Okay, well, welcome everybody. My name is Stan Berenshteyn. I cover digital health at Wells Fargo. With me today is Omnicell. From Omnicell, we have CEO Randall Lipps, CFO Nchacha Etta , and the Senior VP of IR, Kathleen Nemeth. I'm gonna hand it over to Kathleen briefly.
Thank you, Stan. Good afternoon, everyone, and welcome to all of you here with us today in Boston, and those of you who are joining us online. We are delighted to be with you here today. We have so many exciting things going on at Omnicell, both from the product innovation side, as well as a commitment to strong financial performance. Before we get started, I do wanna remind everyone that we will be talking about forward-looking statements, and please see our most recent filings with the SEC for a full list of risks. Now, I'd like to turn it over to our Chairman, President, CEO, and Founder, Randall Lipps.
Thank you, Kathleen, and thanks for joining us today. You know, Omnicell is really a company that's really focused on being the strategic partner for providers. We've been doing this for 30 years, really helping providers manage medications throughout the continuum. We're really excited because we've recently launched some new products, which we'll talk about in a few seconds here, but also, we're transforming our model. We've been more of a traditional capital equipment sales with service, break/ fix, following, but we've expanded our services to include advanced services and outpatient services that really change the profile of our P&L. In fact, this last quarter, we were 50% recurring, 50% equipment sales. We've got a strong balance sheet, and we feel we're really poised for profitable growth.
Now, our goal is really to transform the pharmacy, and what I mean by that is we need to get pharmacists out of the basement and from behind the counter and getting them more engaged with patients. This really means that we have to focus on automation and technology and services, along with devices that help medication practices excel wherever healthcare is performed. Obviously, medication is everywhere in the healthcare system, and it's so important that those get practiced efficiently, effectively, cost-effectively, and safely. We have a lot of products that work in these continuums, and we continue to be on a multi-year innovation roadmap to continue to drive our growth. We think we've got the right business model. We think that we're doing really well with our partners.
We have about half the largest providers in the country are our customers, and we feel like we're growing our advanced service revenues, double digits, which is where we wanna be. And we're really focused on getting innovation moving, not just innovating, but accelerating innovation. We have a new innovation center, new processes for innovation, new partners for innovation. We're using AI with our programmers. We are expecting a lot more return out of our R&D dollars because of these new technologies that we have applied and new processes we applied to the innovation roadmap. We recently announced XT Amplify, which was launched in April. This is the on-ramp to our next generations of product.
While it does fill the gap as we end our current cycle, product cycle, upgrade cycle, where about 70% of our customers have already booked their upgrade or installed their upgrade over the last seven years, so we're at the end of this upgrade cycle of equipment. We've added the XT Amplify as a way to going back to our customer base to say, "Look, this will help you with better cybersecurity, access to more technology, and is the roadmap that allows you to move forward to the next generations of technology without having to do major forklifts." So this is the beginning of a long roadmap.
Many of the customers, particularly if they're new, that we bring on board with us, we not only get them going on the XT Amplify, we take them behind the curtain to show them how getting on XT Amplify will get them to the next generation of products, and with XT, we did our first Amplify. We did our first group of services and product deployments, new console upgrades, which provide better and faster user interfaces and cybersecurity. Really, access to a platform that really allows the rest of our products to get connected in, robots that work down in the pharmacy, carousels, other solution sets, so you really need to get to the next software to access these. MedChill, which is a very specific product for helping with cold supply chain storage and retrieval.
Really important that you be able to control these at the unit level, dose level, in order to feel confident that you can deploy meds all over healthcare systems, both inpatient and out. And then some other services around supply, service scale, and change management services we call Care Plus. We also just last month talked about a new service that we launched around central med automation services connected to centralized distribution centers. So there are about 50- 70 hospital groups that either have or are involved in spinning up centralized distribution centers to service multi-hospital locations, multi-clinics, and outpatient operations.
Many times, they reduce significantly the footprint they have in each of their hospitals to move those assets to the central locations, and it provides economies of scale, reduction in cost, better visibility around inventory, superior shortage management, and better compliance on regulatory because all of the drugs are managed and controlled from an enterprise and central location. These take a lot of effort, usually two to three years to spin up, but the returns have been significant, and we have been involved in these, as many of these are selecting our robots to fulfill the automated picking piece. Many are designed such that once meds enter the process and begin the robotic journey, no human ever touches the med until it is actually dispensed to a patient. Extremely accurate, extremely safe, extremely cost-effective.
