Omnicell, Inc. (OMCL) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Omnicell Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Peter Kuipers, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon and welcome to the Omnicell’s second 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 July 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 provide an update on our business. After Randall's remarks, I will cover our results for the second quarter of 2019 and our guidance for the remainder of the year. Our second 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.

Thanks Peter. Good afternoon. We are pleased to share results of another strong quarter as the healthcare industry continues to recognize the importance of the vision of the Autonomous Pharmacy. As we've discussed previously, this vision of creating a zero error fully automated and digitized infrastructure will lead to enhanced safety, control and efficiency of medication management across continuum of care. We have made significant strides this quarter to advance this vision and engage customers to join us on this journey. Our business is very healthy and continues to grow profitably. Key financial results for the quarter include record revenue of $217 million up 15% from the same quarter of 2018. Non-GAAP EPS of $0.67 per share compared to $0.46 per share in the same period last year representing a 46% increase. Our product backlog at June 30, 2019 is at an all-time high and is growing faster in our product revenues. During this quarter, we continue to see strong momentum of new customer partnerships that are embracing the vision for the Autonomous Pharmacy. The Autonomous Pharmacy integrates a comprehensive set of solutions powered by the Omnicell cloud data platform across three key areas. First, 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 automation of medication dispensing workflows which includes expert services that serve as an extension of pharmacy operations to support improved efficiency, regulatory compliance and patient outcomes. Some of our recent partnerships include Spartanburg Regional Healthcare System, an integrated healthcare delivery network in South and North Carolina has selected Omnicell Solutions after flagship research and teaching hospital. Spartanburg Medical Center as well as the newly acquired Mary Black campuses, Spartanburg will make -- Spartanburg like many provider networks is building a centralized distribution center or CDC at the main hub for pharmacy supply chain management. Central to operations in this new centre will be Omnicell’s XR2 Automated Central Pharmacy System, the robotic system designed to automate critical workflows to maximize inventory control, help improve efficiency and increase medication safety. Spartanburg will also have the ability to better utilize health data analytics through Omnicell Performance Center. MUSC Health named number one health system in South Carolina by U.S. News and World Report will be implementing Omnicell's Robotic IV Insourcing Solution to bring sterile compounding in-house as part of the health system central pharmacy operation. This unique program combines advanced robotic technology data and expertly train pharmacy technicians staff into a comprehensive turnkey package. MUSC Health will also implement Omnicell’s XT series in patient care areas. Additionally, we have secured several long-term partnership commitments with leading healthcare systems including St. Luke's University Health Network in Eastern Pennsylvania and Western New Jersey plus Northern Arizona Healthcare and in Charlotte, North Carolina’s based Atrium Health. These health systems will support medication management across their service networks through Omnicell Automation and Intelligence Solutions helping to improve management of the pharmacy supply chains, pharmacy staff, we focus on patient and clinical satisfaction. These three health systems alone represent approximately 1% of the U.S. hospital markets based on total bed count. For the second quarter in the company's history over 80% of these deals are anchored by long-term commitments and over 90% of these customers will purchase multiple products from the Omnicell’s platform. These are examples of how our business has expanded over those years from a single point solution to a platform of products and services which has resulted in larger deal sizes across multiple product lines, more complex implementations and we believe a more comprehensive and enduring relationship with our customers. Autonomous Pharmacy is steadily evolving from a vision to a collaborative mission being driven in partnership with our customers and industry partnerships. I'm thrilled to share this progress and look forward to our continued success. Let me turn the call back over to Peter for second quarter update and the rest of the year guidance. Peter?

