Q2 2023 Omnicell Inc Earnings Call
Good afternoon, and welcome to your Omni felt second quarter 2023 financial results call. Please note that this call is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.
To withdraw your question again press Star one.
I will now turn the call over to Kathleen Nemeth Senior Vice President of Investor Relations you May begin your conference.
Good afternoon, and welcome to the Omnicell second quarter 2023 financial results conference call on the call with me today are Randall Lipps, Omnicell, Chairman, President CEO, and founder and Cha-cha executor.
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 cells plans strategy objectives goals expectations cost savings actions or outlook that are subject to risks uncertainties and other factors that could cause actual.
Results 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 FCC on March 1st 2023 and in other more recent reports filed with the SEC.
Please be aware that you should not place undue reliance on any forward looking statements made today all forward looking statements speak only as of the date hereof or the date specified on the call except as required by law, we do not assume any obligation to update or otherwise release publicly any revisions to our forward looking statements.
Our results were released this afternoon and are posted in the Investor Relations section of our website 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 reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures.
Are included in our financial results press release issued today.
With respect to forward looking non-GAAP measures, we do not provide a reconciliation of forward looking non-GAAP measures to the comparable GAAP measures 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 all for joining us today.
Today, I will walk through our performance this quarter.
Clothing, our key customer wins and trends, we're seeing in our business and the industry.
I'll also provide an update on our outlook for the remainder of 2023, let me begin with our results, which reflect sequential revenue growth and we believe continued financial discipline from the Omnicell team.
Through strong execution, we exceeded our second quarter 2023 guidance ranges for total product and service revenues.
GAAP EBITDA and non-GAAP EPS we.
We generated total revenues of $299 million non.
non-GAAP EBITDA of 47 million and non-GAAP earnings per share of <unk> 57 cents.
Our better than expected performance. This quarter was primarily driven by higher technical and advanced service revenues.
Favorable customer and product mix and cost management.
Gotcha.
We recently welcomed as omni sales CFO will speak to our financial results and key drivers in more detail during his remarks as well as walk through the outlook for the second half of the year.
On last quarter's call, we provided an update on the integration of recent acquisitions reset now called omni sales specialty pharmacy services.
F T S amply care end market touch media, noting that integration was largely complete.
Throughout the second quarter of 2023, we continued to focus on executing our go to market strategy for these acquisitions and we are pleased with the progress we have seen today.
With this momentum underway in what we believe is a robust portfolio. We find that we remain uniquely positioned to continue to support pharmacy operations across the entire care continuum delivering mission critical medication management solutions for our customers globally.
Now turning to the customer landscape and our recent customer wins.
Customers continue to choose Omnicell solutions to maximize clinical and financial outcomes, which we think further demonstrates the important role we're playing in the automating and modernizing global medication management infrastructure.
I will start with the customer wins for advanced services.
The successful implementation of inventory optimization service for a group of its hospitals a major southern the health system is now expanding this service to approximately 20 hospitals across its health system.
The customer indicated that its increased need for visibility insights and analytics for inventory control and cost savings led to the decision to expand the solution.
In addition, with the continued challenge of Labor shortages. This health system is also seeking insights from the Omnicell platform in an effort to improve pharmacy technician efficiency.
Recognizing the potential value and delivering secure solutions and the pharmacy supply chain, our Florida health system has chosen omni cells IV compounding service to help it as it seeks to gain better control over medications and decrease reliance on <unk> III.
Be outsourcing.
This customer is also expanding its central pharmacy automation footprint with Omnicell care ourselves.
And premium software license for their entire fleet of XT automated dispensing systems and.
In terms of competitive conversions are central pharmacy customer in Minnesota has decided to convert their automated dispensing system footprint. The omni sells X T cabinets, while expanding system wide pharmacy inventory management, what the inventory optimization service.
This combined technology strategy should increase visibility and efficiency.
Better aligning to the health systems patient safety initiatives.
The more current XD customer based in southern California has chosen omni sells specialty pharmacy services to support the launch of our health system, all the specialty pharmacy.