And then, finally, just on the last slide, wish we had a little bit better visual here. This is our largest installation in Lexington, Kentucky, that has four of these robots all lined up together, connected with conveyor belts, sorting processes that deliver the meds to the bins, that then get directly delivered to the hospital, to achieve this really next generation of processes. So with that, I'll turn it over to you, Stan.
Great. Well, that was very helpful. Maybe we can start with the thing you just mentioned, the central med automation service. So it seems like it's built on the XR2. Can you just tell us, besides it being a hub-and-spoke model that you're not selling, what's new with this announcement? Is it the way that you're selling it? Anything we should be considering?
I think, yeah, obviously, we're selling the hardware, which is important, but really, we're selling the capabilities and processes to enable that. And that means people on site. It means a lot of consulting and insight from us on how to set these things up in order to pull this off in a timely way. And then there's a lot of change management goes on. People are fearful that their main pharmacies were being reduced in size on-site, and that it could possibly be, you know, when they need a med, they may not be able to get it. So, you know, going through those change managements, how to cycle the meds, how to do all the processes and get everyone comfortable to throw on a switch, is so important as we move forward. The
And then we also enabled some new feature sets that we've never had, that really are only, consolidated service center-specific, being able to roam around a big consolidated center with mobile devices, tracking devices, to make sure you can access all the meds, whether they're in cold storage, in an IV room, or, placed inside a big robot process.
Okay, now you've discussed that you're at the end of your XT upgrade cycle. You announced a bunch of products as part of your XT Amplify platform. How should we think about your go-to-market strategy here? What are your priorities from these products?
I think the XT Amplify is really a gap filler. One, it allows us to extend the life of the products for our large customer base that's already bought them or installed them. It's a confidence builder for customers who have not upgraded, that when they upgraded, they're getting a platform that we are investing in. We've already announced products, and we'll be announcing more products that extend the value of the XT Amplify platform. It's a great platform, REX, to take to new customers because new customers are concerned about they're gonna have a multi-decade relationship with us. Not only what do we have, but what kinds of innovation can we attach and expect on these platforms?
And as technology gets faster, easier, AI, people are expecting these systems to have, you know, automated visual systems, RFID, all the things that are out there that can now more easily be implemented and expected to allow you to get 100% visibility and the tracking of meds as they flow through the system. But the Amplify is not just an extension of our current XT platform, it's the beginning.
It's the first step of this major platform roadmap that as we go through time, we will update the software but not the hardware, and then we'll update the hardware but not the software, so that we can bring customers along, and we can monetize those customers in a succinct way that isn't disruptive to pulling out hardware and sticking hardware in and not be as captured to the capital equipment cycles that we are very tied to today, or less tied to today, but we want to be less tied to in the future.
Right. So if we think about maybe just narrowing the topic here onto XT Cabinets themselves, right? So the product that's associated with that is XT Extend, right? You just mentioned that the XT Cabinets that you had debuted, I think, in 2017, you're now 70% adoption rate there towards the tail end. This is year one of XT Extend. Can you give us a framework of how to think about when are you gonna get to 70% adoption of XT Extend?
I think it's a multi-year question. It's not just when is the XT Extend gonna get saturated. Probably as we move forward with Extend, there will be additional products and pieces that come along with that that allow you different options to upgrade without doing the XT, but maybe doing something bigger replacement cycle but works with the XT Extend. So it's both a gap filler and an enabler that allows you not to lose your investment in some of the products you have today. But it also enables you to pivot to next generation products without losing as many capabilities as you might if you did a whole hardware swap for that one piece and have to spend all that money at one time.
It's something that I believe that our customers are really in favor of spending consistently over time with us and not having these, you know, big budgets appear and then go away, so we're trying to synchronize our development and coordinate our development so that we can get that consistent growth in earnings.
Okay. And then in terms of XT Amplify adoption, this is year one of you generating bookings for this product. Can you just tell us the clients that are demanding this product, any thematic call-outs there? What type of clients, large, small, or did they get Extend a long time ago?
