Q3 2022 Omnicell Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today at.
At this time I would like to welcome everyone to the only sell third quarter 2022 financial results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one thank you.
It's now my pleasure to turn today's call over to Kathleen Nemeth Senior Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to the Omnicell third quarter financial results Conference call.
On the call with me today are Randall Lipps, Omnicell, Chairman, President CEO , and founder and Scott Seidelman Executive Vice President and Chief Commercial Officer, and Peter <unk> Executive Vice President and Chief Financial Officer.
This call will contain forward looking statements, including statements related to financial projections or other statements regarding arm yourself plans objectives expectations target expense management or outlook that are subject to risks uncertainties and other factors that could cause actual.
Results could differ materially from those expressed or implied.
We're a market 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-K filed with the SEC on February 25, 2022 and in other more recent reports filed with the SEC.
Please be aware that you should not place undue reliance on any forward looking statements made today.
All forward looking statements speak only as of the date hereof or the date specified on the call.
Sept 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 morning and are posted in the Investor Relations section of our website at IR Dot Omnicell Dot com.
Additionally, we'd like to remind you that during this call we will discuss some non-GAAP financial measures reconciliation of these non-GAAP measures to the most comparable GAAP financial measure are included in our financial results press release posted in the Investor Relations section of our website with respect to forward.
Looking non-GAAP measures such as guidance and targets, 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 thank.
Thank you Kathleen.
Good morning, and thank you for joining us today.
This quarter, we continued to advance our strategy to transform the pharmacy care delivery model and.
And deliver mission critical medication management solutions for our customers.
As I said at our recent Investor Day I started this company 30 years ago to improve medication management and <unk>.
<unk> medical caregivers to spend more time with their patients.
We continue to innovate each day to further this objective as well as to achieve our mission to be the clinicians most trusted partner.
Our go forward strategy is not only to continue to advance these important objectives, but also to deliver on the tremendous growth. We see ahead of us as we transition our business to an as a service model. It is clear to us that our strategy is working as the demand for advance.
Services, including a retail SaaS solutions.
<unk> strong.
Advanced services, our omni sales future.
We're especially encouraged by the strong results we're seeing for these solutions.
Continue to focus on the long term value, we believe we can create.
Delivering cloud based platform solutions designed to enable SaaS and tech enabled pharmacy operations across the entire continuum of care.
That said in the near term we are.
Seeing significant headwinds in our point of care products.
The economic environment, including its effect on our health system customers shifted rapidly for the end of third quarter.
This has caused many health systems to implement capital budget freezes and additional budget approval processes, which is resulting in elongated sales cycles.
At the same time.
Ongoing health system labor constraints.
Turning to increase which has resulted in a higher than typical number of customers requesting to temporarily defer.
Their implementations.
These factors have adversely affected bookings and revenue in our point of care business.
We are updating our overall bookings and revenue outlook for the year Accordingly.
I do want to point out that despite the current environment, we are continuing to see major implementations move for.
We continue to believe our customers recognize the need for our point of care products to meet compliance like many other companies across industries, we are navigating a dynamic macroeconomic environment.
We'll continue to respond to this changing environment, including by implementing appropriate actions on expenses where needed.
Take what we believe is a prudent and disciplined approach to managing our business through this period.
I'll speak more about these actions in a minute.
Walk through the third quarter financial results.
Third quarter revenue of $348 million was below our guidance range, driven primarily by customer requests to reschedule delivery and implementation of our point of care products.
GAAP net income for the third quarter of 2022 was $17 million or <unk> 37 cents per diluted share.
non-GAAP net income for the third quarter of 2022 was $45 million or $1 per diluted share.
This was in line with our guidance due to strong expense management as well as reductions in performance based compensation expense.
non-GAAP EBITDA for the third quarter of 2022 was $61 million.
As I mentioned, despite headwinds in point of care, our advanced services, including our in life and health products and solutions continue to see robust demand.
One example of this demand is the fact that in the third quarter, we installed a record number of Cps or that's our X are two robots as a service installations.
We are also pleased with the momentum we are seeing an omnicell one.
And the strong demand for our IV compounding service.
During the third quarter and live in health closed a deal with a major northeast based pharmacy chain.
Contracted for two key digital solutions.
<unk> health is expected to exit 2022, with an approximate annual revenue run rate or a R. R of $90 million.
As our retail customers appear to increasingly turned to in life and health for our uniquely positioned SaaS offerings.