Thank you, Randall. Our second quarter 2019 GAAP revenues of $217 million was up 15% over the second quarter of 2018. The increase in revenue is largely driven by an increase in XT Series implementations from a growing base of customers. Second, increases in annual service and maintenance revenue from a large installed base of equipment and lastly contributions from new products introduced over the last year. The second quarter earnings per share in accordance with GAAP was $0.37 per share, up from $0.16 per share in the second quarter of 2018. The increase in earnings per share is largely due to higher revenue in the second quarter of 2019 and achieving economies of scale over our operating expenses. In addition to GAAP financial results, we report our result from 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 in amortization of debt issuance cost. These non-GAAP financial statements in addition to GAAP financial statements because we believe it is useful for investors to understand the effect of amortization of acquisition-related costs and non-cash stock compensation expenses that are a part of our reported results as well as onetime events the acquisition and restructuring related expenses. A full reconciliation of our GAAP to non-GAAP results is included in our second quarter earnings press release and is posted on our website. Second quarter 2019 non-GAAP EPS was $0.67 per share compared to $0.46 per share in the same period last year representing a 46% 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 and income for the second quarter 2019 was $1.1 million compared to $2.8 million in the second quarter of 2018, the decrease primarily related to lower interest expense as we have continued to deleverage. Let’s now move to the balance sheet and cash flow. Second quarter 2019 cash flow from operations is $27 million. Our operating cash flow in the second quarter was primarily driven by net income and adjustments for non-cash related items such as depreciation and amortization which were partially offset by changes to the working capital. During the second quarter of 2019, the company generated approximately $12 million of free cash flow. We believe our business will continue to deliver free cash flow through the remainder of 2019. Inventories at June 30, 2019 were approximately $104 million, flat from the previous quarter and flat from June 30, 2018. We have been able to hold our inventory relatively constant over the last year despite continued growth, new product launches and larger average deal sizes. Accounts receivable days sales outstanding for the second quarter are 87 days down six days from the previous quarter and one day from June 30, 2018. The decrease in DSO from last quarter is primarily driven by higher sales. As of June 30, 2019 our cash balance was $87 million up $10 million sequentially and up $41 million from June 30, 2018. The increase in cash is due to proceeds from our aftermarket offering and operating cash flows. During the second quarter, we used a lot of our aftermarket offering to sell approximately 217,000 shares of the common stock at an average selling prices of $82.51 a share. Total gross proceeds raised during the quarter was approximately $80 million. These proceeds were used repay outstanding debt. During the second quarter, we repaid $21 million in debt. As of June 30, 2019 we have $80 million of outstanding from the debt and our loan leverage measured outstanding total funded loan balance over the last 12 months of bank EBITDA was approximately 0.5 times. As of June 30, 2019 we are now in a net cash position for the first time since the closing of this same transaction in early 2016. Our headcount is 2555 at June 30, 2019, 83 from the end of the previous quarter and up 131 from the same quarter last year. The majority of the quarter-over-quarter increase is for manufacturing, implementation and service personnel needed to support our business as it continues to expand. Now moving to our full-year guidance. We are increasing our full-year product bookings guidance. We now expect 2019 product bookings to be between $765 million and $790 million. Our previous guidance was between $745 million and $780 million. The increase in our product bookings guidance is based on strong commercial momentum especially from expected orders for our XT Series. We continue to gain traction in XT upgrades and as we have mentioned previously, we're in the early years of the XT upgrade cycle. We are increasing the midpoint of 2019 total revenue guidance by narrowing our guidance range. We now expect 2019 total revenues to be between $886 million and $900 million. Our previous guidance range was between $880 million to $900 million. The midpoint of our new guidance range is $893 million compared to $890 million with the midpoint of the guidance range provided in our 1Q 2019 earnings call. Also the midpoint of our new total revenue guidance range implies approximately 13% year-over-year growth from a full-year 2018 total revenue. This breakdown as follows. We now expect 2019 product revenue to be between $653 million and $663 million. Our previous guidance range was $652 million and $668 million. We now expect 2019 service revenues to be between $233 million and $237 million. Our previous guidance range here was $228 million and $232 million. We are narrowing our total year 2019 non-GAAP EPS guidance. We now expect 2019 non-GAAP EPS to be between $2.65 and $2.82 a share. Our previous 2019 non-GAAP EPS guidance range was $2.62 and $2.82 a share. The midpoint of our new non-GAAP EPS guidance implies approximately 31% growth year-over-year. For the third quarter of 2019, we expect total revenues to be between $227 million and $233 million. We expect product revenue to be between $168 million and $170 million. We expect service revenue to be between $59 million and $60 million and we expect non-GAAP EPS to be between $0.67 and $0.72 a share. Finally for 2019, we are assuming an average tax rate of 7% in our non-GAAP EPS guidance range. As Randall mentioned, we are very pleased with the results for the second quarter 2019 and we look forward to the team to deliver profitable results throughout the rest of the year. Now, we would like to open the call for your questions.

