Omnicell - Earnings Call - Q1 2021

Transcript

Speaker 0

Good day and thank you for standing by. Welcome to the OmniSales First Quarter twenty twenty one Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Ms.

Kathleen Nemeth. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon and welcome to the Omnicell first quarter twenty twenty one financial results call. On the call with me today are Randall Lipps, Omnicell's Chairman, President, CEO and Founder Scott Seidelman, Executive Vice President and Chief Commercial Officer and Peter Kuyper, Executive Vice President and Chief Financial Officer. This call will include forward looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward looking statements, please refer to the information in our press release today in the Omnicell Annual Report on Form 10 ks filed with the SEC on 02/24/2021 and in other more recent reports filed with the SEC.

Please be aware that you should not place undue reliance on any forward looking statements made today. The date of this conference call is 04/29/2021, and all forward looking statements made on this call are based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change, and we undertake no obligation to update these forward looking statements. Finally, this conference call is the property of Omnicell, Inc. And any taping, other duplication or rebroadcast without the expressed written consent of Omnicell is prohibited.

We've refreshed and expanded the Investor Relations section of our website where you can find our first corporate sustainability report and other information. On our call today, Randall will provide an update on our business. After Randall's remarks, Scott will provide perspective on the healthcare industry and our key customer wins. Finally, Peter will cover our results for the first quarter, our guidance for the second quarter and our total year guidance. Our first quarter financial results are included in our earnings announcement which was released earlier today and is posted in the Investor Relations section of our website at omnicell.com.

Additionally, we'd like to remind you that during this call, we will discuss some non GAAP financial measures. Reconciliations of these non GAAP measures to the most comparable GAAP financial measures are included in our earnings announcement. I will now turn the call over to Randall.

Speaker 2

Good afternoon and thanks for joining us today. Omnicell is off to a solid start for the year and I'm proud of the outstanding results delivered by the team this quarter. We exceeded the top end of our guidance ranges for revenue, non GAAP EBITDA and non GAAP EPS posting record revenues of $252,000,000 and non GAAP earnings per share of $0.83 for the first quarter. We believe these strong results reflect our customers' trust in Omnicell and the recognition of the significant benefits inherent in the vision of the Autonomous Pharmacy. Our first quarter performance also reflects excellent operational execution and financial discipline with non GAAP EBITDA of $51,000,000 and strong free cash flow of $44,000,000 Peter will review the financial results and the guidance for the second quarter and the full year in more detail later in the call.

It's been about one year now since the COVID-nineteen pandemic fundamentally altered our society and our daily life. During this time, we have focused our efforts on supporting our healthcare partners through this unprecedented time. We successfully pivoted to virtual installs of hospital sites and like many companies, we implemented remote work practices. We learned a lot over the last year and we believe the industry now recognizes that medication management is a mission critical element of their care delivery model. It's been a privilege to support our customers as they work to modernize and optimize their medication management systems and we are confident that Omnicell is well positioned to enable them to accomplish this effectively and efficiently.

Now turning to recent customer successes. We increased our number of long term sole source contracts during the first quarter with top 300 U. S. Health systems. One of these new wins is the largest single sole source agreement in Omnicell's history.

A top 10 U. S. Health system has chosen Omnicell to help them design and implement complex pharmacy workflows in support of their journey towards the Autonomous Pharmacy. We now have long term sole source agreements with 147 of the top 300 U. S.

Health systems. We are honored to have been selected for this critical infrastructure initiative and believe a win of this magnitude demonstrates that our strategy and our execution are working. And our second quarter is off to a solid start with the addition of Scripps Health as our 148 long term sole source agreement. Through this new partnership, Omnicell will be implementing automated dispensing systems for patient care areas and operating rooms, cloud based intelligent solutions and tech enabled services. This newest win is a competitive conversion opportunity for us and underscores the strength of Omnicell's value proposition.

