Omnicell, Inc. (OMCL) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Omnicell Fourth Quarter Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Kathleen Nemeth. Thank you. Please go ahead.

Thank you, Operator. Good afternoon and welcome to the Omnicell fourth quarter and full year 2020 financial results call. On the call with me today are, Randall Lipps, Omnicell Founder, Chairman, President and CEO, Scott Seidelmann, Executive Vice President and Chief Commercial Officer, and Peter Kuipers, Executive Vice President and Chief Financial Officer. This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell annual report 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 February 1, 2021, and all forward-looking statements made on this call are based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change, and we undertake no obligation to update these forward-looking statements. Finally, this conference call is the property of Omnicell, Inc., and any taping, audio duplication or rebroadcast without the expressed written consent of Omnicell is prohibited. Randall will provide an update on our business, after Randall's remarks, Scott will provide perspective on the healthcare industry, our market momentum and key customer wins. Peter will cover our results for 2020 and our guidance for 2021. Our 2020 fourth quarter and full year financial results are included in our earnings announcement, which was released earlier today and is posted in the Investor Relations section of our website at omnicell.com. Our prepared remarks will also be posted in the same section. 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 the call over to Randall.

Good afternoon and thank you for joining us today. 2020 was an outstanding year for Omnicell as we continued to drive growth in our business, executed well on our strategies, and deliver tremendous value to our health system partners, their patients, and our shareholders. I am so proud of all of our employees who consistently put our health systems partners first during this unprecedented year. Our fiscal 2020 results are at the high end of or above the prelim results we announced in mid-January. We are very pleased with our performance, which exceeded our pre-pandemic bookings guidance and the guidance we provided in October 2020 across all key metrics, including revenues, total product bookings, and non-GAAP EPS. I'm especially pleased to note that we ended the year with record product bookings of more than $1 billion. We achieved substantial increases in new customer wins, underscoring the robust and growing demand for our solutions. At year-end, well over half of the top 300 health systems in the U.S. were Omnicell customers, and we had long-term sole source contracts with 145 of them, including two new customers added in the fourth quarter. Despite the ongoing pandemic and the disruption it caused across the healthcare industry, in the first half of the year, we also made strong progress advancing our long-term strategic priorities. Notably, we expanded our autonomous pharmacy portfolio with the strategic and accretive acquisition of PSG's 340B Link business now called Omnicell 340B. We also accelerated our shift to cloud-based solutions and tech-enabled services through the launches of Omnicell One and Central Pharmacy Dispensing Services. Omnicell One is a cloud-based platform that connects nearly all of our devices and is a compelling differentiator for Omnicell. This is underscored by the rapid growth we saw in 2020 in our SaaS, subscription software and tech-enabled services bookings, which we significantly exceeded plan for the year. Now with a robust portfolio of tech-enabled services that complement and enhance our core hardware products, we continue to leverage our market leading position and our large installed base to further drive recurring revenue growth in advanced services. The rapid growth in this important category is positioned to continue for years to come. In fact, we are forecasting 50% CAGR in advanced services from 2020 through 2025. Most importantly, the pandemic has shone a spotlight on the importance of pharmacy management, highlighting the need for increased digitization and virtualization of processes throughout the healthcare system and underscoring the strategic relevance of Omnicell Solutions. There is widespread and growing acknowledgment that more sophisticated automation and digitization capabilities enable healthcare providers to focus more on patient care and reduce costly errors, and we are in a unique position to enable our customers to do just that. We believe that we are indeed a category creator in that respect. The pandemic made it clear to providers that they need an entire category of solutions to effectively manage the pharmacy supply chain. We expect to continue to see demand for autonomous pharmacy solutions. Now, I also want to briefly touch on our approach to ESG matters and the actions we are taking on this front. But first, let me emphasize that we view Omnicell as a company with a social mission. Our focus on reinventing the pharmacy care delivery model is designed to dramatically improve health outcomes and lower healthcare costs for everyone. Our teams are motivated by knowing that our work to improve medication management has a tangible, real world impact on healthcare workers, patients, and communities, and that these are not just numbers, these are our friends, our colleagues, and our dear families. We also recognize that we are accountable not only to our customers and our shareholders, but also to the global community. With this in mind in December, we published initial ESG disclosure and performance information aligned to SASSB, TCFD, and GRI guidelines. Among other things, we are focused on innovating to drive sustainability across our business, ethically and responsibly, sourcing materials by adhering to internationally recognized OECD guidance and elevating our diversity and our inclusion initiatives. We believe there is a better way to do business. We're excited about the journey we are beginning and look forward to sharing more in the spring, when we release our inaugural corporate responsibility report. Now looking ahead, I'm confident we are very well positioned to continue to drive growth in our business and to deliver value for our shareholders, as we support our healthcare partners on their journey to the autonomous pharmacy. We're excited to continue building on our momentum in 2021 and beyond. While Peter will review the 2020 results and the 2021 outlook in more detail, I wanted to highlight that we are reaffirming the 2021 guidance and long-term targets we provided last month. In terms of our 2025 financial roadmap, we are targeting a 14% to 15% compounded total annual revenue growth rate from 2021 to 2025. Over the same period of time, we are also targeting an expansion of our non-GAAP EBITDA margin from 21% in 2021 to 25% by 2025, representing a margin expansion of approximately 400 bps. Our strong position in the market, growing customer base, and focus on innovation give us confidence that we will be able to achieve these goals. Now, I'd like to turn it over to Scott to discuss about the industry and some key customer engagements. Scott?

