Q4 2022 Omnicell Inc Earnings Call
Ladies and gentlemen, thank you for standing by walking to the Omnicell fourth quarter 2022 financial results call I would now like to turn the call over to Kathleen Nemeth.
And your Vice President Investor Relations. Please go ahead.
Good afternoon, and welcome to the Omnicell fourth quarter and full year 2022 financial results conference call on the call with me today are Randall Lipps, Omnicell, Chairman, President CEO and founder.
Seidelman Executive Vice President and Chief Commercial Officer, and Peter Kuiperoid, Executive Vice President and Chief Financial Officer.
This call will contain forward looking statements, including statements related to financial projections or other statements regarding omni sales plans objectives expectations cost saving actions or outlook that are subject to risks uncertainties and other factors that could cause actual.
Our 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-K filed with the SEC on February 25th 22.
Two and in other more recent reports filed with the S E C.
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 except as required by law, we do not assume any obligation to update or otherwise release publicly any reason.
Visions to our forward looking statements.
Our results were released this afternoon and are posted in the Investor Relations section of our website at IR Dot Omnicell Dot com. Additionally, we would 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 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 non-GAAP measures to the comparable GAAP measures on a forward looking basis. As these items are inherently uncertain and difficult to estimate and cannot be predicted without unreasonable effort.
With that I will turn the call over to Randall Randall.
Good afternoon, and thank you for joining us today.
Wed like to begin by providing some context on what we're currently seeing as it relates to the overall health care environment and the medication management markets that we address.
Well also discuss the form 8-K, we filed today detailing additional cost savings actions. We are taking in an effort to ensure we are well positioned to navigate the ongoing economic challenges we face.
And then we'll walk through some highlights for the fourth quarter and full year 2022 as.
As well as our priorities for 2023.
Starting with the current health care environment.
Capital committees within our health system partners continue to look to be highly focused on ensuring optimal ROI for their budgetary spend and investments.
We believe we are in a strong position to help our health system and retail customers realized savings in our ally as they invest in omni sales connected devices and SaaS and tech enabled services.
Although it appears most customers are still in a capital constrained environment.
We believe we are uniquely positioned to help health systems address many of the medication management pain points they are facing today.
While we are pleased to see greater stability within our customer base.
We remain mindful of the potential ongoing headwinds given the continued macroeconomic uncertainty for us.
And our customers.
As a result.
We intend to take what we believe is a cautious stance on how we manage the business.
November 2022, we disclosed that we were reducing our workforce by approximately 9% across the majority of our functions.
We're continuing to refine our cost structure and are maintaining our focus on expense management to align with our anticipated revenues now.
Now in view of that today, we announced we will be further reducing our workforce across many of our functions.
In addition, we are reducing our real estate footprint to align with our broader hybrid work strategy and to further reduce costs to that end, we expect to reduce square footage by the end of the second quarter of 2023.
Through these initiatives, including the reduction in workforce, we announced in November 2022, along with other expense containment efforts, we anticipate the annualized savings from operating expenses to be around $50 million for 2023, which does not include the expected volume based reductions.
Within cost of sales.
While it is always difficult to make decisions that adversely impact our employees, we are not immune to the challenges companies across many industries continue to face and we are committed to taking actions. We believe will help us to be well positioned for the long term.
Now turning to some of the highlights of the fourth quarter and full year 2022.
Now as I meet with our customers several things are becoming increasingly clear to me.
First omni sales advanced services provide measurable ROI.
We believe this is important to our health care partners, particularly in the current economic environment. In addition.
Our connected devices and advanced services improved compliance and we believe also improved nurses.
And pharmacists day to day work experience. This in turn appears to be improving patient care. We believe this combination of factors validates our strategy and the industry vision of the autonomous pharmacy.
The market demand for our service is clear to us.
We are energized by our mission and believe we are uniquely positioned to help our health systems and retail partners to transition to a next generation cloud native capabilities that we anticipate will ultimately transform the pharmacy care delivery model.
Second despite what continues to be a challenging macroeconomic environment customers are continuing to convert from competitors to only sell we announced two new long term sole source agreements during the second half of 2020 two.
And we added a new competitive conversion during the fourth quarter of 2022. This brings us to sole source contracts with more than half of the top 300 U S health systems.
We believe these new wins exemplify the customer momentum.
The advanced services that continued throughout the end of the year.
Scott will speak to our customer wins in more detail momentarily.
While we are seeing stabilization among our customers' capital spend with respect to connected devices. We remain confident in our expected growth trajectory of advanced services, particularly our robotic based services such as I P. C S and C. P D S.
This positive momentum reaffirms our belief in our long term vision to transform omnicell to an as a service company.
