduction in force and other expense containment efforts, which achieved $50,000,000 of annual operating expense savings. Based on timing, it is reasonable to assume that we saw slightly less than half of the savings in the first half and we will see The full remaining impact of cost savings in the second half of the year.

Speaker 4

Great. Just as a follow-up, you mentioned headwinds continuing related to labor environment at the hospitals around nursing and technicians. Do Do you guys have any expectations for that to improve over the remainder of the year or is built into your guidance, really just The similar levels of kind of labor issues that we're seeing at hospitals right now. Thank you.

Speaker 3

So while we're seeing incremental improvements as the year progresses, Scott, our health systems are still challenged by continued macroeconomic uncertainty and labor constraints, which of course are impacting our customers' buying decisions. While advanced services, including our technology enabled solutions, help to drive automation and reduce the need for labor, near term labor challenges Continues to impact our customers' ability to adopt new technologies, which is contributing to our decision To guide towards the lower end of the range.

Speaker 2

Yes. Just flavors and concerns about committing to new projects, Particularly in Advanced Services where you have more disruption than you would in just ADC business, which is We're not seeing that in that particular area, but mostly in the advanced service areas where you've got new robots and new things to install. You need IT and technical people on the organizational side to commit. Thanks, Randy. You bet, Scott.

Operator

Your next question comes from Allen Lutz with Bank of America. Your line is now open.

Speaker 5

Thanks for taking the questions. The product revenue was up quarter over quarter. And I guess you're kind of guiding for sort of flattish Sequentially, but I guess 3 quarters kind of in this range, it seems to me that things have at least bottomed. It doesn't I guess what are you seeing in the pipeline? Is the pipeline today better than it was 3 months ago, 6 months ago?

Speaker 5

Just trying to get some perspective on what you're seeing there.

Speaker 2

Yes. I would have to say that customers are excited about our products and the pipeline continues to And I think it's all about what is the funding timing on these products. And I think we all would have to agree that The modernization of medication management has to take place. There needs to be robots. There needs to be automated software doing these things so that we can run Pharmacies at near perfection or get us to the Autonomous Pharmacy.

Speaker 2

So I think the industry has bought into that vision and it's bought there. It's just Question on the timing of that. And so we're engaged as much as we ever have been. It's just the uncertainty about the funding piece.

Speaker 5

Great. And then to follow-up on Scott's question, Randy, you mentioned the hospital budgetary pressures on new solutions. Can you bifurcate between, I guess, the Enlivant product suite, the products you acquired and then sort of the products that you've built in house? Is there a difference in growth rates between those two business lines that or is there any difference you're seeing with prospective clients on either of those? Thanks.

Speaker 2

Well, I think the Enlivant is very exciting area. We've developed a lot of new products. We talked about The go to market was a Medicaid product for the Medicaid plan, which I think is very unique for us. And so there's a lot of opportunity there. What's probably more interesting is we're bringing that mostly retail product solution set into our core customers, Because these big provider networks, big hospital networks, they want to engage patients in the same way in an outpatient format And even all the way to the home.

Speaker 2

So they need the same kinds of tool sets that have traditionally been sold and the enliven environment, which has been To retail pharmacy, so we're really starting to see that crossover begin to happen. And that's the exciting piece. I think most of the headwinds is Not in the retail piece, but it's mostly in these big provider hospitals where nursing and IT people particularly Redlining or exhausted some pharmacy techs as well. So it's just a matter of time before They get those positions funded and get the relief and doesn't know exactly when. I think we're seeing the for profit hospitals are already Probably ahead of the regular market as far as getting better results and getting better alignment on some of those things.

Speaker 2

But I think the pipeline is strong and the Enlivant product is really an exciting place because Not just because of what it's doing there, but that we're actually crossing it over into our core product expansion of our marketplace. Great. Thank you.

Operator

Your next question comes from Dan Berenstain with Wells Fargo, your line is open.

Speaker 6

Hi. Thanks for taking my questions and a warm welcome to Inchacha. Maybe we can start on booking guidance. I mean, you guided lower here on the lower side of the range. Can you maybe just share some details as to what's impacting that, any particular products or services to call out?

Speaker 3

Yes, Ben. Thank you for the warm welcome. Like I mentioned earlier, as well as in my prepared remarks again, Our customers are still challenged with labor constraints as well as macroeconomic uncertainty. But we're also seeing some near term headwinds in advanced services, particularly IV as customers are navigating a very complex

Speaker 6

Regulation environment. Okay.