Thank you, Randy. To start, I'd like to take a step back and highlight Omnicell's significant market opportunity and our uniquely differentiated solution and position. Pharmacy is one of the largest portions of the U.S. healthcare system and delivers unquestioned healthcare value. Like other areas in healthcare, the pharmacy care delivery model has significant problems that decrease quality, increase costs, and increase provider burnout. The reason for this is that, while these are really good people doing really good work, they are doing it in a very manual way. Several pharmacy leaders validated the need for greater automation in 2019 and published a framework that not only quantifies the opportunity for pharmacy to increase healthcare value, but established the majority of providers today who are early on in this evolution. Because of this significant need, we launched a new category of solutions called the Autonomous Pharmacy that will automate many of the workflows that prevent pharmacists, nurses, and other caregivers to focus on solving the really big clinical problems. The autonomous pharmacy is a new category that combines hardware, software and services to enable providers to improve quality, reduce costs and increase human efficiency. The autonomous pharmacy built on our market-leading position in automated dispensing systems, with the delivery of a portfolio of true technology enabled services that not only create real healthcare value for our customers, but also significantly increases our market size and adds material recurring revenue streams. Today, we have over 25 years of experience helping provider self-medication management problems. And as such, we believe we have an unparalleled channel not only into our core growth market, health systems and hospitals, but also the post-acute and retail portions of the market. Because of our comprehensive product portfolio, our brand and our unquestioned channel leadership, we are extremely well-differentiated and well-positioned to realize the full potential of the autonomous pharmacy. Now, turning to key customer engagements this quarter. We are very proud of the substantial increases in new customer wins and bookings achieved during the fourth quarter and throughout 2020. As we noted our preliminary results announcement, we signed two new long term sole source agreements with top 300 U.S. health systems during the quarter, bringing the total to 145. SolutionHealth has signed a 10-year sole source agreement to expand Omnicell's footprint across its Southern New Hampshire network. Interoperability and enhanced visibility across the supply chain were key to solution health decision. Another newly signed long term sole source customer is a large West Virginia-based academic medical center that has strengthened its partnership with Omnicell to optimize safety and improve workflow efficiency through a new five year agreement that will extend Omnicell Solutions throughout its four hospital system. A large Midwestern health system and current Omnicell customer has selected Omnicell's point of care solutions to support safety and efficiency across their nine hospital locations and multiple cancer centers throughout Indiana. This was a significant competitive conversion. Other customer wins during the quarter include a major Georgia-based academic healthcare system and longtime Omnicell partner that has signed a 10-year sole source expansion, to leverage Omnicell’s integrated platform of solutions, to enhance pharmacy supply chain management across their integrated health network. Now, a few comments on our progress internationally. First, we announced during the quarter that the Southeast London integrated care system will expand the deployment of Omnicell automation systems across six acute hospital sites. This also includes collaboration for Omnicell and the trust to launch a European-based technology-enabled intelligence center to deliver advanced analytics, manage supplies and medications. This is very exciting and we believe will strengthen our market position in both the UK and across Europe. Internationally, we are also continuing to gain momentum in Asia with recent medication management, automation, customer increments in Singapore and Japan. In addition to those customer wins, we are pleased with the continued momentum within our advanced services portfolio, which is a key component of our strategy. Let's walk through some of the highlights. Omnicell One, we have made good progress in the market and signed several agreements with numerous large health systems. Omnicell One is emerging as a significant competitive differentiator. Central pharmacy dispensing services, also known as CPDS, combines our XR2 robot with experts and software to help health systems, central pharmacies reduce errors and reduce costs for oral drug distribution. We are very pleased with the positive customer feedback we are receiving on this recently launched solution, and look forward to continuing to update you on our progress. EnlivenHealth is a service that combines software analytics and experts to help retail pharmacies provide value-added services to patients, and also helps retail pharmacists and payers manage medication issues for complex patient populations. We are very proud of the important contribution EnlivenHealth is making to support the COVID-19 vaccine rollout. Enliven Launched Care Scheduler, an exclusive digital solution that automates the scheduling, patient outreach and reporting for administering the vaccine, we have already signed up numerous pharmacy customers for Care Scheduler and are conducting advanced conversations with other partners to purchase the new SaaS technology. To-date, care scheduler has been deployed by over 2,000 retail pharmacy and standup vaccine clinics. Previously, we announced that Walgreens popular Save a trip refills was powered by EnlivenHealth medication synchronization technology. In fact, that program is so successful that Walgreens recently launched a national TV ad campaign to promote the service. Finally, our health plan business continue to grow during Q4, as EnlivenHealth expanded its member adherence and value-based programs with existing industry partners. Now let's turn to Omnicell 340B. Customer reception to our 340B offering has been quite strong. The 340B team closed multiple new opportunities in Q4. These new wins include one of the largest not for profit health care systems in Texas, and one of the largest in the United States. We are pleased with the strong momentum we are seeing in this business. The broad adoption of these new technology-enabled services represents a significant milestone along this journey to transform the pharmacy care delivery model. Overall, we are incredibly excited about our leading position within the healthcare ecosystem. The autonomous pharmacy and the launch of our new technology-enabled services has created a meaningful new addressable market, along with significant recurring revenue streams. This strengthens our growing leadership position across a 10-year, $70 billion total addressable market, as we continue to be a leading strategic partner to those health systems that we focus on. We believe we have tremendous potential to transform the pharmacy care delivery model, in turn generating significant value for Omnicell and our shareholders. Now, I'd like to turn the call over to Peter, to discuss our fourth quarter and full year financial results and our 2021 guidance. Peter?