We believe that the power of our customer relations is unique within our industry as we are truly strategic partners with our customers and work closely together to understand, design and implement complex pharmacy automation workloads. This enables pharmacy staff and care providers to spend their time where it matters most caring for patients. It is the quality of these relationships together with our innovative products and services that enables us to achieve market share gains and improve business performance. Importantly, our advanced services portfolio, which includes several subscription based technology enabled services such as Omnicell 340B, Enlivant Health and Omnicell One delivered strong results for the quarter and continues to be well received by the market. As we continue to enable the vision of the Autonomous Pharmacy, we are evolving from a product hardware company to a technology enabled software services business powered by the cloud.

2021 marks nearly thirty years since the company was founded. And throughout the years, I've learned that evolving this business and undertaking a shift in strategy requires that we continue to elevate our culture. For instance, three years ago, I hired Scott Sotelman to help transform our commercial organization to realize our vision. And Scott has since assembled a great team that has been responsible for some of our recent strong execution. And under this mindset, we welcome Christine Nellen to Omnicell during the first quarter of this year in the newly created role of Chief People Officer.

The Autonomous Pharmacy vision requires investments investments in our people and culture, which is why the role is so critical for us at this time. Christine brings more than twenty five years of experience at high performing software and technology companies such as Oracle and most recently PSG. We are delighted to welcome Christine to the team. Our achievements over the years have always been driven by our people, individuals from diverse backgrounds who share a commitment to our vision and seek to make a positive impact in the world. During the last year, our employees have shown great dedication and efforts despite the many, many challenges brought by the pandemic.

Now before I turn it over to Scott, I wanted to highlight our recently released inaugural ESG and Corporate Responsibility Report, which many of you have probably already seen. We recognize that we are accountable not only to our customers and our shareholders, but also to the global community. We are focused on innovating to drive sustainability across our business ethically and responsibly sourcing materials by adhering to the internationally recognized OECD guidance and elevating our diversity and inclusion initiatives. We will hope to find our first report helpful and we look forward to continuing to provide updates on our progress. Now looking ahead, I remain confident and believe that we are well positioned to continue to drive growth and add real value to the communities we serve.

We're excited continue to build on our momentum in 2021 and beyond, and we appreciate your support and confidence in Amiga. With that, I'll turn it over to

Speaker 3

Scott. Thank you, Randy. Before I discuss some of the customer highlights and our progress this quarter, I want to briefly expand on the point that Randy just mentioned regarding the organizational work that we have done over the last few years. Once we translated the Autonomous Pharmacy vision into a strategy, strategy, it was clear that we needed to evolve our organizational design from one focused on delivering primarily a single hardware product to one that could deliver new products and technology enabled services built on the cloud. We significantly changed our organizational design by elevating our account management structure and nationalizing our sales and customer organizations, a structure that has been recognized by Gartner as a best in class go to market design.

And we also added professional services, product management, customer success and software engineering function. And to that transformed organizational design, we recruited seasoned leaders with expertise in technology enabled services, staff, customer experience and software development. So today, we are fortunate to have a complete world class commercial leadership team, which is largely responsible for our exciting and recent results. The combination of our strategy, transformed organizational design and new leadership is helping us to realize the vision of the Autonomous Planet data. Practically, that progress can be seen in our continued expansion of our long term customer partnerships and competitive conversion.

As Randy mentioned, we increased the number of sole source agreements in the first quarter, bringing our total to 147. Our 146 sole source agreements were the top 10 health systems, We've selected Omnicell to deliver medication management solutions across its network of more than 65 hospitals and five fifty facilities in The U. S, the largest contract in our company's history. Additionally, we signed our one hundred and forty seventh agreement in Q2 with a North Carolina based four hospital system. And our second quarter is off to a solid start with the addition of Scripps Health as our one hundred and forty eighth long term sole source agreement.

Through this new partnership, Omnicell will be implementing its XT automated dispensing system and its cloud based intelligence solution. This is a competitive conversion and underscores the value of our market position proposition. Another highlight for the quarter is the competitive conversion with an Illinois based academic medical center that will be expanding their footprint from XT automated dispensing systems across their integrated health network. One of the reasons that our sole source strategy is winning in the market is because of our unique advanced services portfolio. Let's walk through some of the highlights.

