Omnicell - Earnings Call - Q3 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Omnicell Third Quarter Earnings 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Peter Kuipers, Chief Financial Officer.

Please go ahead, sir.

Speaker 1

Thank you. Good afternoon, and welcome to the Omnicell third quarter twenty nineteen earnings call. Joining me today is Randall Lipps, Omnicell Founder, Chairman, President and CEO. 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 February 2739, 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 October 2439, 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. Finally, this conference call is the property of Omnicell Inc, and any taping, auto duplication or rebroadcast without the expressed written consent of Omnicell is prohibited. Randall will provide an update on our business.

After Randall's remarks, I'll recover our results for the third quarter of twenty nineteen and our guidance for the remainder of the year. Our third 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. Our prepared remarks will also be posted in the same section. Let me now turn over the call to Randall.

Speaker 2

Good afternoon. We are pleased to share the results of another record quarter. Key financial results for the quarter include record revenue of $229,000,000 up 12% from February. Record non GAAP EPS of 76¢ per share compared to 63¢ per share in the same period last year, representing a 21% increase and non GAAP operating margins of approximately 17%, up over a 180 basis points from third quarter of twenty eighteen. The value we are creating through our Autonomous Pharmacy vision is being realized every day as more customers join us on our journey to revolutionize the pharmacy care delivery model.

We are continuing to invest in technology to advance this vision. Our intention is for medications to be managed through a zero error, fully automated, and digitized infrastructure across the continuum of care. The autonomous pharmacy vision integrates a comprehensive set of solutions powered by the Omnicell cloud data platform across three key areas. Automation solutions designed to digitize and streamline workflows. Secondly, intelligence that provides actionable insights to better understand medication usage and improve pharmacy supply chain management.

And third, automation of medication dispensing workflows, which includes expert services that serve as an extension of pharmacy operations. By connecting these solutions across the continuum of care, we have the opportunity to help solve for problems like prescription errors, medical waste, medication adherence, and opioid abuse, all significant industry wide problems driving medical costs up and reducing the opportunity for better health care outcomes. As we have previously discussed, our business has expanded over the years from a single point solution to a platform of products and services that we are developing further in the vision of the autonomous pharmacy. This has resulted in large deal sizes across multiple products, and we believe more comprehensive, valuable, and enduring relationships with our customers. We're pleased to highlight our newest health care partnerships, a ten year renewal and expansion of the sole source agreement with Mercy.

Mercy is one of the top five hospitals systems serving Arkansas, Kansas, Missouri, and Oklahoma. This will support medication management and streamline workflows across their service network through Omnicell automation and intelligence solutions in central pharmacy and patient care areas. We have also reached a renewed and expanded five year agreement with Vivient, the world's largest group purchasing organization, for our full portfolio of products, including XR two, IV workflow and robotics, and medication adherence solutions. Omnicell has been recognized with Vivien's innovative technology designation

Speaker 3

for

Speaker 2

our industry leading solutions. Salem Health Hospitals and Clinics, the premier health care provider for Oregon's Midlimate Valley, has selected Omnicell Solutions at its flagship Salem Hospital. Salem Health will be implementing Omnicell XT automated dispensing systems along with integration to the hospital's electronic health record system to streamline workflows, improve nursing pharmacy efficiency, and help enhance patient safety. Salem will leverage closed loop interoperability in the system to provide advanced medication tracking and diversion prevention. In the government sector, Durham VA health care system in North Carolina and Teague Veterans Medical Center in Central Texas have selected the Omnicell XR two automated central pharmacy system, an important technological step toward building a fully autonomous pharmacy.

IV automation also continues to gain traction in this segment as facilities including Cincinnati VA Medical Center and the VA of Los Angeles are adopting our IV workflow technology. Now I'd like to turn the call back over to Peter to discuss third quarter financial results.