Thank you, Scott. 2020 demonstrated the strength of our strategy and our business model. Our customers are clearly embracing the vision of the autonomous pharmacy, which is reflected in the growing percentage of high visibility and high predictability recurring revenue. Our customer see that value in Omnicell's platform and solutions, and are partnering with us as they advance their pharmacy automation roadmaps. Tuning now to our financial results. Our fourth quarter of 2020 revenues were $249 million, an increase of $36 million over the prior quarter and up 0.4% over the prior year. Our full year 2020 revenues were $892 million, a decrease of $5 million in 2019. Our fourth quarter earnings per share in accordance with GAAP were $0.37 per share, compared to $0.51 per share in the fourth quarter of 2019. Our full year 2020 earnings per share in accordance with GAAP was $0.74 per share, down from $1.42 per share in 2019. A full reconciliation of a GAAP and non-GAAP results is included in a fourth quarter earnings press release that is posted on our website. Full year non-GAAP EBITDA was $159 million. The slight decrease of 4% over the full year non-GAAP EBITDA of $167 million in 2019. Fourth quarter non-GAAP EBITDA of $52 million, an increase of 13% compared to $46 million in the fourth quarter of 2019. Fourth quarter non-GAAP earnings per share was $0.91 per share, compared to $0.77 per share in the same period last year, representing an 18% increase. Full year 2020 non-GAAP earnings per share was $2.54 per share compared to $2.81 per share in 2019, representing a 10% decrease. Product bookings for full year 2020 were $1,002,000,000 compared to an $830 million for the full year of 2019. This represents an increase of 23% despite the impact of COVID-19. Total product backlog at the end of 2020 was $924 million, compared to $588 million at the end of 2019, representing a significant increase of 57% year-over-year. This was a record year for product bookings, which exceeded even our pre-COVID bookings guidance by over $100 million. Our guidance beats and product bookings was driven by the increased strategic importance of our medication management automation solutions, resolving in greater than expected product bookings from the 145 long term sole source agreements, and from increased momentum in its health services. Of the $924 million in ending product backlog, $307 million or 33% is considered long term. This percentage is up from 20% at the end of 2019. The year-over-year percentage increase reflects the expected timing of implementations from the strong second half bookings, and represents also the growth in a sense services. Non-GAAP gross margin for the fourth quarter was 51.5% an increase 47.1% in the third quarter, driven by strong volume leverage and product mix. Non-GAAP EBITDA margin for the fourth quarter 2020 was 20.7%, up from 19.3% in the prior quarter. I would like to quickly touch on the cash flow liquidity and capital structure, which positions us very well for future growth. As of December 31, 2020, our cash balance was $486 million. Cash flow from operations during the fourth quarter was $76 million and was $186 million for the year ended December 31, 2020, representing increases from $35 million and $145 million for the comparable periods in the prior year. Free cash flow generated in the fourth quarter and year ended December 31, 2020, was $65 million and $131 million, respectively, compared favorably to $21 million and $82 million for the comparable periods in the prior year. In terms of accounts receivable, day sales outstanding for the fourth quarter were 71 days compared to 81 days for the fourth quarter of 2019. Inventories at December 31, 2020 were $96 million compared to $103 million in the previous quarter and $108 million as of December 31, 2019. Before turning to guidance, I would like to walk through the long term financial framework, we presented previously in our preliminary results press release, and at the JP Morgan Healthcare Conference on January 13, earlier this year. We included this slide deck in our fourth quarter earnings release, summarizing our long term financial framework. I will walk you through the highlights. Slide 3, highlights our revenue base is resilient and highly visible in nature, and is differentiated by five key drivers. First, a very robust product backlog. Second, our long term sole source agreements with 145 of the top 300 U.S. health systems. Thirdly, customers clearly failure offerings as evidenced by a strong customer retention rate of 99%. Fourth, we have strong insight in annual service and maintenance revenue from our large installed base of connected devices, which is in the early stages of its upgrade cycles. And lastly, while nearly all of our revenue is highly visible, roughly 40% of our revenue base is recurring in nature and we are focused on growing this percentage over time. Now moving to Slide 4, an area of our business which is driving substantial growth and high visibility revenues