As well, we now have 152 of the top 300 U S health systems under long term sole source contracts.
Many recent long term sole source wins have been competitive conversions.
This was the case for one of our two new long term sole source customers with the other being an existing omnicell customer.
Expanded its relationship with us.
Whether a competitive conversion or a current customer.
We believe health systems are choosing to enter into long term sole source contracts.
With Omnicell due to our strong positioning with our advanced services offerings.
Scott will provide more color on this growth shortly.
But I wanted to acknowledge that our strong presence across the U S. Health system is a testament to our 30 years of hard work by Omnicell employees.
Find that the breadth.
The depth of our channel.
Comprehensive portfolio of solutions and our singular focus on the pharmacy continues to be important points of competitive differentiation for the company.
We believe that we are uniquely positioned to capitalize on the growth opportunities ahead.
And that we're just getting started.
We are facing headwinds and operating in a difficult environment, but as I said on our last call.
<unk> has been through many different market cycles in the past 30 years.
We have navigated each of those cycles and evolved our business to ensure we meet our customers' needs and we will continue to do so.
On that note I want to address how we intend to navigate the headwinds we're seeing.
We plan to take actions to significantly reduce expenses.
A review of all areas of our cost structure underway.
We intend and believe we have the ability to adjust our spending to align with revised bookings and revenue levels.
At the same time, we plan to continue to invest in our advanced services.
We believe they are omni sales future and that our continued investment in R&D and our innovation Road map will enable us to continue to transform our business and support our growth agenda.
Near term, we anticipate operating against the challenging backdrop, and we have revised our outlook for the year.
Taking this expectation into account.
That said, we continue to be confident in our strategy and we believe omnicell is well positioned to enable the digital transformation of the entire medication management continuum.
Our health care system customers recognize the value of Omnicell provides and we look forward to delivering long term value to all of our stakeholders. So with that let me turn it over to Scott for some details.
On the quarter.
Thank you Randall.
As Randall noted we saw significant headwinds primarily in our point of care products and solution this quarter.
Hospitals and health systems are under financial pressure experiencing labor constraints, and some instances, resulting in capex budget freezes and there are additional budget approval processes, resulting in a long dated sales cycles.
So in some cases, we have seen pauses and point of care implementations due to availability of health system labor or hospital construction delays.
We are also now well over 50% through the XT upgrade cycle. We are currently operating in a difficult environment, particularly with respect to point of care.
However, it is important to understand that we strongly believe our strategy to transform our business to an as a service model is working how.
How do we know.
Let's look at a few of the key indicators, we are tracking to gauge. Our success first we are seeing many of our advanced services customers achieving real ROI with these solutions, whether it's through improved patient care reduce labor expense better compliance and or improved financial performance. Our customers are relying on us to partner with them to address their most.
Pressing medication management challenges across the continuum of care and as a result, we are seeing increasing reference ability for our services with customers proactively sharing their successes with other health systems.
We are also seeing strong demand in the market and our pipeline for these services appears to be growing faster than the market.
Also this quarter, we saw record revenue for our central pharmacy dispensing service.
And lastly, as I will discuss further in a moment our advanced services portfolio continues to differentiate omnicell with large health systems.
For all these reasons, we intend to accelerate our transition to advanced services and we are continuing to invest in our growth agenda.
One example of what we believe is smart continued investment in our advanced services is our recently launched specialty pharmacy service.
It can help provide hospital systems with an additional potentially significant source of revenue to <unk>.
Even some of the financial pressures that they're facing we also believe that in the future our transition to advanced services, which comes with projected predictable recurring revenue will ease the point of care replacement cycle Challenge. We are currently experiencing next I'll touch on a few of our recent customer highlights.
At Investor Day, I spoke about our vision to transform healthcare by optimizing medication management within each setting of care with the patient at the center.
We believe that this vision is resonating strongly with customers Randall spoke briefly about this in his remarks and we are really excited about the long term sole source customers. We've added recently as we continue to build strong partnerships among top 300 health systems through these agreements.
To that end, we are excited to announce that a Virginia based health systems signed a five year sole source agreement for Omnicell Central pharmacy, and point of care dispensing solutions inventory optimization services and cloud hosted medication management platform.
This customer signed the agreement after successfully adopting Omnicell IV compounding service. This win of the top 300 health system customer was a competitive conversion that we understand was one due to our expertise and our commitment to investment in and focus on next generation medication management.