Discussed we're not only cited on these cells deep expertise is a key factor in this decision, but also recognize what it saw as an opportunity for a comprehensive technology strategy to support continued growth across the care continuum.
And live in Health has also reached a significant milestone entering the Medicaid market with a new medication synchronization partnership with a leading Medicaid plan.
The partnership aims to enhance medication adherence among underserved populations by offering personalized support to patients. We are proud of the role Omnicell plays in improving patient health.
And lastly, a northeast pharmacy chain selected didn't live in help to support personalized IV or <unk>.
And just 120 days the chain saw a notable rise in automated prescription refills, a significant reduction in pharmacy interruptions and lowered call transfers by approximately 17%.
Moving on to the market environment and what we are currently seeing in the overall health care industry. We continue to take what we believe is a prudent approach to managing the business, but as evidenced by our customer, whereas this quarter. We are pleased that omnicell products software and tech enabled services appear to be resonating.
With the market.
Our health system customers have faced many challenges in the last few years and are evaluating technology and innovative solutions that are designed to help them achieve their long term strategic goals.
Well with salary cost pressures as well as labor constraints remaining key challenges for hospitals.
Thank God. They sell is an important part of the solution.
For us the need to automate optimize and modernize the medication management process is becoming clearer.
Which should help ease the pressure on hospitals to implement the services and solutions they purchase at the outset.
All these should be a long term tailwind for Omnicell. We are also seeing some near term headwinds as some customers choose to delay adopting new technologies in order to mitigate additional training requirements for their workforces.
As we look ahead to the second half of the year, we expect full year bookings to trend towards the lower end of the full year guidance range. We previously provided due to ongoing capex budget constraints that some of the factors I just outlined.
<unk> the strong first half performance and solid expense management, we are raising our full year 2023 guidance for total revenues non-GAAP EBITDA and non-GAAP earnings per share.
As I mentioned.
I will discuss our guidance in more detail, but long term trends appear favorable as we expect customers need for automation tools and software enabled services to offset continued pressure driven by labor constraints.
Now moving on to ESG.
Started the second quarter, we were pleased to publish our third annual ESG report we.
We continued to make progress toward our goal of creating positive change and delivering innovative technologies that are intended to help our customers build a healthier world. This entails designing our products with a view to minimize our environmental footprint.
Maximizing patient outcomes.
We also continue to support a diversity equity inclusion and belonging initiatives that are intended to foster an engaging and inclusive workplace.
Through our ESG efforts, we aim to ensure healthy lives and promote wellbeing for all.
Before I turn it over to Chad to discuss our financial results for the quarter in more detail I want to note. The most recent addition to our board and speak to some leadership changes.
In July we were pleased to have classic Bobby Gaucher will join our board as the independent director.
As part of omni sales ongoing refreshment process. The addition of Bobby expands our board to 10 members.
Bobby is an established leader who brings more than 30 years of global SaaS and health care technology experienced the Omnicell currently serving as the president of SaaS for RESNET incorporated.
And it is an important addition to our board.
He has an impressive track record leading to high performance teams and software products that is responsible for the vision strategy and day to day operations of raws meds rapidly expanding SaaS portfolio.
We are also pleased to have welcomed chacha as omni sells new CFO at the beginning of June .
Charter is a seasoned financial and accounting executive with more than 20 years of experience, leading and working in global financial organizations across health care and consumer products industries.
It's a pleasure to work with charge out thus far he is commercially focused and collaborative leader shares our passion for improving patients' health.
We find we are already benefiting from his insights and I know he's looking forward to speaking to some of his priorities with you today.
In addition to welcoming Chacha, we also announced a number of other organizational changes designed to create a more streamlined organization with a continued focus on operational excellence.
This included the appointment of new members to our leadership team as well as a number of motions within the organization.
We believe we have put the right team in place to lead the next phase of our performance as we seek to continue to deliver value for our shareholders our employees.
Health care partners and their patients.
With these changes I want to emphasize that our strategy remains the same we are simply moving into the next phase of omni sales evolution.
We believe we must adapt to continue meeting the ever changing needs of the industry and our customers.
New leadership structure reflects this effort and should enable us to operate more nimbly and further strengthened our position as a leading medication management provider.
