Omnicell, Inc. ($OMCL)

Well, good afternoon, everyone. I would like to welcome everyone here to the presentation from Omnicell. Very pleased to have the management team here today. Thank you for making the trip. You probably don't know this, but when I spent about 5 years at Baxter, so got very familiar with the pharmacy space. And while we don't cover Omnicell always sort of seen the company in and out -- customer visits and also just doing kind of the general market research. So really pleased to have the opportunity to sit down with you and talk a little bit about the business.

Glad to be here, Dave. Thanks for having us.

So maybe we just sort of start with some like high-level framing here. I mean you came out of -- you've come out of a tough period for the business and now you're seeing growth kind of reaccelerate here. Maybe just help us think about just the evolution of the top line growth rate the past couple of years and how we should think about we'll start with 2026 and then we'll talk a little bit later about the longer term.

Sure. Well, the pandemic was a big acceleration of our business and really brought in the product cycle so we saw decreased growth, probably for the first time in a long time in '23 and '24. Now we've returned to growth in '25. We've launched a new product. We're standing on the precipice of our next cycle of brand new, exciting products, both front end, back end. And we've also entered a specialty pharmacy in a big way. So the business has 2 levers now, sort of the revenue and earnings producing side of pharmacy and big providers as well as the cost containment and control of medication management on providers on inpatient and outpatient.

Yes. Maybe we could dive into the market a little bit here because obviously, you and Pyxis have been around a while. Medication Management continues to be a pretty big challenge for hospitals. So what would you say in terms of just market dynamics? Like what have you solved, what still needs to be solved? And what are your customers telling you now are their biggest priorities?

Well, just in terms of medication management, medications are the #2 largest expenses for providers right after labor. So it is something that's very concerning. And does have the duality of offering both revenue and earnings capacity as well as cost containment. So getting the meds right is important to getting the right outcomes. And sort of in that sphere, we've seen medication move to sort of a nice to have some automation products to a must-have to mission critical to having whole visibility, not only in a hospital, not only in inpatient but in outpatient as well. So there's a really big lean in to wanting a total enterprise viewpoint that can be rationalized across hundreds, if not 1,000 facilities to make sense and that is something that we see all the time as being on the docket for these customers as they expand. They're continuing to get bigger. And even in this joint geographies, which is pretty amazing. And so to make great decisions on medications means you can make the difference in your margin on your business. So you need a system that can be enterprise-wide and acceptable.

One of the things that's always interesting about a story like Comedy sell or conversations we have around pick this or this business that you always get kind of bucketed as like it's an equipment company -- but if you look at your revenue, it's only -- it's a little over half products, I think, and then the rest is software and service. So -- like what is Omnicell today? And how do you think about the framing of the business?

Great question. I mean it's more hardware-centric in the earlier days, and now it's becoming more software services centric because you just don't need a piece of hardware to manage the drugs itself. You need all the intelligence that helps you get drugs to the right place. And if you think about some of these institutions, they have 1 million, 1 million discrete locations where they're trying to manage meds to a very precise level in order to be able to get them to the patient at the right time in the right way. And with that equation of difficulty, you can't do that with people. You've got to have great intelligence and systems that really operate at a whole different level. And so it's exciting to see how AI and cloud-based systems can start to really make a dent in some of the expectations of what you can really refine in the processes.

So how are you now selling to customers is the moving to a SaaS model? Can you talk about ARR as a metric now? I mean -- how is the business model changing?

Well, there's more components on the software SaaS side more naturally. We want to take the workload of our customers. So taking the servers out of the basement and moving them into the cloud, taking cybersecurity, taking the management of upgrades and all those things, we want to take that on for our customer because it's just better but that -- those are fees and those are reoccurring fees. And then there's a connection fee to that cloud base as you need storage or compute power, or other things associated with it. So we're able to move more of our services along with the hardware. You still need the hardware, but you can not only purchase it, but lease it or in some cases, actually rent it in order to get the results you want. And so our businesses -- people like to think of it as when is just the next product cycle, but it's so much different than it was even 5 years ago.

