Omnicell, Inc. (OMCL) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Omnicell Corp Second Quarterly Earnings Call. At this time all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chief Financial Officer, Peter Kuipers. Thank you. Please go ahead, sir.

Thank you. Good afternoon, and welcome to the Omnicell second quarter 2020 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-K filed with the SEC on February 26, 2020, 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 28, 2020 and all forward-looking statements made on this call are based on the beliefs of Omnicell as of this date only. Future events are 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, 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 will cover our results for the second quarter of 2020 and our guidance for the third quarter of 2020. Our 2020 second quarter 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. 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. Let me now turn over the call to Randall.

Good afternoon and thank you for joining us today. I'd like once again to start the call by recognizing all of the healthcare professionals who are on the frontlines battling COVID-19. These are challenging times and your courage and resilience in the face of this pandemic continues to be nothing short of heroic. As our healthcare partners continue to navigate the impact of COVID-19, we remain focused on our long-term strategy, which we believe is unchanged. We are committed to executing the vision of the autonomous pharmacy by delivering automation, intelligence and services designed to transform the pharmacy care delivery model to help drive significantly improve outcomes and lower cost. As a COVID-19 pandemic spread in different regions in the U.S. and internationally, there were several shortages not only in ICU capacity, equipment and PPE that occurred at varying levels, but also in pharmacy. More specifically, in U.S. hospitals, we found that there was a lack of visibility in pharmacy supply of approximately 75 drugs that are critical for COVID patients. In response to help our hospital customers, we did two things. We leveraged our analytics platform and rapidly develop specific analytics tools to better inform health systems and help them strengthen their pharmacy supply chain. And as discussed on our last call, we also developed and launched a rapid response XT automated point of care system offering to help health systems expand bed capacity for potential patient surges. And speaking with our health system customers and industry groups in recent months, we understand that COVID-19 has made them recognize how critical a sophisticated supply chain is to smooth business operations, and quickly to react to a surge in patients. COVID-19 also increase the urgency to digitize and automate processes throughout health systems, including the digitization and automation of pharmacy, to reduce manual touches of medications, and to enable healthcare providers to focus more on patient care. As a result, we believe that our health systems customers are more willing to take these transformational steps because they see the significant value in what we do. We are using this moment in time to focus on and invest in those strategic priorities that are within our control to accelerate Omnicell’s transformation and we are doubling down on the development of the vision of the autonomous pharmacy in the following areas. First, we are accelerating the commercialization of the professional services that we announced in December last year. Second, we are increasing the momentum of the shift to cloud-based products and services development. Third, we're speeding up the simplification, speed and efficiencies of quote to cash processes. And fourth, we are continuing to drive virtualized and digitized commercial implementation and engineering processes. We believe that these actions will result in a stronger and even better position on these post pandemic conditions. In terms of building out our offering, last week, we announced another key milestone on the journey to the fully autonomous pharmacy, Omnicell One, which will be generally available in August. Leveraging cloud-based data and predictive prescriptive analytics, Omnicell One provides real time visibility with actionable insights and workflow optimization recommendations that will help improve clinical, financial and operational outcomes across the pharmacy supply chain. As a result of COVID-19, many of our customers have prioritized supply chain optimization in order to provide critical care to patients. We believe Omnicell One represents a significant step towards leveraging analytics that enable our customers to meet demand in an efficient manner. At the time of our last call, we had a little visibility into the impact of COVID-19 on our customer base. Shelter in place was enforced throughout the U.S. and parts of Europe. Elective surgeries had been postponed and hospital systems were ramping up to treat COVID-19 patients. As a result, our sales teams had some difficulty engaging with customers on new bookings also, some implementations from backlog were being delayed as hospitals were consumed with treating COVID-19 patients or were preparing for a potential surge in COVID-19 patient hospital admissions. Since the time of the last call with parts for the U.S. and Europe reopening, our visibility into our customer base and how they are managing their businesses through the pandemic have increased. In addition, customers have a better understanding of how to treat COVID-19 patients and adjust their capacities accordingly while returning to more normal operations. We also have greater visibility into our customers' financial scenario planning and forecast. We believe that a leading indicator for the spend environment for our products and services is the level of elective surgeries compared to pre-COVID levels. We have seen an improvement in elective