Speaker 1

Thank you, Randall. Our third quarter twenty nineteen revenue of $229,000,000 was up 12% over the third quarter of twenty eighteen and up 5% from the prior quarter. The increase in revenue was largely due to an increase in XT Series implementations, growth in annual service and maintenance revenue from a larger installed base of equipment as well as increased population health solutions revenue. As discussed in the past, our population health solutions include medication synchronization, patient messaging and other adherence solutions. The third quarter earnings per share in accordance with GAAP was €0.46 up from €0.33 per share in the third quarter of twenty eighteen.

The increase in earnings per share is largely due to higher revenue in the third quarter of twenty nineteen and achieving economies of scale over our operating expenses. In addition to GAAP financial results, we report our results on a non GAAP basis, which excludes stock compensation expense, amortization of intangible assets associated with acquisitions, acquisition and restructuring related expenses, tax reform and restructuring income tax benefits and expenses, contingent gains and amortization of debt issuance costs. We use non GAAP financial statements in addition to GAAP financial statements because we believe it is useful for investors to understand the effects of amortization of acquisition related cost and noncash stock compensation expenses that are a component of our reported results as well as onetime events and acquisition and restructuring related expenses. A full reconciliation of our GAAP to non GAAP results is included in our third quarter earnings press release and is posted on our website. Third quarter twenty nineteen non GAAP EPS was €0.76 compared to €0.63 in the same period last year, representing a 21% increase.

Similar to the increase in our GAAP EPS, the increase in earnings per share on a non GAAP basis is again largely due to economies of scale achieved in the context of higher revenue. Non GAAP other expenses for the third quarter of twenty nineteen was $600,000 compared to $2,200,000 in the third quarter of twenty eighteen. The decrease primarily relates to lower interest expense as our outstanding debt balance has decreased and interest rates have fallen. Let's now move to the balance sheet and cash flow. At September 3039, our cash balance was $137,000,000 up from $87,000,000 at June 3039.

Our outstanding funded debt was $80,000,000 resulting in a net cash position of $57,000,000 During the third quarter, we did not sell any stock under our at the market program. Cash flow from operations during the third quarter and nine months ended September 3039, was $56,000,000 and $110,000,000 respectively, compared to $16,000,000 and $57,000,000 for the comparable periods last year. The increase in operating cash flows is primarily driven by increased net income and improvements in working capital. Free cash flow generated in the third quarter and nine months ended September 3039, was $42,000,000 and $63,000,000 respectively, compared to $2,000,000 and $50,000,000 for the comparable periods last year. The increase in free cash flow is primarily due to the increases in operating cash flow mentioned earlier.

Accounts receivable days sales outstanding for the third quarter were eighty two days, down five days from the previous quarter and down eleven days from September 3038. The decrease in DSO from last quarter and prior year is primarily due to higher sales and increased collections. Inventories at September 3039 were approximately $106,000,000 up $2,000,000 from the previous quarter and up $7,000,000 from September. Increase is primarily driven by demand for the XT Series product line. Our headcount was 2,625 at September 3039, up 70 from the end of the previous quarter and up 199 from the same quarter last year.

The majority of the increase is from manufacturing, implementation and service personnel needed to support our business as it continues to expand. We expect this hiring trend to continue as we grow the business. Let's now move to guidance. The specific guidance for the fourth quarter of twenty nineteen is as follows: We expect total revenue to be between $240,000,000 and $246,000,000 We expect product revenue to be between 181,000,000 and $186,000,000 We expect service revenue to be between 59,000,000 and $60,000,000 and we expect non GAAP EPS to be between $0.75 and $0.80 per share. Now moving to our full year 2019 guidance.

We expect 2019 product bookings to be between seven sixty five million and $790,000,000 This is unchanged from our previous guidance. We are narrowing our guidance range for 2019 total revenue. We now expect 2019 total revenue to be between $889,000,000 and $895,000,000 The midpoint of our updated and narrowed revenue guidance implies approximately 13% year over year growth from our full year 2018 total revenue. This revenue guidance breaks down as follows: We now expect 2019 product revenue to be between $653,000,000 and $658,000,000 Our previous guidance range was $6.53 and $663,000,000 We now expect 2019 service revenue to be between $236,000,000 and $237,000,000 Our previous guidance range was $233,000,000 to $237,000,000 We are increasing and narrowing our total year 2019 non GAAP EPS guidance. We now expect 2019 non GAAP EPS to be between $2.79 and $2.84 per share.