We've worked hard to build a strategy that we believe will transform the pharmacy care delivery model globally now, we're laser focused on execution and bringing in people with the right skill sets that are keenly focused on profitable growth and I believe we are well positioned for the future.
Now with that I'll turn it over to the charger to introduce himself and provide further details on our performance and outlook.
Thank you for the wall welcome Randy.
Thank you to the entire Omnicell team.
Football School my on boarding over the last several weeks.
I am excited to be here with all of you today.
I am looking forward to meeting many of you in the weeks ahead.
I believe in the company's mission and vision.
Thrilled to be leading omni sales finance.
<unk>.
Which play a key role in enabling the overall strategy and driving operational excellence.
Since joining in June I.
I have been working closely with the executive team.
To enhance omni sales mission to continue to be the healthcare provided us most trusted partner for medication management.
My time here, so far has reaffirmed why I joined Omnicell.
Omnicell has a differentiated strategy.
From the pharmacy care delivery model.
Along with incredibly strong customer relationships.
With you Brian Lee cognition.
The talented team here at <unk>.
Phil is mission, driven and fully committed to improving patient care.
Ensuring positive outcome.
These are just a few of the reasons why I believe the company is well positioned for long term success.
Now before I discuss our financial results.
I would like to share with you my immediate priorities in the second half of the year and going forward.
First in.
We intend to leverage data analytics and insights to strengthen our financial outperformance in.
And improve the predictability of our business.
Second I will seek to ensure that we are strategically deploying capital to support innovation on wells, both stable profitable growth.
And third.
I will work to ensure that we continue to operate with financial discipline as.
As we work to improve operational efficiency throughout the organization.
I've really enjoyed my first few weeks at Omnicell.
Look forward to working with the team as we move the company's strategy forward and continue to deliver long term value to our stakeholders.
Now turning to our financial results.
Our second quarter 2023, total GAAP revenues were $299 million.
An increase of 8 million or 3% over the prior quarter.
And a decrease of 32 million or 10% compared to the second quarter of 2022.
The year over year decrease reflects lower point of care revenues, primarily as a result of ongoing health care systems capital budget constraints.
Services revenue were $111 million.
An increase of 13% versus the second quarter of 2022.
Really driven by growth in advanced services.
Total revenues in the quarter away a level million above the top end of our previously disclosed second quarter 2023 guidance range.
Really due to favorability within technical and advanced services.
Which is not expected to reoccur in the second half of the year.
non-GAAP gross margin for the second quarter 2023 was $46 eight the fed.
An increase of 200 basis points from the prior quarter.
Primarily due to higher services revenues.
And the result of our prior cost containment actions.
In addition.
We saw lower cost for semiconductors field and fleet compared to the prior quarter.
A full reconciliation of our GAAP to non-GAAP results are included in our second quarter earnings press release and.
It's posted on our Investor Relations website.
Our second quarter 2023 earnings per share in accordance with GAAP, where it sense compared to a loss of <unk> sales in the prior quarter.
Income of 20 cents per share in the second quarter of 2022.
This improved performance compared to the first quarter of 2023.
Flex the absence of impairment and abandonment charges.
Operating lease right of use assets.
Assets.
Profit from higher revenue as well as the full benefit of prior cost containment actions.
As we have previously shared with you.
Sustained GAAP profitability is a key objective for the company.
Our second quarter, 2023, and non-GAAP earnings per share with 57 cents.
Compared to 39% in the prior quarter.
<unk> sales in the same period last year.
Our second quarter non-GAAP EBITDA was 47 million.
An increase of $20 million compared to the previous quarter.
Decrease of 9 million when compared to the same period last year.
Our second quarter, 2023, non-GAAP , EBITDA and non-GAAP earnings per share exceeded guidance, primarily due to higher services revenue.
Customer and product mix timing within the year.
Strong cost management.
The operational favorability in the second quarter non-GAAP earnings per share.
Offset by higher than expected second quarter income taxes.
The impact from the income tax expense reflects timing within the year and is expected to be favorable in the second half of the year.
At the end of the second quarter of 2023, our cash balance was $399 million.