Omnicell One is a cloud based technology enabled service that combines software, analytics and experts to help health systems manage drug inventory, increase provider efficiency and reduce compliance risk. We continue to see strong market demand for this unique solution. Recently, West Virginia based WBB Medicine inscribed to Omnicell One as part of a multiyear full source agreement renewal. Central Pharmacy Dispense Service is to market. With the positive customer feedback we are receiving on this recently launched solution and look forward to continuing to update you on our progress.

In the first quarter, Altman Health Foundation and the Christ Hospital Health Network signed long term agreements with CPDS. Omnicell 340B is a technology enabled service that combines workflow software, analytics and experts to help health systems organize their increasingly complex and financially critical 340B programs. We see strong market demand for this solution, and this is a great example of the power of Omnicell channel to accelerate acquisitions. Less than six months after we acquired this technology enabled service business, we successfully integrated the Omnicell 340B capability into our Autonomous Pharmacy vision. And excitingly, in Q1, the largest not for profit health care system in Texas expanded its existing Omnicell relationship with the implementation of Omnicell 340B solutions under a multiyear agreement.

Also in Q1, we signed Omnicell 340B partnerships with an integrated health system in the Midwest and one of the largest community health centers in the Northwest. Enlives and Health is a technology enabled service that combines workflow software, analytics and experts to help retail pharmacies and payers to increase provider efficiency, improve economics and provide population health services to at risk populations. We are helping retail pharmacies and health plans to improve patient outcomes while reducing costs through advanced technology solutions for patient engagement and communication. We are very proud that Enlivant Health Care

Speaker 0

is playing an important role in enabling pharmacies and other healthcare entities

Speaker 3

are to efficiently manage the historic COVID-nineteen immunization effort. CareScheduler automates the scheduling, patient communication and reporting for administering vaccinations, immunizations and select diagnostics, all increasingly important services as pharmacists are asked to expand their scope of service. This week, we announced a new partnership with Twilio, a global leader in cloud based digital communications technology. The partnership will enable Enviven Health to accelerate the creation and launch of an omnichannel communication solution that will allow customers to create a truly personalized experience for their patients and members using interactive phone messaging, SMS, texting, chatbots, e mail and a mobile app. Like a traditional SaaS offering, Enlivant Health will continue to frequently add new features and capabilities to this platform to increase value for its retail pharmacies and payer customers.

We are still early in the development of our Advanced Services portfolio and the realization of the Autonomous Pharmacy vision. However, overall, we are excited by our recent performance and long term outlook. Our Advanced Services portfolio not only creates new sources of revenue growth and recurring revenue streams for Omnicell but is key to achieving a fully autonomous pharmacy. The powerful combination of our advanced services portfolio with our superior channel and long term sole source contract strategy reinforces our confidence in the 2025 Advanced Services revenue targets we shared with you at the JPMorgan Annual Healthcare Conference earlier this year. As a reminder, we are forecasting a 50% CAGR in Advanced Services revenue from 2020 to 2025, which would be 20% to 30% of total revenue by that time frame.

Now I'd like to turn the call over to Peter to discuss our first quarter financial and operational results and our Q2 and full year 2021 guidance. Peter?

Speaker 2

Thank you, Scott. Our strong first quarter commercial, operational and financial results demonstrate the strength of our business model and that our strategy is working. Our healthcare system partners are embracing the vision of this fully autonomous pharmacy, resulting in an increasing percentage of high visibility and high predictability recurring revenue for Omnicell. Our customers see the value in our platform and solutions and are partnering with us as they advance their pharmacy automation world class. I'm very pleased with the progress we're making in furthering the vision of Autonomous Pharmacy and are proud of the solid execution of our nearly 3,000 Omnicell team members continue to consistently deliver.

Turning now to our financial results. Our first quarter twenty twenty one revenues were $262,000,000 an increase of $3,000,000 over the prior quarter, up 10% over the first quarter of twenty twenty and above the top of our guidance range.