And I would think on the software side, obviously, the pace of use. So are you equipped to deliver over-the-air upgrades and of software launch...

I mean, great question. In the on-prem equipment basis, you can deliver about 2 software upgrades a year, maybe a major and a minor -- as we move to the cloud, we have upgrades every 30 days. And so our ability to accelerate innovation, accelerate results and provide more services for our customers, what we're actually doing the hands-on work maybe of some of the optimization and other things is more enabled by that.

And just operationally just to make sure I understand it. When you're taking a awesome on-prem to cloud, are you actually doing that? What is -- what are you actually moving and what's on the hospital and what's on you?

Well, we're actually taking their on-prem equipment and moving it into the cloud and connected it to our Amysphere. So it's all our product at that point, it's all managed by us. And that's a huge relief from the institutions. So they are paying money today. They obviously manage on site, provide computer space for it. So they're redirecting those dollars from internal to external to us. So that's a new revenue source for us. But probably more importantly, it's a better customer experience. It also means that as we deploy different types of equipment, not just sort of the main cabinet that goes on nursing floors, but other kinds of devices they become plug and play. You plug them into the network. They get lit up, get connected to the omnisphere in the cloud and then you're able to aggregate all that data and workflows in a single place.

And then I want to jump in on some products in the business in a second, but 1 more strategy question. When BD bought CareFusion, obviously a while ago, part of this strategy was sort of comprehensive medication management and the sort of end-to-end -- the pump is going to call up the dispensing Cabot and tell what's need and somehow it's going to get from there the pending cabinet and the basement up to the patient. And it was -- it kind of made sense sort of -- but 1 numbers sometimes. But as you think about your positioning in the market competitively, do you see -- how do you think about end-to-end medication management and where you play?

Well, medication management is important. There's a lot of medication management processes that go on the nursing floor, there's a lot that go down before meds get to the floor, like robotics for mixing and compounding and fluids management is a big piece of it. And look at the specialty drugs we have coming queued up, 25% of those are going to be infused -- and so having products and services that help enable that in institutions that are not ready for that kind of growth is important. And I don't think we want to own just every space as long as we can rationalize and connect into that space, that's the most important part.

Okay. let's jump into some of the products. Let me talk about Titan X. You've talked about that as your third-generation platform. Talk -- tell us a little bit about features and benefits. And what are some of the the differentiators that you're bringing to market here?

Well, I hate -- and I want to, it's just -- it's really cool. It's not just so it's an upgrade and improvement over the old. We started with a clean sheet paper, started all over -- and it really predicts what people are going to use the system for. So when a nurse comes up and it's time to get meds up for a patient, it predicts what patients you most likely wants. It's not a cloud here that's not closed. So it already has it queued up and it says, this is what you want. 2 clicks and you're in and you're out and then you have the meds flowing up. This is versus the old way of I want to get this patient and I want to get this drug and this drug, you don't have to do that anymore. You can see it's just so easy to use. So all of this predictive setup really releases the nurses from burdening them down with doing all these tasks individually. And the same thing for pharmacy techs when pharmacies tech center act for the system it actually gives them a menu of things they need to do at that moment when they walk up. And this kind of tech really allows nurses and pharmacists to be quickly in service on how to use the product. They don't need a lot of training. It's very intuitive. If I were to come up and just ask you to use the new system and say, take out 3 drugs for Rainy, it's 90. You could instantly do it. If I ask you to do that on our old system, you'd say, well, you need to send me the training. I don't know what to do at this point. So -- this is a huge step function past where we've been. And the fact that it's operating in the cloud as well as a very strong edge system, it really allows us to be able to implement new changes, new innovation faster than we ever could in the past. And that's what I'm excited about. I used to hate going to see like 10 customers and boy, they all want this 1 thing. Yes, let's put that in the road map. Okay, that's 2 years from now. Now it could be 60 days from now or 90 days or 180 days from now. It's just -- it's -- the business is fun again. It's almost like we're starting over and it's we're inventing new stuff and moving fast.