Our previous 2019 non GAAP EPS guidance was between $2.65 per share and $2.82 per share. The midpoint of our new and updated non GAAP EPS guidance implies approximately 35% growth year over year. For 2019, we're now assuming an average tax rate of 9% in our non GAAP EPS guidance range. Using the midpoints of the provided ranges, we expect non GAAP operating margins for the full year to be slightly above 15%. As Randall mentioned, we're pleased with the results for the third quarter of twenty nineteen, and we look forward to continuing to deliver profitable results in the fourth quarter.

Before we turn to the Q and A portion of today's call, I want to touch briefly on an informal inquiry that we received from the SEC following the report from self proclaimed short seller Glasshouse that was issued in July. Such inquiries are not uncommon following reports like the one Glasshouse issued. We have responded and are fully cooperating with the SEC. We remain consistent in our July 1539 response to the Classhouse report. With that, the purpose of today's call is to discuss our third quarter earnings, and we ask that you keep questions focused on our results.

Now we would like to open the call for your questions. First question, please.

Speaker 0

Your first question is from Matt Hewitt with Craig Hallum.

Speaker 4

Good afternoon. Thank you for taking the questions. Can you hear me okay?

Speaker 1

Yes, we can hear you. Yes, yes.

Speaker 4

Okay. Good, good. All right. First off, revenues, particularly product revenues came in a little bit light of my expectations, the Street expectations. I'm just wondering if there was anything timing related or maybe if you could provide a little bit of color on how these orders are kind of flowing through given the strength in your bookings.

Speaker 1

Yes. Right. So bookings are strong. Backlog is very healthy and strong. You have a slightly below the midpoint of the provided guidance range.

We had some headwinds from an FX perspective internationally. And then there is a little bit of timing delay in The UK from a Brexit influence as well and a tiny bit in The Middle East from the geopolitical developments there. So we wouldn't have those three factors than we would have been at the higher end and exceeding the product guidance range, if you will.

Speaker 4

Okay. That's great. And then shifting gears to the gross margin. So product gross margin, a very strong quarter. I think it might be a record there on the gross margin.

Meanwhile, service and other gross margin has kind of been ticking down a little bit. Where do you see those two kind of moving over the near to mid term? Can gross margins continue to expand as you add more and more software? Does that fall into the service? And if so, then why wouldn't that one be ticking up?

So

Speaker 1

for gross margin, we have a favorable product and customer mix in the third quarter. We do expect gross margins to continue to increase over time with the caveat that typically the first quarter is a lower quarter in revenue, if you will, and then we build up during the year. So there's definitely a little bit of volume leverage as well in the third quarter and expected in the fourth quarter also. For service margins, so we did mention strength in population health solutions. That comes typically at a tiny bit lower margin compared to the more traditional service revenue that we have.

And then we're also investing in professional services for implementations as we go forward. So those two factors, a little bit of mix on service and then we're investing also in professional services and then we're ramping up the installation implementations of the newer And as they are at lower scale versus kind of the core products, if you will, that makes it the percentage a little bit down on the surface gross margin line.

Speaker 4

Got it. All right. Thank you very much.

Speaker 1

Thank you.

Speaker 0

Your next question is from Mike Ott with Oppenheimer.

Speaker 5

Good afternoon. Thanks for taking my question. Peter, you mentioned, I think, that some of the REV strength growth in the quarter was due to the Population Health Solutions. Just curious if you'd call out strength in any particular Pop Health Solutions.

Speaker 1

Really across the board. I mean we went live with a larger program, if you will, that was nationwide that has some really good enrollments and that's driving the majority of it.