While 2022 presented unprecedented challenges within the industry. We are focused on the long term and believe we are well positioned to deliver increasing value for all our stakeholders.
Now turning to our high level financial results 2022 bookings were 1.054 billion compared to one point to one 7 billion.
For full year 2021.
Selecting a slowdown primarily in our point of care bookings, particularly offset by an increase of advanced services bookings.
Our full year 2022 GAAP revenues were one point to 96 billion and non-GAAP revenues were one point to 97 billion, an increase of 14% from the prior year.
Full year 2022, GAAP earnings per share were <unk> 12 cents per share and non-GAAP earnings per share were $3 per share.
We intend to manage the company to deliver growth in GAAP earnings over the long term. We expect this will require a more targeted approach to our stock based compensation programs and overall cost efficiency.
Now looking ahead to 2023 as I noted earlier, we intend to take what we believe is a cautious approach to managing the business given the current macro economic environment.
Our priorities for 2023 are the following.
One deploying what we think is a prudent plan to pursue our growth agenda, while also working to lower cost and improve efficiencies throughout the company to continuing to make meaningful progress on the integration of recent acquisitions to drive expected synergies.
And three invest in R&D and innovation that is expected to drive future growth.
To reiterate while we faced challenges in 2022 my conviction in omni sales future has never been stronger I look forward to working alongside the Omnicell team as we endeavor to deliver long term value for all of our stakeholders.
Before I turn the call over to Scott.
I would like to note that we announced today that Peter Capers will be stepping down from his role as CFO and will be leaving the company on July one 2023.
I work closely with Peter over the last seven years and appreciate the significant contributions Peter has made to omnicell over that time.
Peter joined the company when our revenues were just under 500 million annually and we just concluded 2022 with nearly $1 3 billion in revenue.
Now we have launched the search for our next CFO .
Peter will help to ensure a smooth transition.
Thank you Peter.
With that I will turn the call over to Scott. Thank you Randall as Randall noted we are encouraged that demand conditions within health systems and hospitals appear to be stabilizing.
Our customers continue to face labor constraints and in many cases remain under capital budget freezes and while we have seen this environment, primarily impact our point of care business, we're continuing to see strong demand for our advanced services.
Advanced services are a key part of our intelligent medication management infrastructure, which.
Which is intended to help customers address problems in their medication management processes from the inpatient beds to the home.
Let's walk through a few of our recent wins that we believe highlight the power of our offering.
First is an Ohio based health system that has chosen to partner with us for Central Pharmacy Dispensing service IV compounding service and our inventory optimization service.
Additionally, this health system will convert to our XT automated dispensing system.
We believe that the comprehensive nature of our solution was critical to winning this competitive conversion.
Also in Q4, one of the largest integrated healthcare networks in Tennessee and in existing customer upgraded its adcs to our XD dispensing system and also contracted for central Pharmacy dispensing service.
IV compounding service and our inventory optimization service.
Again, the health system has indicated that they partnered with us because of the potential total value creation of our solution across their medication management care delivery model.
Also as part of our advanced services portfolio. Our recently acquired specialty Pharmacy service continues to gain traction with health systems that are looking for a partner that can help to quickly stand up our optimized our specialty pharmacy operations.
For example in Q4, the largest private teaching hospital in Florida chose to partner with Omnicell to establish a new specialty pharmacy program.
Citing our specialty pharmacy expertise and managed services model as key reasons for the partnership.
Overall, we are very pleased with the demand that we're seeing for our advanced services and as such in 2023, we will continue R&D investment across the portfolio.
Additionally for enlighten health in 2023, we will focus on integrating the technology platforms of the two companies that we acquired in late 2021.
We believe that the strong demand we have seen for our advanced services, coupled with our continued R&D investment should position us well for growth in the future with that I will turn the call over to Peter.
Thank you Scott Good afternoon, 2022 was a challenging year for the company. We found that many health systems and hospitals reacted to the ongoing macroeconomic challenges by implementing capital budget freezes and additional capital approval requirements, resulting in elongated sales cycles.
This mostly impacted our point of care business have resulted in the company lowering its full year 2022 guidance.
I'm pleased to note that we have not seen further deterioration in the health care environment in the last quarter of 2022.
So far in 2023 four.
For fourth quarter of 2022, we delivered results that generally exceeded our revised 2022 guidance ranges.
Our health care system in retail pharmacy customers look to continue to rely on and partner would only sell to help them deliver improvements in patient care to achieve return on our investments and build long term strategic relationships in an effort to realize the industry vision of the autonomous pharmacy.
Our fourth quarter, 2022, GAAP and non-GAAP revenues were $298 million or $3 million above the top end of our revised 2022 guidance range.
