Omnicell, Inc. (OMCL) Earnings Call Transcript & Summary

[Audio Gap] analyst here at BofA. We are excited to have Omnicell here. We have CFO, Nchacha Etta; and Kathleen Nemeth, Head of IR. Kathleen has some brief safe harbor comments, then we'll get started.

Thank you, Allen, and thank you, Deb, as well for hosting us today. We've been having a great day here in Las Vegas. Before we get started, I want to remind everyone that during our chat with Allen today, we may make forward-looking statements. There are risks associated with forward-looking statements, so please be sure and review our most recent filings with the SEC. With that, I'll turn it over to Nchacha for some opening remarks.

Thank you, Kathleen. Thank you, everyone, for coming. I would love to begin by just saying a few words about our company, for those of you who are not familiar with Omnicell or if you haven't covered Omnicell for a while. So over the last 30 years, Omnicell's mission has been to transform the pharmacy care delivery model by providing very innovative medication management solutions that we believe will help us -- would help our customers achieve the right outcomes. We are a global company with a strong market position in the U.S. or in North America per se. Our solutions help address key medication management challenges around the world, and we are very excited about our multiyear innovation strategy that we've launched. We're truly dedicated to delivering products and services that we believe will provide positive outcome to our customers or patients as well as a positive return on investment to our customers. And so we're really excited to be here and look forward to answering your questions.

That's great. Thank you, Nchacha. During last quarter's earnings call, Randy made some, I guess, more optimistic comments about the state of the health system market. It seems like health system finances are stabilizing, and operating margins for hospitals are improving. Can you talk about your recent conversations with current customers, prospects? Have those conversations changed at all, the type of conversation that you're having versus 3, 6, 12 months ago?

Yes. It's a very good question. Thank you, Allen. So in conversations that we've had with customers, I think it's clear that the macroeconomic environment continues to improve. We saw some survey data that showed that the utilization trends for health systems were solid in Q1. However, the macroeconomic environment continues to be challenged because of the higher interest rates that we're all aware of, and so there are still some pockets out there of customers, both medium, small and large customers, that are still challenged from a CapEx spend standpoint. We do, however, believe that -- we expect to see some improvements in the overall CapEx spend for health systems and that, coupled with the fact, with the macroeconomic environment that we're operating in, we're taking a very cautious approach to managing our business. And some of that was reflected in the guidance that we provided at the beginning of the year.

So the guidance for 2Q implies a sequential improvement in product revenue. So it seems like you're seeing some type of benefit, and then the implied for 3Q, 4Q would be a further ramp. I guess can you speak to the expectations that are embedded in your guidance as it relates to product revenue? Where is that sequential growth going to come from? How do you think about just the source of that improvement over the course of the year?

Yes. So our guidance, especially in the second half of the year, is based on customer scheduling. We do have visibility to our customers' schedule at least 3 to 6 months from a forecasting standpoint. And so would we expect that our customers, based on the orders or the scheduling plans or interest to schedule, our revenue will ramp up in the second half of the year. Also, we're seeing a modest increase in demand in our bookings in the second half of the year. So we believe those 2 factors will definitely drive our revenue increase in the second half.

Got it. As you think about the revenue growth algorithm, I think the expectation for the new product, XT Amplify, is that it's not going to be a significant contributor in 2024. Maybe can you talk about -- I guess, first, remind us what is XT Amplify? What are some of the services or solutions that is embedded within that? And can you talk about what's embedded in your guidance, if anything, as it relates to that new product?

Yes. So XT Amplify is a multiyear outcome-centric innovation program that we've embarked on. Again, this is an initiative that we're looking at helping improve our overall long-term performance of the company. And so it has a suite of services and solutions. For example, we have MedChill, which is a product with refrigerated drawers. That product comes with refrigerated drawers that will help provide safety for some medications. We also have XTE, which is a console upgrade, which is basically going to help from an overall performance of our ADC cabinets. We also have ServerScale, which is a product that will help most hospitals or health systems manage their servers from a cloud-based cloud standpoint. And so those are some of the key products. We have about 4 or 5 key products within the XTA portfolio that we announced during the Illuminate in April of this year. From a 2024 standpoint, we expect minimal contribution to the overall bookings and revenue plan. Again, like I mentioned earlier, this is a multiyear innovation program that we launched, and we expect this to be -- to contribute to our long-term growth plan or strategy.

Can you talk about the price point of XT Amplify and what you expect an adoption curve could look like? If not an exact price point, maybe relative to the overall XT? And just kind of how should investors think about maybe the intermediate-term adoption curve? Are there any parallels from prior console upgrades that we can look at? Or just any way for investors to think about what the opportunity set looks like. Maybe not the growth, but the types of customers or percentage of customers that would benefit from this upgrade?