Speaker 2

Yes. Just expand on that a little bit I can't say that. The IV has gone through sort of an FDA filter to get Some insights and it's gotten made through that. Now it's going through individual states, pharmacy boards to set further regulations or compliance rules. So in some states, it's just going slower than other states.

Speaker 2

And so that's holding back Certainly, some decision making until they understand how that's fully going to be executed.

Speaker 6

Okay. And then I guess to square that with guidance, I mean, it seems like you outperformed on that Advanced Services side, product bookings Was reiterated. Maybe if we just take a step back here, you started the year with about $500,000,000 in short term backlog. You essentially need $250,000,000 in entry or bookings to hit that. We're over 50% of the way through the year.

Speaker 6

What kind of visibility do you have here? And where are you versus where you thought you'd be at the start of the year?

Speaker 2

Well, I think we have really strong visibility, and we've implemented, particularly on revenue and earnings, Particularly for the second half of the year because much of it is already scheduled. And we've brought in new processes and The disciplines to lock in those that visibility. So we feel really strong about that piece As we move forward, I think the part that we're talking about where there's less visibility is when are people going to commit their capital Our commitment to these new projects, not necessarily some of it may be financial, but a lot of it is when is the organization Going to be ready to take on these newer platforms, which really require new workflows, new training, We require IT to go in and spend some time integrating these new platforms into their operation. That's where we see the hesitancy mostly.

Speaker 6

Okay. Thanks so much.

Speaker 1

Thanks, Dan. Your

Operator

next question comes from Matt Hewitt with Craig Hallum Capital Group. Your line is now open.

Speaker 7

Good afternoon. Thank you for taking the questions and it's nice Speak with you, ChaCha. Maybe the first question, there recently was a Supreme Court ruling that prompted CMS to Announce a $9,000,000,000 or $9,000,000,000 with a B payment, to hospitals related to the 340B program. I realize that, That market has been pretty challenged over the past couple of years, but does this change things? And what does that mean for your 340B platform going forward?

Speaker 2

Well, it probably means that a couple of things. We have Two angles to 340B. 1 is the 340B where we have contracted pharmacies and that we have That is relatively flat for this year $30,000,000 to $35,000,000 and we continue to believe that is what that outcome will be. But it does mean that in our specialty pharmacies where we're spinning up services, remember, it means there are Bigger rebates for our customers, which means there's more advantage to deploying our service and it means slightly more revenues for us, But not significant in that specialty pharmacy services. Probably the bigger opportunity, frankly, is the $9,000,000,000 rebate, There's been discussion about whether it's going to actually hit 2 hospitals in either Q4 or Q1, No one really knows, is an opportunity for hospitals to spend more money, obviously, on our solution sets.

Speaker 2

Now I haven't really seen that connection point take place yet where a CFO has said, gee, I know I've got this X millions coming in. Now I'm ready to spend it on this project. My guess is they're going to wait till they get the money in the bank and then decide What to accelerate and the like. But I think that's a big opportunity for us and it reaffirms that 340B, I think the program to have your own in house pharmacy, you're going to get richer rebates. You're going back to the old rebate amounts, which were significantly higher in many cases.

Speaker 2

So that just bolsters that program to Be adopted by more people.

Speaker 7

That's great. And maybe one separate question here regarding gross margins, a nice step up here This quarter, I think much of it was on the services side. But when I think back to a year ago, you faced 3 specific challenges: steel, Semiconductor chips and transportation costs and gas, it sounds like you got a little bit of benefit this quarter from On the semiconductor side and then on the transportation, as we look at the remainder of this year, are you expecting some further benefits from those three areas As you kind of work through either inventory on hand or as the prices for those products come down? Thank you.

Speaker 3

Yes. So as we disclosed during the Q4 2022 prepared remarks, inventories as of December 31, 2022 included approximately $18,000,000 of advanced services advanced purchases and receipts of semiconductors. The balance was relatively consistent as of June 30 this year compared to December 31. And so, we believe that also we have some receipts of remaining buybacks That we have committed to purchase, to assure continuity of our supply chain.

Speaker 7

Got it. Thank you.

Operator

Your next question comes from Bill Sutherland with The Benchmark Company. Your line is now open.