A full reconciliation of our GAAP to non-GAAP results is included in our fourth quarter and full year 2020 earnings press release and is posted on our Investor Relations website.
Fourth quarter 2022 earnings per share in accordance with GAAP or a loss of 64 cents per share compared to income of 37 cents per share in the previous quarter and income of 28 cents per share in the fourth quarter of 2021.
The fourth quarter of 2022 earnings per share in accordance with GAAP includes the impact of $17 million for severance related expenses as disclosed in our form 8-K, we filed on November 32022, as well as the impact of $4 million for the impairment of operating lease right of use assets as we wrap.
<unk>, our office space as part of the efforts to align with our broader hybrids work strategy.
non-GAAP gross margin for the fourth quarter of 2022 was 45, 3% a decrease of 220 basis points from the previous quarter, primarily due to lower revenue fall in beverage.
Cost actions, including the previously announced head count reductions in November 2022, generally had very little impact on our fourth quarter 2020 results.
We expect to begin to see the benefit from these actions on gross margin and operating expenses more fully in the second quarter of 2023.
We expect to see volume leverage beginning to return by the fourth quarter 2023 as revenues projected to grow throughout the year.
Fourth quarter, non-GAAP , EBITDA was $26 million compared to $61 million in the previous quarter and $52 million in the same period last year.
Fourth quarter 2022, non-GAAP earnings per share were 33 per share compared to $1 per share in the previous quarter and 92 cents per share in the same period last year.
Fourth quarter non-GAAP earnings per share were above our revised fourth quarter 2022 guidance due to higher revenue.
Lower cost of sales.
Solid expense management and lower performance based compensation.
Turning now to review our full year 2022 results.
Bookings for full year, 2022, or $1 billion and $54 million compared to 1 billion two imminent $17 million for the full year 2021.
Bookings decreased 13% over the prior year, primarily due to a slowdown in point of care bookings as an increasing number of health systems implemented capex budget freezes or additional capex approval requirements.
Partially offset by an increase in a sense services bookings.
Our total backlog was 1 billion toilet and $15 million as of December 31, 2022.
Compared to $1.254 billion as of December 31, 2021.
As further detailed on slide 13 of our earnings presentation.
In the form 8-K, we filed today and published on our Investor Relations website. Prior to today's call. We are now providing additional information about the portion of our backlog derived from both product and services bookings.
Backlog, representing a dollar amount of bookings for our products and defense surfaces, which have not yet been recognized as revenue.
We consider backlog that is expected to be confirmed to revenues and more than 12 months to be long term backlog.
Product backlog includes connected devices, such as our XT series automated dispensing systems and the product portion of our central pharmacy, dispense surface and IV compounding surface.
Product backlog as of December 31, 2022 was $797 million of which $503 million of short term product backlog.
And $294 million as long term product backlog.
We believe the majority of the long term product backlog will be convertible into revenues between 12 and 24 months.
Advanced services backlog only includes the portion of our defense services multiyear contracts, which have a stated minimum commitments with any agreements.
That's fine surfaces include surfaces, such as our in life and health solutions to be fully be solutions specialty pharmacy surfaces inventory optimization surface and other software solutions.
As well as the service portion of our central pharmacy spend surface and IV compounding service.
While we partner closely with our customers from providing a fence surfaces and the majority of our defense services are provided under multiyear contracts.
Only a portion of these contracts has stated minimum commitments.
Our fast services backlog consisting of minimum contractual commitments as of December 31, 2022 was $418 million of which $50 million is short term.
Services backlog and $369 million as long term firm services backlog.
Long term our defense services backlog typically represents multiyear subscription agreements usually with contractual terms of between two and seven years.
All of which have not yet been implemented which will be conferred into revenue ratably over the contractual term.
Despite the challenging macroeconomic environment, our full year 2022, GAAP revenues were a record $1.296 billion and non-GAAP revenues were a record $1.297 billion.
A 2022 non-GAAP revenue saw an increase of $164 million or 14% from 21 2021.
The strong year for your non-GAAP revenue increase reflects continued demand for omnicell medication management and adherence automation solutions as well as the contribution of revenue from scaling at fendt surfaces and the impact of recent acquisitions.
Our full year 2022 earnings per share in accordance with GAAP with 12 cents per share our full year 2022, non-GAAP earnings per share were $3 per share a decrease of 81 cents per share or 21% from 2021 the year over year.
Decrease was mostly driven by reduced operating leverage from lower than originally expected revenue during the second half of 2022.
For full year 2022, total inflationary costs were $26 million, which is $4 million lower than expected at the time of the third quarter 2022 earnings call, primarily due to a moderation in semiconductor steel and freight cost inflation.