[Operator Instructions] Your first question comes from the line of Mohan Naidu from Oppenheimer. Please go ahead. Your line is open.

Thanks for taking my questions. Randy, Peter you think you guys made a comment about backlog being all time high. I guess XT is probably a big part of it. Can you talk about what other products are contributing to that. And is there any change in mix in that backlog, I think as of last year, I think you guys had mix around 22% long-term versus short term. Any other color would be useful.

Thanks Mohan. If you look at of course the total revenue, product revenue, it’s a big service revenue to the site, so within product revenue there is also product backlog XT Series is the biggest product line. So yes that is the correct assumption. There is one new out there that most of the increase, the revenue increase in product backlog. It's really more in the short term backlog. So that is an improvement if you will in the Installation, timing and the product backlog. So we're very pleased with that commercial momentum as we refer to the backlog.

And I guess Peter, what are the products that are contributing on the short term side apart from XT, are there any specific products that are gaining momentum at this point?

It’s platform of XT Series, Performance Center, XR2, it’s not robots and services. So building out the platform that we announced in December our last year XT. So that’s all picking up and including our device.

Okay, thank you. And maybe couple more of questions. I guess in the last couple of weeks there have been a lot of questions about receivables growth and revenue recognition. Maybe I guess what type of terms do you normally place in your contracts for payments. It sounds like the implementations are taking longer. So there are delays in conversion there but you insist on a fixed payment terms or do you let the clients wait until the full implementation is done and can you elaborate any of that?

Yes. So it's a good question. A couple of dynamics there. So the average payment terms are roughly 45 days larger long-term partnerships might be more kind of 60-day range. International has by nature longer payment terms as usual in this business practice there. And I would say because of the larger deals and the larger installs probably adds about 10 days to that average. And I would also say because of our configurable product that we serve the customer that probably adds another 10 days, it calculates to roughly about 80 days average there. You can compare and also maybe some other Medtech companies that are also in the 80 range to up to 100 or above that. So we feel very comfortable. You should also consider that we build for our main product lines, we built on shipping. So not all companies do that. So to some extent that's the elongated the payment cycle as well.

And just to be clear, when you ship the product, when you put that revenue, I guess not revenue but that amount into receivables do not recognize the revenue, right?

Exactly. Revenue falls later after installation is completed, after there's written customer acceptance for the main product lines.

Okay, got it. Thank you so much for taking my questions.

Your next question comes from the line of Gene Mannheimer from Dougherty & Company. Please go ahead. Your line is open.

Thanks. Good afternoon. Good job on the quarter and outlook. I just wanted to follow the other line of questioning. Do you think you can get DSOs back down to the 60s and 70s levels over time and same for inventory days. Could you bring, could those go even lower going forward?

We're not really going to give guidance on the specific DSO and do that if you will. Of course we're working on both metrics expecting to have some traction there. Again I would refer also to other Medtech companies that DSOs range 80 to 100 and not all of those have contractual terms where you actually can build upon sharing the price. So we have a strong contractual term there. On the inventory side, I would say that we do have a fairly large installed base as you know that we need to stir on services perspective as well. If a marketing commitment to serve as equipment in the field for about 10 years, so that included in inventory as well plus then we have the new products ramp up for XR2 and for this.