Speaker 8

Hey, thank you. Welcome, Joshua. I guess my main question for you at this point might be as you evaluate Capital deployment, kind of what's going into your thinking and what's that process going to be?

Speaker 3

Yes. So, we will continue to evaluate our capital deployment strategy and we'll make the right Investment decisions to fuel our sustainable growth from an innovation standpoint.

Speaker 2

I think M and A is definitely a long term strategy that will be there, I think. But I think that Tata is looking at the balance sheet and then we definitely have nice cash flows. We've got maybe some debt we need to restructure eventually. And so I don't think it feels like there's anything immediately at this point, but something really to consider as we move forward.

Speaker 8

Got it. And then, can't have a call this quarter without asking about AI and your What your thoughts are as far as implementing that technology across your product set?

Speaker 2

I think AI has a lot of potentials for For many of the obvious areas that many companies are looking at software development, customer interaction, Communications, both internally and externally with customers and The ability to gain unique efficiency. So we love the fact that AI is here. We think it eventually will accelerate The ability to get to the Autonomous Pharmacy sooner and that's really important to us. But I think it's a little too soon to say where and exactly how those impacts will be, but We have AI is on top of our list as we move forward to have specific strategies around specific use cases, Mostly internal to the company and we want to be very careful as we use them externally because of No, just regulatory and proper use of such powerful tool when we use it outside the full walls of the company.

Speaker 8

So it's been mostly an internal focus, Randy?

Speaker 2

I think the first steps are internal and we may have some proof cases that we may use Certain selected beta customers, but and many of our customers, we are very encouraged by them. They are actually leading some of the way on some of these projects and Bring us then to them. So I think there's a lot of excitement about solving large unstructured data questions That can be easily answered. So there's a lot of unstructured data in healthcare. So lots of opportunities for sure, right?

Speaker 2

Okay.

Speaker 9

Thanks very much.

Speaker 6

And I

Speaker 2

would just mention Bobby Goshel from ResMed and the SaaS is one of the reasons we got him and put him on his board. He is AI pro and he's helping us think through the process as well. And we've got a lot of resources. Bharat on our team It's top notch. So I just feel like we have lots of opportunities there, but we're not ready to share how that's going to impact us directly, but It's definitely a part of our strategy.

Operator

Your next question comes from David Larsen with BTIG. Your line is now open.

Speaker 9

Hi. It's my understanding that you were increasing prices for your products in 2023, just any color around that? And are those price increases more than offsetting inflation for semiconductors? And then over what time period should we expect to see these price increases continue to occur? Will they be sort of complete At twelvethirty onetwenty 3.

Speaker 9

Thanks.

Speaker 3

Yes. So we will continue to assess our price increase strategy. But as we continue to we continue to or we are continuing to see the benefit of pricing actions put in place over our last We are also seeing modest reduction in cost for semiconductors on freight and steel, which have been subject to significant inflationary pressures on recent periods. So in the Q2, for the first time, we saw the benefit of pricing actions outweigh the impact of these inflationary costs, which will modestly be favorable to product and gross margin in the second half.

Speaker 2

And I'd also add to that some of our pricing actions, there are You can't implement them every it's only for those customers who have renewing service contracts coming up that year can you renew them for. So They're ongoing as we move forward as customers come in. So there are some increases as we move forward and I think Our strategy is to be prudent about that.

Speaker 9

Okay. And then how far along are you in terms of like the XT The sort of upgrade process, are you like 60% of the way through that process? And then it's my understanding that At some point, everybody is going to have to upgrade because you'll sunset support of the more legacy solutions. Is that correct or not? And then once you do get through these XT upgrades, won't there simply be another version of the Automated dispensing cabinets that you sort of bring to market and there will be a whole new cycle that starts?

Speaker 9

Just any thoughts or color there would be very helpful.

Speaker 2

Yes, we are significantly way through the XT upgrade. It's well over 60%. And we don't believe that the whole 100% of the market is even going to convert. So we're getting toward the end of that, but we continue to add on with what we call Expansions, which is a big part of our XT business as well as competitive conversions. We usually have a 10 year life cycle to our systems And we generally cycle new products.

Speaker 2

On that, I believe we started in 2017. We don't time it exactly with those days, but certainly we have to continue to upgrade our hardware to Take on new software solutions and really looking to add more value, create more value for our customers. And so You're right in assuming that we don't have any timelines to talk about, but you're right, we do have product cycles that we Traditionally do and we're nearing the end of the XT.