Up from $340 million as of March 31st 2023.
As of June 30 of 2023.
We had 418 million of availability under our revolving credit facility.
And there was no outstanding balance.
In terms of accounts receivable.
Days sales outstanding for the second quarter of 2023 was 85 days.
A decrease of 17 days over the prior quarter.
Primarily due to strong cash collections as well as timing of invoicing within the quarter.
Inventories as of June 30 of 2023 were $131 million, a decrease of $11 million from the prior quarter.
Reflecting continued strong progress our global supply chain team is making on key process improvements and.
And inventory management initiatives.
Free cash flow during the second quarter of 2023 was 58 million driven by strong cash collections.
Now moving onto our full year and third quarter 2023 guidance.
As Randall mentioned earlier, we continue to take a prudent approach to managing the business.
We expect the full year bookings for 2023 to trend towards the lower end of the previously provided range of 1 billion to $1 1 billion.
Customers are showing signs of caution implementing new workflows that stress already stretched thing on label, which is continuing to impact the timing of new capital and software projects.
We are pleased with our strong first half performance.
Thus, calling our solid execution and prudent cost management.
Considering the strength advanced services and technical services.
As well as continued strong execution.
We are raising our full year 2023 total revenues to range between $1 1 billion to $1 2 billion.
An increase of $10 million from the top and bottom end of our previously provided guidance range.
We are reaffirming our full year 2023 product revenues to range between $740 million to $760 million.
Due to the solid execution in the first off.
We are raising our full year 2023 service revenues to range between 420 million to $440 million.
An increase of 10 million from the top and bottom end of our initial guidance.
We expect advanced services revenue to be between $205 million and $215 million.
An increase of $5 million from the top and bottom end of our original guidance.
This reflects 13% increase at the midpoint compared to 'twenty to 'twenty two.
Approximately 18%.
Of 2023 total revenues.
We expect technical services revenues to range between $215 million and $225 million in 2023.
An increase of $5 million from the top and bottom end of our original guidance.
This represents an increase of 6% at the midpoint as compared to 2022.
Please refer to the slide number 14 in our earnings presentation published on our Investor Relations website.
A summary of the total year revenue guidance components.
We expect total year, 2023, and non-GAAP EBITDA to range between $130 million and $145 million.
An increase of $10 million from the top and bottom end of our initial guidance.
Which reflects the incremental profit from higher expected services revenue for the year.
On prudent cost management.
We expect 2023 non-GAAP earnings per share to be between $1 75 and $2 per share.
An increase of 20% from the top and bottom end of our initial guidance.
The full year, non-GAAP EBITDA and non-GAAP earnings per share guidance includes the impact of the previously disclosed $50 million of annual operating expense savings.
Derived from the recent reduction in force and other expense containment efforts.
Primarily within SG&A.
We continue to expect 2023 operating expense and <unk> savings will be largely offset by the impact of year over year inflation in employees salaries and increases in expected performance based compensation.
<unk> cost increases.
We expect non-GAAP operating expenses to be flat to down year over year.
Included in this number is a higher expected blended tax rate in 2023.
As a result of the increased profit expectations.
For the full year 2023.
We are now assuming an effective blended tax rate of approximately 11% in our non-GAAP earnings per share.
For the third quarter 2023, we are providing the following guidance.
We expect total third quarter 2023 revenues to range between 290 $300 million.
We expect product revenues to range between $185 million on $190 million.
And services revenues to range between the $105 million and $110 million.
We expect third quarter 2023, non-GAAP EBITDA to range between 31 million and $37 million.
Although we expect third quarter 2023, and non-GAAP earnings per share to range between 42 sales and 52.
The third quarter non-GAAP gave you the non-GAAP earnings per share guidance includes the expected impact of product and customer mix.
And planned investments in innovation and advanced services.
As well as seasonal third quarter expenses.
We believe the long term opportunities for Omnicell are compelling.
We are committed to delivering strong financial and operational performance.
With that we would like to open the call for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from Scott <unk> with Keybanc. Your line is now open.
Hi team congrats on the very very strong results and outlook.
My first question is really on the operating expense line.
