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

Good afternoon, everyone. Welcome to the JPMorgan HealthCare Conference. My name is Annie Samuel and I cover health care technology and distribution here at JPMorgan. We're thrilled to have Omnicell presenting with us this afternoon. We'll have CEO and Founder, Randall Lipps; to start, CFO, Nchacha Etta and we have Kathleen Nemeth with IR. So Kathleen, I'll turn it over to you.

Thank you, Annie. Good afternoon, everyone, and welcome to the JPMorgan Healthcare Conference. We're delighted to be here today. I also want to extend a warm welcome to those who are joining us online. Before we get started, I would like to remind everyone that during today's presentation, we may be making forward-looking statements. For a full list of risks associated with those statements, please see our most recent filings with the SEC. And with that, I will introduce our CEO, Randall Lipps.

Thank you, Kathleen and Annie. It's nice to be with you and JPMorgan again. Thank you. Well, Omnicell is the strategic partner to health systems in the large and growing medication market. We've been doing this for over 30 years, and we have a great track record of innovation. And to go along with that, a really strong client base of more than half of the top 300 U.S. health systems. We have some recent introductions of new product lines, XT Amplify, Central Med Automation Service and OmniSphere, really represents a reinvigoration and are focused on new products and really matches well to the new buying behaviors that we are seeing in our customer base post pandemic. We remain committed to being the leader in connected devices. XT Amplify is designed to bring additional value to our current XT customers and is expected to increase our overall competitiveness with new customers. And it also gives customers -- current customers confidence to expand in other areas that they haven't done previously with our technology. Advanced Services is expected to be a key driver of our future growth. And we expect it also to be an increasing portion of our reoccurring revenue and margins and net margins. Now we have a strong balance sheet, and I think we're poised for sustainable and continued growth. Now our strategy is to transform the pharmacy and we want to transform the pharmacy so that we could get better outcomes for all our stakeholders. And we want to do this with smart devices, robotic devices, software workflows, expert services and of course, analytics, which we really see as the foundation for AI. And it is AI, we believe that will drive the Autonomous Pharmacy. Now recent innovations we've introduced in the marketplace. Coming out of the post pandemic, we saw some change in buying behaviors from our customers. One of the things that happened is they really wanted to invest in their people. A lot of the post-pandemic situation, they realized that they underserved their employees. And hence, we saw the inflection points with nursing and some of the other hospital staffs coming out of the pandemic. Another piece of buying behavior that was really clear is during the pandemic, no one had enough information on their supply chain. Where are the meds and how can I get them positioned successfully to meet the demand? So having an enterprise system that can look at everything, inpatient, outpatient, inventory, about to arrive, just arrived and understanding a full picture of what that real-time situation looks like. So XT Amplify is a new device that fits into our current platform that streamlines the workflows and enhances the nurse experience. And so a lot of times what we're seeing with XT Amplify why these partners of ours are spending their precious capital on XT Amplify. Is the answer the issue around creating a better experience for nursing. And that experience is so important that even if they bought a brand-new XT system only a year ago, they're still going to replace it with the new console because you have a better experience, and they want it to be consistent. Now on the enterprise side, we see hospitals making 2 moves to do a better job of trying to track all of their meds everywhere all the time. One is to create consolidated service centers where everything that comes in and goes out, goes through 1 location, more like an Amazon warehouse, if you will. And the second thing is to deploy enterprise software. This is OmniSphere. This is our cloud-based next-generation software. That is cyber-certified HITRUST, and it's really the future. Because you can connect and we'll be able to connect all the devices, robots, smart devices and integrate the workflows into a single platform. And these 2 things really interest our customers today. XT Amplify comes with more than just the console, which is XTExtend. It also comes with MedChill, which is a new device, which allows us to track individual cold chain -- cold supply chain medications 1 at a time, which allows the institutions to leave those medications further away from the home base so they can be tracked carefully. Also, we have supply expert. This is a software platform that fits on top of our systems that allow our customers to attract nonpharmacy products through the supply station or on the shelves near them. And 2 services that really help customers do things they sometimes don't do very well themselves. One is manage their servers behind their own on-prem firewall and consulting services to help them redesign their workflows, called CarePlus. Our future has a lot of reoccurring revenue and new services that we call advanced services. And these are them. So IV Compounding, which allows us to put robots, experts on-site, backed up with expertise remotely to do on-site production of IVs. Secondly, we have Central Pharmacy Services which also is deploying robots and technology and experts as well as on-site people to manage large pharmacy inventory locations. And then we have inventory optimization, outpatient digital pharmacy. This really allows -- many of our institutions are putting more money in outpatient as well as in outpatient pharmacy. And so we have the ability to enhance the outpatient pharmacy with very specific digital services like Med Sync or IVR. In other words, interactive voice or natural voice language services that takes the load off the pharmacists. And probably our fastest-growing advanced service is specialty pharmacy. We go in and set up a specialty pharmacy inside the 4 walls of the hospital, and we have the experts to run and drive that. Well, we believe we're well positioned to win. We've got the right products. We believe we have the right business model, particularly the fact that we now have this duality of connected devices, which are mostly capital equipment driven and reoccurring revenue. We are well aligned with our strategic partners, and we believe that we're really in sync with where their buying behaviors have moved to and the products we have developed and the innovation road map that we already have in place that is driving a lot of excitement in the market as we discuss with our customers. These advanced services allow us to solve problems that we never have been able to solve before because it's a combination of technology and people and expertise. And this really gives us this longer sustained, profitable revenue road map that is more resilient in the future. So with that, I'll turn it over to Annie. Do you have some questions for the team?