For full year 2022, we delivered non-GAAP EBITDA of $193 million, which is above our 2022 revised guidance range.
Full year 2022, non-GAAP EBITDA margin of 15% was a decrease of 540 basis points from the previous year.
Now moving to cash flow full year 2022 free cash flow of $17 million a decrease of having a $56 million is primarily due to lower GAAP net income as well as the impact of higher inventory and timing of cash collections at the end of the fourth quarter of 2022, our cash balance was at three <unk>.
The $30 million.
Up from $266 million as of September 32022 to.
The $64 million increase in cash is to resolve of strong free cash flow and record cash collections in the fourth quarter of 2022.
Free cash flow during the fourth quarter of 2022 was $65 million compared to $5 million from the previous quarter and $43 million in the fourth quarter 2021.
In terms of accounts receivables days sales outstanding for the fourth quarter of 2022 was 93 days unchanged from the previous quarter.
Inventories as of December 31, 2022.
$148 million, an increase of $1 million from the prior quarter and an increase of $28 million from the fourth quarter of 2021. It is important to note that the inventories as of December 31, 2022 includes approximately <unk>.
$18 million on fed purchases have receipts of semiconductors that we believe will help reasonably secure supply for future customer implementation timelines.
All supply and demand for semiconductors are becoming more balanced lead times continue to be law.
The teams continue to execute well.
As for you just in Refis revenue volumes, particularly for point of care.
We continue to expect with a high level of confidence that our supply chain has and will continue to procure critical components for our products, including semiconductors to deliver mission critical systems and connected devices to our health care customers.
Now moving onto 2023 full year and first quarter of 2023 guidance.
Given the continued macroeconomic uncertainty, we expect 2022 bookings to be between $1 billion and one $1.100 billion.
Bookings includes both the bookings from products as well as the bookings from our sense surfaces.
The midpoint of the 2022 bookings guidance is approximately equal to our full year 2022 bookings.
For full year 2023, we expect total revenues to be between $1.150 billion and $1.190 billion.
We expect product revenue to range between $740 million and $760 million.
Subsisting of expected.
Revenue from short term product backlog to a lesser extent revenue from within your bookings and from recurring consumables revenue.
We expect 2023 service revenues.
To be between $410 million and $430 million.
Our service revenue includes both revenue from advance surfaces as well as revenue from technical services.
We expect service revenue from our defense services.
Revenue to be between $200 million, and two and a $10 million, which is a 10% increase at the midpoint compared to 2022 and represents approximately 18% of 2023 revenues.
The 2020 through it fine 2023 at first services revenue consists of recurring revenue of the installed base of attack surface and solutions and the expected revenue from the short term with defense services backlog and to a lesser extent expected new advance services implementations.
We expect service revenue from technical services, which includes our post installation technical support training and customer education solutions to a range between $210 million at $220 million in 2023.
An increase of 4% as compared to 2022.
Please see slide number 14 in our earnings presentation published on our Investor Relations website for a summary of our revenue guidance components.
Today, We also announced a reduction in force as part of our cost containment measures measures together with the cost containment actions, we announced in November 2022, and an effort to create operating leverage in the line of cost that expected revenue volume.
Of the total reduction in force announced in November as well as today's announcements approximately half of the head count reduction was within functions included in cost of sales mostly from reduced volume.
Off the portion of our reduction in force that will reduce operating expenses going forward.
Nearly all of us when and functions included in SG&A and very little in R&D as we continue to make key investments that are expected to drive innovation.
We expect gross margin percentage to modestly expand in the second half of 2023 due to the expected benefits from these cost containment actions as well as expected volume leverage increased impact of pricing actions and moderating inflationary cost.
We continue to seek to balance cost containment has been investing in innovation.
Specifically, including our first surfaces and strategic next generation automation solutions.
A majority of the approximately $50 million of anticipated annual operating expense savings expected to be derived from the recent reductions in force and other expense containment efforts is from functions included in SG&A.
The expected 2023.
Operating expense annual savings will be largely offset by the impact of year over year inflation and employee salaries and increases in expected performance based compensation from the cost increases and investments in R&D.
We expect non-GAAP operating expenses in total to be flat year over year.
With non-GAAP SG&A down slightly.
By offset slightly by an increase in non-GAAP R&D.
Which reflects our focus on cost savings, while continuing investments in our growth agenda.
We expect total year 2023, non-GAAP EBITDA to be between $120 million and $135 million.
The total year 2023, non-GAAP EBITDA guidance includes the impact from estimated lower revenue volume cost actions designed to create operating leverage expected reduced inflationary pressures and anticipated favorable impact from our pricing actions. We've put in place in recent years, and which we expect to have a greater impact.
In 2023.