And for Titan X, you might take back your comment that even I can figure out everybody has been trained well you SP1 Going to ask that question. When I want to ask about my next question, like how does it actually work? Like how does it know how does it ingest the data to figure out like that I'm going up at 9:00 a.m. to pull a script for Andy, is it -- it's actually like visualize this for us.

I walk up to it, and it knows that it's me and knows that I take care of patients I don't identify at some point as you. And then you as a nurse had been either assigned or usually assigned certain patients. And so you've either taken a met out for that patient already or most likely have these rooms when you come there. It knows all these things. Now it may predict something that's not quite right, so you may have to adjust it. But most of the time, as you use it more, it gets better and better and better. And all patients have med scheduled that haven't been fulfilled yet at a certain period of time. over a certain window. So it's pretty easy to predict what you're there for and you need to apply those meds in order to be medically correct and getting those meds to the patient at that time. So it sounds space age, but it's pretty intuitive, and it's it's probably 1 of the areas that we get the most amazing feedback from is we don't really have to sell them on it. We just said, try this, try that, what do you like? And why do you like it?" -- and it's very satisfying to see people use it.

And how do you think about the product development and needs when you go through different sites of care, whether it's a hospital pharmacy on the general floor, in the ICU, I don't know if you're in the retail pharmacy. But how do -- do you need different platforms for each setting? And how do you think about that fee...

Different settings for each of those, the ICU ER, general MedSec floor, even certain other kinds of floors, you may need different dynamics based on additional protocols that need to be followed, but all those are customizable. And what's really cool about our innovation center and in our Executive Briefing Center, you can go set up all of those from a corporate standpoint and then push a button and roll them all out before they're even shipped out. And then it's literally plugging it in and provisioning the system of on-site lights itself up, and it doesn't take a lot of people on our side or their side to get the system going. And physically, you just need to transfer the meds over. So this is just been in this business so long. We've been studying these problems for so long. We finally to say, let's let's just kill all these problems off and let's make this easy because the biggest part of health care adopting new technology is how adaptable, how much pain is it cost to change. And if you move the pay to change, you're going to get people taking the tech all day long.

Okay. That's a good segue to kind of jump into the business a little bit. It came out of the gate strong you exceeded revenue expectations as well as all profitability metrics. You kept revenue guidance unchanged for the year, but not reflected the earnings outperformance on the bottom line and the balance of the year. Talk maybe now it's a little bit of a reflection, Give us some thoughts contextualized Q1 and kind of your decision to leave guidance unchanged.

We shared with the markets at the Q1 earnings that we felt that we were still within the range of the full year revenue being a quarter end. We're partway into the year. But we definitely saw some early signs that showed profitability following through for the rest of the year. A couple of things. One, we've been pretty disciplined on our spend management. And so we're starting to see some early wins there. In terms of margins, we saw favorable gross margins in the first quarter, a little higher than the upper end of the normal range. And so as we prepared our full year guidance, we brought back to a place that we thought was more reflective of a full year. So solid Q1, high end of revenue, beat on earnings, and we were able to cascade the earnings component, a big chunk of it forward throughout the rest of the year.

And as you think about the revenue side of it, how much of this was -- while it's 1 quarter in maybe there's some market uncertainty out there, let's see what happens or there was something onetime in Q1? I think we have good visibility to the year being within that range.

And I think we find ourselves trying to manage through from the end of the cycle of XT, which is now in year 10 to the entrance of the new product type NXT, which is in year 0. And so we want to find a thoughtful, smooth management through -- and what we found for our employees and for our customers is the consistency of implementation within the customer sites is really helpful for managing our cost structure and managing our customers' experience both of which are important to us. I can see the intuitive thoughtfulness and guidance coming through. I don't know Jamie and Marsh will trade you on expectations management. But clearly, I can hear it.