Yes. So XT Amplify is really -- we're leveraging our existing customer base we have. As you know, we're nearing the end of our upgrade cycle with our G5 cabinets, and so we're opening it up to all of our customers who would love to embrace the product or the solutions. When we announced this in April, we got quite a significant amount of interest from our customer base. And so again, the expectation is that this will ramp up, but in the long term. We don't expect any significant benefit in 2024. And from a price point standpoint, it's about 1/3 of the price of our existing cabinet. And so we do expect that contribution to really be a key part of our overall growth. But the margins for XTA are comparatively higher than the margins for our XT cabinet. So again, it's a huge opportunity for us to really help us with our long-term growth strategy.

Got it. One of the questions we are getting a lot from investors is kind of what the margin profile of Omnicell could look like. The company has obviously done a good job getting costs out of the model to help offset some of the impact from lower gross profit, but last quarter, you hired a consultant that's looking at the business. Are there opportunities for additional costs to be taken out? How are you thinking about maybe the opportunities? Or are you more or less set with the OpEx line as it exists today?

So I'll begin by saying this, Allen. So we're not happy with the performance of the company over the last few years. And so we know that there are opportunities to improve our margins, especially if you saw in Q1, our margins were impacted by our product mix as well as investments that we made in Advanced Services. And so just looking at our overall margin for the rest of the year, the remainder of 2024, we do expect to see an increase in our overall margin from increased product revenue. And so we will leverage the volume increases that will help improve our overall margin. With regards to the management consultant, I think you asked or touched on that. Again, the goal here is really to conduct a holistic review of our business from an operational standpoint. We believe that there are opportunities that we can capitalize on to improve our overall performance. As you saw late last year, we did take some actions to improve our overall profitability from a headcount reduction standpoint. Those are quick and easy fixes, right? Those are easy solutions that you can execute to improve your profitability. But we felt like it was very important for us to do a holistic review of our portfolio, and hence, the decision to bring in an outside consultant to give us -- come in with a new set of eyes and give us a very independent perspective of opportunities they see it, both from an operational standpoint, go-to-market initiative as well as look at some of the portfolio companies or businesses that we've acquired over the last few years that some are doing well, some are not doing as well and some are doing exceptionally well. And so we're really looking forward to the outcome of some of the recommendations or findings that will come out of the report, and we are going to look at it, review it as a management team and make the right decisions that we believe will continue to unleash shareholder value.

Yes. I appreciate that. I want to talk a little bit about the business, because obviously, there's the core business that is catered toward 50% of the top 300 health systems, and then there's the other part of the business, I'll call it the Enliven suite, which is more focused toward a retail pharmacy. As you think about those 2 businesses, are there any clear synergies that you've observed by having those businesses together? I'm just wondering how do you think about the synergies of having those 2 businesses under the same roof? Are there specific things that you can gain scale from? Just curious kind of what you're seeing from that perspective.

Yes. Enliven is a very unique business because it's really focused on the retail pharmacy space. As you know, Omnicell's mission is really to transform the pharmacy care delivery model, and so we do have some products and additional solutions that we are launching, for example, as part of our XTA portfolio. And as we look at really expanding this multiyear outcome-centric innovation strategy, we do believe that there will be synergies that we can leverage from the Enliven business. But today, Enliven is really a unique business within our portfolio. And it's -- we had a good Q1 in Enliven, and we expect it to continue to perform well over the next few years.

Great. I want to talk about the Specialty Pharmacy business. I think on the call, you talked about 400 hospitals and clinics using the product. What's driving Omnicell's success there? And I asked the question to Randy last year. Is -- how material of a revenue contributor is the Specialty Pharmacy business? And I believe it's -- it seems to me like that is pretty core as it's -- your health system customer is the one that's leveraging this. So I'm just curious, is this a material revenue contributor for the business? And then what type of growth are you seeing there?

So the Specialty business is a very strategic business for Omnicell because again, it's very similar to our core business. We have almost the same cohort of customers. And so the business, from a growth standpoint, has a significant amount of growth potential. The business has been growing double digit over the last few years, and we expect the business to continue to grow. However, the margins of the business have not been as attractive because, again, it's a business model that requires investments upfront. And as you scale the business, then you start benefiting from improved margins. And so today, it's not a significant contributor to our overall revenue. But over the near term and long term, we expect the business to continue to grow. Like I said, it's growing double digit. And so it's -- we expect it to be a key contributor to our overall growth strategy over the near term.

Going back to the core cabinets business, have you seen any change in industry churn over the past few years? It seems like it's a relatively stable market, but I'm just curious if there's any dynamics there that are evolving in either direction.

The overall market is very stable. Like I mentioned earlier, there have been some headwinds in our segment or in the industry that have impacted hospital's ability to expand. But there are very few health care systems that are expanding from the number of beds standpoint today. So things have been kind of stable, but we do anticipate that as the macroeconomic environment continues to improve, I'm sure some of the larger health care systems will invest in -- will expand, and that will create opportunities for the key players in the industry.

Great. And can you provide a quick update on the regulatory review of IVX? Any updates there?

Do you want to?