We expect EBITDA margins to expand as we move through 2023.
Based on the projected timing of cost actions pricing actions and the impact of volume leverage within gross margin and operating expenses in the second half of the year.
We expect 2023 and non-GAAP earnings to be between $1 55, and $1 80 per share.
This takes into account a lower expected blended tax rate in 2023, and the expected increase in share count as a result of new shares being issued under our employee stock plans.
For full year 2023, we are assuming an effective blended tax rate of approximately 5% and our non-GAAP earnings per share guidance.
Compare to an actual blended tax rate of 6% in 2022.
For the first quarter of 2023, where we are providing the following guidance.
We expect total first part of 2023 revenues to be between 273 and $283 million with product revenues to be between $179 million and $184 million in service revenues to be between $94 million and $99 million we.
First quarter of 2023, non-GAAP EBITDA to be between $6 million and $12 million.
We expect first quarter of 2023 non-GAAP earnings per share to be between four cents per share in 2014 cents per share.
Seeing strength in our customer partnerships, which include long term sole source agreements with over 150 of the top 300 U S health systems.
Of our customers in the top 300 use health systems more than half is contracted for at least one of our fan surfaces.
As a fan services scaling we see strong momentum in the pipeline to continue to expand the adoption of our defense surfaces within the top 200 U S health systems.
We continue to strive to deliver value for all of our stakeholders in this challenging macroeconomic environment and we remain confident in our potential long term opportunities. We look forward to updating you on our progress in the coming quarters.
Lastly, I want to thank Randall for your kind words earlier in the call. It has been a great privilege to have worked with you our executive leadership team our board of directors and all of the incredible people, who make only sell a great company.
I am grateful to have led to finance global supply chain International.
And corporate development teams and the athlete of parts during the time of scaling a business model transformation.
I'm proud of being a part of the team that has created such value within health care. At this point I have accomplished your objectives I set out to achieve in a joint omnicell over seven years ago, and we're looking forward to the next chapter in my career.
I will be supporting the team as the search for my successor commences and know what help to assist in a smooth transition later this year.
I noted the company is well positioned to continue to evolve and take full advantage of the need for medication management automation solutions and I'll always wish omnicell great success.
With that we would like to open the call for your questions.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if any point you'd like to withdraw from the queue. Please press star one again, you'll be provided the opportunity for one question and one further follow up questions. We will now take a moment to.
Render our roster.
Our first question comes from Stan Bernstein from Wells Fargo Securities. Please proceed.
Hi, Thanks for taking my questions I guess first Peter it's been a pleasure working with you wish you the best of luck.
Maybe a first.
I want to also say thank you for breaking down the backlog details I was very helpful.
Maybe first I just wanted to get a clarifying question the announced savings that you announced today is that also factored into guidance that you.
Provider portfolio.
Thank you Stan as I said this is Peter I really like working with you as well.
Yes to your last question.
The impact of the cost actions today of cost containment actions include.
Included in factored into the guidance that we provided both for total year 2003, and also for the first quarter of 23.
Got it Okay. That's helpful and then on advanced services. So.
Comments on demand services from from I believe last quarter. It seemed to suggest that pacing expectations were pretty much unchanged from the investor day, but it seems like the guidance. We provided right now the expectations are somewhat moderated is there anything to specifically call out of what changed from maybe a quarter or two ago.
Hey, Stan it's Scott.
No not really I think that we continue to see strong demand.
We continue to be excited I think that generally the advanced services deliver.
Positive ROI for the customers and Thats why we continue to see demand in this macroeconomic environment I think as it relates to the guidance in 2023 I think that.
Obviously, we're taking a cautious approach to this.
And.
We'll go from there.
Yes, maybe to add to that.
It's really the guide for bookings for 'twenty, three if you click Donald Brown will not breaking out.
EMEA bookings between core product bookings and service bookings.
Core bookings are expected to be down for the year.
Services bookings are expected to be.
Increasing freight if you will.
Delineation perspective.
Got it and then maybe one quick one here on the point of sale XT products.
So so it seems like you've been upgrading them recently based on them, reaching end of life.
You should obviously have good visibility there as you think beyond 2023. So I'm just curious if we think into 2024 and maybe even 2025.
What's what's the replacement pipeline looking like.
In 2024, and 2025 is it is it.
Steady versus 2023 higher lower.
Guidance, you can give us here.
We do have.
Solid pipeline of replacement over the next handful of years.
I think we do look at that is we do a predictability to it is steady it's only a component of ADC sales in any given quarter.
So it does give us nice predictability.
Thank you.
Thanks, Pat next.
Next question please.
Our next question comes from the line of Matt Hewitt from Craig Hallum Capital Group. Please proceed.
