Omnicell, Inc. (OMCL) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the Omnicell First Quarter Earnings Announcement. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Peter Kuipers, Chief Financial Officer. You may begin your conference.

Thank you. Good afternoon and welcome to the Omnicell first quarter 2019 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 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-K filed with the SEC on February 27, 2019, 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 April 25, 2019, and all forward-looking statements made on this call are made 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, other duplication or rebroadcast without the expressed written consent of Omnicell is prohibited. Randall will first provide an update on our business. After Randall's remarks, I will cover our results for the first quarter of 2019 and our guidance for the remainder of the year. Our first quarter financial results are included in our earnings announcements 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 this same section. Let me now turn over the call to Randall.

Good afternoon, everyone. I am extremely pleased with our performance and the execution of our strategy as we continue to transition the business towards delivering on our vision of the autonomous pharmacy. Some of the key financial accomplishments during the quarter include revenue of $203 million, up 11% from Q1 2018. Non-GAAP earnings per share of $0.61, up 110% from Q1 2018 and non-GAAP operating margin of 13%, up 500 basis points from Q1 2018. As we previously announced late last year, our vision of the Autonomous Pharmacy 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, intelligence that provides actionable insights to better understand medication usage and improve pharmacy supply chain management, and lastly, enhancing medication dispensing workflows through expert services that serve as an extension of the pharmacy operations to support improved efficiency, regulatory compliance, and patient outcomes. The Autonomous Pharmacy vision is driven by core products such as our XR2 Central Pharmacy robotic dispensing system, which is designed to provide automated medication dispensing with virtually 0 errors. This system reduces labor costs, decreases medication waste and improves patients' safety by helping to ensure each patient receives the right medication at the right time. Our IV technology has been shown to reduce medication compounding cost by 66% compared to outsourcing alternatives. And finally, the Omnicell Patient Engagement platform provides the pharmacy with a holistic view of patients, not only by organizing prescriptions, but by identifying, preparing and documenting ongoing patient engagement that drives revenue and promotes medication adherence. During the first quarter of 2019, we continued to see strong momentum in new orders booked, which include multiple products from the Omnicell Autonomous Pharmacy platform. During the first quarter, we signed several sole-source agreements with healthcare organizations that are expected to implement and expand the utilization of our solutions for years to come. In addition, we gained further momentum with new customer wins in Q1 2019. Some notable examples of customer integrating our Autonomous Pharmacy solution include Inova Health Care, Northern Virginia's leading nonprofit healthcare provider, serving more than 2 million individuals annually, is expanding its current automation footprint with the addition of Omnicell's Robotic IV Insourcing Solution, a unique program that combines advanced robotic technology, data and expertly trained pharmacy technician staff into a comprehensive turnkey package that provides a streamlined path for hospitals to insource their sterile compounding. On patient floors, Inova will implement Omnicell's XT Series automated medication dispensing systems, which help improve workflow efficiency, medication accountability and patient safety. CaroMont Health, one of the leading regional healthcare providers in North Carolina, has selected Omnicell's comprehensive industry-leading medication management platform to help enhance financial performance and operational efficiency. This includes leveraging Performance Center to better track medication inventory and usage as well as the addition of IVX Workflow automation to support sterile compounding and XT Series automated dispensing systems to help improve patient care on nursing floors. And lastly, The University of Tennessee Medical Center in Knoxville has extended their partnership with Omnicell, upgrading their medication and supply dispensing systems to the XT Series. The University of Tennessee will also be using Omnicell's Central Pharmacy Manager to streamline their medication processes from the time a medication is received from the wholesaler to the time a medication is dispensed to a patient or an automated dispensing system. Central Pharmacy Manager helps improve visibility to view inventory and usage. So it can help improve patient care on nursing floors by ensuring availability of medications. We are thrilled to partner with these organizations and many more as we improve healthcare for everyone. At this point, let me turn the call back over to Peter to discuss our first quarter financials.

