Omnicell Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Omnicell 4th Quarter and Full Year 2023 Financial Results Call. Please note that today's 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

Speaker 1

Good morning, and welcome to the Omnicell 4th Quarter and Full Year 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, 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 in the Omnicell annual report 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 Except as required by law, we do not assume any obligation to update or otherwise release publicly any revisions to our forward looking statements.

Speaker 1

Our results were released this morning and are posted on the Investor Relations section of our website at ir.omnicell.com. Of these non GAAP measures to the most comparable GAAP financial measures are included in our financial results press release issued today. With respect to forward looking non GAAP measures, we do not provide a reconciliation of forward looking non GAAP measures to the comparable GAAP measures or 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 morning, and thank you all for joining us. Today, I will walk through our high level performance for the Q4 fiscal 2023, including some key customer wins. ChaCha will also provide an update on the current demand environment and our Q1 full year 2024 outlook. Beginning with our results, we delivered overall 2023 financial results roughly in line with the original guidance as we provided in February 2023. However, Bookings for full year 2023 were down 19% for the prior year and missed our original guidance.

Speaker 2

For the Q4, total GAAP revenues were $259,000,000 down 13% from the prior year. Total non GAAP EBITDA for the Q4 was $24,000,000 above our 4th quarter guidance due to strong expense management versus $26,000,000 for the prior year. GAAP earnings per share was a loss of $0.32 per share versus a loss of $0.64 for the prior year. Now let me be clear. We do not view our recent performance as acceptable.

Speaker 2

Although we have taken various actions to improve our performance, We intend to take further action. For example, over the past few years, we launched a number of advanced services that are gaining traction with customers and beginning to scale. We also previously announced a heightened focus on managing costs, including an approximate 7% reduction in our workforce announced last quarter. These already announced cost actions are expected to result in $50,000,000 of savings on an annualized basis by the end of 2024. We recognize we have more to do.

Speaker 2

Our results tell us there is a need for a thought full evaluation of where we can potentially make other changes to improve from our operations and go to market initiatives to our product portfolio. Accordingly, we have decided to undertake a holistic review of the business With the assistance of an outside consultant in an effort to determine how we can best optimize our operations and investments. Now Omnicell's strength has been demonstrated repeatedly over the years, and we believe our core point of care business remains critical to health systems' ability to safely and efficiently manage medication across the continuum of care. We intend to continue to evolve as a company to improve our performance and deliver returns to our shareholders. We are moving forward with this work with determination and urgency.

Speaker 2

We will continue to transform the pharmacy care delivery model and advance the industry vision of the Autonomous Pharmacy. However, we are committed to ensuring we deliver strong returns for shareholders As we work to achieve this mission, I look forward to updating you on the progress. For example, I'd like to share the past few years as we launched a number of our business across sales that are gaining traction with customers, Industry wide scale wins impact cost pressures. We also previously announced the strength of the focus on managing costs. But as we move to 2020, we received percent reduction in time and workflows last quarter.

Speaker 2

These already announced that

Operator

Pardon the interruption. We are experiencing a technical difficulty. Please allow a moment for the conference to continue.

Speaker 1

Thank you, operator. Will you continue the recording, please?

Speaker 2

Industry wide headwinds impacting hospital and health systems seem to persist in 2023. But as we move into 2024, we are seeing some encouraging signs of stabilization. Industry research indicates that 2024 CapEx budgets could increase year over year. In turn, some forecasts are predicting that health systems will start moving forward with long delayed capital projects in 2024. However, we believe challenges may persist across the industry, including continuing high labor cost and operating cost.

Speaker 2

And therefore, we will continue to take what we believe is a cautious approach to managing our business. We continue to believe that Omnicell is an essential part of the solution for the industry. We think we are Uniquely positioned to capture incremental market share as hospital cost pressures alleviate and the macroeconomic environment improves. As I mentioned, our lower year over year bookings create challenges for 2024, And we expect revenue and non GAAP EBITDA profit to decline from 2023. However, as we work to transform the pharmacy care delivery model through a combination of automation, intelligence In technology enabled services, we believe that the solutions we are able to deliver to customers are more important than ever.

Speaker 2

The total addressable market for medication management remains large. Omnicell has successfully increased our installed base of point of care connected devices through market share gains over the previous 3 years. We are very enthusiastic about and encouraged by The opportunities to deliver product and service enhancements within the XT installed base. We recently launched the XT console upgrade, which is designed to enhance data and network security and improve nursing efficiency and overall user experience for our XT cabinets and showcase this solution atashp2023midyearmeetingindecember. The XT console upgrade is part of a broader strategy Toward a planned XT product refresh, we are investing in the XT platform to bring a multi year initiative that provides key products and services to drive medication management outcomes.