Yeah, I think, you know, obviously, the customers that have had XT the longest are probably the most prime segment for this product because, you know, they can gain the most. They have terminals out there that have been out seven or eight years. They get worn out when they get pounded on every day. But they probably also need the better cybersecurity than what they had originally. They need the faster chips, the more security chips embedded in those, so that it means more value to them immediately. But a lot of times what happens as we go into these accounts, and many of these accounts still have some of the very old G- Series that need to be upgraded.
So they'll go ahead and upgrade those with the Amplify systems, but then they'll say, "Gee, I wanna upgrade the rest of my XT platform so that they're all consistent, and I can get access to the same reporting processes and technologies to spin up the platform." So many times we may have people replacing consoles that are only two years old, but that's so that they can have the consistent platform for all their space and pharmacy constituents.
Okay, Nchacha, I wanna bring you into the conversation. You know, obviously a lot of changes past couple of years. Can you just bring us up to speed in terms of where you are in terms of rightsizing the organization? Where are you in terms of cost savings, synergies that you're, I guess, trying to capture? Are we at the tail end of that, or is there more work to be done?
Yeah. Yeah, as you know, one of the first actions when I joined the company was to rightsize the organization through a reduction in force, and we've done a couple of those over the last year and a half. Secondly, or recently, we announced the winding down of our robotics operation in Germany. That is in the works. It's being fully executed as we speak, and we made an announcement last quarter. We've also at the beginning of this year brought in a consultant because as I came on board, I really wanted to make sure that from an operational standpoint, we're very efficient as a company.
We brought in this consultant who recently completed the work, and some of their recommendations really went to validate what Randy just mentioned, our multi-year innovation strategy, which will be a conduit for our growth over the next couple of years. And so all those actions, including one of the most important things that we've done in our culture, so that I have tried to inculcate into the Omnicell culture, is this continuous fiscal discipline model, where you know, we're very prudent with our expense management, and it's not just a one-time reduction in force or cost takeout action. It's really how do we continue to operate efficiently as an organization? That's it. The organization is really embracing that culture, and so we feel really good about where we are.
Of course, all of this is geared towards improving our, you know, top line and profit.
So going forward, investment, you're gonna be very prudent in terms of how you're deploying capital, but most of the changes are in the rearview mirror. Is that fair to say?
I would say so, but again, it's an ongoing process. It's part of our DNA at Omnicell going forward.
Okay.
-to make sure that we're operating very prudently. Yeah.
Sure. Will you share with us, expectations for EBITDA margins over the next couple of years?
Yeah, I mean, you know, you saw our EBITDA margin, our gross margin grew by 440 basis points in the second quarter of this year. You know, that's just the beginning of this process that's focused on improving our EBITDA margin. But, you know, as we invest to run this point, as we invest in this refresh multi-year innovation program, as well as continuing to manage our costs prudently, we strongly believe that it will help contribute to our overall improvements in EBITDA margin. And also, we continue to invest in our advanced services portfolio. Today, it's almost 50% of our business and growing double digits. So as that business continues to, or the portfolio continues to scale, we will see an improvement in our overall EBITDA margin.
Okay. And Randy, I wanna go back to your robotic business, maybe more on the IV compounding. So we've seen some regulatory headwinds there. The repertoire of the robots may have been somewhat limited. The ROI maybe has been underwhelming. You know, what are you doing in that regard? And maybe the demand that you are seeing, where is that coming from? Even though there's those issues, where is that demand coming from?
I think there's a strong demand for IV automation, both automation you know, full automation and semi-automation, as healthcare systems deal with both shortages and, you know, efficiency plays by compounding on-site versus buying outside the organization. The issue is that as these systems have become more apparent, the FDA has stepped in and given some pretty strong guidelines on what the operational parameters of these robots can be, and how long the shelf life of each of these compounds can be before they're no longer valid. So we have had to redesign our programs and our robots to deal with these additional constraints. It's not that we can't, it's just that our robots weren't ready to deal with so many different SKUs.
That's because now, instead of running a long set of one SKU for a long period of time, we have to do multiple SKUs during the day, and that makes the robot less efficient. In order to get the ROI, you've got to redesign your robot software in order to meet those conditions. We're in the process of doing that. We've got sort of four key targets. We've made the first two targets. We've got two more targets to make before we get to where we really wanna be. Then we've gotta add to the formulary of the things that we can compound. But people want these. We continue to take orders, but we've had to invest more in the product line before we can more widely distribute it.
