Good afternoon, everyone. Welcome to the J.P.Morgan Healthcare Conference. My name is Annie Samuel, and I cover healthcare technology and distribution here at J.P.Morgan. 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 J.P. Morgan 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 J.P. Morgan 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 in our focus 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 current customers confidence to expand in other areas that they haven't done previously with our technology. Now, 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 recurring 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 can 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 or buyers are spending their precious capital on XT Amplify, is to 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 a new console because you have a better experience, and they want it to be consistent. Now, on the enterprise side, we see hospitals making two 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 one 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 is 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 two things really interest our customers today. Now, XT Amplify comes with more than just the console, which is XT Extend. It also comes with MedChill, which is a new device which allows us to track individual cold supply chain medications one at a time, which allows the institutions to leave those medications farther 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 track non-pharmacy products through the supply station or on the shelves near them, and two 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 recurring revenue and new services that we call advanced services, and these are them. 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 Med Automation Service, 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 MedSync or IVR, in other words, interactive voice or natural voice language services that takes the load off the pharmacist. And probably our fastest growing advanced service is specialty pharmacy. We go in and set up a specialty pharmacy inside the four 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 recurring revenue.
We're 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 roadmap that we already have in place that is driving a lot of excitement in the market as we discuss it with our customers. These advanced services allow us to solve problems that never have been able to solve before because it's a combination of technology and people and expertise, and then this really gives us this longer, sustained, profitable revenue roadmap 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 J.P. Morgan Conference this year, that there's a lot more kind of optimism around that. You've, on your calls, spoken to some market stabilization that's driving maybe some re-engagement 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?
Yeah. 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've moved 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 high priority have come back for us to get engaged with the customer. And I believe that that continued optimism as we move into next year will keep that engagement and pipeline high.
That's really helpful, and then I think one other thing that you had kind of talked about before when the market was a little bit more challenging was that it led to this elongation of kind of pipeline conversion, so are you seeing any shift there? Are things happening sooner, or is that still kind of something that you're seeing out there?
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. I think that alignment that we have now with our go-to-market and our 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. Their customers, their GPO customers are really kind of feeling that. For you, I think we had initially kind of thought that 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 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? How do we think about labor as it relates to your business?
I would think kind of longer term, this should be a tailwind for your business as you think about the autonomous pharmacy.
Yeah. 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 on board, IT and others. And when we had these issues around labor shortages, some of the departments, we would say, "We don't have enough people to engage with you right now." Even though we purchased the product and are ready to deploy it, we don't have the people on board. So we haven't seen very much of that. And we also have a very keen measurement inside the company where we measure out of all the scheduled product that we have for a quarter how much has moved out or requests 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'll take some of the pressure off of the workforce and the labor workforce themselves. And that's our job. We've got to figure out a better way to manage medications without as much nursing time or as much pharmacy time. Non-critically, most of it's 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.
And 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? And we got to hear about the robots and 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, the 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?
Most of the workflows that are enabled intervene because people have to intervene because there's not a good connection or a good enough process that connects the data. The most important people, most important item is to get the data together and connected. That's what Omnisphere does. 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 two other areas where AI is really impactful for us is robots. Robots are generally programmed to do very precise things and pick things up based on giving the measurements for this widget on the sizes, and then it knows how firm to press and how wide to grab and everything. AI is allowing us to skip all those functions.
It can see and understand intuitively how to pick that up. And generally, that's the biggest issue in pharmacy robots is the variation and 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 multi-year 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 of these additional services with that. So can you maybe talk about within Amplify, what are you most excited about?
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, the next generation that you move from Amplify to Omnisphere, and then you're ready to go, and so that roadmap is one that our customers really want to understand how they get there. They can't get there all at once. They need to take steps, and so now they understand what the steps are. Amplify is the first piece.
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. Generally, at these Illuminate events, we announce more. We're going to continue to announce more products that connect to the Amplify. Those kinds of things drive excitement because the new products, they generally solve problems that have not been able to solve 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 within? Because I think you formerly used to have some kind of long-term targets. You don't necessarily have anymore. But as we think about what is the right growth, as we think about Amplify kind of being a key driver of that, how do we think about maybe putting that into our 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 did 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 for 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 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 timeline of when you start to kind of have a customer say, "Yes, we want to do this," to when that actually translates to 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, when will we start to really kind of see the meaningful inflection in the bookings, and then when will that translate to the actual revenue dollars?
It takes approximately, again, when we book, it takes approximately six to 12 months for any product that we launch 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. Yeah.
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 cycles?