We are also excited to announce a new 10 year long term sole source agreement signed with an Indiana based health system.
This customer was also an IV customer that is now implementing both XT automated dispensing systems and Omnicell, one our SaaS advanced service that delivers inventory optimization capabilities.
With the addition of specialty pharmacy services to our portfolio, we are engaging our customers more strategically our specialty pharmacy services team can work with customers to identify how the addition of an in house specialty pharmacy will lead to better patient care and potentially significantly improved financial performance specs.
Specialty pharmacy is a significant part of medication management and our specialty pharmacy service is a key part of our portfolio.
We signed two significant customers this quarter and our pipeline continues to grow.
This quarter, our longtime omnicell customer in Lasalle.
Adopted additional advanced service offerings for inventory optimization, and central pharmacy, dispensing service to improve visibility and accelerate time to value realization for these solutions.
We also hosted over 280 health systems for our all illuminate live event, which included the formal launch of our specialty pharmacy services offering that further expands our portfolio of advanced services and other exciting solution updates.
Well then participants appeared very interested to hear how temple University hospital, especially pharmacy services customer is achieving significant financial outcomes through their in house specialty pharmacy operations.
Also within our advanced services portfolio and live in health has been performing very well.
And live and is helping pharmacy, streamline and automate their patient engagement and clinical and financial workflows.
This frees up critical time for pharmacists, allowing them to practice at the top of their license and provide high value clinical services that improve patient health outcomes and strengthened bottomline pharmacy business results.
As Randall mentioned earlier, we are excited about the new deal we closed with a major northeast based pharmacy chain that contracted for two key digital solutions.
We believe our strong execution will continue to help retail pharmacies overcome current challenges to deliver better care and increased profit.
This is currently a difficult business environment and we are disappointed in these results.
However, we are pleased that we added two new long term sole source customers and that we continue to see strong demand and make solid progress with our advanced services, including <unk> live in health solutions.
While this near term period may be difficult, we are confident in our transition to an as a service model and excited to work closely with our customers to transform health care for the better.
I will now turn it over to Peter.
Thank you Scott this was a very challenging quarter for the business environment shifting rapidly towards the end of the quarter.
Randall noted we are seeing a high level of customer requests.
The strong point of care installations Hurricane Ian also occurred late in the quarter, which delayed multiple customer implementations. Both of these factors negatively impacted our revenue.
In addition, we're seeing an increasing number of health systems implement capex budget finishes or additional capex approval requirements, which have resulted in lower expected bookings for the full year.
It is important to note that the SaaS majority of the decrease in expected full year of 2022 bookings just in point of care products.
Demand for our services remains robust.
While revenue was modestly impacted in the third quarter I am pleased that strong expense management as.
As well as lower performance based compensation expense enabled us to deliver non-GAAP EBITDA and non-GAAP EPS within our guidance ranges.
When we sell employees across the company continue to put our customers first.
And I am pleased with our team's diligent expense management during the quarter as well as the solid execution that are more than 4100 Omnicell team members continue to consistently deliver and then mark economic environment that remains challenging.
Turning now to review of our third quarter results.
Our third quarter of 2022, GAAP and non-GAAP revenues were a record $348 million.
Our non-GAAP revenues increased $17 million or 5% over the prior quarter and were up 17% over the third quarter of 2021.
The year over year revenue increase reflects strong demand for only sells mission critical medication management automation solutions as well as the contribution of revenue for recent acquisitions.
Total revenue in the quarter was below our guidance range, primarily due to customer timing delays, including delays from health system labor availability and a small portion due to the impact of hurricane Ian and FX headwinds.
Our third quarter, 2022, organic GAAP and non-GAAP revenues increased 11% year over year.
In addition to the acquisitions of <unk> <unk>.
<unk> now referred to a specialty pharmacy services and markets as media are performing well and.
We expect these recent acquisitions to support our long term growth objectives.
non-GAAP gross margin for the third quarter of 2022 was 47, 5% a decrease of 200 basis points from the prior quarter. This decrease was primarily due to the product and customer mix of implementations during the quarter as well as higher employee related cost due to higher head count and our annual merit.
Increase which became effective on July 1st.
Third quarter 2022, GAAP earnings per share was <unk> 37 per share compared to <unk> <unk> per share in the second quarter of 2022.
<unk> 61 per share in the third quarter of 2021.