Speaker 2

This year, Our innovation pipeline related to the XT platform is anticipated to begin to provide key product enhancements and services designed to improve medication management. Our XT fleet of products are focused on delivering outcomes health systems are asking us for and related to patient safety and efficiencies. As I mentioned, Our innovation pipeline is very strong within point of care and we believe we are beginning to see the signs of stabilization in 2024. We are very excited about these initiatives because they will amplify what our customers have already purchased. Now turning to some important customer wins during the quarter.

Speaker 2

Health systems continue to find value in long term collaboration with Omnicell as evidenced by 2 multi year sole source agreements. This includes an Illinois based health system, which has expanded A multi year sole source agreement to convert the automated dispensing cabinet footprint across multiple locations to Omnicell's XT automated dispensing system. Standardizing their technology strategy with Omnicell solutions should position this health system well for future expansion. Most recently, In January, we were pleased to participate in the grand opening of Tennessee based Ballad Health's New consolidated distribution center, which will support medication distribution for Ballad Health hospitals across the Appalachian Highlands region. This new facility is anchored by our central pharmacy dispensing solution, which includes 3 XR2 robots along with Omnicell carousels and packagers, which are intended to help Ballad help optimize inventory management and allow pharmacy staff to focus on higher value tasks.

Speaker 2

Trish Tanner, VP and Chief Pharmacy Officer for Ballad Health has long been an advocate of technology driven pharmacy care as a member the Automation Pharmacy Advisory Board. During the event, she commented, it's not just technology, It's about advancing patient care, streamlining operations and embracing future where our health professionals can devote more time to what truly matters. And that of course is the well-being of our patients. We could not agree more with this sentiment and are proud to be leading the effort to enable our customers to get closer to achieving the industry vision of the autonomous pharmacy. We also continue to take steps to enhance our corporate governance With the recent election of Eileen Volknecht to the Board of Directors, Eileen is a widely respected leader with driving an operational excellence and developing global businesses.

Speaker 2

We are thrilled to have her join the Board. Welcome, Eileen. Now let me be clear, we have hard work ahead of us, but we are taking the steps we believe are necessary To strengthen our financial performance, accelerate profitable growth and drive shareholder value, We remain confident in Omnicell's long term opportunities and continue to believe that the company is uniquely positioned to transform the pharmacy care delivery model and ultimately help enable our customers achieve better outcomes and increase their ROI. Now with that, Xiaocha,

Speaker 3

I will turn it over to you for more details on the quarter. Xiaocha? Thanks, Randall, and thank you all for being here today. We will discuss our full year 2023 financial performance, the current demand environment and our Q1 and full year 2024 outlook. Over the last three quarters, we have taken a hard look at our business and products, along with our go to market strategy and have given a lot of thought to how we can strengthen and refine certain processes.

Speaker 3

As Randall mentioned, To better understand the opportunities in front of us and ways we can strengthen our financial performance, we have decided to undertake a comprehensive review of our business and engage a consultant to assist in looking at everything from growth opportunities and further operational improvements to productivity enhancements and refinement in our product portfolio. During 2024, we will also intend to reevaluate the financial and key performance metrics we report, including bookings and backlog, and we will consider potential new metrics we may be able to share in an effort to provide additional transparency and information to our stockholders. We look forward to updating you on our progress. With that, let me get into results for the Q4 and full year 2023, as well as our outlook for 2024. For the Q4 2023, total GAAP revenues were 259,000,000 slightly above the midpoint of the guidance range we provided during our Q3 2023 earnings call.

Speaker 3

Total revenues in the quarter were down 30% compared to the Q4 of 2022, reflecting lower point of care revenues primarily as a result of ongoing healthcare systems capital budget and labor constraints. Services revenue were $113,000,000 an increase of 12% versus the Q4 2022, primarily driven by growth in technical services as a result of strong execution, Growth in the installed base and decisive pricing actions. Non GAAP gross margin for the Q4 2023 was 43.6%, a decrease of 2 10 basis points from the prior quarter. Compared to the Q3 of 2023, non GAAP product gross margin decreased 4 50 basis points, while non GAAP services gross margin expanded modestly. The decrease in product gross margin is primarily based on the impact of the lower revenue and mix of product within the quarter.

Speaker 3

A full reconciliation of our GAAP to non GAAP results are included in our Q4 2023 and Q3 2023 earnings press release, which are posted on our Investor Relations website. Our Q4 2023 earnings per share in accordance with GAAP were a loss of $0.32 compared to earnings of $0.12 per share in the prior quarter and a loss of $0.64 per share in Q4 2022. Our Q4 2023 GAAP earnings per share include $10,000,000 of severance related expense associated with our 2023 cost savings plan. Our Q4 2023 non GAAP earnings per share were $0.33 compared to $0.62 per share in the prior quarter $0.33 per share in the same period last year. Our Q4 2023 non GAAP EBITDA was 24,000,000 a decrease of $17,000,000 compared to the previous quarter, which reflects the impact of lower product revenue in the 4th quarter, partially offset by cost actions taken in the quarter.