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. I think eventually most of our customers will 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 two 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 one tailwind, but we have those two. I mean, headwind is XT down and the two tailwinds kind of offsetting each other.
Okay. Great, and then I guess maybe just kind of 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 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?
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 I feel like we've been competing for 30 years in the marketplace, and I feel like we're pretty good at it. I feel like today we're really well positioned to continue offering good value for current customers and even new customers. I think it hasn't been a lot of changing between market share between us or anybody else. I think we're holding ours and expanding a few.
Great. You recently announced Omnisphere. Could you just maybe describe what that encompasses, what that means for existing products?
It's really the generation of the future. It's really the product is our next generation product, cloud-based, of course. It already has a HITRUST certification. If you want to buy the most cybersecure product we 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 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.
When we think about the Autonomous Pharmacy, what I hate to use a baseball term, but what inning are we in? Does this accelerate that?
I think as we get to the Omnisphere, it certainly is the first most important key in that cog. Not only having the vision and the platform and understanding what we wanted to do, but that is the first step. I think that we just released it to customers this December at the largest trade show that we attend. We just got so much excitement about it because all of our customers are pretty sophisticated when it comes to getting more sophisticated when it comes to tech. That's what they expect from 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.
Great. Maybe just turning to advanced services because this has really been a point of strength for your business. Can you just help us understand maybe the go-to-market strategy and what's working so well there?
We have a lot of advanced services. There's a lot of things we want to accomplish here, is to solve some problems that are difficult to solve and sort of just a product or solution set, but actually involve people because you can't solve some problems without some experts on site. IV robotics is a good example. We have a very sophisticated robot that we have deployed and beginning to deploy. We have our own people run the robot and produce syringes and output of IV mixtures so the customer doesn't have to. It's more of an output, but it's brought on site at the pharmacy in their clean room. That's a unique solution set to solve a problem that customers can't get on their own. Probably the most fastest growing one that we have today is specialty pharmacy.
Every hospital needs to be in the specialty pharmacy business. Every hospital needs to have access probably to a 340B program. So you need to have a specialty pharmacy in combination with a 340B program. And so we're seeing a very strong uptake with that business. And it probably will continue to be the fastest growing piece of our advanced services. But these are services that when you go to the C-suite and you talk about what's strategic, you're talking about specialty pharmacy. That's strategic. And having a consolidated service center or an application that can manage the entire provider network, that's strategic. So we're moving out of sort of just solution-based, small product-based solutions that are narrowly fit to these strategic offerings. And it's kind of a new day as we do that.
I think the pandemic taught the C-suite pharmacy it has to be run strategically, not just tactically.
Maybe to that point, what are your customers asking you for when you think about kind of different solutions that you can add on to that platform?
Yeah. Well, I think many of our customers are looking to go outpatient, set up more surgery centers, more clinics, keep the patient more enclosed in their own systems. And so you see a lot of expansion into the outpatient area. So you need outpatient solutions, both devices, both software, both workflow, and abilities to manage the medications in those locations. Many of these locations still are run on paper. Someone just orders some meds, sends it to the pharmacy, and someone drops them off. So lots of opportunities there to improve. And they want them because it's the single side, the same chief pharmacy officer runs all the medication distribution for the entire network in all of their locations.
That's really helpful. Maybe this one's for Nchacha. Your product revenue has been kind of pressured over the last couple of quarters. What kind of needs maybe you could first start with what's driven that, and then what needs to happen for us to see some re-acceleration there?
Yes. So what's driving the decline in our product revenue over the last recent quarters has primarily been the fact that we're nearing the end of the XT upgrade cycle. And so that's putting pressure on our product revenue from impacting from a product mix standpoint. But most importantly, what needs to happen is, as you know, innovation has been the key success factor for our company over the years. And so we have to invest in innovation. And that's why you see we've been very pleased with the investments that we've made as we announced XT Amplify because we believe this is just the beginning at this point, the beginning of a series of products or announcements that you will see us make to continue to drive revenue. And we do expect that as we make these investments, it will help us continue to drive our revenue growth.
As we think about Amplify, how much of that is going to be product versus software?
So what we're building is a balanced portfolio. We will announce some new products within the XT Amplify umbrella. For example, XT Extend is just an example of a product that comes with high margins compared to some of our existing products. And so we do expect we will see an increase in or more products being announced, as well as some of the services that you saw in the presentation, like CarePlus and SupplyX.
But today our split on product and recurring and non-recurring is about 50%. And we think we'll continue to increase to more recurring over time, which will drive stability and predictability.