As a reminder, third quarter 2021, GAAP EPS and non-GAAP EPS included a stock excess tax benefit of <unk> 50 per share compared to <unk> <unk> per share in the third quarter of 2022.
Full reconciliation of our GAAP to non-GAAP results is included in the third quarter of 2022 financial results press release.
Within the Investor Relations section of our website.
Third quarter 2022, non-GAAP earnings per share were $1 per share.
Meeting the high end of our guidance range compared to 84 per share in the previous quarter and $1 <unk> per share in the same period last year.
We delivered non-GAAP EBITDA of $61 million in the third quarter of 2022 compared to non-GAAP EBITDA of $56 million from the previous quarter and.
$66 million from the same quarter last year.
Despite the lower than expected revenue relative to our guidance, we achieved non-GAAP EBITDA and non-GAAP EPS within our guidance ranges as a result of strong expense management and lower performance based compensation.
At the end of the third quarter 2022, our cash balance was $266 million up from $245 million as of June 32022.
Cash flow provided by operations was $21 million.
non-GAAP free cash flow during the third quarter of 2022 was $5 million.
Our free cash flow in the quarter was impacted by lower cash collections on the reduced revenue and timing of shipments in the quarter.
For accounts receivables days sales outstanding for the third quarter of 2022.
<unk> was 93 days.
Days sales outstanding reflects an increase of seven days over last quarter, primarily from the timing of invoicing within the quarter.
Inventories as of September 32022 for $147 million, a decrease of $3 million from the prior quarter and an increase of $43 million from the third quarter in 2021.
It is important to note that the inventories as of September 32022.
Included approximately $18 million of SaaS purchases and receipts of semiconductors.
We'll have reasonably secure supply for future customer implementation timelines.
We believe that we are continuing to execute very well on a global supply chain process improvements and inventory management initiatives.
Now moving on to our full year and fourth quarter of 2022 guidance. We are revising our full year 2022 outlook due to the following factors.
Increased health system Capex budget freezes.
Additional health system capital budget approval processes.
Our resulting an elongated sales cycles.
Health system labor availability impacting implementation schedules.
<unk> continued macroeconomic environment of uncertainty.
Demand for <unk> services remains strong and we're very pleased with the interest and.
And services portfolio from the top 300 U S health systems. However, the factors I noted earlier impacting our expected full year bookings primarily in point of care.
As a result, we now expect the following.
Our full year 2022, we expect product bookings to range between $950 million and $1 billion and $50 million.
We expect 2022, GAAP and non-GAAP revenues to be between.
$1 million $284 million and $1.294 billion.
We expect full year, 2022, GAAP and non-GAAP product revenues to range between $889 million $894 million, we expect full year 2022, GAAP and non-GAAP service revenues to be between $295 million.
$400 million.
240, <unk> solutions for 2022 revenue continued to track to our prior estimate of $30 million to $35 million.
We now expect deferred services revenue as a percentage of total revenue to be approximately 14% in 2022.
We expect full year, 2022, non-GAAP EBITDA to be between $177 million and $183 million.
Reflecting the margin impact of the reduction in revenue.
We expect full year 2022, non-GAAP EPS to be between $2 73 per share.
$2 83 per share.
We now expect total inflationary cost in 2022.
Approximately $30 million for full year 2022, we are assuming an effective blended tax rate of approximately 6%.
And our non-GAAP EPS guidance.
For the fourth quarter of 2022, we are providing the following guidance.
Outlook incorporates our expectations for the impact of lower revenue as a result of the lower than anticipated bookings at point of care.
As well as an uncertain business environment as I noted previously.
Total fourth quarter, 2022, GAAP and non-GAAP revenues to be between $285 million and $295 million.
GAAP and non-GAAP product revenues to be between $183 million and $188 million and GAAP and non-GAAP service revenues to be between $102 million and $107 million.
We expect fourth quarter 2022, non-GAAP EBITDA to be between $10 million $60 million and we expect fourth quarter of 2022 non-GAAP earnings per share to be between <unk> <unk> per share and <unk> 15 per share.
In summary, this was a difficult quarter and we expect this environment to remain challenging in the near term we will remain.
Confidence in our long term outlook and we intend to take actions designed to align our cost structure and expected bookings and revenue levels.
We are looking at all categories of costs and intend to manage expenses prudently and diligently.
At the same time, we plan to continue to invest in our growth agenda.