Great. Thank you so much. And I'll start with the questions, but if anybody in the audience has a question, raise your hand, they'll get you a mic. But I thought maybe we could just start with the macro backdrop because it's something that's kind of really impacted you over the last couple of years. But it seems like, especially in the halls of the JPMorgan conference this year that there's a lot more kind of optimism around that. You've on your call, spoken to some market stabilization that's driving maybe some reengagement with your customers. So can you just maybe give us a sense of what you're seeing in the demand environment? And maybe any changes you've seen in purchasing behavior from your customers?

Yes. I think over time, we've definitely seen the incremental improvement of many of our providers, not all of them, but many of them as we move forward. I think particularly the second half of last year, we saw many of these providers probably reach mid-level single-digit margins and maybe even a little bit better. And I think as time has progressed and these margins have improved a little bit, maybe it's not all the way back to where they were, but it seems to be more consistent. Has allowed us to be a lot more engaged in projects that were shelved or not as -- were not as high priority have come back for us to get engaged with the customer. I believe that continued optimism as we move into next year will keep that engagement and pipeline high.

That's really helpful. And then I think 1 other thing that you had kind of talked about before when the market was a little bit more challenging is that it led to this elongation kind of pipeline conversion. So are you seeing any shift there or things happening sooner? Or is that still kind of still something you're seeing out there?

Well, we're seeing some shortening of that. I think as we have pivoted to the XT Amplify, which answers this issue around how do we improve the environment for our employees, particularly nursing. That seems to resonate a little bit more than maybe with some of the robots in the back end that don't impact as many people. And I think that alignment that we have now with our go-to market and launching of these products that really impact the users is much more engaged and more willing to spend money for the nurses or the broad spectrum of employees than just a few.

That's great. And we heard actually from Premier a couple of days ago that this labor issue has not really gone away. I mean it has to a certain extent, but it's still kind of very critical to their customers, their GPO customers are really kind of feeling that. For you, I think, we had initially kind of thought that like the labor shortage would be this incredible opportunity for you to kind of hit the gas and accelerate. But really what -- you did find some kind of difficulties were like the staffing didn't enable them to be able to kind of do these implementations and it made it a little bit more challenging. So how are you navigating that environment? Are you seeing stabilization? Like how do we think about labor as it relates to your business? And I would think kind of longer term, this should be a tailwind for your business as you think about the Autonomous Pharmacy.