Good afternoon, and I'll Echo the other comments on Peter Congratulations and best of wishes in your future endeavors.
Maybe the first one for me and you talked about this a little bit but I'm wondering if we could get a little more color on the hospital.
And capital freezes it sounds like things were relatively stable.
Q4.
So far into Q1, but what are you hearing from customers how are they prioritizing obviously, they still need equipment, they still need to upgrade.
Some pieces, even yours I'm, just curious what youre hearing from them and what are their expectations as the year progresses.
Yes. This is Randy.
Definitely seen a stabilization in the.
The market.
But people are still being pretty cautious on.
Capital.
Two more systems until they really have to.
And when systems do come out of date or they do an expansion that while they may go ahead and put those through so I think it gives us confidence that we don't see any decrease in the market, we haven't seen any significant uptake yet.
I think it gives us.
Good.
Starting point for the year and I think we're.
We're still going to be cautious about the macroeconomic environment.
It's still uncertain length.
Not having a few more quarters of positive results.
These health systems.
Fair enough and then maybe a question on the specialty pharma pharmacy business congratulations on the win there.
As you look out over the course of this year it sounds like you're having good discussions.
Should we be looking at that as a nice growth driver for you this year and maybe kind of setting the stage for 24 and beyond but clearly a nice driver this year.
And this is Scott absolutely.
Specialty pharmacy, and sort of accretion or growth.
Especially pharmacies for health systems is certainly a tailwind in the market is.
Trending very positively there and then we are very bullish and excited about the growth of our offering there.
Great. Thank you.
Our next question comes from the line of Scott <unk> from Keybanc. Please proceed.
Thanks, guys. Thanks for taking my question Peter.
Pleasure, knowing and working with you over these past several years as well.
I guess my first question is on the margins your first quarter implied margins are 3%, we haven't really seen that since 2017 and it implies a steep acceleration.
Throughout the rest of the year can you kind of walk us through what's embedded in guidance is it a.
A sequential stair stuff thats spread evenly over each quarter or is there some seasonality with these cost cuts and demand and orders coming in can you can you just help us walk through this steep acceleration.
From 3% to.
High double digits to get to your 10%.
Margins for the year. Please thanks.
Yes. Thank you. Thank you Scott great working with you as well, yes, I think you mentioned most of the drivers there so really gone through the year the cost actions that we announced both in November this year, both the cost of goods sold and operating expenses will have a more full impact to debate P&L really starting at the mill them here.
So I appreciate you wrap up there if you will from that.
Profitability perspective.
Also in the second half of the year, we see more fully leverage specifically, yes.
This scale more and then also we see some.
Tell me prove with it fully leverage and point of care as well and then lastly, we see pricing actions that we announced previously coming through more heavily and impacting every single quarter I should go through the year.
Lastly.
The inflationary costs for semis.
Trade, we expect to further moderate in 'twenty three and borders.
This year, we actually see pricing actions exceeding the inflationary cost.
For those three components.
Great and then I guess as my follow up.
Or are you thinking about capital allocation.
From this point forward thanks, guys.
Yes, so let's say from a capital allocation perspective, I think Randall I mentioned earlier the approach for the year as far as planning in the guide.
Fair to say that M&A or strategic acquisition is probably a little bit more on the.
The priority from that perspective the.
I am sure when you've got a large cash balance.
For the year of course as well.
Our next question comes from the line of Jessica <unk> from Piper Sandler. Please proceed.
Hi, Thank you guys. So much further questions and then Peter Thanks for all the help over the last couple of years I'm sure we.
We will be in touch between now and July but sorry to see you go.
I guess, maybe for my first one is is there a difference between recurring or subscription and advanced services revenue and what is appearing and short term backlog for advanced services.
Yes.
Thank you for the question Destiny.
We currently have subscription subscription is part of a current alright, so thats the way that she gets almost similar.
Similar for Defense services, and then for your second question.
In March and then also in the Investor deck that we posted.
Services backlog.
So we are exclusively.
Only the minimum contractual commitments and the defense services multi your contracts.
Not including.
The run rate.
The installed base that are not call her by minimum commitment contract.
Got it but advanced services bookings would include the run rate and then backlog only includes the minimums there how should we think about the relationship between the surface.
Right.
Got it. So then just in terms of the ratio of short term advanced services backlog to revenue guidance, we should think of that as it.
Subscription baseline upon which subscription revenue and then.
Transactional revenue kind of layers.
Exactly and then you layer on the short term firm services backlog on top of that to a really small extent.
Those limitations that are going live throughout the year.
Got it.
Can you guys clarify what was the advanced services bookings in 2022, and then just I think someone may have asked this earlier, but.