Speaker 3

First quarter earnings per share

Speaker 2

in accordance with GAAP was $0.30 per share compared to $0.37 per share in the fourth quarter of twenty twenty zero two six euros per share in the first quarter of last year. A full reconciliation of our GAAP to non GAAP results is included in our first quarter earnings press release that's posted on our website. First quarter non GAAP earnings per share were $0.82 compared to $0.91 per share in the previous quarter and $0.66 in the same period last year. First quarter non GAAP EPS result exceeded our expectations due to stronger revenue as well as favorable expense items such as travel and the timing of headcount additions. Non GAAP gross margin for the first quarter was 50.6%, a slight decrease from the previous quarter primarily due to revenue mix and increased trade expense.

Year over year, this represents an increase of 120 basis points, driven by volume leverage, supply chain initiatives and favorable product mix. The non GAAP EBITDA margin for the first quarter of 20.1% expanded by two sixty basis points compared to the same to the prior year first quarter and decreased slightly from the previous quarter. I would now like to call on strength of our cash flow performance. At the end of the first quarter, our cash balance was $548,000,000 up from $486,000,000 as of 12/31/2020. This $52,000,000 increase in cash was driven primarily by $57,000,000 of cash from operations.

Free cash flow during the first quarter was strong at $44,000,000 compared to $65,000,000 from the previous quarter and $11,000,000 from the prior year. In terms of accounts receivables, days sales outstanding for the first quarter were seventy six days, an increase of five days over the last quarter and a decrease of seventeen days from the first quarter twenty twenty. Inventories as of 03/31/2021 were $96,000,000 essentially flat with the prior quarter and a decrease of $17,000,000 when compared to the first quarter of twenty twenty as a result of our concerted efforts on global supply chain process improvements and inventory management. Before turning to guidance, as a reminder, would like to walk through the long term financial framework we initially presented at the JPMorgan Healthcare Conference earlier this year and that we reiterated on our last earnings call. I will now walk through the highlights.

Our revenue base is resilient and highly disciplined in nature and differentiated by five key drivers. First, very robust product backlog, which increased during the first quarter and is expected to further increase during the year. Second, long term sole source agreements have now 148 of the top 300 units held. Third, customers' value of our offerings is evidenced by our strong customer retention rate of approximately 99%. Fourth, we have strong insights into annual service and maintenance revenue from our large installed base of connected devices, which is in the early stages of its upgrade cycles.

Lastly, while nearly all of our revenue has high visibility, roughly 40% of our revenue base is recurring in nature, and we are focused on growing this percentage over client. As we have previously discussed, an area of our business which is driving substantial growth in high visibility revenue is Advanced Services. We're forecasting a revenue CAGR of approximately 50% for twenty twenty twenty twenty five for these advanced services, with revenues expected to reach 20% to 30% of total revenue and Amazon revenues by 2025. This is subscription based recurring revenue with high margin Unity blocks. We're targeting a company level total revenue CAGR of 14% to 15% in 2021 and 2025, reaching 1,900,000,000.0 to $2,000,000,000 in total revenue for 2020.

We're targeting non GAAP operating margin of 21 and a non GAAP EBITDA margin of 25%, both by 2025. We have built a company that's able to scale very well and we believe we are very well positioned to deliver on 2025. Driven by a number of factors including improved business mix, benefits of long term exclusive customer partnerships, economies of scale, manufacturing savings and process efficiencies. As we continue to scale the business, we expect to redeploy some of these savings into value creating growth

Speaker 3

and innovation initiatives.

Speaker 2

Now moving on to our full year 2021 updated guidance. Given the strong start to the year, we are raising our full year non GAAP EBITDA and non GAAP earnings per share guidance. As a reminder, our full year 2021 product bookings are expected to range between €1,090,000,000 and €1,115,000,000 And we expect total 2021 revenue to range between $1,085,000,000 and $1,105,000,000 We expect product revenue to range between $770,000,000 to $785,000,000 And we expect service revenue to be between $315,000,000 and $320,000,000 We now expect total year 2021 non GAAP EBITDA to be between $231,000,000 and $242,000,000 Using the midpoint of the updated and increased non GAAP EBITDA ranges, this represents an approximate 21.6% non GAAP EBITDA margin for 2021, up approximately three eighty basis points in 2020. In 2021, we're assuming an effective blended tax rate of approximately 12% in our non GAAP EPS guidance. We now expect 2021 non GAAP earnings per share to be between $2.5 per share and $3.7 per share.