surgery levels and availability of budgets spent in our customer base. A recent L.E.K Consulting survey estimated that the levels of elective surgery versus pre-COVID levels will increase from around 40% in the second quarter to 65% to 75% in the third quarter, to 75% to 85% in the fourth quarter, and next year approaching 95%. While this is encouraging, overall we believe that the drivers of a sustained recovery and electric surgeries will likely vary regionally and may be predicated on the extent and duration of COVID outbreaks. Turning to our results for the second quarter and our business outlook, on our last call we discuss expected disruptions for product implementations as well as new product bookings. At that time, it was difficult to predict how significant these disruptions would be to our business. As time progressed, we gained more visibility into the environment. And I'm pleased to report that the impact to our business was not as significant as we expected. And we exceeded our own internal plans for each of the product bookings, revenue and non-GAAP EPS during the second quarter. While the environment continues to change rapidly, we are beginning to see more positive indicators for our business. Although we’ve seen some delays in new product bookings, we were encouraged by the progress made during the second quarter. In many regions, elective surgeries have resumed and in areas less impacted by COVID-19, we have been able to resume some onsite sales activity. The overall level of system implementation has also been increasing. I'm also pleased that we have experienced no disruption to our supply chain and our implementation capacity, which was and has been fully available throughout the year. At this point, knowing what we know, we believe that the second quarter bookings and revenue represents the lowest quarter in 2020. We expect that bookings and revenue will increase sequentially through the third and fourth quarter of 2020. We have implemented a variety of technology based tools to assist our customers through this difficult time, virtual tools that enable customers to self-install certain automation products have been extremely valuable, and that we've enabled some implementations of our solutions to continue without the need for our teams to be onsite to perform these services. In addition, we have been successful in leveraging technology to transition to remote product demonstrations, which has enabled our sales team to engage with our systems in a virtual environment. We did accelerate the implementation of these virtual tools, and intend to continue to use and leverage these tools post pandemic. For many years, we've talked about our long-term sole source agreements. Today, I'd like to go in depth on these agreements. This is a really important element to our strategy going forward, as it enables us to understand the value of the customers we've already signed off. We have been implementing and expanding this strategy successfully for the last two years. In 2018, we realigned our commercial structure to focus on the top 300 health systems in the U.S. with dedicated customer success executives, as we believe they represent the vast majority of the available market we target. So, as of the end of the second quarter, more than half of the top 300 U.S. health systems, as defined by definitive healthcare are current Omnicell customers. And a 141 of those have entered into long term sole source agreements with us, most with a duration of five to 10 years. With the majority of the sole source arrangements, we have co-developed a multiyear medication management automation plan to drive increased levels of medication management automation to deliver improved accuracy, patient and financial outcomes. So, to assist with your understanding of how multiyear medication management automation plan works in practice, we have included an example of an Omnicell health system customer in the investor deck posted on the Investor Relations portion of our website. This customer example shows a 12 location health system planning to invest in medication automation in each of the next five years to deliver increased KPIs and outcomes and efficiency, compliance, safety and people. Now moving to customer success, some of the new customer wins during the second quarter include Orlando Health, one of the Central Florida's largest health system, serving more than 2.7 million patients will implement Omnicell XP Automated Dispensing systems across its eight hospital system to improve clinical and operational efficiencies at the point of care. Moses H Cone Medical Center in North Carolina will be expanding their Central Pharmacy IV Compounding Program, a comprehensive service model that combines advanced robotic technology, data intelligence, and expertly trained pharmacy technician staff to in-source their sterile compounding to enhance patient safety while reducing overall cost. Also during the quarter, our Population Health Solutions division successfully launched our first location with Walmart as part of an enterprise wide rollout of our medication synchronization platform to all Walmart locations. In our international market, we recently announced a new software partnership with the West Yorkshire Association of Acute Trust, an innovative collaboration of NHS Trusts across West Yorkshire in Harrogate in the United Kingdom. The six NHS Trusts in this region will be implementing our supply x -- supply chain solutions, improve supply chain, help deliver consistency of care, and openly share data across the collaborative. We are thrilled to partner with these organizations. We are committed to working with our healthcare partners during these challenging times providing the technology and intelligence that will help them navigate a rapidly changing landscape and deliver safe, efficient and high quality patient care. With that, I'll turn it back over to Peter for second quarter results.