Okay, it makes sense. Thank you. Could you offer Randy maybe some commentary around the IV line of products. How's the reception there. What are you seeing. What type of reception from your customers? Thank you.

Well I think everyone in the provider network is probably cost of why we’re compounding. And you have a lot of choices to make either outsourcing or buying a robot or in-sourcing in on the shelf, you done it. And the pricing in the IV compounding market shifts around a little bit. So it's a more complicated equation because how you sent the robot out but you wanted to get maximum efficiency. And so that's why we see bigger uptake on the IV buy side but we're really helping customers run that for them and we could get better throughput and better productivity out of it. But this is a constant problem caused by the compounding and I think we have new products on the IV workflow side and we're heavily invested in this area to constantly find ways to make this cheaper, faster and better. And so I think everybody recognizes it, it's about what strategy they want to take and how comfortable they are having us come in and help them run some of those pieces or whether they want to try to take some of those on themselves and I think some of the earlier customers who took these products themselves. I think it's harder for them to keep up with the configuration changes as much as they should. So we think we got the better working models in the floor.

Very good. Thank you.

Your next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Please go ahead, your line is open.

Thank you for taking the questions. Just a couple for me. I guess first-off on and kind of some of the areas that have been hot button items here recently. But on the receivables and the DSOs and I appreciate what you put on the press release but I'm wondering if you could discuss a little bit how the business has changed over the past call it half dozen years. Are you seeing more systemwide adoption maybe 10, 12 hospital systems purchasing the product versus single hospitals or even divisions within the hospital. And how does that change or how do those bigger contracts, how do those change, how you collect on those receivables?

Yes, that's a great question. So we talked in this script and in earlier scripts about the long-term sole source or long-term commitment if you will, multiyear and those are typically five, seven or 10 year commitments where we become also become partner for that health system to provide all medication management automation products and services and that is substantiated, if you will as you go through the partnership to build the next level of pharmacy in the health system by purchase orders of bookings every year or six months if you will as you build that out. The deal size is also becoming bigger. So those deals are becoming bigger, the installs are becoming bigger as well. I would say, it doesn’t impact the average collection timing as well. Sometimes hospital systems for last four and installed over the last facility but they're becoming a lot more strategic as well. If you look at our bad debt expense the last five years has been less than half percent. So hospitals do pay also the bigger health system including as well but just might be little follow-up guidance.

Okay. And then shifting to the inventories, I know you just provided a little bit of detail there as far as making the commitment for 10 years to support the programs. But if you look back there's been some comparisons to the last upgrade cycle, the G4 upgrade cycle. Maybe if you could describe a little bit some of the differences between the G4 upgrade cycle and the full equipment platform upgrade cycle with XT and some of these other product lines?

Yes, so the G4 upgrade was different. That was a console upgrade, which is a computer console in the frame on the existing frame if you will. Therefore the product call, so both for upgrades and sold complete product, so the requirements for inventory for service was definitely the same products if you will. Now move forward now to current period today. We now have the largest installed base specifically in the U.S. consisting of AcuDose and G4 Omnicell that we will support for economic life for our customers up to 10 years after purchase and of course those service bars are not used in the XT Series. So that's a new frame and a new console. And if you look at inventory base on demand for both current product perspective and from service perspective I feel comfortable there.

Got it. All right. And then maybe one last one from me regarding adjusted operating margin 14.8% in the quarter. That's a really good number and it's the highest we've seen since Q2 of 2014 which was a little bit of an anomaly due to some recognition of vacation. But I'm wondering 14.8% in Q2 implies that you're going to get higher than that as we get into the back half of the year. Have you had a chance to look at maybe a three or five year target for that, I know that you've kind of historically stuck to that 15%. But as you look at the model shifting to more software, do you envision an opportunity for that to maybe lift at times to something north of 15% on an annualized basis? Thank you.