We believe that our margin expansion progress is on track towards the 2025 estimated non GAAP EBITDA margin target For the second quarter of twenty twenty one, we are providing the following guidance. As you noted last quarter, we continued to invest in scaling our business to support the expected increase in revenue and the timing of customer implementations. Our second quarter guidance also includes additional freight costs given global market conditions. We expect total second quarter revenue to be between $265,000,000 and $3.00 $7,000,000 with product revenues between $192,000,000 and $195,000,000 and service revenues between $73,000,000 and $75,000,000 We expect second quarter non GAAP EBITDA of $53,000,000 to $56,000,000 Using the midpoints of the second quarter guidance ranges, this represents an estimated quarter over quarter non GAAP EBITDA margin expansion of approximately 30 basis points.

We expect second quarter non GAAP earnings now to be between $0.80 per share and $0.85 per share. The team has done a fantastic job supporting our customers during these unprecedented times. As Randy mentioned, while many of us are on the cell position to remote work, this is not an option for our supply chain and manufacturing teams. We have remained on-site since the start of the pandemic, ensuring that access to our critical and strategic medication management automation management systems were assembled, tested and transported to our healthcare assistant partners on frontlines. I would like to thank them for their terrific contributions.

In summary, we are very pleased with our commercial, operational and financial results for the first quarter of twenty twenty one, and we look forward to updating you on the progress in the coming years. With that, we would like to open the call for your questions.

Speaker 0

Your first question comes from the line of Sean Wieland with Piper Sandler.

Speaker 4

Hi. Thank you guys so much. It's Jeff on for Sean. I think we're interested to know just how exactly the COVID vaccine management solution was developed. And if

Speaker 5

you could talk just a little

Speaker 4

bit about the innovation process where your customers asking you for this. How was it rolled out? And maybe just was it more a new customer driver? Was it incremental revenue driver at existing customers? Any detail on that would be helpful.

Speaker 3

Sure. I'll take that. This is Scott Sveigleman. I think the question just folks couldn't hear you was really around sort of what was the innovation process around the development of our COVID vaccination solution, which is we launched CareScheduler under the brand name. First off, CareScheduler, what that actually is, so Enlivant Health platform is a SaaS platform that we provide to retail pharmacies that enables pharmacists to automate a variety of workflows, frankly, to let them focus on things and actually treating the patient as opposed to doing any administrative thing.

Clearly, one of the things that we hear loud and clear from our pharmacy retail pharmacy customers as COVID unveiled and frankly the scope of practice for pharmacists was expanded and it became clear that pharmacists were going to have to start providing these vaccinations Was that they just simply did not have the tools to do that and we're talking in some cases around pretty basic capabilities of how do I schedule patients. And now with COVID, do I want those patients queuing up inside the retail pharmacy, etcetera. And so we certainly are eager and continue to add value and add capabilities to that retail platform, which creates incremental value for those retail funds. So I think kudos to the team that quite quickly over about a six month period, they identified the need, developed the software and rolled that out. I think one aspect of your question was did we really roll this out to new customers net new customers on the platform or was this incremental for existing customers?

The short answer is both, but predominantly existing customers, right, which is that like in typical SaaS platform fashion, we could charge an additional amount for the CareScheduler module. And as they upgraded to that and have that capability, they could provide that service to their customers. So it was really quite fast. And I think like many things during the pandemic, I was we have been very proud of that team's ability not only to develop and bring the product to market, but actually get it deployed and to the point where it can be used quite widely by that customer base. Anyway, hope that gives you some flavor.

Speaker 4

Yes. That's helpful. Can I just quickly one follow-up on that? So how is Enlivant Health driving patient engagement and communication pre Twilio? Or are they these pharmacists essentially going from nothing to a comprehensive omnichannel solution?

Speaker 3

Absolutely. And so like I said, the Amigon platform automated workflows for pharmacy pharmacists. And one of those workflows or one set of those workflows is enabling pharmacists to engage their patients. That was voice in the form of IVR, voice in the form of IVR, text message follow-up communication. So we were providing those services.