Speaker 5

Okay. And then also you said some nice government deal flow in the quarter. Is that fairly typical for the 3Q? I mean how does this compare to past years? Mean I realize the government fiscal year end here at €930,000,000

Speaker 1

So third quarter typically is the higher quarter for government business. And so we would it's the highest quarter likely for government business in the year, so that's for bookings, right? We're very pleased to see that also the government is adopting components of the Autonomous Pharmacy like the X-ray two, central pharmacy robot and IV automation. But you're right, the third quarter is for most government organizations that we serve and partner with kind of a fiscal year end for them. But we do expect some more business also in the fourth quarter from government.

Speaker 4

Great. Thanks very much.

Speaker 0

We do have a question in queue from Matt Hewitt with Craig Hallum.

Speaker 4

A couple more here. Adjusted operating margin, obviously, a very strong quarter and above your typical 15%. I think you've kind of talked about that at the back half of the year coming in north of that 15% historical target. And I'm not trying to put you on the spot here, but you've got Q1. You just explained that typically you do see some deleveraging or some deleveraging there from a margin perspective.

But how should we be thinking about this given the strength that you're seeing from a bookings perspective, which should translate into revenues? You're seeing leverage in other areas of the business. Is 15% still the appropriate number?

Speaker 1

Yes. So we think for now it is. We do see strength year over year. That is absolutely correct. But we do have investments, continued investments in the Autonomous Pharmacy and some of the products that we already mentioned, and we're building up the new products as well.

Plus we're investing in services from a professional services perspective. So for now, that is the kind of the total year, longer term framework. We're looking at potentially updating it in the not too distant future, but for now it's 15%. Okay.

Speaker 4

Another question regarding DSOs. You've shown steady improvement the last couple of quarters, bringing that Do number you have an internal range or target that you're shooting for? And maybe how close are we to

Speaker 1

Yes. We're definitely reducing the accounts receivable balances, if you will. I think we went over the drivers compared to other medtech companies on prior calls as well. We do not have a formal DSO target. The DSO is purely a mathematical calculation of the gross AR balance over revenue in the quarter.

The one part that is very difficult to estimate is really the shipments in the last couple of weeks of a quarter because they are mostly for installs and revenue in the following quarter. So that piece makes it really difficult to estimate. But we do have the one piece we do have internal cash collection targets by month, if you will, for the teams. And we're definitely driving those very hard, and we see some really good results.

Speaker 4

Okay. One last one for me. Regarding Mercy, as you mentioned, top five health system. By my math, that's an extremely large contract, ten years. The last sole source agreement you signed with them, I believe, was back in 02/2003.

So this is consistent with that kind of that longer term partnership that you've previously had. But as we think about this, I would assume that they're upgrading the XT cabinets. They're adding XR2. How will those kind of layer into revenues? I would assume that or should think that they would be more front end loaded in this ten year sole source agreement.

But maybe kind of walk us through how these longer term agreements kind of layer on over their term. Thank you.

Speaker 2

Yeah. I'll I'll I'll take that question, if you don't mind. You know, these big customers who have been our customer for a long time really have to look at the redeployment of the newer technologies and really redesign it from the ground up, not just replace what they have, but how do you get much more out of the technologies and with the coordinated connection between the pieces. And so as we build out the design of that over the next couple of years, then we really generally, you start with the oldest equipment. And since they're an older customer, they they have quite a bit of equipment that's aged.

So and the newer equipment, of course, since they run the same initial software technology that we run today, they don't have to replace it quite as quickly. So the key is that that we're able to deploy a total solution set that really gets to some of these pharmacy issues that have not been able to be addressed without sort of a total current comprehensive view. But I just from a rollout standpoint, I would think that that, you know, Mercy has a lot of systems which, you know, have been our customer for a long time. So they probably need to have some of those systems replaced sooner than later.

Speaker 4

Understood. Thank you very much.