It seems like the growth rate expectation for advanced services might have moderated a little bit.
And I'm, just curious kind of what is driving that moderation from what was like a 30% CAGR to at that time.
Yes.
Yes, so we haven't broken out the book, including the Asia for 22 between the service and the knowledge and services growth rate of 23 years is roughly similar.
Pat.
10% is revenue.
What's that services so.
The way to think about it is really starting with bookings of course.
Got it.
And then you've got the revenue right.
Thanks.
Actually higher than the 10%.
For different services.
Revenue year over year increase.
Okay.
Right. My understanding was that just advanced services revenue was going to grow at something like a 20% to 30% CAGR through 2025, and I'm just interested to know like has that expectation changed and and if so what is driving that change the expectation.
That's it for me Thank you guys.
Yeah, Okay. So the second part of the last part of your question. So.
We really look at the business from a less.
Point of care.
From a bookings perspective, and a revenue perspective.
The Delta with deferred services revenue and arrow. So theres a lot of Delta there that is growing right. So and I think it's fair enough to say that.
The expectations are slightly lower for the time being also given the current macroeconomic environment, but there are there are growing nicely.
And again, we're somewhat conservative in our approach for planning for the year with 23 as well so thanks for taking consideration.
Yeah.
Our next question comes from Bill Sutherland from the Benchmark Company. Please proceed.
Hello, everybody.
I'm not going to say goodbye, Okay, we'll get around to that.
So.
Talked I think on a recent conference about.
In roofing the forecasting.
Capabilities, I'm curious kind of what steps you've taken.
You kind of broke up there a little bit could you repeat that.
I'm sorry.
Hey.
Mobile phones I was just curious about what kind of things.
I am too.
Just further improved.
Our testing and planning functions that you guys I think alluded to was something you wanted to focus on.
Okay.
Sorry, Bill can you review that again.
We couldn't hear the powerful right.
I don't want to hold up the call.
Phil fading in and out.
Yes, we missed the exact point of improving was it the cash flow, we couldnt quite hear.
Okay, you know what.
I'll just get on my call back.
I'll take care of that thank you.
You may begin to improve.
Our next question comes from David Larsen.
From BP.
Please proceed.
Hi can you give an update on how far along your base is with regards to the XP.
Upgrades are you, 60% all the way through 70% of the way through.
And then just broadly speaking like over what time period does that entire upgrade process.
And is it like a 10 year process and year on year, six which means that over the next three years. The rest of your base is going to have to upgrade to the X T and then.
Do people have to upgrade to the XP or can they choose not to.
And yeah. So thanks.
Thank you David for the question.
Couple of questions in one question there so.
Yes.
60% upgrade cycle factors, specifically Barbara Thanks, Scott earlier indicated that there are more growth drivers only.
Tycho, we also have expansion thanks.
Versions as well.
Sure.
For 10 years, we do not provide.
Technical services anymore, which means no more software upgrades.
Thanks Nathan.
No.
For customers to stay in compliance and generally upgrades.
The prior generation equipment.
Yes.
Okay. So what I think I just heard was about 40% of your base still needs to upgrade to the <unk> and that was going to have to happen at some point over the next three years.
Correct.
Above 60%.
Over the last four years.
Okay, Great and then for semiconductors is pricing locked in for all of your semiconductor needs for 2023, and what about 2024, and then like if things heat up in Taiwan between China, and Taiwan are you protected from that type.
Have an event in terms of your Cogs.
<unk>.
Yeah. Thanks, David So we pointed out in the prepared remarks that we now have $80 million.
Previously.
Semiconductor cenith's tourists.
A good way into the end of the year to fulfill.
Somebody Madison, we just locked in pricing for the remainder of the year as well.
I would say, we're not from a risk factor.
Excluded.
Any geopolitical impact.
And then as that risk goes off will continue to manage it effectively as you can.
Okay, and then just in terms of like the hospital clients I guess, Scott what are you seeing on the ground.
There are enough labor available in terms of nurses and technicians to actually deploy these cabinets.
As labor so tight that people just aren't available to deploy these things.
Thanks, David.
Look I mean hospitals are still struggling with labor challenges I think labor expenses continued to be higher than they were back in 'twenty, one 'twenty two but it seems to be getting better I think hospitals like like any other business or any other organization just takes a bit of time to figure out the new operating reality and that's certainly what it feels like.
We are not seeing.
At this point.
Sort of a major pushback on implementation timing et cetera, as a result of those labor constraints like we said I think the environment stabilized our processes are stabilized.
What's working what's not working which is the basis of our forecast or guidance in 'twenty three.
Okay and then it's my understanding that there were some very favorable rulings by the Supreme Court and other courts that are.