Committed to delivering value to all of our stakeholders and look forward to updating you on our progress in the coming quarters.
With that I would like to open the call for your questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Dan <unk> with Wells Fargo Securities. Your line is open.
Hi, Thanks for taking my questions I guess I'll start with elephant in the room on the on the bookings side here.
Sure.
Pretty sizable reduction in the year, but can you walk us through exactly how widespread.
Most of our customer base are you seeing capital budget freezes and then maybe related to the delay in implementations of clients provided any visibility into how long do you plan to delay these implementations.
Yes, well I think it's fairly widespread but not everywhere, but I think increasingly more and more large health systems have put a delay, particularly at the end of third quarter when they start to.
Starting to see their financial results.
And so.
And as far as implementations, we see because there are not enough.
People on site to deal with the installation process because of labor shortages.
And probably also some.
Concerned about nursing. These systems all are impacted by nursing as the major user of them.
So that they don't want to disrupt.
The shortage of nursing with another project at a deferred them to when they feel like they have more control over their local environments, and usually that gets delayed a quarter or two.
Because.
They have committed to do the upgrade or equipment in so that's not going away, but the timing on when it actually happens.
Is the key.
Okay, and then maybe one quick one are you still sticking with your 2025 guidance.
No we are not reaffirming the 2025 framework.
We.
We remain committed to these targets.
We cannot reaffirm the timing.
At this point.
Okay. Thank you.
Thanks, Dan next question please.
Your next question is from the line of Jessica <unk> with Piper Sandler Your line is open.
Hi, Thanks for taking my question I guess.
On the <unk> call you guys, specifically said the customers, we're not delaying but that if any one of them that you'd have plenty of that backlog to kind of.
Just replace one deployment with another I guess what happened.
With that strategy relative to the products driving your guidance revision right.
Appear does this guidance was adequately covered I guess.
Where's the disconnect.
Hey, guys. This is Peter so what changed really.
To the very end of the third quarter was really the.
Timing of availability as well customer requests.
Delays.
Implementations, where our multiple.
All prior quarters.
That said multiply.
Now does that the majority of the delays and implementation projects have been rescheduled.
Okay got it and then just as you talk about kind of pulling back on operating expenses.
With the revenue revision.
Should we think about the ADC upgrade site or upgrade opportunity.
As being less than that $1 8 billion.
You outlined a few years back.
So two parts to the question is yes. So we're looking at all types of expenses of course, we're looking at for variable costs will adjust accordingly, we will look at all types of operating expenses as well.
As far as the ADC product line.
Yes, we do believe that the majority of the acreage cycle will happen, but there is definitely a timing impact.
As you can see the majority of the lowering of the product bookings guidance the expected.
Bookings guidance for 2022, the vast vast majority of that is point of care.
Got it and my last quick one is just Walgreens I think reported that she also has partnered with 75 health systems.
Curious your view on how many health systems are candidates for their own specialty pharmacy can you help us frame the Tam in terms of how systems.
And then just I think for Walgreens at least this business is growing.
Upwards of 40% a year there just how quickly do you expect your specialty pharmacy offering to Greg. Thanks.
Hey, Jess it's Scott.
I think we feel that the.
Specialty pharmacy.
The market for outsourcing the operation of specialty pharmacy specialty pharmacy is a big market, it's largely greenfield.
So we think that.
There is a significant number of the exact counts.
I'm not sure quite how to get out or at least I don't have that at my fingertips, that's something we could follow up on but its a big greenfield market and we're well positioned and we think that having this offering paired with omnicell channel, but more importantly.
Our other products and services is a significant differentiator and we're really excited about the growth.
Got it.
Your next question. Your next question is from the line of Allen Lutz with Bank of America. Your line is open.
Thanks for taking the questions.
One for Peter can you talk about the timing of any potential opex reductions is this something we could see in <unk>.
Or is this more of a 2023 dynamic.
Yes, we're going through the planning of cortisol of operating expense and also Friday will cost actions.
And accordingly.
But then in the next couple of months, we'll provide more clarity on the sizing.
Impact on the timing of the cost actions.
Okay. Thank you and then you mentioned delays began really at the end of third quarter win when health systems started to see their financial results can you can you provide any type of context historically when there has been a slowdown or a change.
In the conversation with these health systems, how long that typically take to play out I know that every.
Every cycle is different than the last but typically.