What the partnership with Twilio does is enables us to really upgrade the quality of those communication technologies, to add chat and other online and mobile. And so it really for us, of developing that for ourselves and modernizing those, we're able to partner with our best in class provider and get to market so much faster.

Speaker 2

Yes. It allows us to put our resources on solving problems, not delivering basic connectivity to people. It really allows us to work on those complex workflows that really solve problems.

Speaker 4

You.

Speaker 5

Our next

Speaker 1

question please? Thank you, Jessica. Next question?

Speaker 0

And your next question comes from the line of Iris Long with Berenberg Capital Management.

Speaker 5

Hi, guys. Thanks for taking my question. So I guess a follow-up to the Enlivant Health question. I'm wondering if you guys can talk about how big is the retail pharmacy business as a percentage of your total revenue right now? And then as we think about the guidance and as you continue to add more features to the platform, I guess what growth assumptions are you do you have or what are the growth assumptions embedded in the guidance?

Speaker 2

Think, Yara, this is Peter. So the retail pharmacy part of our business, right, is a smaller part of the business if you compare it to the hospital side of the business. It is growing a really nice momentum, maybe generally kind of in line with the total company growth. We are focusing, I think we discussed before, really on the software platform there to really engage the patients

Speaker 5

Okay, got it. And then the pricing model there, is it just subscription model based on the number of module? Is that the right way to think about it?

Speaker 2

Yes, it's a combination of the subscription model, technology and services. And a good chunk of that is also pure SaaS.

Speaker 5

Great. And then the other question

Speaker 3

more cash. Okay.

Speaker 5

And then the other question I have is on Omnicell one. So it seems that you guys are seeing strong customer interest. So I'm wondering if you can compare Omnicell One to maybe some of the other software solutions on the market. What's Omnicell One advantage? And then I guess the same similar question there, can you remind us what's your pricing model and pricing strategy going forward?

Speaker 3

Sure. So the question is how does Omnicell One compare to some of the other offerings in the market? I think you guys referenced that, right? On the one hand, the vision for Omnicell wants not to be a pure analytics product in the sense that there's a lot of analytics capabilities in healthcare. And the challenge of analytics capabilities in healthcare, I can't speak to actually pretty much the only issue I've worked in.

The challenge is that getting an operator in the customer to actually react to that data and actually change things, that's often they're not connected many times because the workflow is so complicated. And so what we've done with Omnicell One is to really integrate analytics with workflow. So if Omnicell One is predicting that there's a potential for a stock out or a shortage, instead of just creating a dashboard that someone may or may not pay attention to, Omnicell One actually sends a notification to the pharmacy tech to actually do something or create a task in a workload. And so we think that on the one hand that connectivity between analytics and workflow is really so important. And I mentioned previously, think extending that is that we have a customer success organization, a former pharmacy informaticist, workflow expert that get assigned to accounts that really in true customer success fashion are really trying to interpret some of the data and work very closely with customers to engage and provide better outcomes.

So on the one hand, it is very much a true service in that in the sense that we're identifying outcomes, we're integrating it with workflow and there's an expert that is on the customer journey with the customer to achieve those outcomes. We think that's highly differentiated. The second one, I think on the second dimension, which is breadth of offerings, that Omnicell One optimizes inventory, optimizes provider efficiency, optimizes avoidance of compliance risk. So that breadth is very unique when compared to other service offerings. That was very deliberate in our approach to not offer those as separate modules, but to operate as a single subscription service.

Combines it. And again, like a true subscription service, we're continuing to add that and add that functionality and that value will continue to grow for the customers and strive more demand

Speaker 2

for the service.

Speaker 5

Great. If I may add one more question. So you guys talked a lot about competitive conversion. So I'm wondering what do you think is the main driver for success there? And then how has that changed maybe compared to last year?