Speaker 3

Our 4th quarter 2023 non GAAP EBITDA at non GAAP earnings per share exceeded the guidance range we provided during our Q3 earnings call due to strong cost management across our organization. Turning now to review our full year 2023 results. Bookings for full year 2023 were 854,000,000 compared to our original full year 2023 guidance of $1,000,000,000 to $1,100,000,000 provided in February 2023 and $1,054,000,000 for the full year 2022, a decrease of 19% from the prior quarter. 2023 bookings were lower than original full year guidance, primarily driven by lower than expected orders for our advanced services, particularly tech enabled services, which includes CPDS and IVCS. Additionally, our point of care bookings, including XT cabinets were lower than original expectation As a result of healthcare system customers continue to delay capital budget decisions and XT cabinet Bookings continue to moderate as a result of timing in our XT upgrade cycle.

Speaker 3

To summarize, The majority of the lower than expected bookings in 2023 was a result of lower demand for CBDCs and IVCS and other advanced services. Our total book backlog was $1,143,000,000 as of December 31, 2023, compared to $1,215,000,000 as of December 31, 2022. Product backlog includes connected devices such as XT Series automated dispensing systems and the product portion of our central pharmacy dispensing services and IV compounding service. Product backlog as of December 31, 2023 was 611,000,000

Speaker 2

of which

Speaker 3

$378,000,000 is short term product backlog, which we expect to convert to revenue within 12 months. Product backlog decreased by $186,000,000 over the prior year as a result of lower 2023 bookings. Advanced services backlog includes only the service portion of our Advanced Services multiyear contracts, which have a stated minimum commitment within the agreement. While we partner closely with our customers when providing advanced services and the majority of our advanced services are provided under multiyear contracts. Only a portion of those contracts have stated minimum commitments.

Speaker 3

Advanced services backlog as of December 31, 2023 was 532,000,000 of which $72,000,000 is short term advanced services backlog, which is expected to convert to revenue within 12 months. Advanced services backlog increased $130,000,000 or 27% over the prior year. Our full year 2023 GAAP revenues was $1,147,000,000 a decrease of $149,000,000 or 11% from 2022. The decrease in revenue over the prior year reflects the impact of lower bookings as I just outlined. Our 2023 port product revenues were $709,000,000 and our 2023 services revenue were 439,000,000 Within the full year 2023 services revenue, technical services revenue were 226,000,000 and advanced services revenue was $213,000,000 2023 advanced services revenues increased 14% over the prior year.

Speaker 3

Our full year 2023 earnings per share in accordance with GAAP were a loss of $0.45 per share. Our full year 2023 non GAAP earnings per share were $1.91 per share, a decrease of $1.09 per share from 2022. For the full year 2023, we delivered non GAAP EBITDA of $138,000,000 a decrease of $55,000,000 from 2022, which is above the revised 2023 guidance range we provided in the Q3 of 2023. The year over year decrease in earnings per share and EBITDA was mostly driven by lower revenues during the year, partially offset by cost savings actions, including the benefit from cost savings plans we announced in November 2022 November 2023. Although our full year 2023 bookings and revenues were lower than expected, when we provided the original guidance February 2023, we are pleased with the results of the cost savings plans that as we announced in November 2023.

Speaker 3

Together with other factors, including ongoing cost savings initiatives implemented throughout the year, The implementation of the 2023 cost savings plan drove non GAAP EPS and EBITDA to be above the original guidance and non GAAP EPS and EBITDA guidance. However, we believe there is more work to be done on this front. And as I mentioned, we are actively working to identify opportunities to further streamline our costs. We believe the favorable profitability during the year demonstrates our commitment to taking actions designed to bolster the continued profitability of our business during this challenging customer and product period. At the end of Q4 2023, our cash balance was 468,000,000 up $21,000,000 from $447,000,000 as of September 30, 2023.

Speaker 3

Our full year 2023 non GAAP free cash flow was $126,000,000 compared to $17,000,000 for the prior year, which includes the benefit of reductions in accounts receivable and inventory during the year, reflecting strong working capital management. As we communicated in our November 2023 earnings call, we continue to be mindful of the upcoming 2025 maturity of our comparable senior notes and are considering various options to maintain strategic flexibility for our company and in an effort to minimize potential dilution for our stockholders. In the meantime, we believe we are in a very good position with the current convertible senior notes, which have a 0.25 coupon interest rate. In short, we remain confident in our capital structure and our ability to support the ongoing execution of our growth strategy. In terms of accounts receivable, days sales outstanding for the Q4 of 2023 was 90 days, an increase of 6 days over the prior quarter and a reduction of 3 days compared to Q4 2022.