are SaaS, subscription software and tech-enabled services revenue, also called advanced services. The strong upside to our 2020 bookings was primarily driven by two factors, one, general events from our long-term source of partnership agreements, and then two, advance services significantly exceeding our total plants. This revenue tied to seeing great momentum in pipeline and bookings and we expect the revenue CAGR of approximately 50%, from 2020 to 2025 for these advanced services. With advance services revenues expected to reach 20% to 30% of total Omnicell revenues by 2025, this is subscription based recurring revenue with high margin unit economics. There are several key factors that enable us to grow our advanced services revenues so rapidly. First of all, COVID clearly increased urgency to digitize and automate processes throughout health systems, including the digitization automation of the pharmacy to reduce manual touches of medications and to enable healthcare providers to focus more on patient care. Against the backdrop of the pandemic, our solutions are more strategically relevant than ever. The increased need from health systems for outcome based solutions also is driving advanced services growth. And then lastly, our strong and in parallel channel and installed base of connected devices is also driving advanced services growth. Slide 5, underscores our commitment to drive profitable growth through disciplined execution. We are now targeting a 14% to 15% combined compounded total annual growth rate from 2021 to 2025, reaching $1.9 billion to $2 billion in 2025. Of course, if you measure that CAGR start from 2020, it will be materially higher. On an organic basis, we're targeting an 11% to 12% revenue CAGR from 2021 to 2025, reaching $1.65 billion to $1.75 billion in 2025. The main organic revenue growth drivers are grow and expand within the existing customer base, upgrade cycles, continued market share gains and growth from innovation as we continue to deliver on the next level for the autonomous pharmacy. From an inorganic perspective, you're targeting a 3% CAGR from 2021 to 2025. We have a team focused on this, and we are actively evaluating potential opportunities that will fit into our market leading platform. We also believe that we can leverage a strong channel to drive value from potential acquisitions. And Slide 6 details our path to a continued margin expansion, we are targeting a non-GAAP operating margin of 21% and a non-GAAP EBITDA margin of 25% by 2025. This represents a non-GAAP operating margin and a non-GAAP EBITDA margin expansion of approximately 400 basis points from 2021. We have built a company that is able to scale very well, and believe we are well-positioned to deliver this margin expansion in the coming years, driven by a number of factors including improved business mix, the long term customer partnerships, economies of scale, manufacturing savings and process efficiencies. As we continue to scale the business, we expect to redeploy some of these savings into value creating growth and innovation initiatives. Now moving on to our full year 2021 guidance. As we look at the rest of the year, we expect to continue a strong momentum, particularly as the healthcare operating environment normalizes. Since the third quarter of 2020, we’ve generally have seen and continue to see our healthcare partners manage their strategic system implementations well during a pandemic search. To that end, we expect 2021 product bookings to be between, $1,090 billion and $1,150 billion. We expect total revenues to be between $1,085 billion and $1,105 billion. We expect product revenue to range between $770 million and $785 million. We expect service revenue to be between $315 million and $320 million. We expect total year non-GAAP EBITDA to be between $228 million to $240 million. We expect 2021 non-GAAP earnings to be between $3.40 and $3.60 per share. For the first quarter of 2021, we are providing the following guidance. As we noted last quarter, we continue to invest in scaling our business to support the expected increase in revenue and the timing of customer implementations. We expect total revenues in the first quarter to be between $243 million and $248 million. The product revenues between $171 million and $174 million and service revenues to be $72 million and $74 million. We expect non-GAAP EBITDA for the first quarter to be between $40 million and $43 million, and we expect first quarter non-GAAP earnings per share to be between $0.64 and $0.69 per share. This is above the typical first quarter seasonal pattern, as a result of our very strong exiting year-end backlog. In summary, we are very pleased with our financial and operational results for the fourth quarter and for full year 2020. And combined with the fact that we're still in the early stages of our journey towards the Autonomous Pharmacy, we’re confident that Omnicell has a very bright future ahead. With that, we would like to open the call for your questions. Operator?