Seeing SG&A coming down 17% sequentially from last quarter's a nice.
Operating leverage there, what's driving that is that mostly head count on the point of care side or are there is there other cost efficiencies that we should be aware of thanks.
Thank you Scott there are definitely are that cost efficiencies that you would need to be aware of.
We achieved $50 million of annual operating expense savings.
The full remaining impact.
Cost savings in the second half of the year.
Great and just as a follow up you mentioned headwinds continuing related to a labor environment at the hospitals around nursing and technicians.
You guys have any expectations for that to improve over the remainder of the year or is built into your guidance really just the similar level of kind of labor issues that we're seeing at hospitals.
Right now thank you.
Okay.
So while we're seeing incremental improvements as the year progresses, Scott our health systems are still challenged by continued macroeconomic uncertainty and labor constraints, which of course are impacting our customers buying decisions.
While advanced services, including our technology enabled solutions.
To drive automation and reduce the need for labor near term labor challenges continues to impact our customers ability to adopt new technologies, which is contributing to our decision.
To guide towards the lower end of the range.
Yes, just on labor.
And concerns about committing to new projects, particularly in advanced services, where you have more disruption than you would in ADC.
<unk> ADC business, which is we're not seeing that in that particular area, but mostly in the advanced surface areas, where you've got new robots and new things to install you need it and technical people on the organizational side to commit.
Thanks, Randy you bet Scott.
Your next question comes from Alan Leong with.
Bank of America. Your line is now open.
Thanks for taking the questions the product revenue was up quarter over quarter, and I guess, you're kind of guiding for sort of flattish sequentially, but I guess three quarters kind of in this range. It seems to me that you know things have at least bottomed there it doesn't seem like they're getting worse I guess what are you seeing in the pipeline is the pipeline today.
It's better than it was three months ago six months ago, just trying to get some perspective on what youre seeing there.
Yes, I would have to say that the customers are excited about our products in the pipeline continues to expand I think it's all about what is the funding timing on these products and I think we all would have to agree that the modernization of medication management has to take place there needs to be a robust there needs to be automated Saul.
We're doing these things so that we can run.
Pharmacy is at near perfection or get us to the autonomous pharmacy. So I think the industry has bought into that vision and spot. There. It's just a question on the timing of that and so we're engaged as much as we ever have been.
It's just the uncertainty about the funding piece.
Great and then a follow up on Scott's question, Randy you mentioned that hospital budgetary pressures on new solutions can you bifurcate between I guess, the enlighten product suite. The proxy you acquired and then sort of the products that you built in house is there is there a difference in growth rates, but.
When those two business lines or is there any difference youre seeing with prospective clients on either of those.
In life and is very exciting area we've developed.
A lot of new products, and we talked about the go to market with a medic.
Medicaid product for the Medicaid plan, which I think is very unique for us and so theres a lot of opportunity there, but probably more interesting is we're bringing that mostly retail product solution set into our core customers.
Because these big provider networks Big Hospital networks, they want to engage patients in the same way in an outpatient format and even all the way to the home. So they need the same kinds of tool sets that have traditionally been sold and the in light of an environment, which has been to retail pharmacy. So we're really starting to.
See that crossover begin to happen.
And that's the exciting piece I think most of the headwinds is not in the retail piece, but it's mostly in these big provider hospitals were nursing and people, particularly our.
Uh huh.
Red lining or exhausted some pharmacy tax as well. So it's just a matter of time before they get those positioned funded and get the relief and it doesn't know exactly when I think we're seeing the for profit hospitals are already probably ahead of the regular market as far as getting better.
Results in getting better alignment on some of those things, but but I think the pipeline is strong and the alive and product has really been exciting place because.
Not just because of what it's doing there, but we're actually crossing it over into our core product.
Expansion of our marketplace.
Great. Thank you.
Your next question comes from Dan Bernstein with Wells Fargo. Your line is open.
Hi, Thanks for taking my questions and warm Wilkinson charger.
Maybe we can start on bookings guidance, you guided lower here on the lower side of that range.
Maybe just share some details as to what's impacting that.
At current products or services to call out.
And thank you for the warm welcome like I mentioned earlier.