How long does that does that typically last.
Yes, thanks for the question I'll take the.
This is really unprecedented in my 30 years, usually it's <unk>.
<unk> ramped down in the slow ramp up more of a U shaped when it comes to capital spending and healthcare systems.
And.
Yes, I really think many of these health care systems believes that September was kind of return back to normal.
And and they were improving on their margin.
Throughout the year.
And so.
But I think it didn't improve enough.
So with that I think but the increased cost of capital.
The increased cost of nursing and the uncertainty of what that cost might be the availability of labor.
All impacted sort of at the same time, which created this sort of.
Frozen moment for some of the health systems to have orders in hand.
It differed.
And I think it's really unprecedented I really don't I think we.
I don't know a lot about the future because this is such an unusual time.
And.
Precisely how it will come back and when it will come back.
One thing I know long term they need the systems.
They know that their infrastructure and pharmacy has underinvested in.
And so these orders are disappearing.
Sorry.
I appreciate the color. Thank you.
Your next question is from the line of Scott Schonhaus with Keybanc. Your line is open.
Hi team so drilling in on the full year guidance.
Everyone's talked about the lower revenue guide coming from the delayed sales cycle and delayed installation installations.
Deteriorated rapidly in the quarter I want to focus on the profitability guidance that came down by 28%.
Peter I guess can you.
Breakout. The makeup of this guide down how much of this was due to lower integration costs and how much of this was due to higher labor costs and slower macro.
Thanks.
Yes, thanks for the question Scott So.
First of all integration costs are tracking to our original guidance.
It's about $6 million to $8 million for the year that remains on track.
Gration by itself is going well also hitting the milestones.
<unk> integration perspective.
I would say, 90% plus of the decrease in profitability on EBITDA level is driven by the reduction in volume mostly for product revenue.
Thanks, you have a follow up Scott.
No that's it.
Thank you.
Your next question is from Matt Hewitt with Craig Hallum Capital Group. Your line is open.
Good morning, and thank you for taking the questions.
I guess, just kind of goes back to a couple of questions ago regarding.
This potentially being an unprecedented situation that you're facing if I think back to OE no nine.
When you had the credit freeze essentially short term markets froze up.
I feel like at that time, you ran into somewhat similar situation where.
Im drawing a blank here, but I think if I remember correctly. It was like Q4, you provided your physical outlook for I think it was for <unk> nine and with my Q1 ordering patterns can change because the markets had frozen short term funding markets.
I don't know if you can remember, but how long did it take for those things and I realize it's a little bit different situation in that now you've got labor shortages, but it was still a credit.
Financial situation, where the budgets froze it required extra timing to get.
Signatures is there any correlation to that period.
Yes.
Yes.
I kind of reaching back in my memory Bank, there, maybe you're trying to forget I'm sure. It was probably a year or so.
Before.
It didn't come back all at once it sort of a gradual upswing.
As the credit markets froze and people can really really see the cash flows that was more of a financial driven.
Well I guess the cost of capital here is also sort of.
A factor in but I actually think the factor is more about.
Readiness to accept.
Systems.
With the labor shortage and the sensitivity to nurse activities.
Then just the capital alone people people need the systems people need them to install them and upgrade them and eventually the systems that they have they're not upgraded has to be upgraded so that will come but now they are trying to delay this.
Obviously can.
So they get a firmer grip on their own financial situation.
Regulatory.
Recalling.
And it was within the year.
That's helpful. Randy. Thank you and then maybe as you look at the current delay.
Delays.
How much of those would you say are tied to budget budget conditions versus labor. So are there customers that are simply listen we've got the money we want to implement these systems, but we just don't have the staff and is there something that you could do on your side, even if it's just over the short term.
Get those systems integrated thank you.
Hi, This is Scott.
Yes.
Honestly I think the behavior at the hospital side is a bit frenetic most of what we're hearing the vast vast majority of what we're hearing is.
Kind of last minute oops like gosh, we don't have the staffing for this can we push this out a couple of weeks or Oh gosh, we thought we had staging areas, but we don't have staging area can we move it around.
Very very little of what we've heard has been sort of a financial question or issue driving the delay has simply been mostly gosh I'm down 40 people to begin with and know him down 10 more I just don't have the staff right now.
And we looked at implementing some of the labor on site to help with some of the situations. There is a limited amount of things.
Things that we can do as an outside vendor in some of those situations.