Speaker 3

Inventories as of December 31, 2023 were $110,000,000 a decrease of $37,000,000 from December 31, 2022. Our global supply chain team continues to make great progress managing inventory levels. Now moving to our 2024 full year and Q3 guidance. We would like to start by commenting on the current demand environment we are seeing within point of care. We are encouraged by the opportunities to offer new and innovative product enhancements on a larger installed base, including the XT console upgrade Randall noted in his opening remarks.

Speaker 3

We believe that with these new innovations, We should see a modest increase in point of care product bookings in 2024. Our core franchise is strong. Our channel is a durable source of future opportunities, and we are excited by our innovation pipeline. Based on these expectations, We expect our full year 2024 bookings to range between $750,000,000 to 875,000,000 We expect our full year 2024 total revenues to range between 1,045,000,000 to $1,120,000,000 We expect product revenues to range between $605,000,000 to $650,000,000 We expect services revenue to range between $440,000,000 470,000,000 We expect services revenues from advanced services to range between $220,000,000 235,000,000 We also expect services revenue from technical services to range between $220,000,000 235,000,000 The revenue guidance reflects our expectations for the continued impact of a challenging environment for our health system customers and timing of our XT product lifecycle. At the midpoint, The full year 2024 revenue guidance implies an expected year over year product revenue decline, partially offset by a modest increase in advanced services revenue when compared to 2023.

Speaker 3

As we have shared in the past, Advanced services provide a stable reoccurring revenue stream and for a majority of our services, We have multiyear contractual partnerships with our health systems and retail customers. As we continue to book new orders, The increase in the installed base will continue to contribute to advanced services revenue growth. Please refer to our Q4 2023 earnings release published on our Investor Relations website for a summary of the full year 2024 revenue guidance components. We expect full year 2024 non GAAP EBITDA to range between $90,000,000 120,000,000 We expect full year 2024 non GAAP earnings per share to be between $0.90 $1.40 per share. For the full year 2024, we are assuming an effective blended tax rate of approximately 19% in our non GAAP earnings per share guidance.

Speaker 3

The full year 2024 non GAAP EBITDA and non GAAP earnings per share guidance includes the expected impact of a full Year over year gross margin percentage decreased as a result of the lower point of care revenue, partially offset by the benefit of the recently implemented cost savings plan. We continue to expect approximately $50,000,000 of annualized Cost savings as a result of the cost actions announced in November 2023, of which around 75% is expected to be in operating expenses. A majority of the benefit from the cost actions is anticipated to be realized in the beginning of the first quarter of 2024 with a smaller portion of the savings expected as we progress through the year. As a reminder, the cost actions are expected to be partially offset by year over year inflation, as well as lower gross margins due to anticipated product mix. For the Q1 2024, We are providing the following guidance.

Speaker 3

We expect total Q1 2024 revenues to be between 232,000,000 and $242,000,000 with product revenues to be between $128,000,000 $133,000,000 and services revenue to be between $104,000,000 $109,000,000 We expect Q1 2024 non GAAP EBITDA to be between a loss of $2,000,000 and earnings of 4,000,000 And we expect Q1 2024 non GAAP earnings per share to be between a loss of $0.10 per share and breakeven per share. In summary, we continue to execute against our long term growth strategy and navigate a challenging macroeconomic We are seeing challenges for our customers, including the impact of the macroeconomic environment and labor challenges, and we expect these headwinds to continue in 2024. However, we are Confident that the approach we are taking to managing the business should position Omnicell to deliver on our commitments over the long term. The team has built a strong foundation from which we expect to continue our momentum in transforming the pharmacy care delivery model and are taking actions intended to improve our performance. We remain focused on driving value for our stockholders As we look to execute on our strategy and work towards to capture the opportunities we see ahead of us, We continue to endeavor to drive long term profitable growth and success at Omnicell.

Speaker 3

I want to conclude by thanking our employees for their continued hard work and commitment to Omnicell. With that, we would like to open the call for questions.

Operator

First question comes from Stan Berenstien with Wells Fargo. Please go ahead.

Speaker 4

Hi, good morning. Thanks for taking my questions. Maybe a couple on the bookings guidance. First in Chacha, I heard if I heard you correctly, you said point of care product bookings is expected to increase in 2024. And if that's the case, Can you help us understand what's driving the decrease in overall bookings guidance for the year?

Speaker 3

Thanks, Dan, for the question. We are continuing to see our customers be more cautious as they consider implementing new workflows that stress or really thinly stretch nursing IT and IT staff, which potentially impacts the timing of contracting and implementing new capital and software projects. While we are expecting a modest improvement in demand for our point of care solutions as a result of new innovations and services, we still expect moderation of sales of our XT cabinet based on where We are currently in the XT upgrade cycle. However, in advanced services, we continue to work with our customers to navigate the complex regulatory environment for IV Robotics. Please keep in mind that however, there is A lot of interest in IV services, which is quite strong and we believe the long term trends remains favorable.