Well as in my prepared remarks again.
Customers are still challenged with labor constraints as well as macroeconomic uncertainty.
But we're also seeing some near term headwinds in advance services, particularly IV as customers have navigating a very complex regulatory environment.
Okay, Yes.
Yeah, just to expand on that a little bit if I can't say that the IV has gone through sort of an F. D. A.
Filter to get some insights and has gotten made through that now it's going through individual states pharmacy boards.
To set further regulations, our compliance rules. So in some states, it's just going slower than other states and so that's that's holding back certainly some decision making until they understand how thats fully going to be executed.
Okay, and I guess to square that with guidance.
I mean, it seems like you outperformed on that against services side product bookings was reiterated.
Maybe if we just take a step back here you started the year with about $500 million in short term backlog.
You essentially need $250 million and enter your bookings to hit that well over 50% of the way through the year.
What kind of visibility do you have here.
Where are you versus where you thought you'd be at the start of the year.
Well I think we have really strong visibility.
And we've implemented particularly on revenue and earnings, particularly the second half of the year because much of it is already scheduled.
And we've brought in new processes and.
New disciplines to lock in those that visibility so we feel really strong about that piece.
As we move forward and then I think the part that we're talking about where there's less visibility is when are people going to commit that capital or commit to these new projects.
Not necessarily some of it may be financial but a lot of it is when is the organization is going to be ready to take on these newer platforms, what's really required new workflows, new training or does it require you to go in and spend some time integrating these new platforms into their operation.
That's where we see the hesitancy mostly.
Okay. Thanks, so much.
Thanks, Dan.
Your next question comes from Matt Hewitt with Craig Hallum Capital Group. Your line is now open.
Good afternoon. Thank you for taking the questions and it's nice to speak with you in charge.
Maybe the first question. There recently was a Supreme court ruling that prompted CMS to announce a $9 million <unk> 9 billion dollar with a b payment.
Hospitals really related to the 340 <unk> program.
I realize that that market has been pretty challenged over the past couple of years, but does this change things and what does that mean for your three $3 40, b platform going forward.
Well it probably means that a couple of things we have to.
You know two angles to three <unk> to be one is the 340, B, where we have contracted pharmacies and that we have said is relatively flat for this year of 30 to 35 million.
We continue to believe that is what that outcome will be.
But it does mean that in our specialty pharmacies, where we're spinning up services remember it means that our bigger rebates for our customers, which means there's more advantage to deploying our service and that means slightly more revenues for us, but not significant in that specialty pharmacy services, probably the bigger opportunity.
And frankly, as the $9 billion rebate, which there's been discussion about whether it's going to actually hit.
Two hospitals in either Q4 or Q1, no one really knows.
<unk> is an opportunity for hospitals to spend more money, obviously on our solution sets now I haven't really seen that connection point take place yet where.
CFO has said Gee I know I've got this.
Millions coming in now I'm ready to spend it on this project My guess is theyre going to wait until they get the money in the bank and then decide.
What to accelerate and the like but I think that's a big opportunity for us.
I think the program to have your own in house pharmacy.
We're going to get richer rebates.
Back to the old.
Rebate amounts, which were significantly higher in many cases so.
That's just bolsters that program to be.
Be adopted by more people.
That's great and maybe one separate question here regarding gross margins a nice step up here.
This quarter I think much of it was on the services side, but when I think back to a year ago. You were for your phase III specific challenges steel.
Semiconductor chips and transfer transportation costs and gas it sounds like you've got a little bit of benefit this quarter from now on.
On the semiconductor side and then on the transportation as we look at the remainder of this year are you expecting some further benefits from those three areas as you kind of work through either the inventory on hand or as the prices for those products come down.
Yes.
Yes, so as we disclosed during the Q4 2022 prepared with BACS inventories as of December 31, 2022 included approximately <unk> <unk>.
$18 million of advanced services advanced purchasing some receipts of semiconductors.
The balance was relatively consistent.
June 30 of this year.
Compared to December 31st and so.
We believe that you know.
Also we have some we see supplementing buybacks that we have committed to purchase.
I shall continue to have our supply chain.