Thank you, Randall. As Randall said and as I will discuss in more detail later, COVID-19 has had a negative impact on new bookings and has delayed implementations as our ability to access hospital systems and their staff has been restricted in certain locations. That said, we are encouraged by the results for both product bookings and revenue in the second quarter. Our second quarter 2020 revenue of $200 million was down 8% over the second quarter of 2019. The decrease in revenue from last year was largely due to delays and implementations of point of care, XT series related to COVID-19. Moving to the earnings per share, second quarter loss per share in accordance with GAAP was $0.10. This compares to earnings per share of $0.37 per share in the second quarter of 2019. The decrease in earnings per share is largely due to lower profit as a result of a decrease in revenue, as well as higher operating expenses compared to the same period last year. The impact of these factors has partially offset the lower income tax expense. A full reconciliation of a GAAP and non-GAAP results is included in our second quarter earnings press release and it's posted on our website. Second quarter 2020 non-GAAP EPS was $0.37 per share, compared to $0.67 per share in the same period last year, representing a 45% decrease. The decrease in earnings per share on a non-GAAP basis is again largely due to lower revenue, which was partially offset by lower income tax expense. Now I'd like to quickly cover our cash flow and liquidity, as we believe it is strength of our business, particularly during these uncertain times. At June 30, 2020 our cash balance was $134 million, up from $104 million at March 31, 2020. The increase primarily resulted from free cash flow generated within the quarter of around $28 million, primarily driven by improvements in our working capital. Net cash provided by operating activities during the second quarter of 2020 was $47 million, up from $27 million during the same period last year. The increase was primarily due to improvements in working capital, partially offset by lower net income. Accounts receivable days sales outstanding for the second quarter were 87 days, unchanged from the same period last year and down six days sequentially. We had record accounts receivable collections in the second quarter. Our liquidity remained strong. As of June 30, 2020, we had no debt and have access to $500 million of committed capital to the revolving credit facility that we put in place in November 2019. As we discussed on the last quarter call, we took certain cost reduction actions during the first half of 2020. These cost savings actions include: one; elimination of all non-essential travel, second; hiring delays, third; reduction of consulting costs, fourth; elimination of a tradeshow and other marketing related expenses and fifth; delays in certain capital expenditures. In addition to these actions, we have delayed management fees for 2021 and have reduced other compensation incentives. We also restarted certain parts of our organization to ensure that we are operating as efficiently as possible as we accelerate a transformation of the zero-error fully autonomous pharmacy. As a result, we eliminated approximately 130 roles within our organization primarily related to the engineering, surface and manufacturing organizations. Approximately two-thirds of these reductions were a result of previously announced strategic decisions. Our one-third was volume related and better enabled us to match our business to the current market. Strategically, this facilitates and accelerates the shift from hardware-based and on-premise engineering development capabilities to cloud-based competencies that require different skill sets. And for services, this change accelerates a shift from traditional maintenance services to the professional services offerings that we announced last year. We recorded approximately $6.5 million of severance and restructuring costs in the second quarter as a result of these actions. Overall, through our cost reduction actions and this restructuring, we expect to realize an additional approximate $40 million of operating expense savings during calendar 2020, when compared to the original pre-COVID 2020 guidance, almost on February 6th, this year. To provide additional color here we expect 2020 operating expenses now to be between $310 million and $315 million. We will continue to manage our operating expenses in line with the performance of the business and would expect the majority of these cost savings to be limited to 2020 as we begin to increase investments overtime to support market demand driven future growth. Now moving to our guidance, our revenue and non-GAAP EPS. While the mid to longer term outlook remains uncertain, we do believe that we have reasonable visibility into the near-term. As a result, we are providing the following guidance for the third quarter of 2020. We expect total revenues to be between $204 million and $212 million. We expect product revenue to be between $143 million and $149 million. We expect service revenue to be between $61 million and $63 million. And we expect non-GAAP earnings per share to be between $0.44 and $0.52 per share. We have taken a regional approach to our bookings pipeline as availability of resources, budget, and the level of COVID-19 impact varies by region. And at times, there's also variation within one region. While we do not provide guidance for product bookings at this time, we do expect product bookings to increase from the second quarter through the third quarter and from the third quarter through the fourth quarter. Lastly, we have refreshed our long term market assessment, including our go-to-market strategy of long term sole source partnerships. Now we have updated our strategic financial framework goals. We believe that post pandemic conditions, we can return to the path towards a long term goals offs 10% to 12% organic revenue growth, 80% non-GAAP operating margin and free cash flow between 90% and 110%, as a percentage of GAAP net income. While on long term framework, we may suffice we believe that this will take longer to achieve than initially expected, given the uncertainty and duration of COVID-19. With that, we'd like to open the call for your questions.