Speaker 4

Okay.

Speaker 3

Sorry, go ahead. So I'm saying we expect our full year bookings to again be between the range of $750,000,000 875,000,000 But we're very excited about our innovation within the XT platform.

Speaker 4

Okay. So What about on Advanced Services? Are the bookings for Advanced Services expected to be positive or negative for the year?

Speaker 3

As I mentioned earlier, we continue to see our customers navigate a complex regulatory environment within our IV Robotics.

Speaker 4

Okay. And so you're saying that point of care is seeing modest increase in demand, but XT sales are expected to decline. So on a net basis, our product bookings just to be clear, our product bookings overall Expected to be negative in 2024 or positive?

Speaker 3

Slightly positive.

Speaker 4

Okay. So that would imply Advanced Services has to be negative, right, to get the overall bookings guidance negative?

Speaker 3

That's correct.

Operator

Okay.

Speaker 4

Okay. I appreciate that. And then just in terms of the guidance range, it's pretty wide, $125,000,000 Can you just walk us through what factors are in the guidance range?

Speaker 3

Right. We provide a very reasonable guidance that we believe is what we think we can achieve for the year. Yes.

Speaker 2

And I think the As we introduce new innovation throughout this year and this is a big innovation year for us, the uptake on that innovation and adoption by our customers And that's why we see the lift in product bookings and how fast it can be implemented is varied. So we're just at the beginning of the first phase of the XT upgrade cycle, which means Every XT customer is in play now with an offering. And as we Continue to innovate, we'll have to see how those new products, how quickly they can uptake. And this is a big year at the beginning of the cycle of these New XT products and platform that will get a lot of customer attention. It's just we have enough time this year to get it in the pipeline and get it sold and then eventually when does it revenue.

Speaker 4

Got it. Okay. Well, thanks so much. I'll jump back in the queue.

Speaker 3

Thanks, Tim.

Operator

Thanks, Tim. Your next question Comes from Ann Samuel with JPMorgan. Please go ahead.

Speaker 1

Thanks so much for taking the question.

Speaker 5

Jen, I was hoping maybe, in the advanced services business, can you parse out maybe what some of those key challenges are? Is it Still issues around hiring the pharmacy technicians or is it something broader within the industry backdrop around demand?

Speaker 2

Well, I think IV, a lot of interest in demand. It's just making our way through the regulatory environment It's by state. It's not just federal, it's by state. So to achieve that, you have to take the proper steps to get there. So That's the biggest dampener there.

Speaker 2

And for CPDS, it's really a lot of our customers are looking at Where to deploy robotics? Is it in a consolidated service center like Ballad? Or is it in a large hospital? And so these strategies that the customers are looking at are slightly changing from what they have been in the past. And so they're not ready to dive into new innovation until they sort of get their big hospital network strategy built on how they're going to dispense medication across a broad group of hospitals and clinics.

Speaker 2

And because of that, I think we're in a lot of discussions, but they're moving pretty slow.

Speaker 5

That's really helpful. Thank you. And then, maybe just one more on the bookings. Can you just remind us of the timeline Converting bookings into revenue, how long that takes? If we were to start to see a pickup in the macro, and maybe some improvement in your bookings, how long would it take for us to see that

Speaker 2

Well, it's a good question because this is one of the things ChaCha discussed about coming up with new metrics because Bookings can be confusing, but the easiest thing is to look at product. Product generally is 12 to 18 months for installation, maybe shorter than 12 months in many cases. So that's a key driver for the business or the near term part of the business. Bookings in Advanced Services are a multitude of different monetization of the stream over either 3, 5, even 10 years. And so it kind of confuses When those backlog dollars will hit the P and L, but they're generally longer than 12 months and 3 to 5 years.

Speaker 2

So, it's not the same impact. But the key for us and the way to look at our P and L As we gave guidance on Advanced Services this year for the revenue, so that is the revenue piece of the Advanced Services. The product backlog then is monetized in 6, 12, maybe as much as 18 months. So that's more of the near term revenue. So you think the advanced service And the product revenue and that that steers you pretty close to how the business works.

Speaker 2

Perfect.

Speaker 5

Thank you so much.

Speaker 2

You're welcome.

Operator

Thanks, Jeremy. Your next Question comes from Scott Schoenhaus with KeyBanc. Please go ahead.

Speaker 6

The product bookings or the product guidance for revenue and bookings. So are you assuming any revenue contribution this year from that new XT Series console That you talked about as a growth opportunity? And then secondly, on Advanced Services, you talked about the regulatory environment Pressuring advanced services demand for the IVX, but are you also seeing any slowdown in maybe the retail side in Livent Health? Thank you.