[Operator Instructions] Your first question comes from the line of Iris Long with Berenberg Capital.

Thanks for taking my questions. So firstly, so it's great to know that you guys have 145 full force agreements with these top 300 health systems. I'm just curious if you can kind of talk about what details are included in these agreements? And then, from these agreements, do you kind of have a sense of what product offerings these hospital systems are interested in purchasing, and also, I'm wondering like what percentage of these customers have expressed an interest in buying things like a central pharmacy, the sensing system, like IV compounding system, or even like an Omnicell software platform that you guys have?

Yes, Iris. So that’s a great set of questions there. So, almost without exception, the new long-term sole source agreement, these partnerships are 10 years and at times even 15-years. They are really led by advanced services. So, these advanced services really bring the autonomous pharmacy to life, and in most of the cases they are included. Some of these are also market share gains, and they make up a large percentage of our -- the bookings from these long-term agreements make up a large percentage of our total company bookings.

Iris, this is Scott Seidelmann. I would just add to that, I think that's all completely correct. I think you've got to remember that a significant reason why these health systems are entering into these long-term sole source agreements with us is because of the complete portfolio. Their interest lies in one or multiple of Omnicell One, CPDS, IZ [ph]. And as you can imagine from what we've disclosed about those service lines, the penetration is quite small. And so, I think it should give you a really great indication of where the opportunity is in terms of our ability to upsell those customers. That’s frankly why they're entering into the agreement.

Okay, that's very helpful. And then a follow-up question, you guys talked about you are targeting 50% CAGR for the SaaS subscription revenue and the tech-enabled services. I was just wondering like Scott you have mentioned, there's so many moving pieces here. Do you have a name, a few products or service that you expect to have the highest growth in the near term, maybe, like 12 to 18 months? And then I'm also wondering, is that 50% growth organic or have you kind of baked in the assumption of acquisitions?

So, I think taking those questions in reverse order, the second one is the easiest. That growth rate is organic. We're not anticipating or essentially not factoring in the upside of acquisition to accelerate those product lines. I think your first question breaking it down, obviously, we don't disclose the individual growth rates, but what I would say is, is that we feel that that growth, that each one of those products or services has that opportunity for pretty substantial growth. So, I don't think – while we won't go into the details, what I would say is, is that there isn't one that is in the near term or even in the medium term significantly outperforming the others. It's not a weighted average calculation. It's simply that we believe this portfolio as a whole is growing like this.

Okay, got it. That's helpful. Thanks for taking my questions.

Thank you.

Your next question comes from the line of Scott Schoenhaus with Stephens.

Hi, Randall, Peter and team. How are you guys?