So, but we're looking at the ways to ease the pain.
Understood. Thank you.
Thanks, Matt.
Your next question is from Dev, we're <unk> with <unk>.
Aaron Berg capital Management your line is open.
Hey, good morning, Thanks for taking my questions.
The first one James.
I'm curious how much of the bookings.
Bookings backlog the products for customers that you have for bookings backlog.
Have you had discussions with in regards to these delays.
Because what I'm wondering is if there is more delays from customers that just have an informed yet.
Sure.
Part of the product backlog that you currently have even more of a fall off any percentage any color around that would be helpful.
I'll follow up thanks.
I don't think we have a percentage.
Think that we are expecting that in this environment that hospital labor shortages will continue and that what were what were sort of what is included in our guidance. In Q4 is the notion that we will continue to see delays in movement, just because hospitals are continuing to struggle.
Okay.
That's helpful.
The other thing is I guess.
Kind of around this time.
Hospitals are also looking into full year 'twenty three projects.
Part of these delays.
Are the discussions that hey, we expect this to.
It would be implemented sometime in 2024.
Randy mentioned, it's usually delayed a couple of quarters and then from a booking standpoint.
These capital budget freezes as any color as to.
When that might turn around.
Expect for example, the <unk> replacement upgrades that to be a windfall in maybe 2023.
Because I don't know how long they can delay that far right from upgrades standpoint, any color there would be helpful. Thank you.
I think the last point I think that.
As Randy pointed out that.
We're placing equipment that is end of life. This falls into the risk management and compliance so that portion of the ADC business when those need to be replaced I think we have seen and we believe going forward that hospitals will continue to replace that but that is only a portion of the ADC sales.
I think as we think about 'twenty, three and the financial impact of the hospitals and I think my sense is that hospitals are.
And a bit of what's driving there.
A bit of what's driving their behavior currently as they are unknown in terms of when to my electives come back when does my revenue and my cost model align et cetera. So I think what we're assuming is that this financial.
Challenge for hospitals continues through 'twenty, three and as a result, I think that.
We have to think through our our bookings through 'twenty three in a conservative way.
All right.
Your next question is from the line of Joy Zhang with SBB Securities. Your line is open.
Hey, guys. Thanks for taking my question I wanted to go back to an earlier question My 500 analysts now about testing.
Question you Michael.
Traffic and conversion.
Nine.
Just looking at the differences.
Macro economically labor market is much tighter now versus back then which should be some sort of offsetting factors right.
Recurring versus nonrecurring revenues you also have a lot more recurring revenues than before so all these factors point to a slightly better situation.
And as a follow up are there any other factors maybe on the competitive pricing landscape side that could be driving this situation being.
Kelly.
Yes, I would say comparing OE.
Want to actually have to go hire someone to enable some of our solutions to get the optimal output out of them. So that really speaks to probably why these services continue to grow through this economic environment situation in labor situation is that's exactly what they need.
And.
Just looking at our financial model of the point of care systems is such a large portion of our growth and our profit right.
As they are affected it until we get through the <unk>.
Conversion towards the advanced services model more.
Going to have a bigger impact certainly less than it would've been if we were all leased.
Capital equipment oriented business.
So certainly.
A different situation from that standpoint.
Appreciate the color.
Your next question is from the line of Anne Samuel with Jpmorgan. Your line is open.
Hi, Thanks for taking the question.
You've talked in the past about M&A being a big component of your growth strategy. I was just wondering given some of the pressures that you're facing right now are there any changes potentially in the near term to your capital allocation strategy.
Well I think M&A long term is always a key to our strategy has been as we transform the business and still will be.
I think with that said.
Sure.
We want to be prudent during this time until we get a really good handle on the pace of the business and the pace of the market.
Thank you.
Your next question is from the line of David Larsen with <unk>. Your line is open.
Hi, can you talk a little bit about what youre seeing in terms of inflation for your costs related to semiconductors.
Steel.
Freight.
And then can you also talk a little bit about your sourcing for semiconductors are they coming from Taiwan or other areas and what are you doing about pricing to help cover these costs for 2023 and beyond how do you know you are raising prices high enough and.
If youre getting any pushback from the hospital.
Okay. Thanks for the question so inflation in our prepared remarks, the inflationary cost headwinds for fiscal 'twenty. Two we brought down by a couple million dollars, a $2 million to $3 million lower than previously expected most of that lower headwinds. If you will for the year is in semiconductor. So we see some favorability there.