Speaker 2

Well, I think Live and Health is a different business model, mostly SaaS. We did have some churn in the business, but we're not necessarily seeing slowdown in interest or the value that the product line brings. We are seeing We believe that advanced services for IV is Certainly a bigger impact. If Ivy were where we would want it to be, it'd be probably riding the ship on the advanced service side.

Speaker 6

And then, your guidance on the product side for revenue, does it assume any contribution from the new console?

Speaker 2

A small amount in the back half of the year, yes, but small amount. Thanks.

Speaker 1

Thank you, Scott. Next question please.

Operator

Your next question comes from Alan Lutz with Bank of America. Please go ahead.

Speaker 7

Good morning and thanks for the questions. One for Randy or Inucha. On the strategic review, Trying to get a sense of where this is focused. Is it more on the operational cost structure? Could it result in The divestiture of assets and just can you elaborate a little bit more on the scope here?

Speaker 7

Is basically everything on the table? And then try and understand the timing here. Is this something where we should expect a resolution in 2024? Thanks.

Speaker 2

It's just a holistic operational and go to market review, right. I mean, we've got a lot of great products. We've either launched or acquired over the last several years and it's just time to do a review on those. And It's been a long time since Omnicell has had this type of year and decline. So it just makes sense to do this review.

Speaker 3

Yes. I'll just add to that that our results tell us that there is a need for a Significant and thoughtful evaluation of where we can make changes to improve our performance from operations to go to market initiatives as well as our overall product portfolio. And while the cost savings that we've taken already underway. We need to evaluate opportunities for additional actions that will enhance value creation for our shareholders.

Speaker 7

Great. And then on the product bookings, curious, follow-up to some other I'm curious if the driver just to kind of break down some of the drivers around the expectation for higher bookings growth From the product side in 2024, would you say what's as we think about changes to hospital budgets that you're seeing, The new XT console upgrade, I'm just curious, are those the two things that are providing them the greater confidence here as we go through 2024. I'm just curious what you're seeing today as it relates to your conversations with hospitals. Thanks.

Speaker 2

Yes, definitely the macro environment has improved over time is still some headwinds there. But the XT product line, which is the point of care product line is A big contributor of what's in product, upgrading the cycle of the XT line is something we did Before, right, we went from G3 to G4 with a console upgrade. Now we've got the XT console that's going to be upgraded to the next version, which is a natural thing for customers to do. It's a playbook that we've run before. So we're really confident that this will resonate with customers, extend their investment they made in the XT product line To bring them more value, provide more security, some of these keyboards and screens are 7, 8 years old, they need to be replaced.

Speaker 2

So There's a lot of logic there for customers and a little bit more willingness we see for them to invest. And This is not just a pharmacy piece. It's something that will help nursing, which is a very sensitive area of our providers these days.

Speaker 7

Great. Thanks, Randy.

Operator

Your next question comes from Matt Hewitt with Craig Hallum Capital Group. Please go ahead.

Speaker 8

Good morning and thank you for taking the questions. Maybe a couple on the new console upgrade. And Randy, thanks for explaining. I mean, it sounds like it's like the G4. When I think back over a couple of your prior upgrade cycles, you had an external driver that helped kind of expedite the process.

Speaker 8

I think, you know, at one point, it was the EHR meaningful use. You guys were the only ones that had approval for that. And so that helped drive adoption of a new cabinet. And then at one point, it was the windows 2000 sunsetting. What do you see as a driver for this new console upgrade?

Speaker 8

Is it on the cybersecurity side? Is there something else that could externally kind of drive customers to adopt this new platform?

Speaker 2

Yes, in itself, it definitely allows you to access the latest operating systems, which Of course, everybody is concerned about and so it is more secure. It's also more efficient for nurses to use it. There's some Efficiency enhancements, as well is going to be a platform which we will get continue to innovate on that will allow them access to these new innovations. You'll have to have the new console to access these additional innovations as we go along. And probably the biggest driver is that if you made an investment in XT, You want to be able to lengthen the life of that frame.

Speaker 2

And in order to do that, you have to do the console upgrade because we're not going to allow the continual use of an older piece of equipment when it gets out of date. And so to get that refresh From the frame, you've got to upgrade the console. So it's something that they're used to. It's something that we've done over the years. They understand.

Speaker 2

And we've had a lot of discussions and pipeline on it. So it's sort of just very, very early returns. I'd say we're pretty pleased with how it's going right or it's expected to go.

Speaker 8

That's great. And then Maybe a similar question or related question, with it just being a software upgrade, Should that result in a shorter sales cycle unlike when you're ripping and replacing the full cabinet Because this is just software, does that result in a shorter sales cycle or shorter implementation cycle and therefore maybe help a little bit sooner?

Speaker 2

Yes, let me just speak clearly. It is a hardware console. It's like the interaction screen and keyboard they use, but it's a fairly simple Exchange less than an hour to pull out the old and put in the new and then it has the new software and it's ready to go. It is a little bit simpler to make the sale and a little bit simpler to revenue as well, because you're Not doing a forklift of a major product line. You're just upgrading and enhancing the one that's already there A little bit of hardware and a lot of software.