Yes, it's actually stabilized quite a bit, I think, from a labor standpoint because we don't have any resistance to a well-planned installation date, and it impacts a lot of employees. You have to obviously get nursing onboard, IT and others. And when we had these issues around labor shortages, some of the departments would say we don't have enough people to engage with you right now. Even though we purchased the product and ready to deploy it, we're not -- we don't have the people on board. So we haven't seen very much of that. And we also have a very keen management inside the company where we measure out of all the scheduled product that we have for a quarter, how much has moved out or request to move out and that's at an all-time low. So our customers are highly engaged and willing to install the systems and want to install the systems. And so that's really given us great visibility and great predictability in our revenue. But as a tailwind, I certainly believe that long term, as these systems become more sophisticated and really are able to do the work, it will take some of the pressure off of the workforce and the labor workforce themselves. And that's our job. We've got to figure a better way to manage medications without as much nursing time or as much pharmacy time, not currently, most of it is administrative, it's not clinical. So how do we get the pharmacist, if you will, out from behind the counter or out of the basement and engage with the patient, let the Autonomous Pharmacy do the work.

It's -- you always talk about the pharmacist operating at the top of their license. And we had a really splashy presentation earlier in the week from NVIDIA, right. We got to hear about the robots and like they're going to change the world, and they're going to be doing surgery and all this kind of stuff. But it feels like a lot of opportunity for AI is removing that administrative problem so that the clinicians or pharmacists can operate at the top of their license. So can you maybe talk about what you're doing there, how you're enabling that?

Well, most of the workflows that are enabled are intervened because people have to intervene because there's not a good connection or a good enough process that connects the data. So the most important people -- purpose -- the most important item is to get the data together and connected. And that's what OmniSphere does. So then it's easy to apply AI to optimize something, apply AI to process something because you have all the pieces and you have a lot of data, and then you can drive the outcome. I'd say 2 other areas where AI is really impactful for us is robots. Robots are generally programmed to do very precise things and pick things up given the measurements for this widget on the sizes and then it knows how [ firm to depress ] and how wide to grab at everything. AI is allowing us to skip all those functions. You can see and understand intuitively how to pick that up. And generally, that's the biggest issue in pharmacy robots is the variation in types of products and units that you have to pick up. It's not one. There's just thousands. And so AI will really enable all the products to be infused into some automation process. That's the real advantage because today, you can get 80%, how do you get the last 20%, you really need AI-infused robots to help you get there.

That's great. Maybe we can move on to XT Amplify because this is really kind of a new growth avenue for you. You've previously spoken about healthy customer appetite for this kind of multiyear program. You've said it's more than just a product upgrade cycle, right? I think that's something important to highlight because you've got all these additional services with that. So can you maybe talk about within Amplify, what are you most excited about?

Well, it's a couple of things. When you go to the customer and you talk about the XT Amplify, it really allows them to -- it's the on-ramp to the future. So it's not just about what it's going to do today, but it's what it can do in the future. And that gives them the confidence to deploy it now and also buy more equipment that can be infused with that new piece. And a great example is OmniSphere is the next generation that you move from Amplify to OmniSphere, and then you're ready to go. And so that road map is 1 that our customers are really -- want to understand how they get there. They can't get their all at once. They need to take steps and so now they understand what the steps are, Amplify is the first piece. And once you're in the Amplify family, then that gives you access to new technology. The first phase of technology, we just released in April of last year. And generally, at these Illuminate events, we announced more. So we're going to continue to announce more products that connect to the Amplify. So those kinds of things drive excitement because the new products, they generally solve problems that have not been able to be solved before through some new technology.

That's great. And maybe, Nchacha, can you just help us think about how to maybe quantify Amplify as a growth driver? How do we think about the building blocks of kind of embedding that with them. Because I think you formally have some kind of long-term targets, you don't necessarily have any more. But as we think about like what is the right growth, as we think about like Amplify kind of being a key driver of that, how do we think about maybe putting that into your models?

Yes. So I think we announced during our Q3 2024 earnings call that all the products that we announced under the XT Amplify umbrella, were available to book last year. And so we said we do not expect them to contribute to revenues in 2024. But as we go into 2025, we do see an opportunity where these products. And going forward, XT Amplify will continue to start generating meaningful revenues from our business. And primarily because since we announced XT Amplify in April of last year, the feedback that we've gotten from our customers has been very positive. And so that makes us to believe that it puts us in a position where we feel like this will help us expand our footprint and market share, especially as the macroeconomic environment continues to stabilize and improve and our customers start making capital investment decisions to expand their businesses.