Good.

Good. My first question revolves around your expanding EnlivenHealth and 340B Link software platforms. On the EnlivenHealth side, I believe you mentioned you now have over 2,000 pharmacy stores signed up, which if I look back at your press releases, it's a nice increase from mid-January when you noted, it was around 1,000. Can you talk about the ramp there, given what we're seeing with vaccine distribution? I believe the total market opportunity, you guys have outlined in the past as currently around 60,000 stores in your network. Is that right? And can we talk about what you're seeing with the current state of the vaccination distribution?

Yes, so CareScheduler, which you have to think of as a module on the EnlivenHealth platform, the platform as a whole is sold to retail pharmacies and does several things, right med synchronization, communication. CareScheduler is a module that they can subscribe to as an enhancement to the core platform. And so, I think to your point, we have 2,000, that's growing rapidly, but you've got to remember that the way that the vaccine rollout has progressed is that retail pharmacies are really sort of a late channel for the vaccine deployment. And so I think that what I would infer from that is that we will continue to see a significant increase in those number of facilities as retail as a channel is leaned on more and more to help vaccinate the population, right as certainly we get out of the frontline healthcare workers and beyond the folks in nursing homes and LTACs to you and I. We're going to rely more heavily on those retail pharmacies, and we would expect continued growth there.

Great. Thanks, Scott a lot. And then, on the 340BLink side, I think you mentioned in your prepared comments you're seeing success in planning up clients and penetrating this market, which is great, I think that speaks to your services, the strong services guidance that you provided. Can you just talk more about where you are in the cross selling capabilities on top of your installed base? I think, the questions I get from investors is how quickly can they ramp up this cross selling of this software business all on to their pretty large installed base. So, can you talk about the opportunities in the 340B Link market specifically, and your opportunities for the year? Thanks.

Sure. Look, I think that if we step back, the thesis for the acquisition of 340B was twofold, one of which is is that our vision is to help providers solve many of the complex problems that exist in pharmacy, one such problem is the ever important or financially important and rapidly growing 340B program. It's just a very complex program to administer and let alone optimize. And the 340B solution was a technology-enabled service that very much engages and helps providers to do that, with a technology architecture, and frankly a business model that was very sort of synchronous with the way that we were approaching our advanced services portfolio. The second part of the thesis is that given the breadth and depth of our channel and the strength of our sole source arrangement with the top 300 health systems that we could accelerate the growth of that business. Now, we're early on in that integration process of the story, et cetera. But what I can say is, is that we're increasingly very bullish about our channel’s ability to scale that product and we see a lot of Greenfield opportunity in the channel.

Great. Thanks, guys. I'll hop back in the queue.

Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital.

Congratulations, on a strong finish to the year and thanks for taking our questions. Maybe the first one up, where do we sit in the XT upgrade cycle? Obviously, there was a little bit of disruption last year, but obviously, and then you finished the year so strong. Where are we and how many years left we have of that upgrade?

Yes. So I think it's posted in the IR deck as well on our website. The upgrade cycle for just XT is at 36%, if you measure it over the installed base before December 16th. Of course, we've grown the installed base significantly since then, so 36% in that.

Okay, that's good. That's helpful. Thank you. And then question for you on the software side. And I don't know if you'll have this handy, but maybe just an approximation would be helpful. But what percentage of your installed base today is running Omnicell One? And as you look out over the next couple of years, I think, Omnicell One is primarily related to the medication side. Is there an opportunity to roll out something comparable for the supply side? We've seen that there's a lot of interest for that, particularly in Europe, where they are managing the supplies as well? And I think a software platform might be beneficial there.

Yes. So remember, Omnicell One is a service that combines workflow analytics and experts to help health systems in the U.S. today, really do three things, which is one, manage their inventory. So literally, which drugs should they buy, deploy, where should they put them, utilize them predict et cetera. Two is to take their pharmacy labor, which is one of the largest expense categories for a hospital, and really optimize that, where should their pharmacy techs go, when should they go there, et cetera. And so it just gives them a tool to really help manage that more efficiently. And three, is really start to avoid compliance risk, and so most notably, diversion, so avoiding diversion events. And so, we are very early on in the penetration of this product in the market. What I will say is that, it has become a part of almost every or the vast majority of even XT conversations with customers Omnicell One not because you could imagine it's kind of like Microsoft Office through running a pharmacy, it's become a significant portion of the conversation. But we are early on in that process, in terms of the penetration of that. To your point of regarding so in the U.S., drugs are obviously the significant expense and supplies are a smaller expense. Outside of the U.S. that's flipped, as you noted that supplies are a much larger portion of the expense and drugs are much, much smaller. So we certainly have heard that need and we vision there could be an opportunity to build something similar to OC One internationally to help manage supply. And I think we highlighted in the script that one of the UK Trust we've actually partnered with in an exploratory way to look into doing exactly that.