So maybe just on that product cycle transition. Handoffs are really tough when you go from 1 1 product launch to another in any business. What are some of the things that you guys did to prepare to make it as smooth as possible? And have you contemplated any hiccups in that transition?

Well, I think we -- last we transition when the G-Series to the original XT Series. We made some mistakes and we had a lot of learnings. One of the mistakes is we had a hard cut off pretty quick on our G Series. And we really kind of forced all customers to quickly move to the new series. And a lot of them were fine with the G-Series and said, look, I'll make my decision to move to the next generation in a couple of years. I just want to run my operation. I don't want to disrupt what I have or my expansion plans. So in this case, we're still going to be able to sell our old Series XT as well as our Tinexta. It just depends on where you are as an institution. We'll make it as easier to facilitate both, but we're not going to cut off immediately, both series or start to try to reconvert old orders into new orders, those kinds of things unless the customer really, really wants to. And that will make us smooth the transition instead of having salespeople go back and redo orders and things like that -- and secondly is giving customers not just how does the transition work for the hardware, but how does all the software work and setting up a 3- to 5-year plan so that they can really understand where each of these pieces come into play and what options they have and putting a strategic plan together with the customer that works over the next 2 or 3 years and making sure it meets their priorities. So having a very specific plan that that allows for the rollout of product where they want it and at the speed that they want it. And that's 1 of the things that particularly Baird and the team have brought into the company is this more consistent rollout steady quarter-to-quarter without a lot of fluctuations, which gives us better cost, better quality and customers are just the higher expectations for both sides is exactly what's going to happen. And then it does happen when it does that way. So -- and I think we're really set up for the transition, and we're giving you plenty of time to announce with plenty of beta testing time. I think we've done a lot of things a lot differently than we've done in the past. And so it's exciting as every quarter goes by, that we do the check boxes and then move on to the next set. SP1 Excellent. Maybe just coming back to the question on guidance for a second parked 1 there that talk about having a lot of visibility to the year.

Maybe just unpack where that -- the source of that visibility, how far in advance do you really kind of view on backlog converts to revenue and what are some of the leading indicators that you watch to kind of reinforce that confidence?

Yes, I think a couple of things, David. The team has done a really nice job of engaging with our customers. It's a way to not only sell the product but to actually set up the implementation and the ultimate usage experience. That increased engagement has given us greater clarity on scheduling, which has allowed us to manage our workforce accordingly. So that experience also provides line of sight during the course of the year, which is really helpful in satisfying those customer needs.

And how far in advance do you 1 does you close in this visibility to go up? Or is it pretty...

Yes. So as you would anticipate, you start to look 1 to 2 quarters out, you've got a high degree of visibility as you get to 3 to 4, you have a good degree of visibility and now in a thoughtful, consistent manner 90 days out, 180 days out, it's really nice clarity in the business, and that allows us to set up to satisfy our customers. And maybe just on the market for a second. You've talked about a $2.5 billion annual kind of refresh cycle -- 10 years refresh cycle.

So the $8 billion to $10 billion ADC market you're talking about. Is that cumulated over the -- over the duration -- over the duration -- and is there any I think BD is about to go through a product or refresh the product refresh. Is there any kind of like abnormalities that occur in these cycles? Obviously, you had COVID, but -- where do you think we are in the kind of ADC replacement cycle?

The ATC replacement cycle is prime over the next several years, where the other party -- primary party in the space has market share leadership -- and we've been steadily chipping away at it over the years. They have a significant number of their hardware units that are coming off lease and are subject to renewal. And then we are entering that year 10 of the natural refresh of our hardware. So as I look forward over the next 2, 3, 4 years, I think it's a really exciting time in the space. And I think the innovator mentality that's very focused on the customer experience should prevail.