Got it thank you.
Okay.
Your next question comes from Bill Sutherland with Benchmark Company. Your line is now open.
Hey, Thank you welcome to touch our guests Mike My main question for you at this point might be a few.
Evaluate capital deployment kind of what's going into your thinking.
What's that process is going to be.
Yes so.
We will continue to evaluate our capital deployment strategy and we will make the right.
Investment decisions to foil sustainable growth from an innovation standpoint.
Yeah.
And I think M&A is definitely a long term strategy that will at least there I think but I think that.
<unk> is looking at the balance sheet and definitely nice cash flows.
Maybe some that we need to restructure eventually.
And.
So I don't think it feels like there's anything immediately at this point, but.
Something that really to consider as we move forward.
Got it.
And then okay.
Carlo this quarter without asking about AI and your.
What your thoughts are as far as implementing that technology across your product set.
Well I think AI has.
A lot of potentials for many of the obvious areas that many companies are looking at.
Software development customer interaction.
Communications, both internally and externally with customers and in the.
The ability to gain unique efficiency so.
We love the fact that AI is here, we think eventually we will accelerate the ability to get to the autonomous pharmacy sooner.
And that's really important to us.
But I think it's a.
A little too soon to say.
We're in exactly how those impacts will be but.
We have AI is on top of our list is.
As we move forward to have specific strategies around specific use cases, mostly internal to the company and we want to be very careful as we use them externally.
Because of.
Just regulatory and proper use of such a powerful tool.
When we use it outside the four walls of the company.
So so.
Mostly internal focus Randy.
The first steps are internal and we may have some proof cases, then we may use certain selected beta customers and.
And many of our customers. We are very encouraged by them. They are actually leading some of the way on some of these projects and bring us in terms of I think theres a lot of excitement about solving.
Large unstructured data questions that can be easily answered so theres a lot of unstructured data and in health care. So.
Lots of opportunities for sure right.
Alright, okay. Thanks.
I was just mentioning Bobby go show from <unk>.
AI Pro and he is he is helping us think through the process as well and we've got a lot of resource of a ride on our team is top notch. So.
I just feel like.
We have lots of opportunities there, but we're not ready to share how that's going to impact us directly, but it's definitely a part of our strategy.
Your next question comes from David Larsen with BPI.
Your line is now open.
Hi, It's my understanding that you were increasing prices for your products in 2023, just any color around that.
And are those price increases more than offsetting inflation for semiconductors.
And then over what time period should we expect to see these price increases continue to occur will they be sort of complete.
12, 31 23.
Yes, so we will continue to assess our price increase strategy.
But as we continue to we continue to so we are continuing to see.
The benefit of pricing actions put in place over our last over the last two years.
We are also seeing modest reduction in cost for semiconductors freight on steel, which have been subject to significant inflation out appraisals on recent periods.
The second quarter for the first time, we saw the benefit of pricing actions outweigh the impact of these.
Inflationary cost, which will modestly be favorable to product on gross margin in the second half.
And I'd also add to that some of our pricing actions.
There are.
You can't implement them every is only for those customers who have renewing service contracts coming up that year can you renew them for us so they are ongoing.
We move forward.
As customers convert out so there are some increases as we move forward and I think we are.
Our strategy is to.
To be prudent about that.
Okay, and then how far along are you in terms of like the X T sort of upgrade process are you like 60% of the way through.
That process and then it's my understanding that at some point everybody is going to have to upgrade because youll sunset support of the more legacy solutions is that correct or not.
Then once you do get through these XT upgrades.
Walter simply be another version of the automated dispensing cabinets that you sort of bring to market and there'll be a whole new cycle that starts just any thoughts or color there would be very helpful. Yes.
Yes, we are significantly way through the XT upgrade its well over 60%.
And we don't believe that the whole 100% of the market is even going to convert.
So we're getting towards the end of that but we continue to add on with what we call expansions, which is a big part of America.
XD business as well as competitive conversions, we usually have a 10 year lifecycle to our systems and we generally.
Cycle, new products on that I believe we started in 2017.
We don't time, it exactly with those.
Those days, but.