Speaker 8

Got it. All right. Thank you.

Operator

Your next question comes from David Babin, BTIG. Go ahead.

Speaker 9

Can you talk about your own sort of cost inflation trends along the lines of like deal and freight and your own labor. And then I think you're implementing some price increases for your base to help offset that. How are those being received by your customers and how far along are we in that process? Thanks.

Speaker 3

So we continue to monitor our supply chain risk and the geopolitical environment and the impact that has on our business. And Inflation has normalized in recent quarters, but we as we take pricing actions, We believe that this will be well received by our vendors.

Speaker 9

Okay. And then with the XT sort of upgrade, Randy, I think we had been talking about like being maybe 70% or more of the way through sort of this full XT upgrade process on previous calls, I think what I'm hearing from you now is that it's a full reset. Everybody is going to have to go through this new XT upgrade for this new console. Can you talk a little bit about the pricing for that, please? Like how much of a lift Should we expect to see per customer?

Speaker 2

Well, just the console alone and we're looking at expanded portfolio to take to the customer, which we will announce throughout the year how this broader innovation is going to work. But it's about as these console upgrades generally are about a third of the price of the unit.

Speaker 9

Okay. So it sounds like it will be actually very material, quite frankly, which is obviously a good thing. And then just my last one is for the 1Q revenue guide that looks low. So I like how ChaCha beat the guide this quarter. That's great.

Speaker 9

Are you being conservative with the 1Q revenue guide Or what is causing the seasonality here? And I guess my concern is if you're not being conservative, then you're kind of expecting a pretty good lift in the back half of the year. Any color there would be great.

Speaker 3

Yes. Look, we provided a plan that we believe we can manage a company to and we remain optimistic about our innovation within the XT platform, which includes this console upgrade, and We expect a modest improvement in demand for our point of care as we go into 2024.

Speaker 9

Okay, thanks. I'll hop back in the queue.

Speaker 3

Thanks, David.

Operator

Your next question comes from Stephanie Davis with Barclays. Please go ahead.

Speaker 10

Hey guys, thank you for taking my questions. I heard in the prepared remarks that you guys were talking about executing against your long term growth strategy. So I wanted to revisit that. I know the Analyst Day last year, you talked a lot about moving from more of a services and software play away from Harbor alone, advanced services was part of that. Where are you in that transformation?

Speaker 10

And is that still kind of the long term target?

Speaker 2

Yes. Obviously, advanced services is very key, but we'll always product is part of our business model and a big portion of that business model over the past few years, which generate a lot of growth and a lot of revenue has been the point of care. And so that is impacting our model more than we'd like, obviously right now. But to get our model back in balance, we need to be able to have those product revenues, particularly from point of care start to drive our growth and increased earnings. And but there's a lot of ways we can offer those products.

Speaker 2

They don't have to be as a product sale alone. We don't really want to be doing product sales alone. We want to do those product sales enhanced with services around them. But so it's really key for us to move from selling products to really Helping our customers run the day to day operations in their medication processes so they can achieve success. But it does include The offering and the sale of products either embedded in a service or sold as a service surrounded by services.

Speaker 2

So I don't know if that answers your question directly, but it's the same. It's we're moving forward toward Managing our customers' businesses day to day with these enhanced services and the revenues that are driving that can be in the form of traditional product revenues, but always adding on advanced services to get the results and the outcomes.

Operator

That's helpful. That's helpful. And then as you

Speaker 11

go through the strategic review and you kind of shake

Speaker 10

the actual sketch of what's in business versus what's not, Are there any incremental end markets like the retail pharmacy side of the house that might be more compelling to get into given some of the headwinds in hospital?

Speaker 2

Yes, I think there's always in the clinics and Outpatient, there's some lot of growth there and concerns there that there aren't Quite the tool sets that they have on the inpatient side. So a lot of our customers want us to help them figure those out. And certainly Those kind of markets are in our view and either in investing or make or buy. So, absolutely, those make a lot of sense to proceed in.

Operator

All right. Thank you. I'll hop back in the queue. Your next question comes from Bill Sutherland with The Benchmark Company. Please go ahead.

Speaker 12

Thanks. Good morning, everybody. Hey, Randy, you just mentioned make or buy. I was actually going to ask you what your Any thoughts on the capital deployment side and particularly with the cash building quite nicely?

Speaker 2

Yes. I'll let Xiaocha comment on the refinancing of the debt, but I should have said that we probably won't be looking at acquisitions till we get sort of the debt side of it addressed here and that's not too far off in the distant future. I don't know, Chacho, would you want to anything else about that?