Thank you, Randall. Our first quarter 2019 GAAP revenue of $203 million was up 11% over the first quarter of 2018. The increase in revenue was largely due to: an increase in XT Series implementations from a growing base of customers; increases in annual service and maintenance revenue from a larger installed base of equipment; and contributions from new product sales, such as XR2 and IVX Workflow, that are ramping since we launched the products during 2018. The first quarter earnings per share in accordance with GAAP was $0.08 per share, up from $0.07 per share in the first quarter of 2018. The increase in earnings per share is largely due to profits from higher revenue, which is partially offset by higher income tax expense compared to the first quarter of 2018. 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, onetime acquisition and restructuring related expenses, tax reform and restructuring income tax benefits and expenses, contingent gains in amortization of debt issuance cost. We use non-GAAP financial statements in addition to GAAP financial statements; because we believe it is useful for investors to understand the amortization of acquisition-related costs and noncash stock compensation expenses that are a component of our reported results as well as onetime events and onetime acquisition and restructuring related expenses. A full reconciliation of our GAAP to non-GAAP result is included in our first quarter earnings press release and is posted on our website. For the first quarter 2019, non-GAAP revenue was $203 million, which is an 11% increase over the first quarter of 2018. First quarter 2019 non-GAAP EPS was $0.61 per share, up 110% from the same quarter last year. I'd like to take a moment to explain several factors that affected our first quarter 2019 non-GAAP EPS compared to our guidance. Non-GAAP EPS of $0.61 in the first quarter 2019 exceeded the midpoint of our guidance range by approximately $0.20 per share. The majority of the increase was driven by several operational and nonoperational factors. First, our revenue exceeded the midpoint of our guidance range by approximately $4 million. The incremental profit contribution from this additional revenue contributed approximately $0.03 per share of benefit in the quarter. Second, we experienced lower manufacturing and lower operating expenses than expected during the first quarter, which drove approximately $0.09 per share of benefit during the quarter. The higher revenue, combined with lower cost of goods sold and lower operating expenses, resulted in a non-GAAP operating margin of 13% for the quarter, which was above our expectations. Lastly, below operating margin or nonoperational, we recorded a benefit of $0.07 per share related to tax benefits realized from the exercise of employee stock options. During the first quarter of 2019, our stock price increased significantly. And as a result, employee stock options were exercised at a higher rate than we expected. From a tax perspective, the company is entitled to take a tax deduction for the difference between the exercised price and the fair value of the grant. And as a result, our effective income tax rate was lower than we expected. Non-GAAP other expenses for the first quarter of 2019 was $800,000 of expense compared to $1.7 million of expense in the fourth quarter of 2018. The decrease primarily relates to lower interest expense, as we have continued to use excess cash to deleverage and the impact -- and also the impact of foreign currency remeasurement. Beginning in 2019, we no longer report our business in segments. Previously, we reported our business in 2 segments. Our previous segments were automation analytics, which primarily consisted of automation equipment and services provided to hospitals and health systems; and secondly, medication adherence, which primarily provided automation and packaging solutions to institutional, retail and payer organizations. Beginning in 2019, we now report our business as one segment due to the following factors. First, as our business continues to evolve with the vision of the Autonomous Pharmacy, we have made organizational changes to better serve our customers. With the previously announced companywide realignment, including realignment of our field and sales organizations, we are now structured to play a more consultative role, helping our customers to achieve performance goals today, while offering strategic support to drive improved clinical and financial goals over the long term. Secondly, throughout 2018, we began a platform-oriented sales model, whereby we often sell multiple product offerings to our customers. We have found that many of our customers purchase multiple products from our platform. Our platform strategy has made it increasingly more difficult to bifurcate our business. Third, as consolidation within our customer base has continued to occur, it has also become more difficult to manage our business in multiple segments. Lastly, the operating model and strategic decision-making are focused on one strategic direction for the Autonomous Pharmacy vision to serve all of our customers collectively. Let's now move to the balance sheet and cash flow. First quarter 2019 cash flow from operations was $26 million. Our operating cash flow in the first quarter was primarily driven by net income and adjusted for noncash-related items such as depreciation and amortization. During the first quarter of 2019, the company generated approximately $10 million of free cash flow. We believe our business will continue to deliver free cash flow through the remainder of 2019. Inventories at March 31, 2019, were approximately $104 million, an increase -- a sequential increase of approximately $3 million. The increase is driven primarily by additional raw materials needed to meet customer demand as we continue to grow. Accounts receivable days sales outstanding for the first quarter were 93 days, down 4 days from the first quarter of 2018; the decrease was mostly driven by strong collections. At March 31, 2019, our cash balance was $77 million, up $10 million sequentially. The increase in cash is due to proceeds from our at-the-market offering and from operating cash flows. During the first quarter, we utilized our at-the-market offering to sell approximately 243,000 shares of our common stock at an average selling price of $84.98 per share. The total gross proceeds raised during the quarter was approximately $21 million. These proceeds were used primarily to repay outstanding debt. During the first quarter, we repaid $39 million of debt. As of March 31, 2019, we had $101 million of outstanding funded debt. And our loan leverage, measured as outstanding total funded loan balance over the last 12 months of bank EBITDA, was approximately 0.7x. Our headcount was 2,472 at March 31, 2019, down 4 from the end of 2018. The decrease relates to our sales force realignment mentioned earlier, partially offset by new employees hired into other areas of our business. Now moving to our full year 2019 guidance; all product bookings and revenue guidance is unchanged from the guidance previously provided on our fourth quarter 2018 earnings call. We expect 2019 product bookings to be between $745 million and $780 million. We expect 2019 total revenue to be between $880 million and $900 million. We expect 2019 product revenue to be between $652 million and $668 million. We expect 2019 service revenue to be between $228 million and $232 million. We are increasing our total 2019 non-GAAP EPS. Our previous total year 2019 non-GAAP EPS guidance was between $2.40 and $2.60 per share. We now expect total year 2019 non-GAAP EPS guidance -- EPS to be between $2.62 and $2.82 per share. We now expect our non-GAAP operating margin for the full year to approach 15%, 1-5, consistent with our long-term financial framework. Let's now move to the second quarter guidance. We expect total revenue to be between $211 million and $217 million. We expect product revenue to be between $153 million and $158 million. We expect service revenue to be between $58 million and $59 million. And lastly, we expect non-GAAP EPS to be between $0.61 and $0.66 per share. Finally, for 2019, we are now assuming an average effective tax rate of 7% in our non-GAAP EPS guidance range. As Randall mentioned, we are very pleased with the results for the first quarter of 2019, and we look forward to continuing to deliver strong and profitable results throughout the rest of the year. Now we would like to open the call for your questions. First question, please.