Speaker 2

I'd say I haven't changed much from last year, but I'd say a couple of years ago or a few years ago, it's more product based. And as we move to solution based company with a broader breadth of products and now tech enabled services, it really allows us to talk about how are we going to digitize the entire pharmacy workflows so that we can use the power of the cloud to do a lot of the work that just doesn't seem to get done as you would think would happen in a complex pharmacy operation. And so when we go in and talk about the whole breadth of our product offering and the second wave of solutions to help them actually get better performance, not by them just deploying the product, but by us working together day to day, optimizing and deploying the products together, it's a different sense of success rate that they have not seen in the past with other ways of doing it. So people want a better outcome. And the pandemic for sure brought up the shortcomings of the poor pharmacy supply chains in many of these systems, which in many cases diverted the proper care for some patients because they didn't have the right kind of drugs positioned in the right place.

So with that, I think there's a heightened sense of look, we've to digitize the pharmacy in order to really get to where we want to, which is near perfection, getting drugs to the right place, near perfection on regulation and safety and economics and making better decisions and get pharmacists out of the basin, get them out behind the counter and get them with the patients where their clinical practice can maybe change the difference in a big way.

Speaker 5

Great. Thanks so much.

Speaker 0

And your next question comes from the line of Scott Schonhaus with Stephens.

Speaker 6

Hi, Randall, Peter and team. Hey, so my first question is on the results and guidance. You guys beat the top line driven by greater than expected product revenues came in about $4,000,000 above the top end of your guidance range, but you didn't change your full year product revenue guidance. Was this just a pull forward in timing of a contract that you anticipated to occur later throughout the year? I just wanted any additional color there.

Speaker 2

Yes. So, all right, I would say that as you know, the product backlog going into the year, the product backlog for the December was up 57%, right? So we feel very strong, I call it, in the revenue guidance for the year. We did exceed in the first quarter the top end of the guidance range. It's a bit of timing, but it's also fairly early in the year still to look at our daily total year guidance.

We might later in the year, but mostly aligned with customer timing of implementation.

Speaker 6

That make sense? Yes, that makes sense, Peter, given your track record with achievable guidance. Okay. Then on the services side, can you talk more about 340B opportunities and the traction you're seeing in any cross selling? I believe you stated last quarter that the 340B team closed multiple new opportunities in Q4.

Is there any update to these stats in the quarter? And maybe some color on the acceleration of other software platforms that you've been talking about in LIVE and Health, Omnicell One. Your guidance assumes more of a ramp in this service revenues in the back half of the year. Thanks for the questions.

Speaker 2

Thank you, Scott. So multiple questions there. To the 340B, we're very pleased with the addition to the Omnicell platform. We do have a rich pipeline and a really good momentum in cross selling the 340B. We did announce the first cross sell already within now the top 48 multi sole source partners within the top strategy sales systems.

There is a really good opportunity there for those local sole source customers that do not have C40D20 or have a different software vendor. Very positive there. Confident that we'll be able to announce some more positive news there additional cost selling throughout the year and as we go through the years as well. And Life and Health, we talked about in the script quite extensively. We had an early press release as well, really growing nicely, a lot of momentum.

And then also on CPDS, as Scott talked about a little bit earlier, we see some great momentum there as well. All in line and maybe another way to frame it is, and we're very confident in making progress to the long term goal. And certainly, this year, we're definitely on track as we look forward to situation as well and the pipeline. Great.

Speaker 6

Thanks. Looking forward to your continued execution, Peter and team. Thanks.

Speaker 2

Your

Speaker 0

next question comes from Matt Hewitt with Craig Hallum Capital.

Speaker 7

Good afternoon. Congratulations on the good start to the year.

Speaker 2

Good. Thank

Speaker 7

you. First one, I think it's feels like it's been a while since we've talked about the competitive landscape. Obviously, as you guys have expanded the services, added more software, I feel like we don't talk about it much, but are you seeing anything from your peers? Are they trying to match or mimic the way that you've kind of expanded into other areas? Or have they I don't want to say given up, but I just feel like we're not hearing much about the competitive landscape much anymore.

Speaker 2

Well, they're still there. There's always competition. It just depends on what kinds of things our customers are looking for. But most customers are taking a strategic approach in medication medicine. I think if you take a strategic approach, now you have to take a broader and more in-depth approach to figuring out how to digitize the whole pieces of the business and really go to a company that's got a vision for doing that.