Can you just remind us because this is a question that I get very often? On the product side, particularly with consoles, how do you get paid for those? Because I mean, is it kind of a one-time capital outlay? Is it recurring revenue? Because I remember you've been kind of talking about this shift over time of your portfolio towards more recurring revenue.
So it's both. So some of the products that we launch, for example, as you saw from an XT Amplify standpoint, some of the products that are associated with the launch. But then there's services that we wrap around some of those products. And so that's the strategy that we're putting in place to make sure that we're building a very balanced portfolio of both highly profitable products and services that will continue to run this point, will continue to generate recurring revenue for our business to create that very balanced portfolio.
But I guess let's say I'm a new customer and I want to buy a cabinet for my hospital. Am I paying for the whole thing full freight right off the beginning, or is it kind of treated like a capital lease?
The product piece is more of a capital purchase. And you could either go lease or purchase, but it's more of a capital purchase. But in the past, we'd be kind of done. That would be it. But now we're adding on other services.
The technology with the purchase, and that would be the purchase.
It's a CapEx plus.
Okay. Terrific.
The console would be a capital expenditure.
And then the software would be the recurring revenue.
Correct. Yeah.
Okay. Very helpful. Thank you. Maybe just getting into margins because you've been kind of highlighting that you're moving into some of these higher margin kind of businesses. But last year, you implemented some cost reduction measures. How do you think about balancing margin expansion versus revenue growth over time?
Yeah. So we've been very pleased with some of the actions that we've put in place to continue to drive operational efficiencies as well as continue to improve, or manage, our expenses. The organization has really embraced this and it's working very well. This will be part of or this is part of our DNA going forward, where you will see what I call continuous fiscal improvements. We do expect that as we continue to make investments, this should help us continue to improve our margins as our advanced services portfolio continues to scale. But most importantly, I think we announced this during Q3, our Q3 earnings last year, that we're transitioning to this advanced services model. And what it will do is it will help continue to drive recurring revenue.
And it will create a very balanced portfolio that will help, supported by connected devices, that will help create what we consider a very strong, balanced, predictable, and profitable revenue-generating business.
That's great. At your analyst day a couple of years ago, you had laid out some long-term financial targets. And obviously, the market changed. Things were a little bit more complex. And so you withdrew them. But is it fair to think of those when you think about the North Star for where you want your financial algorithm to look, what kind of growth you're driving for, is that still a right kind of framework to think about as a long-term growth?
No. So we're working on our 2025 plans, and we will announce it during our Q4 earnings in February of this year. But again, our goal is to continue to invest in our business to drive both top- and bottom-line growth. And again, seeing the performance that we're seeing with the advanced services portfolio growing double-digit, we do believe that these investments will pay out. And XT Amplify, for example, again, continues to be one of the key growth areas that we believe will help drive our business forward.
But I think long-term, it's got to be an earnings per share target, right? Because the mix has kind of changed from just being product, which had a pretty consistent margin as you grew it, it drove through and drove a consistent profit. As we've got into other businesses that have different margin profiles and different growth rates, the best way to look at that is to contemplate what a good earnings per share or good return is for the company. And so we want to get back to where we were. So that's our North Star. It's not going to be the same way we got there. It's going to be a little different. But it's going to be much more, it's going to be a stronger company to withstand these changes in healthcare and not be so susceptible to the capital equipment wins that we get sometimes.
Right. That's great. You've historically been an acquisitive company. You've kind of leveraged some acquisitions to get you into some of these kind of advanced services and kind of moving away from, again, like you said, the kind of one-time purchases to more recurring purchases. So as you think about capital deployment going forward and potential acquisitions, are you thinking about new technologies that you might be able to add? AI, you've said, is such a big part of it. Is that an area for opportunity? How are you thinking about capital deployment and M&A?
Yeah. We continue to look at opportunities that will create shareholder value for our company. But most importantly, in the near term, we'll really focus on integrating some of the businesses that we recently acquired. And so that's the ultimate goal. As you know, M&A has been part of our historical growth strategy. And so we continue to assess opportunities that will fit our overall strategic needs. And AI is a very attractive area for us.
Great. Well, Randall, in the last two minutes here, what are you most excited about in 2025?
I think the thing that I have seen is our customers have really reinvigorated around innovation. They're hungry now for innovation that's new and different and is not just marginally up a little bit from where it's been. They're more ready to receive new types of innovation with new technologies, and that's good because we've always wanted to be innovative, but you can only usually go at their pace, but now they really want to solve some of these big problems.
Great. That's terrific. Well, thank you so much for sharing your time with us today.
Thank you.