We're sort of minimally distributed today to early customers, and we hope we can move into the next stage as we get through these next key target dates.
If we assume there's resolution on this, well, one, can you give us a timeline for resolution of these other two targets? And two, is there pent-up demand as a result of these elements that are kinda not resolved yet?
Yeah, and we still have a good amount in backlog. I think we'd probably get more orders until people are kind of waiting to see us hit these next targets. And these next targets really don't come to full fruition until next year. So, that's when we hope to see good progress.
Okay. And Nchacha, I wanna go back to margins, maybe on the gross margin line. So you have made progress there. Can you just walk us through where do you expect to see gross margins expand to over the next couple of years? I know advanced services is where you're seeing growth, probably get leverage there. On your product revenue, there's a lot of fixed costs, right?
The trajectory there seems to be a little less certain. Can you just walk us through how the, those, you know, puts and takes impact gross margin trajectory over the next couple of years?
Yeah, look, we're very, we're very excited about the multi-year innovation program that we've embarked on, because, as you know, some of those products are very high margin. And so we do expect that as the business continues to grow, our innovation program continues to grow, we will see an improvement in our gross margin. And XT Amplify is an example of, you know, the improved margin. So as we continue to make announcements similar to XT Amplify, we will see our margins, our gross margins then continue to improve. Also, to your point, you know, the advanced services business continues to grow. And as that business scales, as we invest in it and the business scales, we will see our gross margin improve.
And so really, we feel very confident in, you know, the path that we're going with this combination of factors. But transitioning to that advanced services model also gives us an opportunity, you know, recurring revenue standpoint, which, as you know, is a very strong model and is very predictable.
Okay.
Can I add?
Yeah, sure.
I think that, you know, we think we should see our gross margins kind of return to historic, more recent historic-
Yeah
... ranges in the past, where you have the right balance of hardware and software. As we go forward, I think if you kind of compared Q1 to Q2, there were quite a bit of difference.
Yeah.
Most all of that is just in the mix, and the mix for Q2 is more like what we expect to see going forward, without being specific.
Okay. Randy, so last year, there was a focus on improving contract terms. I think in order to help offset some inflationary pressures, possibly improve some visibility in terms of implementation timelines. Can you just give us an update on has that worked out in any way? What progress on those initiatives?
Yeah, that one of the things that really, we had to suffer through in the pandemic, and particularly kind of post-pandemic, was the nursing shortage. And while we were making good progress on orders, we had a lot of disruption on when people thought they wanted to install to when they really did install, and that would push revenue around and out. And so we've reconstructed the process when we go in to take an order from a customer, upfront, to get full commitment at the right levels in the organization on a installation date. That's very critical to getting the right resources on site, getting the installation done on time, meeting our revenue commitments. And what we've done is, we've reengineered these processes, we've seen a huge drop in the variability of the amount of revenue where customers request a change from their original date.
It's very, very small. It used to be as high as 10%-20% in a quarter, and it's, I don't know, it's 1% or 2% now. It's almost nothing. So when we set up a schedule, we have certainty that those systems are most likely going to install today. The environment in the hospital is obviously different, but you don't have the huge lack of nursing. Things are more settled down, but really, that gives us a lot of confidence, and so we've been using this new approach to really set us up to win, not just in the quarter, but to win the next three quarters. We usually have about three quarters of planning that go into process, the install date, install date for the technology.
You realize that with 50% of the business recurring, there's not much of an alpha on that change of the recurring revenue piece. It's pretty... You know, it's gonna trade within a pretty narrow range of where we think it's gonna be and where it does stand. The biggest piece is the installation piece of hardware, and now we really feel that we've got that piece. Not only is it good timing, managing the resources right, the customer experience is much better. And in some cases now, we are charging the customer for installation, which is new. We want to really say, if there's a lot of change management that gets to go on, you really need our change management consultants to come in and provide a handholding experience to make sure you get the ultimate experience in the install process.
That's really key. That kind of attitude has really raised the level of quality, predictability. Employees are happy because they're not running around, being switched from one account to the other. We're able to train, put the right resources on site. You know, we've really taken this time and this dip to get a lot of things right, and that's one of the ones that we have just hit the ball out of the park on.