Speaker 9

Great. And then just one last quick one if I can squeeze it in. Did I hear you say, Randy, that the $9,000,000,000 CMS will be paid in 4Q of 'twenty three and 1Q of 'twenty four?

Speaker 2

There hasn't been it's still up for grabs whether it's Q1 or Q4 of this year, but as far as my current understanding is that It will be a lump sum and it will be in Q4, Q1, just coming up Q4 or Q1 of the New Year. And those extra dollars, I think, are waiting to be seen by these hospitals, I think, to be sure of what those dates are, but I think That will have an impact on the ability to spend money.

Speaker 9

Okay. Thanks very much.

Speaker 6

I'll hop back in the queue.

Speaker 1

Thanks, Dave. Next question?

Operator

Your next question comes from Jessica Tassen with Piper Sandler. Your line is now open.

Speaker 10

Hi. Thanks for taking the question and congrats to ChaCha on the start date. So I think my first question is just on product Gross margin, those have been kind of moving around quite a bit in the last couple of quarters. I'm hoping you guys can describe the structure of product cost of goods, Margins like where should they be trending, 2024, 2025?

Speaker 3

Thank you, Jessica. So We really cannot comment on 2024, 2025, but I'll tell you that in 2023, The key drivers of our gross margin were higher services revenue, favorable customer and product mix as well as the full impact of

Speaker 10

Got it. So just I guess we're trying to understand, right, the impact of incremental products revenue on the product gross margin. So can you help us maybe understand the mix

Speaker 3

The mix is really primarily between, again, like I said, customer and product mix, as well as Higher services revenue.

Speaker 10

Okay. Got it. So maybe for Randy, is the Medicaid deal that you mentioned, the 1st payer deal within Enlivant Health. And if so, can you just help us understand kind of the context for that deal And maybe the pricing, does Omnicell have any exposure to outcomes or any sort of value based components of that deal?

Speaker 2

Well, it's always somewhat outcomes driven as the medication synchronization is based on signing up customers and keeping them synced up To the regular use of their medication management and that's around a plan that's more holistic That is they are the provider and the pharmacy, if you so to speak. So I think that's the unique opportunity that came here to come outside of what I would call the customer base to be inside of a plan where you See more of this engagement directly with the patient in order to get better outcomes. And we know it's really hard to service in the Medicaid market. So I think we're really excited about that. I think that we're I feel like we're the only company doing these kinds of things That are really making the difference at these multiple levels and multiple market penetration points.

Speaker 2

And because of these Services are so uniquely put together and can be formulated if you have a good patient interaction A scenario to go after and certainly this is one that fits well with us.

Speaker 10

Got it. And my last question is just that you guys beat the high end of services revenue guidance now 2 quarters in a row. So is that upside relative to the high end of guidance coming from better than expected implementation. And if that's the case, Just why wouldn't that strength persist in the second half when the operating environment is arguably going to get better for hospitals and you potentially have this $9,000,000,000 remuneration payment hitting in 4Q. Thanks.

Speaker 3

Yes. Services revenue is expected to be approximately flat due to the strong performance that we saw in Q2, primarily From the favorability in timing of revenues, which is driven by technical services renewal timing as well as advanced services, Which we do not expect to reoccur in Q3 and the second half of this year.

Speaker 2

We just had a lot of renewals in Q2 and sometimes those renewals Come with back payments for a few months they hadn't paid for and so you get an extra few payments there. And so a lot of that happens in Q1 and Q2. It doesn't happen as often in Q3 and Q4.

Speaker 10

Okay, got it. That makes sense. Thank you.

Speaker 1

Thanks, Jeff.

Operator

There are no further questions at this time. I will now turn the call back over to Omnicell's Chairman, President, CEO and Founder, Randall Lipps.

Speaker 2

Well, I'd really like to thank the Omnicell team for delivering a solid quarter, getting us, I would say, back on track. The new management team, particularly Having ChaCha join us, he's been such a great help to us getting our heads straight and moving the company forward. And it's just an exciting time for innovation, exciting time for our customers to deploy these new products And get back to this predictable, profitable, scalable growth, infused with great Envision. So thanks for being here, and we'll

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Earnings Conference Call
Omnicell Q2 2023
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