Positive for the entire 340 B program in hospitals should be getting a pretty significant windfall from those rulings any sense for if and when that might happen and I would think that that could drive some demand.
For your solutions.
I think there's a lot of activity.
And the courts regarding 340 b some good some bad but I think that.
<unk> used to favor our specialty pharmacy service and our 340 <unk> Tpa.
Business, we're taking a cautious outlook this year in.
And expect a relatively to be flat year over year.
Okay, and then just the last one and I'll hop back in the queue in terms of your reported backlog were there any changes in the way that backlog was estimated or was any backlog just kind of written off and reversed out that might reduce like the ending backlog for 'twenty, two or your expected backlog for 'twenty.
Three were there any changes in the way the calculations were being done.
Yes.
Thanks for taking my question. The methodology is unchanged for 'twenty, one 'twenty two we haven't forecasted 23 ending backlog for treatment.
But the number 35 today.
Okay I appreciate it thanks very much and.
Yes, I'll hop back in the queue. Thank you.
Thanks, Doug.
Our next question Nick comes from the line of Stephanie Davis from SBB Securities. Please proceed.
Hi, guys. Thank you for taking my questions on theater, I'm, sorry, Tim walking into the party, leaving the party.
God bless.
It must be doing something much cooler than I am.
Some of that was a bit surprised by the quarter and the outlook, reflecting better than expected product revenues, while service revenues is a little bit light.
Was that more a function of just our mis modeling after last quarter's cod or is there anything to call out there and some of the shifting demand J&J is versus what you're right. That's correct.
Yes, particularly for the fourth quarter was a solid execution by the teams if you will.
Service came in a little bit light, but overall executed well.
Cost management came in came in well also.
And on that the guidance is kind of the same sort of thing.
Well for the guide for the first quarter.
Revenue is expected to be lower.
Quarter over quarter to hold sequentially. So thats good.
Thats the largest impact if you will.
And then of course, the cost actions will start kicking in more in the second quarter. Those are the dynamics. If you could you model out the year quarter by quarter.
And then Randy are you still being predominantly are within Capex budget is really contained to the larger health systems that you mentioned last quarter or how are we going to extension of this a little bit downstream do you like a broader set of the customer base.
I will ask one you also mentioned that the Bakken shale.
Or just any more U shaped.
That kind of recovery arc, playing out so far.
Well I think as Scott said that.
I think particularly after Q3 during Q3 a lot of these.
These big health systems realize that the cost dynamics without the cares Act money.
They had to stop there.
Capital spend.
I think they've now seen that adjustment in the each quarter as we move forward, they're making adjustments or.
And improve the margins in fact, I think last month over the last five Kauffman reported some improvement in the margins.
My guess is that will continue to happen as we move forward.
It's going to take these are slow moving tankers it takes them a little bit of a while but it feels like unless we hit some big macroeconomic another event.
They are starting to slowly.
Move forward.
More margin.
Hi, good morning investment into their institutions, which they need which they know they need to make particularly in pharmacy.
That's helpful. Thanks, guys.
Yeah.
Our final question comes from the line of Alan <unk> from the Bank of America. Please proceed.
Thanks for taking the questions I guess, one for Peter and Scott. So if we just look quarter over quarter. Both revenue segments are down sequentially, but I guess, how should we think about the trough quarter is <unk> is it reasonable to think that <unk> is the trough quarter in terms of revenue for both of these segments.
Is it something thats going to be more of a hockey stick ramp over the course of the year just trying to understand line of sight into the guide and what Youre seeing to give you confidence in the inflection over the course of the year.
Thanks Alan.
Good question, Yes, so of course for the fourth quarter through the first quarter is always a little bit of seasonality.
I will take that into account and then we see product revenue modestly increasing through the year, mostly based on.
Already contracted backlog that we have talked about in the prepared remarks that PFS services revenue and service revenue in totality.
Entirely.
Majority of that is based on.
Backlog at Plaza acquisition.
So that's how we model it out.
And you can do the same.
Got it thank you very much.
Thanks Al.
Yes.
I would now like to turn the call over to Randall Lipps for closing remarks.
Well. Thank you everyone for joining the call and before I conclude the call I wanted to give a shout out to the global Omnicell team.
Their hard work and resilience throughout 2022.
They did not waver on delivering exceptional service to our customers pursuing.
Transformational journey.
And as a service business it is a hard work.
<unk>.
Particularly supporting each other and the communities we serve.
So on behalf of myself and the board of directors and executive leadership team I. Thank all of you Dear employees for the great work of 2022.
Look forward to 2023 as.
As we get back to that growth mode and get forward.
Two transforming the pharmacy thanks.
Thanks, everyone.
Thank you Anthony.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
[music].