Helpful. So most of your bookings is indexed to the second half of the year. Past couple of years, there have been some issues in terms of visibility, where your expectations at the start of the year really did not pan out once you hit third quarter, especially the fourth quarter, when a lot of your bookings are in 4 Q. You know, as we sit here today, how confident are you in your bookings guidance? Do you have any insights you can give us?
I'd say we're confident in our guidance. I mean, we raised our guidance, so that's usually an indication of confidence. I think we've also introduced new go-to markets, new sales process, new people, a lot of things that we are seeing better than expected results in, in the first half of the year. We see a pretty good reflection of those things happening in the second half. You know, it's really good. The Amplify is running ahead of our expectations, and it's not just engaging on the sale of Amplify, but also engaging on other products and commitments that the customer has. Gives a reason for every single customer and every sales rep to go into every account and talk about the future, starting with the Amplify.
And so that's what's really we needed to help us kind of bring the predictability back. Because a lot of those discussions start with point of care, point of care is the most predictable, easiest to understand when it's gonna happen. And usually with those kinds of sales, that's when they add on the robots and the other pieces to those larger events. So I think we've got it right, and I think we've got the go-to market correct to give us that good confidence. And I think everybody knows the health of hospitals and providers is improving. There's no question about that. Not everybody, but it's definitely going the right direction.
That's helpful. I want to ask about Becton and Pyxis. I think they spoke recently. They had very positive things to say about Pyxis that's coming up. Their new product line is launching next year, I believe. How do you- how are you positioned against that? What are your thoughts about the competitive landscape, especially as we head into next year?
I think, you know, we've been competing for thirty years, and so I think we've been successfully taking our fair share of the market and evolving. Of course, BD is a strong competitor, but, you know, this is all we do. We can't just be at parity in order to win. We've got to be better in order to win, and that's just about on every aspect, product, experience, the quality, everything. I think that I feel really good with our position. I think that we continue to win in the marketplace. While this is an announcement on timing, it's not a new announcement.
And since that announcement was originally made, we have garnered new customers to move to us, and I think that's an indication of confidence that they like the XT Amplify, the path that it's on, and where it's gonna take them.
Great. Nchacha, I'd like to ask you about the capital allocation priorities. Any changes in R&D, CapEx, uses of capital on the balance sheet?
Yeah. We're well positioned today with a solid cash balance of $550 million and a $350 million revolving credit facility as of June, as of the second quarter of this year. We also have the convert, as you know, which is just has a 0.25% coupon interest rate, so, and generating 5% in interest income for us. So we're in a very good position. We are exploring all the options that we have at our disposal to make sure that we maximize the return on our shareholders and prevent any dilution. But overall, we're in a very confident, comfortable position with, you know, our capital structure and there are no major changes to at this juncture, to our CapEx or software deployment. Yeah.
Great. Maybe just to close things up, Randy, I'd love to get your sense of the discussions your sales reps are having with health systems over the last six months. I know you indicated health systems are seeing some positive signs on the balance sheet for them. Income statement is looking better, but on the ground floor, the sales reps are talking to health systems. What are they hearing? What kind of discussions are they having, and any changes over the last, you know, year- to- date?
I think we're really trying to have a strategic multi-year discussion with these institutions. They're moving a lot of their business to outpatient because it's more profitable, because they can't do everything on the inpatient side. That's created great discussions with us on our outpatient products that we just launched, and more to come, which we haven't announced. You know, some of our biggest customers, we are in joint discussions on filling those needs, because in order to run these huge enterprises, you must get visibility to all the drugs in all the locations. In order for you not to have, as they push out these points of care beyond a centralized location, it gets harder to manage the meds, harder to manage costs, harder to manage things.
And so you need different sets of products. And so it's really an opportune time to talk about the platform and why the platform is the platform of the future. That as we provide these new solutions, accelerated innovation, they're just plug and play. And you can get your whole point of view on your medications in all your locations through a single platform. And the platform play becomes more important because as hospitals consolidate, they've been consolidating for a long time, but now they're consolidating. You know, 25 used to be a big hospital group. Now they're 50 or 100, and so they just can't afford to have multiple vendors or solution sets that only go a certain areas and not others. You really have to be, you know, holistic in your approach and have a strategy that's gonna allow them to manage everything.
Even if you don't have it all today, you know, the vision of getting to it all in the future is what they're buying into.
Awesome, well, thank you so much for joining, and thank you, everybody.
Thank you, Stan.
Thank you.