Maybe talk about a little about robotics and AI. I think you just hired clinical -- someone to lead unit just higher clinical leadership with Perry coming into the organization. Maybe talk about your vision for that opportunity, what you're hoping gets accomplished here? And how are you going to measure success?

Yes. I think we have 2 primary road maps there. One is to use AI to supplement faster, better, cheaper work, whether it's engineering or customer service. We have initiatives everywhere in the company, everyone in the company must be trained in AI and how to use it and operate it. It's not just a certain departments. And so we think we can drive efficiencies and better returns. So we're all learning at a pretty fast pace. But we really think native genic AI is really important to the business. And so we have a separate stream working on that. And we believe that, that will actually help us accelerate new products and new services that are solution based. They're just not services, we'll just do the work for you. And to me, that's really exciting. And because you look at most big hospital providers have shortages in their tech spaces. They don't have enough tech to do the pharmacy workload required to meet the operational needs. And so if we can move some of that off their plate, with AI and with robotics, I think they're very hungry. And a lot of the -- some of these tasks are pretty simple and easy to do or or don't take much work if it can be supervised and reviews from a quality standpoint. So I think we'll be able to provide actual solutions and workload movement from our customers.

And 1 of the things they've always struggled is like how do you monetize a solutions-based business, like it makes a ton of sense for the customer. But how do you -- what's the business model?

Well, there's 2 or 3 things. One is, as you take off workload, you pay a fee and then they pay you a consumption fee based on not so much people time, but eventually, it rolls into tokens and compute time that you're providing on their behalf to drive these solutions. And I think that I wonder, maybe you would be a better advice on this, but I wonder if that's kind of going to be sort of the currency of the future is really how much compute power are you using and how much expertise or domain expertise do you provide that can give you a view on the solution that no 1 else.

Okay. Well, staying tuned on that and getting some of our updates. Maybe I just -- I want to turn to the P&L in a second, but -- and live and health has been a little bit of a drag on the SaaS business. Maybe just unpack for us a little bit what are the factors contributing to that? And then what turns it around?

Well, retail is the whole sector has been sort of a drag these days. And we have been retooling our business to meet more of their needs. And where there's a little bit of a crisis, I think there's a pretty big opportunity. So we've reformatted some of our solutions and reformatted some of our engineering to provide new solutions to these issues that these institutions have, particularly to be more competitive in the marketplace with the likes of Amazon and so forth.

Is this a strategically important business to you?

As long as it's growing and it's increasing our revenue, it should be. But our providers do use retail and retail, not all the pharmacies have other than specialty have a strong retail strategy. Some do and some don't.

Okay. Maybe just toggling over to the P&L for a second here. I mean the gross margin has quite a bit of variability in it between that 43% and 46% level. Help us think about like the the drivers there? And should we -- the quarters are always important. But how should we think about sort of the broader gross margin trend?

I think we'll always see some variability from quarter-to-quarter. The drivers of that largely are about which products we end up placing and installing during the quarter and recognizing revenue. And the other part of it is what customers did we implement at what was our strength in negotiation in terms of ultimate pricing there. So we'll see some variability. A couple of things I'd point to 2025, we saw an increase in software field software upgrades. And so that impacted our service margin. We'd anticipate seeing improvements in 2026 over 2025 as a result of that. As we enter our new product offering in Type NXT, we'll be introducing it at a modest premium in price, we believe that we'll be able to expand margins as we work through the initial ramp up and scale in process on the manufacturing side. So over time, we're definitely focused there. And you brought up token costs and your cost is now coming up as like a thing on our earnings calls, not just in IT hardware and software, but we heard about heard about this from GE Healthcare. We heard about it from Canon, a few other players. How are you thinking about sort of the surge in cost of chips and memory and other key inputs in while we're on the topic of gross margin? Yes. I think it starts with our supply chain team. They've done a really nice job of building vendor relationships that allow us to protect the resiliency of our supply chain. And by that, I mean our ability to procure the goods necessary to deliver product to our customers timely. They've done a really nice job there. We look at where we can qualify new vendors and we look at opportunities to advance buy when there's periods of compression in the supply availability. And so we'll look to continue to manage that. But I think it starts first and foremost with a team that is leaning forward and trying to address this proactively. So it's something we're all going to face in this industry, but it's something that we're doing eyes wide open. But how much can you do if memory prices up 40% I think it starts with -- memory is a relatively smaller component of our cost. So largely, our cabinets are steel and frames that are created. But there is an electronic component to it. that we have to manage through. But this is not the core capability or the highest contributing cost is memory. Now fluctuations in memory or in chipsets, definitely will cause an impact in the business, but we're managing our way through that.