[Operator Instructions] Your first question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your line is now open.

Good afternoon, and thank you for taking the questions and giving us a little bit of help at least the regarding Q3. Given the current environment, maybe could you talk a little bit about how the selling environment has evolved from maybe May to June to where we're at today, as hospitals are starting to reopen in some areas for elective procedures, how are those discussions changing? And what are the customers telling you?

Well, I think, kind of, almost on every metric I can think of Q2 was below dip in every month and almost every quarter, we're getting more access. The discussions are continuing where they were left off, or we've continued those discussions sort of in a virtual mode. So, I just think that for sure, healthcare systems have discovered that they're going to have to operate at full capacity, even with COVID present. And that includes not just tactically, but continuing to make good strategic decisions like deploying more medication automation over time. So, it's really good to hear these conversations, and not everybody is at the full discussion point or is full level yet, but everybody has made movements toward back to normalcy. And it just, and I think the elective surgery watermarks on the L.E.K study are sort of a good indicator of that. And, but I just think that you've got to remember hospitals, they're a live entity that has been running 24/7 365 and eventually they figure out how to keep their businesses in the proper mode and making good decisions. So, I don't think it's that far off.

Okay, and then maybe a follow up and then I'll hop back into queue. Historically, you've talked about the medication dispensing cabinets and your equipment and software being a top five purchasing item for hospitals. And given the current environment and the budgets that hospitals are dealing with, I think the American Heart Association was talking about losses of $325 billion in the first half of the year, and that's net of the CARES Act. But when you look at this environment, obviously very challenging, how quickly can their buying behavior start to rebound as these elective procedures return? Maybe they're able to kind of get back into maybe not necessarily a black but close enough. How quickly after that? I'm trying to think back to ’08 and ’09. I know there's just disruption there as well, but how quickly are you expecting them to return to the table and get back to contracting? Thank you.

Yes, so Matt, this is Peter. So I think in the past, we've said that we've always considered our automation infrastructure solutions to be in the top two or top three of the priorities. So we think that's unchanged. There's a couple different views as well on kind of the profitability of hospitals, as you can look at the Kauffman Hall report a little bit more positive on the net operating margins for hospitals that they polled in the month of May. But like Randy said earlier, we see momentum, if you will, in the pipeline, in the activities and also in bookings. And we believe that sequentially through the year that product bookings will increase from the second quarter through the third quarter and from the third quarter through the fourth quarter. So I guess, from a caller perspective, we were more positive than ever of you would think and hearing your question.

Understood. Thank you.

Your next question comes from the line of David Larsen from Variety Investment. Your line is now open.

Hi. Can you talk a little bit about your ability to deploy your various solutions in a remote manner? I mean, your product revenue beat our estimate and I think consensus as well. I mean, so obviously you're deploying some products, I mean, how much of these can be done onsite versus virtually please? Thanks.

Well, I think it's really almost the majority of the XT Point of Care systems can be deployed virtually if it's particularly if it's not a first time customer. There's new technologies, including set up wizards that customers or technicians can employ, that almost make it impossible to make a mistake when they do these last steps to bring a system live. So, and these kinds of technologies and deployments of wizards and like have just been done in most recent quarter. And the rapid response deployment of our systems, we found that out right away, that, in fact, that was our only choice as oppose to deploy these things in a virtual manner. So that's quite a bit of few. But every single product we are reviewing more of the activities that can be done, pre shipment or pre go live without our people being there. And it's gaining now some of the hardware installs actually having to help people come in and set up a robot or set up some carousels. You can't avoid having those people there, but most of the software, most of the installation time on our side and even the customer side is software. So and I think we have a lot of flexibility there.