I think people are not buying only into what we have today, but where we're going. That's why you see these partnerships for seven, ten, fifteen years is because it's not necessarily that we have every single product they want today, but they know that we're committed and that software as a service and tech enabled services are places where we're going to continue to create value on the platform. And so to the extent that these customers are aligned with that vision with us and many are and maybe not everyone, but many of them are, it allows us to really compete in different space. But I would never say there's competition. There's always some.

But I think what we're doing is a little different than most people.

Speaker 7

Understood. And then maybe shifting gears a little bit. With the ramps and the number of people vaccinated and obviously pockets of the pandemic maybe showing signs of slowing down. Is that enabling your sales and service teams to get back in and actually meet with the customers face to face? And what can that mean from driving incremental sales?

Thank you.

Speaker 2

Yes. I think we're seeing more of that. I mean, you're vaccinated and under certain conditions where they can meet face to face, I'm not saying everybody is there, but certainly a lot are. But I think for many of our big customers out there, this is strategic. And so it's really beyond the question of how healthy is the financial bottom line of hospital.

This is strategic, something they have to do, they know they need to do. And it's beyond just always having to meet in the old fashioned way face to face. We have a lot of engagement with our account base and with the marketplace. And I just don't feel like this time that's really an entrance to our execution at all. And maybe in some ways getting a few more Zoom calls is a lot more efficient than flying some people around.

We've taken a little bit advantage of that. I feel really good about the pipeline, the momentum, the sales force ability to do what they need to do to get these solutions from customers if they like that.

Speaker 5

You

Speaker 0

have a question from Bill Sutherland with The Benchmark Company.

Speaker 2

I apologize upfront, I got on pretty late in the call, so if you covered it. But Peter, did you address the service gross margin in the first quarter? It was different than my model than 4Q. I thought there'd be a bit more 340B positive impact in it. Yes, of course.

So on the service gross margin, looking at that, we're scaling. So most of the advanced services, right, that's all the recurring revenue. That is accounted for, of course, in service revenue and the scale in that business. Have upright investments, if you will. And from a gross margin perspective, so we expect both product gross margin and service gross margin to increase during the year through the quarter directionally and then also over the next couple of years.

And so I'm not sure I caught the first part of your answer, Peter. So the first quarter is just is there anything other than just I don't know what to call it, noise? It's scaling and investment you know, right, as we build out and scale these service offerings as well. And then as you've seen historically, the benefit cost, I believe benefit cost in the first half of the year is always higher, right, by Goldman Sachs. And adding a few more people earlier on in the year is to deal with demand as we move forward.

So that kind of hits a little bit more in the first quarter. Yes. So that's also what kind of threw me because the R and D was lower than I expected as a percent of revenue. Anyway, one of the thought I had on the 340B, the customers that they have already, are there any discussions with their customers that might lead to sole source deals for your other family of solutions?

Speaker 3

Yes. I think we are looking essentially those ways, right, in the sense that we're looking our channel certainly quite powerful in its ability to introduce this solution to a much broader set of customers through the sole source arrangements and as Randy pointed out, the comprehensive strategic portfolio, there's certainly demand there Are certainly the teams are also working to say are there customers that 340B has that we don't currently serve. It's going to be a much, much smaller list just given the breadth depth of our customer base. But certainly, the teams are exploring that.

Speaker 2

Yes. I was thinking it would mostly go one way, but it occurs to me that it could lead to some sole source deals, too. Thanks for taking the questions. We'll catch up later. Thank you, Bill.

Thanks, Bill.

Speaker 0

I would now like to turn the conference over to Randall Lipps for closing remarks.

Speaker 2

Well, thanks for joining us today. We're certainly pleased with a strong start to the year. And as the need for increased automation and digitization of processes grows, our solutions are more strategically relevant than ever for these customers. Our results and our continued momentum underscores that Omnicell remains a partner of choice and we're excited to continue to build on our platform as we advance the vision of the Autonomous. Thanks for joining us today.

See you next time.

Speaker 1

Thanks everyone.

Speaker 0

This does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.