Speaker 3

Yes, Bill, we continue to be mindful of the upcoming 2025 March already of the convertible senior notes, and We are considering various options to maintain strategic flexibility for our company and in an effort to minimize any potential dilution to our stockholders.

Speaker 12

Got it. Stacks of the quarterly cadence, particularly on earnings, non GAAP earnings, from the Q1 guidance So the full year, quite a lift. Is it going to be kind

Speaker 4

of a

Speaker 12

should we think of it kind of ratably improving or is it more back half loaded?

Speaker 3

I'll say that's uploaded to a certain extent.

Speaker 12

Okay. And then Randy, you said not too long ago in a conference that the regulatory headwinds, which are state by state on IBX. Yes. You kind of thought that most of the important states at least would be worked through during the course of this year. I think that's what you said.

Speaker 3

Is that the case so that

Speaker 12

we can really expect IVX to be taking off in 2025?

Speaker 2

25? We'll have to see how it goes, but I think 2025 is going to be a much better year for IV just because we'll get through some of those states. Some of the things that impacted The IV is what drugs you can mix on-site and how long the stability was. And so our original thesis for some of our sites where we were making proposals, the ROIs weren't as high. So we had to go back and reformulate those and then get hospitals to get engaged on those again.

Speaker 2

So I think we'll have work through most of that by the end of this year.

Operator

Your last question comes from Jessica Tassen with Piper Sandler. Please go ahead.

Speaker 11

Hi, guys. Thank you for the question. I thought the new deck was really helpful, Slide 14, especially. So I wanted to just get kind of clarity on The enhancement of the XT cycle via console versus the upgrade cycle. I guess, What's the thought process on launching the new console during the end of the XP cycle as opposed to just introducing the new console and cabinet kind of bundled together as a new product cycle entirely?

Speaker 2

Well, this has just been our tradition and it's also been part of our brand is that if you buy a frame from us, it's good for 10 years, but it includes an upgrade of a console about halfway through to get new enhancements and Really replacement of the old hardware or the interface console. So customers kind of expect it and it generates good revenue for us And it extends the life of their asset. It's easy. It makes sense for them to purchase and keeps customers engaged with us as we move on to product transitions and product rollouts of new products and services. So It's I would say half our customers in the last, I don't know, 3 years have just installed their XT.

Speaker 2

So if you come it's It's not the timing to come out with a new piece of hardware, total frame at this point. And so this would be the next logical move for us in our go to market As well historically, this makes a lot of sense. And that's probably the reason we've kind of had this dip on as we tailed off on the XT and we're taking off on the console upgrades is we probably had some of those XT cabinet sales were pulled in through the pandemic process. And so it really created a slack in the rope. And now that we're getting the XC console going, which is what people expect about this time, It should help us even out and move forward on a more consistent basis to drive revenue and profit.

Speaker 11

Okay. Got it. That's helpful. So, the customers who have already implemented the XT have not paid for the console yet, but they've Agreed extensively or implicitly to upgrading the console whenever it gets released. Is that fair?

Speaker 11

And is this Kind of an incremental market share driver or a way to drive revenue on the existing XT base?

Speaker 2

This is all for the XT base and it's quite large for us, right, because of our footprint that we've gained over the last 3 or 4 years. So this is a sale into our captured customers XT base that we have today.

Speaker 11

Okay. Got it. And then I just wanted to quickly follow-up on your commentary about The bookings missed in 'twenty three versus the preliminary guide, so about $150,000,000 at the midpoint. If we imagine that the majority of that's attributable to a miss in central dispensing And the IV compounding robot, it just suggests that there were pretty significant expectations for those 2 products in the 2023 bookings guide. Have you guys Thought about or changed your philosophy around guidance for those new products in 2024, just kind of increase the level of conservatism given that their new products with Yes.

Speaker 2

Yes, that's a great point. And I think that you see that in our bookings guide that is lower and it reflects those conclusions you just had. So I think that's implied in there. Yes.

Speaker 11

Okay, great. That's it for me. Thank you.

Operator

There are no further questions at this time. We apologize for the technical difficulties during today's conference. I will now turn the call back over to Randall Witt for any closing remarks.

Speaker 2

Well, thanks for joining us today. We've got a lot to do in 2024, but we're really excited about our innovation road path that we believe is really going to drive growth in earnings over the long term. We really have stepped up our focus on our go to market, on our innovation consistently, even quarter to quarter as we move forward. So look for seeing These new innovations as they come out and how they fit into our roadmap and what they mean to customers and what they mean to our revenue and earnings, it's really In a way, it's really exciting to get to the next phase, which is the upgrade phase and even more rollout of our XT and advanced service lines. I also want to thank the Omnicell employees for working extremely hard as we continue to want to deliver great value for our customers and for each other and get our company going back to growth and back to profitability.

Speaker 2

Thanks everyone. Cheers.

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Earnings Conference Call
Omnicell Q4 2023
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