Okay. And then just one more, I mean, it seems like your cash flow was actually very good this quarter. It's a little bit counterintuitive, given that occupancy rates in hospitals were low, very low. Just that, any thoughts on what drove that? And I mean, would you expect that trend to continue or not?

Yeah, those are three questions there, David. So the cash collections were very strong this quarter. We believe we have a very strong and healthy customer base overall. So that's good to see. From an admission perspective, we understand from our partners and providers actually that currently hospital admissions are within 5% of pre COVID level, so it is not that down much anymore of a prior levels. Cash flow going forward, we expect to have strong collections going forward without giving specific cash flow guidance. So we had a good result in the second quarter and believe we’ll continue to deliver cash flow.

Okay, great. So even though it's going to take a little bit of time for elective procedures to ramp back up, I think I just heard you say that admissions themselves are at 95% of pre COVID levels. That's what you're saying.

Yeah. Depending on who we talk to, we talk to providers and health systems and some of them I obviously hear that admissions what they can see are roughly at a 100% versus pre COVID and then maybe down to 5% is what we've heard. But some hospitals are above capacity as well, above the 100%. That's what we heard so...

Great, thanks. Congrats on a good quarter.

Thank you, David.

Thank you, David.

Next question comes from the line of Steve Halper from Cantor Fitzgerald. Your line is now open.

Hi. Could you just provide some additional details on the Walmart relationship that you mentioned during the call and what you're doing there specifically?

Yes, so our PHS platform is connects side by side with a retails on premise platform and the -- our platform is designed to enhance the revenues of retail pharmacies. And in this case, Walmart has some of our other platforms that they use. Particularly that is the voice of the IVR systems and some other options but most recently, they did the med synchronization where you go through your patient list and find appropriate patients that should really just get their meds once a month, get them filled and really reduce the contact or need to come into the pharmacy or have it delivered once a month all at one time. And so we've had this capability with other large, medium sized retail customers before and now we're rolling it out to Walmart, which I think will take over at least probably six months to maybe a little longer to rollout to all Walmart customers.

So, the intent is to get into all Walmart pharmacy?

Yeah, they're managing and controlling it. So, yeah, the one that's already been approved, I believe enterprise wide, still it's just a matter of the rollout.

Great. Thank you.

Next question is from Sean Wieland from Piper Sandler. Your line is now open.

Hi, thanks very much. So, on the outlook for the bookings, I just want to better understand what gives you the confidence to say that Q2 was the low watermark, considering that, these COVID numbers aren't getting any better and the uncertainty in all of our lives right now for the back half of the year?

Yes, I think there's just the levels of activity in the pipeline at the various stages have heightened quite a bit. And we carefully track every customer where they are with capital spend, likely to spend, likely to shut down and so I think with our sophisticated model, and with our inputs, we feel pretty confident about it. You got to remember a lot of the bookings that are coming in quarter are really things that have been in discussion for 9 months, 12 months, and so they may have been delayed bookings from second quarter or maybe even first quarter. And so a delay of two or three quarters is a pretty long time if in some of these cases for these decisions, so they have pretty high confidence that we can continue to accelerate.

And if you care to comment, will bookings for the full year 2020 be up, down or sideways versus ’19?

What we found on last call is that it's going to be below the original guidance for the full year.

Right, below the original guidance, but I'm just looking at year-over-year.

Yeah, we're giving a bookings number at this time for the year.

Okay. Thank you.

Order of excellence, yeah. Okay.

Thank you.

Next question comes from the line of Gene Mannheimer from Colliers. Your line is now open.

Thanks. Good afternoon. I wanted to just raise the issue of competitive conversions, I imagine that in this environment there's a fair amount of hesitancy regarding hospital’s appetite to make changes here so, can you talk about how much of an impact you're seeing from that? I think historically, competitive swap outs have been about 20% to 25% of your bookings. How's it trending now? Thanks.