Okay. Maybe just lastly on EBITDA, maybe it's just an artifact of timing. I think if you look at your second quarter adjusted EBITDA guidance for a little bit of a step down versus what you produced in Q1. How should we think about kind of cadence of EBITDA?

I think I'd frame it more as Q1 was a bit of a step forward and Q2 is a step into the normalized range. By that, I mean Q1, we were at the higher end of our gross margin. So you had a talked about 43% to 46%. We're at the upper end of that. The second thing that we saw was we saw a management side is nicely. And sometimes that means putting up some toll gates before spending goes through to make sure it's the appropriate return that we would anticipate -- so we signaled to the market that a portion of Q1 was higher margin on products and mix and a portion of Q1 EBITDA overperformance was a result of delaying certain purchases that will be made over Q2 and Q3.

Okay. But no holding back on growth-related investment?

No, absolutely not. We're a green light on the sales force, the competitive front and bringing both Titan XT and Omni Sphere into the marketplace. So those are clean green lights. And it's the back office and the other aspects of our business where discipline is important and warrant it that we're being a bit more mindful.

Excellent. Maybe just kind of close on capital allocation. I mean you've got this process if you had to convert, then you were buying back stock and now you're in a pretty good position. How are you thinking about use of the balance sheet?

Well, I think on the maker buy decision, I think for smart products, we think that we can buy and integrate quickly even that are quickly accretive and fit in the salesperson's bag right away and our in some cases, already in the market. I think it makes a lot of sense to look very closely at those. I think that -- and in both spaces in specialty and in our row inventory business, it makes sense to look at those, particularly if they can be connected into Amisphere. That's the key because as you connect in more products, more systems, you're just able to collect and aggregate the data and and fix it out. But 1 on operating leases. I don't know if you want to. Yes. I think I start with the use of capital at the places where we believe we have the best right to perform and win for shareholders. That's in our core business. And what we learned over the back half of last year is having an on-balance sheet, easy to offer leasing or rental program for customers kept us in the game longer on competitive opportunities. And so if we have there, we've done it historically. We want to lean into that. of return of capital through the expansion of the top line and profits that come with it. So we're going to spend more time on leasing going forward and making sure we're meeting customers where they are on whether it's capital sale or whether it's leasing sale.

Excellent. Well, I think we're just about out of time. Maybe I'll turn it back to you to any closing remarks here, you obviously had your Q1 earnings, you're at the conference meeting with investors, like what's the message you want people to walk out of here with as we kind of gear up for second quarter earnings.

Well, I would just say it's a Europe for the year to the next year, it's exciting time to be a part of Omnicell. We've got the whole leadership team. Probably our AAA leadership has changed over or been remade over the last 2 years. have the best management team ever ready to double the size of the company as we start this next growth and innovation Sprint that we're on. It's just a great time to be at Omnicell and I think all the employees and people who have been making -- getting us set up for this run, and it's just really exciting, and it's attracted a lot of great management people. We just hired a new leader to take over for our specialty season veteran in the arena. So it's just we're set and ready to go. And so this is the start.

Excellent. That's a great place to leave us. And thank you for making the trip to Miami, and we look forward to getting the next update in August.

That's great. Thanks for the question. Thank you.

Thank you.