We have to continue to upgrade our hardware to take on new software solutions.
And really looking to to add more value to create more value.
Great and then just one last quick one if I can squeeze it in did I hear you say Randy that the $9 billion from CMS will be keyed in <unk> of 23 and <unk> 24.
There hasnt been it's still up for grabs whether it's Q1.
Q4 of this year.
But as far as my current understanding.
Is that.
It will be a lump sum and it will be in Q4 Q1.
Just coming up Q4, and Q1 of the new year.
And those extra dollars I think.
Or waiting to be seen by these hospitals I think can be sure of what those dates are but I think that will have an impact on the ability to spend money.
Okay. Thanks, very much I'll hop back in the queue.
Thanks, Paul.
Question.
Your next question comes from Jessica <unk> with Piper Sandler Your line is now open.
Hi, Thanks.
Taking my question and congrats to you and Joe John .
<unk> start date. So I think my first question is just on product gross margin.
Those have been kind of moving around quite a bit in the last couple of quarters I'm, hoping you guys can describe the structure of product cost of fed.
Maybe the mix between fixed and variable and just.
What you would expect for normalized product gross margin like where should they be trending.
24 times.
Yeah.
Thank you Jessica so we really cannot comment on 2020 for 2025.
Tell you that.
In 2023, the key drivers of our gross margin way higher services revenue.
Favorable customer and product mix as well as the full impact of cost containment actions that we took.
Last year.
Got it so just and I guess, we're trying to understand the impact of incremental products revenue on the product gross margin. So can you help us maybe understand the mix between fixed versus variable cost of goods.
Product gross margin.
The.
The product mix. It was really primarily between again like I said customer and product mix.
As well as.
Higher services revenue.
Okay got it so maybe for Randy.
Medicaid deal that you mentioned that first payer deal within in life and health and if so can you just help us understand kind of the context for that deal.
And maybe the pricing and the omnicell have any exposure to outcome.
Any sort of value based component of that deal.
Well it always it's always somewhat outcomes driven as the medication synchronization is based on signing up customers and keeping them synced up to the regular use of their medication management and Thats and thats around a plan that's more holistic.
That is you know they are the provider and the pharmacy. If you so to speak so I think that's the unique opportunity came here to come outside of what I would call the retail.
Uh huh.
Our customer base to be inside of a plan where.
You'll see more of this engagement directly with the patient in order to get better outcomes and we know it's really hard to service.
The Medicaid market. So I think we're really excited about that I think.
I feel like we're the only company doing these kinds of things.
That are really making the difference that these multiple levels and multiple market.
Integration points and because of these services are some uniquely put together and can be formulated if you have.
A good patient interaction.
Scenario to go after and certainly this is one that fits well with us.
Got it.
Last question is just that you guys beat the high end of services revenue guidance now two quarters in a row.
So is that upside relative to the high end of guidance coming from better than expected implementation.
And if that's the case, just why wouldn't that strength persists in the second half when we when the operating environment is arguably going to get better for hospitals.
Andy potentially almost $9 billion remuneration came out.
<unk> and <unk>.
Services revenue is expected to be approximately flat due to the strong performance that we saw in Q2, primarily from the favorability in timing of revenues.
Driven by technical services renewal timing as well as advanced services, which we do not expect to reoccur in Q3, and the second half of this year.
We just had a lot of renewals in Q2, and sometimes those renewals come with back payments for a few months they hadn't paid for and so you get.
Extra few payments there and so a lot of that happens in Q1 and Q2 it doesn't happen as often in Q3 and Q4.
Okay got it that makes sense. Thank you.
Thanks, Jeff.
There are no further questions at this time I will now turn the call back over to Omnicell, Chairman, President CEO and founder Randall Lipps.
Well I'd really like to thank the omnicell team for delivering a solid quarter getting us I would say back on track the new management team, particularly having <unk> join us it's been such a great help.
To us getting.
My head straight in moving the company forward.
And I just it's just an exciting time for innovation exciting time for our customers to deploy these new products and get back to this predictable profitable scalable growth.
Confused with great envision so thanks for being here and we will see you next time.
This concludes today's conference call you may now disconnect.
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