Speaker 1

Thank you, Matt.

Speaker 0

Your next question is from Mitra Rimgopal with Sidoti.

Speaker 3

Good afternoon. Hi, a couple I of noticed SG and A coming in as a percentage of revenue the last couple of quarters. And I know early on, you're scaling up headcount a little. Was just wondering where are on that front.

Speaker 1

Yes. So we'll we enjoy a little bit of leverage here in the third quarter, fourth quarter. But we are growing, looking at backlog and bookings momentum and pipeline momentum. We continue to scale SG and A as we're hiring, like we said we expect to do in the fourth quarter as well. We expect to go up in SG and A cost as well.

Speaker 3

Okay. Then And again, know

Speaker 5

you have another

Speaker 1

Uh-huh. Yeah. And as you know, in the fourth quarter, we do have a number of the bigger pharmacy and health conferences that also add cost to the fourth quarter as compared to other quarters.

Speaker 3

Okay. Okay. No. Thanks for mentioning that. And I know you've obviously announced some nice wins recently, especially, obviously, in The U.

S. And I was

Speaker 2

just

Speaker 3

wondering, outside The U. S. Now, if you're seeing any change in the business environment there.

Speaker 1

Yeah. Like we we said in an earlier for an earlier question. So we we do see some headwinds from a FX perspective on the British pound and the euro. We do see some delays from the NHS capital spending, if you will, in The UK. We think that's merely a delay, mostly related, we believe, to Brexit.

And then in The Middle East, you do have a little bit of the geopolitical impact on ordering patterns as well. We think that's mostly delays as well. But we have a number of wins as well internationally. We do see the ADC adoptions in part of Asia also picking up, specifically in Hong Kong and in Australia where we have some nice wins, if you will. So we've got some good momentum there, but probably a little bit lower in the third quarter than we expected it to be as we went into the quarter.

Speaker 3

Okay. And then finally, know the tax rate obviously came in quite a bit in the third quarter. How should we be thinking about that going forward?

Speaker 1

Yes. So we guided for the full year, right, for 9% blended rate. And the fluctuations there are really kind of depending on benefit of the stock option exercises, so that's why it ticked up a tiny bit. But in that range, it's probably fair for you to assume in future in future years. However, you gotta make sure that that you calculate the incremental profit at the at the federal US rate of 21%.

Right? That's not gonna stay at that low of a rate. The incremental dollars, you need to really tax effect at about 21%.

Speaker 3

Right, right. Okay. And then finally, Randy, I know already on you had mentioned a lot of things that you see you could be making a difference on, things like the opioid crisis, etcetera. And I'm just wondering if you're already having conversations regarding any specific things you could be doing in terms of working with your existing customer base.

Speaker 2

Yeah. I think that there's a whole new set of regulations and, I guess, scrutiny around opioid management in every health care institution. And, you know, we are we have solution sets now, and we are putting time and energy to advancing those to even more the next level because the scrutiny is this is one of the areas that pharmacies have struggled a little bit on and now are are just behind the behind the game because it's become such an important piece of of executing a pharmacy well because people do need the opioids, but, you know, you gotta make sure no one else is diverting them. So it's it's become mission critical like it's never been before. So big opportunity for us, and it's already a great product line that we have, but more to come.

Speaker 3

Okay. Thanks again for taking the questions.

Speaker 1

You bet. Thank you.

Speaker 0

Your next question comes from Bill Sutherland with Benchmark.

Speaker 6

Hey, Bill. Thanks. Hey, everybody. That Visient deal, can you give us some color on that? Is that kinda like more of a partnering situation?

Or how's that gonna work?

Speaker 2

Well, Visient has always been a GPO that we've we've worked with over the years for many, many years. Probably the new part of the Visient deal is really they only had our core products and not the whole expansion line. And so we were able in this round to expand the product line to include IV workflow and robotics, the XR two new product lines. And that's really important because you you want those product lines to be presented as a package, not as, you know, well, Vivien's kind of supportive of this, but not of that. So, you know, that's important for us to have a good relationship with them and then because they they they their members are really look for their blessing on these things.