Great. And I guess maybe as we think about, I guess, people talk about ink to green, right, the time line of like when you start -- you have a customer say, yes, we want to do this to like when that actually translates to like revenues in the P&L. I imagine based on your different products, it probably depends a little bit. Some are probably faster than others. But as we think about Amplify, like when will we start to really kind of see the meaningful inflection from -- in the bookings, and then when will that translate to the actual revenue dollars?

It takes approximately -- again, when we book it, it takes approximately 6 to 12 months for any product that we launched to translate to revenue. And so we do expect that, again, as I said earlier, we announced XT Amplify in April of last year. We do expect it to start contributing to meaningful revenues going forward.

Okay. Great. And then with the XT Amplify kind of expected to extend the life of the XT cabinet, how do you see this program impacting kind of future cabinet upgrade cycle?

You're right. Well, XT Amplify is definitely a tailwind as we go to the XT base and they want to upgrade to the next platform that's, I think, eventually most of our customer we'll do that. But we also are driving not only XT Amplify to drive our product revenues, but expansions. Expansions into new territories that are both inside the customer base and outside the customer base. And so those 2 key drivers will continue to drive our product revenues into the future. Now we do have the tailwind of the upgrade cycle coming to an end. So we kind of have that 1 tailwind, but we have those 2 that, I mean, headwind, takes it down and the 2 tailwinds kind of offsetting each other.

Okay. Great. And then I guess, maybe just a last question on Amplify. What do you think is most misunderstood from the investment community about Amplify?

Well, I think people want to just look at it as a console upgrade and kind of box it in as kind of our old history of how we did it. And we purposely went and added a plethora of products to the Amplify platform. And this is -- this gives customers confidence to continue to deploy not only the console, but other parts of the product. So they tend to buy or have the opportunity to add on these additional products when they're upgrading the consoles.

That's great. Maybe could you just describe a little bit about the competitive landscape? It's fairly narrow, but have you seen any changes over the last couple of years?

Well, I think we've been innovating pretty hard. And I think that's been really helpful for us to engage customers and the marketplace in a unique way. I think we're -- I feel like we've been competing for 30 years in the marketplace. I feel like we're pretty good at it. And I feel like today, we're really well positioned to continue offering good value for current customers and even new customers. So -- but I think, it hasn't been a lot of changing between market share between us and anybody else, but I think we're holding ours and expanding a few.

Great. You recently announced OmniSphere. Could you just maybe describe what that encompasses and what that means for existing products?

Well, it's really the generation of the future. It's really, the product is our next-generation product, cloud based, of course, it's already as a HITRUST certificate from the [ Cyber Security ]. If you want to buy the most cyber secure product that you have, you're going to buy that product. But what does it do? It connects all of our products together with a very elegant integration platform so that you don't have separate databases and workflows are simple and easy to do. And it's scalable. You can scale it to thousands and thousands of locations. And it is the device that -- it is the product platform that will allow our devices to collect the data and analyze the data and really drive the AI. So this is the beginning of the end of the Autonomous Pharmacy, right? It starts with the OmniSphere. And then on top of that, as we will build out AI connection points, it will begin to slowly drive the pieces we need to finish that vision.

And when we think about the Autonomous Pharmacy, what -- to use a baseball term. But like what inning are we in? And does this accelerate that?

Well, I think as we get to the OmniSphere certainly is the first most important key in that cog and not only having the vision and the platform and understanding what we wanted to do. But that is the first step. And I think that we just released it to customers this December, the largest trade show that we attend, and it was just -- we just got so much excitement about it. Because all of our customers are pretty sophisticated when it comes to -- they're getting more sophisticated when it comes to tech. And that's what they expect us is the best native written, cloud-based product out there that can scale up and service any location, any kind of device without having to -- minimal effort to do upgrades and those kinds of things. Things that can be done pretty simplistically.