[Operator Instructions] And your first question comes from the line of Matt Hewitt from Craig-Hallum Capital Group.

Good afternoon. Congratulations to the strong start of the year. First, I wanted to dive in on the gross margin. Historically, if you look back, there's usually a several hundred basis point decline from Q4 to Q1, and then it recovers and grows over the course of the year. That didn't really occur. In fact, your service gross margin was actually ahead of Q4. Was -- maybe what contributed to that? And how do you see that playing out over the remainder of the year?

Yes. Well, I -- we actually see the year going down just a tiny bit, I think, about 60 basis points here from 50.4% to 49.7% on a non-GAAP basis. But you're right, it's relatively flat and not much of a decline. I think we can point to a couple of strengths that we did mention publicly before. We believe in the third quarter earnings call, we did mention that we did see strong sequential increase in the gross margin in our backlog such that, that continues. I would say also -- in the first quarter, we're also somewhat favorable on product mix. So overall, our products and our platform are well received by customers. And the ROI and the benefit is clearly seen, and that shows again in gross margin and pricing strength, also anchored by those sole-source agreements that -- as Randy mentioned earlier.

And then as far as -- you haven't broken out historically, but how should we be thinking about software as a percentage of your mix? Obviously, with Performance Center, the shift toward the autonomous platform, is that a growing percentage? And where does that sit today, if you don't mind breaking that out?

So if you look at our strategic framework, right, as Randy also talked about, the cloud data platform, the automation layer secondly, and then the intelligence layer plus then the IT-enabled services, there are of course software components in each of those layers that are very important to the Autonomous Pharmacy. I would say that if you talk about pure software, that is increasing over time. Performance Center, I would point out, is software-based, but it also includes those Performance Center coaches that advise health systems strategically to really to obtain their goals and to achieve their goals. So it's increasing. We're not going to break that out necessarily in the short term as we evolve and transform the business to really execute on the Autonomous Pharmacy.

Okay. Maybe one last one from me, and then I'll hop back in the queue. I know you're not providing the historical metrics as far as greenfield versus competitive conversion. But maybe if you could speak anecdotally about what you're seeing from the competitive landscape and whether or not you're converting there?

We still are continuing to get competitive wins out there. And that particularly in the last 10 years was a key driver of our growth. And while we do want to continue to win in the competitive landscape, it's really about helping our customers understand how we're going to help them transform their own business by moving them to the Autonomous Pharmacy. And that's where the winning for us takes place. If we can get a customer to understand that, that's more important than getting a particular one-off product sale and a new account somewhere, just because of the breath of the products and the long-term strategic relationship that, that sets up for us as a go forward.

Your next question comes from the line of Mohan Naidu from Oppenheimer.

First on XR2, can you give us any color on how many you implemented so far and what the feedback has been and how does the pipeline look for the rest of the year?

Yes. I think it's going really well with our initial customers, has been well received. The ability to implement the system for both individual patients and other distribution points with perfection is the piece that really excites people. And so we get a lot of traction from that, and it is so central to the story of where the Autonomous Pharmacy is going to be able to take people. So I would just say without any specifics that -- I just think we're -- we feel a little bit ahead at least on the excitement behind that product and the uptake on it. The implementations are always a little bit longer in that sense in that we usually have to do some preparatory work and redesign maybe in a pharmacy to get some of those installs done. But it's just the enthusiasm behind the product we're really pleased with.

That's very exciting. Single dose tracking, this -- that product when you launched it, was very interesting. How has the feedback so far? Any customers that are going to live -- go live this year on that product?

The IVX Workflow?

The single dose tracking, I think you guys had a platform that you talked about at the ASHP.