Yeah. So, we believe we've got a good pipeline on competitive conversions. Also this year, we've had some competitive conversions earlier this year as well. Maybe just a little more color on the historical bookings growth, I think at the December 10th Investor Day, we did say that actually important care, the biggest bookings drivers actually expansion with current customers, and then we also have the upgrade cycle. Competitive conversion, of course, are important to us to be able to have new customers on the Omnicell platform as well but it's not the number one revenue driver for quite some time now.

Right. Okay, fair enough. And thank you for that, Peter. And if you could just talk a little bit more about the reduction in force you implemented. Were there certain product lines that were impacted more than others, whether that’s IV or Medicare as a couple of examples? Thanks.

Yeah. So what we had in the prepared remarks about two thirds of the realignment there are really strategic, right. So last December, we announced that we're accelerating the transformation of our services from maintenance service or break fix services to professional services. So that's about one-third of the realignment there. The other third -- the second third is really the engineering skill sets, where we move more from hardware on-premise capabilities to cloud based skills sets if you will. So by a third, it is volume related, and that's over various locations.

Okay. Perfect. Thank you.

Next question comes from the line of Mitra Ramgopal from Sidoti. Your line is now open.

Yes. Hi, good afternoon. Thanks for taking the questions. First, Peter, I know you talked about the long-term growth of 10%, 12%. And based on the conditions you're seeing and going forward, I think we've talked about Walmart, et cetera. How do you see the point of care relative to central pharmacy and retail institutional as you look at those buckets in terms of where that growth is coming from?

Yeah, so Mitra we don't want to provide specific numbers kind of the breakout of that 10% to 12% compensation, but they are directionally roughly in the same direction as we presented on December 10th last year, right, so where the growth of central pharmacy is a couple of points higher than point of care. And then, retail institutional is kind of roughly in between the two. That’s unchanged.

Okay, thanks. And then obviously, the cash continue or has been building nicely. I was wondering if there are any objectives or goals you have right now in terms of pan use or just let it keep building?

Will keep building, M&A is also part of our strategy, that remains part of strategy, so, depending if there's attractive strategic potential acquisition that could be used as cash as well.

Okay. Thanks again for taking the questions.

Thank you.

Next question comes from the line of Scott Schoenhaus from Stephen. Your line is now open.

Good afternoon, guys. Thanks for taking my question. I apologize if I missed this, but did you comment on what your -- the percent of your legacy installed base with your automated dispensing was for the quarter? I know you usually give that out.

Yeah. So we didn't have it in the prepared remarks, but we're at 26% now, program today. And we assume you will go back and find on our website.

Thank you, Peter. And I guess there's a follow up to that. Do you see that more as less risk as you commented earlier in the call, I believe that the installation in regards to upgrade is easier to do remotely and birch. Is that the case? So that you should continue to see that percentage even stable or pick up going forward?

Now, I think that was Randall that made the call. But, yeah we expect a steady upgrade cycle there. What we said in the past that it's a nine year old recycle with a curve, if you will. And from our perspective, what we believe that is this more of when not an answer, if you will. We expect to be in the mid-90s the percentage as far as the customers the walk rate, because it has also benefits also just from the speed, the capacity perspective and Windows 10 and the narcotics functionality as well. So, yeah we strongly believe that that will increase overtime here.

Great. That's it.

Thank you, Scott.

Your last question comes from the line of Bill Sutherland from The Benchmark Co. Your line is now open.

Hi, thanks, everybody. Randall, in your comments talked about four initiatives. I'm not sure, if this touches on James question or not, I couldn't quite hear the answer. But maybe go through those a little more detail. When you're doubling down on some development activity in those four areas?