Yes, so first looking at 2019 as you've going to back into our guidance and use the midpoints of the provided guidance, I think you leave calculating out roughly $0.145 for years. So the math shows that both third quarter and fourth quarter are estimated to be slightly higher and the 2Q 2019 non-GAAP operating margin, I would say I'm not ready at this point to provide loans or guidance, we’re a transformative company more of a service oriented company, also we do have pharmacy. So as the market we see, the plants are growing with our solution I would say, so more to follow.

Understood. All right, thank you.

And then another last one maybe just looking at the data that we disclosed the growth of the multimillion dollar deals if you will, if you look at the Top 10 for example, the Top 10 deals in the fourth quarter of 2018 they were on average $10.3 million each compare that to fourth quarter of 15 that was $2.7 million in average. So I guess about the last six years is the last four years gives you a good indication of the average PO size for the Top 10 in the quarter. So almost three or four times bigger if you look at those products.

All right, thank you.

Your next question comes from the line of Jamie Stockton from Wells Fargo. Please go ahead, your line is open.

Good afternoon. Thanks for taking my question. I guess Peter, I think you said that obviously you guys have gotten into a slight net cash position here. How are you thinking about at this point. It's been I think little over two years since you did your last acquisition piggybacking on Matt’s question earlier about kind of margin thoughts. Historically, it feels like every time you guys have bumped up against 15%, you've kind of backed yourself down a little bit from that by buying interesting businesses. Anything that would be great.

Yes, Jamie, if I could take that question. I think a lot of momentum in the business, so it really we're actively sorting through essential always and temporary thing that can fit into that platform that will enhance the big pipeline, the big connection to these customers that can tie into the platform to enhance and make it more valuable. So as we have sort of evolved from the single solutions platform play, it makes a lot of sense to try to find the right kinds of tuck-ins just to leverage that platform. So there's lot of things out there. So just got to find the right one at the right time but there's no particular timing but we were active, we will update and we want to make it make sense but it’s not particularly time to earnings or anything else other than finding the right ones at the right time.

Yes, it’s fairly to say also that the last big acquisition. Let’s say if you will recall earlier on the XT upgrade cycle, the early years or think that -- do you think the potential of your upgrade cycle for the customers that came with this actually does product ADC that’s also early years. So there's more to come there. So we always look at the acquisition that doesn't mean that we need to call, call over every year, every two years. You need to find a framework needs to be at least an adjacency, needs to be computing as well revenue growth and the profitability that maybe not nearly 50% at least the contribution likely make sure deals are accretive on a non-GAAP basis, non-GAAP EPS basis if they want.

Okay, that's great. And then maybe just an update. I know you guys consolidated the business and reported two segments anymore. And I realize you kind of changed the way things are run internally. So that makes sense but if we think about maybe the non-acute settings retail pharmacies, institutional pharmacies. Can you just give us an update on how things are going there. Is there any traction in trying to build out a broader offering with deals like the platform?

Yes. I mean, that business is evolving. Done it there we have and then we have a very large customer base and a partner network of the population health solutions side, medication therapy management, a comprehensive medication review. We have some really good early results commercially not big enough to break out brand needs on some of the P&L, so the benefits are that we have a large customer base plus also we have some good proven successes but we need to continue to work on that.

Yes, I think it's still sort of in the embryonic stage but good early success stories and when you deliver those up and continue to see some bigger growth there, we have got nice growth but it’s all small pace and it fits with the whole story. When you go to these provider networks, they're looking at both inpatient and outpatient and you got to have solutions that work in both institutional pharmacy they're evolving as well. I think our business there is still strong. We just want to continue to develop some of our population health products to get to a bigger size.

Okay, thank you.

The next question comes from the line of Bill Sutherland from Benchmark Company. Please go ahead, your line is open.

Hey Bill.

Hey Peter. My question got pretty much answered in the last two, so good quarter. I'll leave it there. Thank you.

Yes, thank you, Bill.

Your next question comes from the line of Mitra Ramgopal from Sidoti. Please go ahead. Your line is open.