You mean the Patient Engagement platform?

Yes.

On the software side, yes. So that's tracking well, right? So that platform consists of multiple products on the same software platform, and it's achieved essentially for retail pharmacies to not have to log in to 10 to 15 different screens. It combines those different activities with one data set. That's going well. We have new patients enrolling every single day. And how it really works as an ecosystem, yes, of course, there's Omnicell that helps implementation and proprietary software and it's plugged in to our ecosystem of retail pharmacy customers. And then the third party in that ecosystem are the health insurance parties that, of course, will want to find their at higher-risk patients and make sure they do enroll in med adherence programs. And yes, so that's going well.

No, I'd say it's gone well and it is relatively not as big a proportion of our revenues. But I think the 2 largest customers that are -- they're ahead of plan in their enrollments and are very enthusiastic about the program. And so we feel like there's a really great future with that product as a base to build upon.

One last one from me on the bookings guidance. What's the confidence level, given that in Q4, you had some, really honestly, $60 million of pull-forward, but you took out some bookings from 2019? I guess -- are you stretched to get to the current guidance? Or have you baked in enough buffering there for bookings growth this year?

Yes. So we feel good about our product bookings guidance. I would say they're tracking really well through the first quarter. Pipeline is very healthy. We see definitely the uptake from a platform perspective. And then, of course, we did the sales realignment in the fourth quarter. And we had minimum to almost no disruption. Really, really happy with the commercial execution and the strategic partnership of our commercial team with a top health system. So yes, we're confident.

Your next question comes from the line of Nina [ph] from Piper Jaffrey. Your line is open.

What portion of your retail pharmacy footprint already has this patient engagement software in place? And again, what's the cross-sell opportunity for this product across your base or other products into this space?

So there is sort of three questions there. Let's kind of go through them one-by-one. So we don't break out the number of pharmacies out of 40,000-plus. But in our network, how many are on the patient engagement platform? That number is increasing, and it's becoming more significant. But it's not necessarily the majority quite yet, but it is growing day-by-day. Cross-selling opportunities of both the patient engagement software platform as well as automation products and services, yes, we see more and more crossovers, where health -- top health systems are at risk for both their own employees' health costs, so we see more traction there where health systems are implementing those solutions. We see specialty pharma within health systems as well in CSCs, or consolidated service centers. So there's definitely the cross-selling opportunity there. That's one of the reasons also actually. We saw that opportunity. That's one of the reasons also we did that sales and commercial realignment in the fourth quarter. So yes, we definitely see it, definitely a lot more traction, but we've got to grow more there. So of course -- it's growing, OK?

And regarding your University of Tennessee win, you mentioned that they're upgrading to XT. Is that a housewide upgrade? Or they're going to take all of their previous systems and switch them over?

Well, I don't want to necessarily disclose customer specifics. But it's a significant booking. It's also a platform booking. That's the only thing I want to...

I think they're going to start with a significant portion and eventually they will, and that's seasonally what happens with most customers.

And your next question comes from the line of Bill Sutherland from Benchmark Company.

Good afternoon guys. What was international like in the quarter?

Yes. So of the $4 million exceeds on the top line for revenue for midpoint of guidance, a portion, $1 million-plus of that was -- the exceed was driven by international. So we definitely see some good uptake as well as international in the quarter.

It looks like that's a trend? It wasn't just a one quarter kind of situation?

I think in general, international, as we look at it, is growing roughly in line with total company.

And then, Peter, as you -- as the rollout of the XT continues, are you getting a sense, i.e., I know you have a very firm feel for the replacement aspect of it. But are you getting a sense for the growth potential beyond just replacement cycle?

Yes. Of course, XT is not only replacements. Of course, there's competitive wins that we will -- we anticipate to have for many years to come. But also expansions of ADC footprint at customer sites, right, where the percentage of corporates, if you will, of awards we also see increasing over time. Yes.

So I mean, that's kind of what I was getting at was it feels like it's up -- it's a time and it's a product where you can expand your influence inside the...

Yes. It's a place to start the next conversation, which is much more strategic than tactical of just replacing with the ADC. So it's well-timed. It's very helpful.

There are no further questions at this time. I will turn the call back over to Mr. Randall Lipps for closing remarks.

Well, it's always good to start the year off with a good start, and it's clear that our platform is winning in the marketplace and the company is continuing to scale nicely. And we've made a lot of adjustments over and realignments over the last two years, and it's -- it seems that we're at a good spot to continue on. And our solutions are driving improvements for patients and providers and healthcare and all sorts of continuums, and I think that's important. And I really like to thank our partners and our employees and our shareholders in believing in our winning strategy to help us deliver the Autonomous Pharmacy and improved healthcare for everyone. Thanks very much. That's for next time.

Thank you. This concludes today's conference call. You may now disconnect.