Yes. I think what's important is that as we move our customers to more sophisticated operations of their pharmacies, we are in particular need to get them more involved in the workflow process, the analysis of the workflow process. So, getting our customers to have professional services up front to do that analysis, to understand how much roadmap do they have to gain and safety, efficiency and clinical. And setting up a really what I call up a sophisticated supply chain operation, which generally includes consolidated service center, which is becoming more the standard. And because of that, because there's so many locations, so many places for equipment and technology that exist, we've got to move more of the functions to the cloud. And the cloud gives us unlimited storage capacity and its compute power, almost unlimited bandwidth. And so that can do so much more for us. And the Omnicell One is a great example of that, because it's doing all the calculations on several of the things that would be normal operations for these groups to do manually. And now are done automatically. And then just internally, the simplification and the speed of both the cash, the way we invoice, the way we charge, the way we collect, the way we ship, when we build product, when it lands, how long after it lands does it get turned on. We're really shrinking that cycle down and collaborating throughout the company to really get this whole process with a big backlog and being able to arrange when the installs can land. We've got room to shrink that cycle. And then it's just the digitization, everything commercial, whether its service calls on RXT cabinets now. We've launched predictive maintenance on anything major before a drawer fails or door fails. This predictive technology now allows us to send people out when it's as convenient for the hospital and to us, enabling us to eventually lower our costs. And over time, more and more of our service calls will be predicted and be resolved as opposed to an acute situation where someone is sent out immediately. So we went ahead and launch that in just July and huge success, huge success instantly, both with customers, both with our service people and both with -- and lastly with the results. And that's just an example of one. And then the wizard like for installing used to take about nine to 15 minutes to go through 70 different menus to set up a unit. Now it takes less than 90 seconds through a wizard and as well as the consistency of setting up these systems when they land the appropriate way. So all of these things are being done to that, I guess we're on the roadmap. But during this moment in COVID, has been a time to really push them forward to keep our people out of the hospitals and to be able to deliver stuff more quickly and efficiently to the customer.

So and as far as the benefits, I see obviously, there’s lots of a benefit here to customer. I'm wondering about for you all. Is this going to be beneficial mainly to margin or do you see it as a way to accelerate growth as well?

Well, I think over time it will be a benefit the margin just cutting down the cycle. Right. And as well as the cost of sending people out. And it has been a pretty big component of the gross margin line. And so when you don't have to send people out or when you don't have to be there present, when you can just plug it in and starts to play, if you will, it certainly makes a big impact over time. One of the things that helped us a lot is, having the customer, have the mindset to ready to accept and do more of a self-install because now it's so easy they can do it and they don't need to have us there present. We might be virtually present over the phone or something, but we don't have to be there physically, which is definitely easier for the customer and easier for us.

Got it, and then Peter just quickly on cost of sales for products. What would you highlight as the main impacts on as a percent of revenue or a percent of sales going up?

Yeah, the main driver there is less falling leverage in the second quarter compared to the prior quarter. So that's the biggest impact. And like Randall and I call it earlier, we expect the second quarter to be the lowest quarter for bookings and revenue in this year, so we expect some modest increases in gross margin as well through the quarters this year and of course, related to the falling of leverage as well, resulting in lower costs of control as a percentage of revenue.

Okay. That's what I figured. Thanks guys.

I don't see any questions in the queue. I will turn it back over to Randall Lipps for closing remarks.

Well, thanks again. And thanks for joining us today. And just in summary, we do believe Q2 is the low for us. We do believe hospitals are figuring out to run their hospitals full. They can’t be in a position where they're not full, whether it's of COVID patients or elective surgery patients. They know how to operate in this environment. And so, I think, that is the driver for the uplift in the strategic decisions hospitals need to make and they are making with us as they move forward with a digitization and deployment of our systems. I hope to that today the more explanation on the long-term sole source partnerships that we have really gives you a good understanding of the strength of our business and the future growth that we talk about the 10% to 12% organic growth that we believe we will return to after COVID. And helping us a little bit during the COVID time is the importance now of the pharmacy supply chain, seen as critical, as we were engaged in the Northeast as the first apex roll through and the shortage of the 75 drugs that were necessary to treat the COVID patients. The supply chains were breaking down. So we use that information to help our other clients move forward. And I think, it just really continues to position the company well. With strong cash flow, our liquidity position is strong and we have constantly been retooling for the future. And I think -- and we're not wasting our time as we move forward. So with that, I'd like to thank again the Omnicell team for continuing to do great work during these challenging times and making a difference for everyone in their healthcare as they move forward. Thanks very much.

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