On your question on the on the sourcing is really a mix of where we get our semiconductors.
You can see in the prepared remarks that we have about $18 million by the end of the quarter.
We purchased in PVC semis and stock if you will.
To really be certain about being able to supply health systems with our connected devices, we are seeing.
Price increases come through specifically on.
And pricing for our point of care and also for everybody or equivalent.
And bookings.
Backlog and then revenue increasingly.
So with the $18 million and higher inventory like do you have enough semiconductors supply right now to bring you through all of 2023, and then I think you also mentioned that some of these implementations have been rescheduled have they all been.
<unk> do they all have start dates or is it just sort of a.
And Big U S kind of delay there. Thanks.
Yes, so on the on the inventory level and kind of the months of run rates.
Does not the full year for calendar 'twenty, three but certainly.
A good portion of that.
As far as the scheduling I think Scott commented on it as well so we see.
Really to the.
Schedule changes or request to changes both from a labor constraint perspective, Thats a health system.
We see that continuing so theres more changes if you will.
By and large.
The backlog has a scheduled starting dates now the nuance here is that.
Compared to other quarters auto Timeframes.
The frequency and the amount of <unk>.
Quest to changes of.
Star days, often implementation that.
There's been really been increasing probably two to three action what we normally have seen.
So it's a continuous process, where we refine the scheduling with customers and David I would only add this is Scott I'd only add there that we see movement every quarter.
Not uncommon.
And it's.
It's.
Relatively modest percentage of the revenue in a quarter that moves around what's different right now is that and we always manage that because of the backlog if a customer needs to move something out if we need to move something out. There is there is plenty to move around into Poland to cover.
More challenging in this environment is that the movement now are from customers due to labor constraints. The challenge is is that.
All customers are dealing with that so so they are much less fungible to say Oh, well call. The next customer and say Hey, we've got an open slot on Wednesday do you want to get going the customers are just they are struggling they don't have that much flexibility that thats. The challenge right now which is different.
Okay. Thanks, very much it sounds like nothing has actually been canceled where they're saying we're canceling. This altogether, it's more to lead okay. Thanks, very much that's correct yes.
Your next question is from Scott Tilghman House with Keybanc. Your line is open.
Hey, guys. Thanks for the follow up just wanted to kind of re circle back on what's different from the previous cycle.
And there is the OE or nine recession, Peter I believe you've always said that you have about 30% to 40% of your customer base that uses some part of some third party party financing now that was the that was nothing back in the 2008 2009 recession are you seeing any differences in customer behavior on the ordering side because of that.
The second question is I think you automated a lot of your implementation throughout the pandemic as a result of everything being shut down how much is that helping you know with these tightly in this tight labor market. Thanks.
Yes, so we would say the percentage so far.
Customers and a large customer population using third party financing is probably still the same around 40%.
Though of course cost of capital has increased so maybe we see a little bit of a slowdown there with the percentages.
It's probably the same.
And as far as the implementation efficiencies, yes, we believe that's the way we scheduled.
<unk> implementation from our perspective, we're definitely more efficient or dependent on.
Timelines with scheduling.
Scott pointed out to the customer site.
Thanks.
Yes.
Your final question comes from the line of Stan Baron Stan with Wells Fargo Securities. Your line is open.
Hi, Thanks for the follow up.
Just a quick one on bookings guidance can you maybe give us some insight into the.
What part of the bookings mix is coming from long term bookings.
Okay.
Yes.
So we lowered the midpoint of the product bookings range by $400 million.
The expected bookings for SaaS surfaces for the year.
Our own plan essentially so the full reduction as a non sensor emphasis in.
Let me just find services part of course is multi year. So so we expect then.
Consequently, and as a percentage of long term in the mix to go up.
As well.
The standards instead of another way I'd just add to that is that while we've seen an elongation of sales cycles across the board. The majority of the of the slowdown is on the point of care side of things correctly.
Thank you.
There are no further questions at this time. It is now my pleasure to turn the call back over to Mr. Randall Lipps.
Thank you for joining us on the call today.
To our shareholders, we will realign this business.
To meet with current.
Economic factors.
We are committed to our strategy of moving to advanced services, we're committed to our customers to improve their experience and get better results.
And we're committed to our employees.
Who will help us get through.
This difficult time as we emerge.
And move forward. Thank you for joining us today.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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