Yes, hi. Good afternoon. Just wanted to follow-up on the record backlog you're seeing and get a sense to say if it's coming more from say new customers versus upgrades or competitive wins, any color on that would be great.

It’s all of the above, we’re in early cycles or years where the XT upgrades, we continue to gain market share, we believe that the first six months of this year we had further gains, market share as well and then the growth also comes from expansion. I can remember that these big health systems that we have a long-term partnership with, they expand as well. And they might implement our products and services at the next facility. So it's a combination of all, so we’re seeing good traction of all of those tracks or revenue drivers.

And I will just add to that XT series. Certainly is in some cases is the entry point for the big discussion which then runs out into a longer and broader type agreement. I think a couple of our deals we announced Spartanburg, was a new customer for us that we brought other ones as well. We don’t really track those things. But it's just about how important it is to have these kinds of systems and a large system in a program added way. And I think that these systems are scaling up and standardizing and most of them, most of them are older systems or legacy systems from where we acquired. So eventually they've got to make a bigger movement towards standardizing it and putting in more piece to the product line. You just start to see that.

Okay, no, that's great. And then just following up on that. Any constraints in terms of being able to handle the increased business you're seeing and in terms of whether it’s needing to add personnel to handle the implementation or you comfortable that you have enough work on board?

Yes, in our prepared remarks we talked about the headcount increase. So sequentially were up 83 on headcounts on the end of March and the majority of 83 is from manufacturing, implementation teams and services. So we are actually scaling up. You have to do that always just a little bit ahead of the revenue increases, just do a lot of training et cetera. So yes, we are doing that. And we don't see newly manufacturing capacity. So for the XT Series, we got really efficient assembly invest plan if you will where we can do second shift also.

Okay, thanks again for taking the questions.

Your next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Please go ahead, your line is open.

Just one follow-up from me, during the prepared remarks I believe you were talking about the three wins with St. Luke's, Northern Arizona and Atrium representing 1% market share from a bed count perspective. And I know historically you've talked about gaining 1% to 2% a year and you obviously hit those numbers and that allowed you to become the market leader as of last fall but I'm just curious does that -- does the 1% to 2% still hold or are you seeing such momentum that you think that you could actually take more than 2% share over the next couple of years as you get into the XT cycle in particular?

So there is a couple of nuances there. So Northern Arizona that was a competitive conversion. So that's a new customer, Atrium is a renewal, I believe platform renewal sole source contract as I think about bigger platform more products if you will and St. Luke is also an existing customer. But that is a new sole source agreement, multiyear agreement.

Okay.

Yes, that's the only part of that suddenly. But it’s anchor if you will but that definitely is our strategy and then smaller locations and health systems that we don't disclose that they will make to the level of press release, we're chipping away at those and we are getting that first year quarter, we takeaway, we have that competitive versions. So we don't necessarily want to give guidance on market share increases but we believe that first six months of the year that we get further gain market share in the U.S. And then 1.5% to 2% has been mostly historic rate over the last couple of years. It might have been higher in so many years but I think that's fair enough for now to assume and the real expansion also our revenue besides competitive first is really the whole platform and then the upgrade cycles.

Got it, all right. Well that’s it, thank you.

Thank you.

And there are no further questions at this time. I will now turn the call back over to Randall Lipps for closing comments.

Well, thanks for joining us today. As we enter the second half of 2019, I'm thrilled to see Autonomous Pharmacy Vision coming to life. Together our health systems and retail pharmacy partners are helping to create value for the industry by transforming pharmacy care delivery model. And this is really freeing up the pharmacists. That is getting them out of the basement behind from behind the counter and getting them connected to the clinicians and the patients, so that we can improve the outcomes for everybody. And I especially want to thank our customers for partnering with us especially the Omnicell team for executing on our strategy as we deliver our vision of the Autonomous Pharmacy and really improve healthcare for everyone. Thanks everybody. See you next time.

Good bye. This concludes today’s conference call. You may now disconnect.