That's great. All right. I'll hop back into cute. Thank you.

Thank you.

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

Hi, thanks for taking the question. It's actually Jess on for Sean. So congrats on the quarter and the end of the year. I think our question, just interested to know if you guys could kind of describe the lifecycle of a sole source customer. So from cabinets to maybe IV compounding or centralized autonomous pharmacy. How long does that installation take? And what is kind of the revenue progression of a typical sole source customer?

So maybe we have posted all that in our IR deck on our website, and a real example of one of the 142 local sole source agreements, I think that's example of that particular customer has 12 locations on the Web site. And you see implementations of point of care, center pharmacy, software, robotics every single year, if you will drive in a KPI's on the right. So, with the SaaS majority of the 145 long term sole source agreements, we have these multi-year co-developed, medication management automation plan. So of course, differenced by customer, but by and large, for the large ones, there are implementations every single year. It kind of depends on what their KPIs are and what their role is in development there.

And I would add to that that I think when you look at the so-called journey of a sole source customer, I’d really break it into two phases. Phase one is, they haven't entered into sole source agreement with us yet, maybe they were a G series customer and they're ready to do an XT upgrade. They've become very interested and it's very clear to them that the strength of the portfolio that they know at some point in the future, they want to explore IV, they maybe want to explore analytics, but it's because of that strength of that portfolio that they enter into the sole source, at which point they enter into that, maybe that comes along with the booking for cabinet, maybe that's a bookings for OC One as part of that. The second phase of that journey, which you can imagine is every one of these products that healthcare, the life cycle, the sales cycle, as along its 12 months, 18 months, et cetera. The challenge with most with selling anything into a health system and certainly in this case is really working with that customer to develop their strategic plan to roll out over ex number of years. And so what the sole source agreement affords us is really a commitment on both sides to partner to understand, not if you're going to buy IV or if you're going to buy OC One, but really to work with that customer almost on the same side of the table for the first time, that as a vendor but a true partner to identify, hey, when does this make the most sense, whether it's in your capital budgeting cycle or whether or not that's the change management, whether or not you're changing your strategy. And so, that second phase its vary, but it really does allow us almost in a unique way to develop almost a sense of frankly, a recurring revenue stream over the next five years with these partners.

Yes. Certainly high visibility.

That’s extremely helpful.

Yes. And I just want to add to that, and certainly as you add on products, it's not one plus one we need obviously the network effect of all their products that come together and the value that’s delivered and produced is much higher. So the concern is it actually gets higher. So this is a motivation to get through the platform in a reasonable speed.

That's very helpful. Thank you. And just to follow up, and I think you guys mentioned that the advanced services portfolio is recurring revenue, much higher margin, and it's obviously going to grow pretty quickly over the next few years. Is there another driver on the OpEx side that we should looking be looking at to contribute to the EBITDA margin expansion? Or is it primarily coming from gross margin?

Yes, most of it is gross margin, you can expect a little bit of leverage from the SG&A in kind of the outer years, if you will.

Got it. Thank you again.

Okay, great.

There are no further questions. I'm sorry, you have one last question from the line of Mitra Ramgopal with Sidoti. Mitra, your line maybe muted.

Okay, why don't we move on maybe to closing statement here as well?

Great. Well, this is Randy Lipps. Obviously, we're extremely pleased this year with the strong financial and operational performance in 2020. Albeit the year of the pandemic, the year that we understood what COVID-19 did mean to the healthcare system, and but most importantly, it really elevated the needs of pharmacy supply chain, digitized solutions to help solve very difficult problems. And it's really launched the company into this next phase of momentum. It's very exciting to go in and connect with customers just not about some product replacement but about a vision to get their pharmacy management up to places they never imagined they could get it before. And that's exciting for me and drives me every day, including the first day I was driven by this 30 years ago. Sarah Lipps was born and started this company. So Happy birthday, Sarah. See you next time.

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