They don't they don't really doesn't buy the product directly, of course, but it's important. And I think that was an important important enough for us to mention it. And and they've always been a great partner of ours. Yep.

Speaker 6

Do you you probably don't wanna give a percentage, but are you in, like, the majority of their hospitals, or is it a lot

Speaker 2

of I would say what our market share is is probably the same market share that we're in their hospital. So we're probably in about half, somewhere around half of of their members. Maybe a little more if they represent the larger groups.

Speaker 6

Okay. I'm curious, just in a general sense on the operating margins as you've talked about this before, I just kind of want to see as you get more experience with these larger multiyear platform sales, net net, should that be generally a lift for your operating margins?

Speaker 1

Well, larger scale always gives economies of scale as well. The left, however, what we said on an earlier question, there's quite a bit of investment to go to really bring the vision of autonomous pharmacy to life. Randy talked about some of the areas that are cumbersome for pharmacists now and are big issues like opioids. If you step back and look at pharmacy, specifically hospital pharmacy, you if you are the leader of pharmacy in a hospital, need to manage about 4,000 different SKUs that you need to have full visibility on, and that's not the case today. There's a big gap there.

Medication waste cost is between 57% of annual medication costs for, for health systems. Feasibility is limited because a lot of the automation is only, implemented kind of the points of care in the OR and the ER. There's there's there is a lot of technology needs and growth to be had. So we do believe that there's quite a bit of bit of investments for us to make to really help the industry to cut to the next level.

Speaker 2

Yeah. And I and I'd I'd just add to that. Our our emerging products are growing really nicely. I mean, they're they're growing at a nice rate. But, you know, they're relatively still small, and and so it's hard to get the scale on those until they they get larger.

Speaker 1

So Yeah.

Speaker 2

The uptake and the orders are nice, and I think it it just, you know, confirms our story of a broader product line and platform that people really wanna drive all the medications through, not just some of those.

Speaker 6

Got it. Thanks. Thank you both.

Speaker 0

Your final question comes from Gene Mannheimer with Dougherty.

Speaker 1

Hi, Gene.

Speaker 7

Good afternoon. Thanks. Good job on the record results. I had just two things. You talked about some major expansions in the quarter.

Certainly, Mercy is a very good one. How about how should we be thinking about net new wins these days? Do you still view yourselves as net share gainers in the market? And my other question relates to the term I heard SEC inquiry. Just trying to understand if you could expound on maybe what areas they're looking into and where the concerns are.

Thanks.

Speaker 1

Yes. So from a market share perspective, we've always measured this, as you recall, in relative share of bed counts in The U. S. We do believe also this year that we have gained further market share, if you will, at a fairly consistent rate. We were clicking away and taking away about 100 basis points to 150 basis points of share.

We believe that is continuing this year as well. And then on the voluntary informal SEC inquiry, we can't really comment on kind of the areas that are generally aligned. We would say refer back to the self proclaimed short seller report. And there's there's nothing to report.

Speaker 2

Okay. Very good. Thanks.

Speaker 1

Thanks, Gene. Yeah.

Speaker 0

And there are no further questions at this time. Mr. Randollits, your closing remarks, please.

Speaker 2

Well, thanks for joining us today. And as we you know, I I think as we we continue to see the autonomous pharmacy is see, it's something that the industry is really hoping for to help change the continuum of care and the way medication management is done. And and it's very exciting. And then our next midyear, ASHP, the American Society of Hospital System Pharmacist, in December, we'll be talking about more about our road map and how the autonomous pharmacy is going to be rolled out to really address some of these big pain points to really change the way medication management is looked at and executed upon. So I hope you can join us there.

And, thanks again to the Omnicell team, who have, like, once again continued to perform well in the marketplace and really out to improve health care for everyone. Thank you very much. We'll see you guys next time.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.