Ladies and gentlemen, thank you for standing by. Welcome to the Omnicell Fourth Quarter 2022 Financial Results Call. I would now like to turn the call over to Kathleen Nemeth, Senior Vice President, Investor Relations. Please go ahead.

Good afternoon. And welcome to the Omnicell fourth quarter and full year 2022 financial results conference call. On the call with me today are Randall Lipps, Omnicell Chairman, President, CEO and Founder; Scott Seidelmann, Executive Vice President and Chief Commercial Officer; and Peter Kuipers, Executive Vice President and Chief Financial Officer. This call will contain forward-looking statements including statements related to financial projections or other statements regarding Omnicell’s plans, objectives, expectations, cost saving actions or outlook that are 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 issued today in the Omnicell annual report on Form 10-K filed with the SEC on February 25, 2022, 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. All forward-looking statements speak only as of the date hereof or the date specified on the call, except as required by law, we do not assume any obligation to update or otherwise release publicly any revisions to our forward-looking statements. Our results were released this afternoon and are posted in the Investor Relations section of our website at ir.omnicel.com. Additionally, we would like to remind you that during this call, we will discuss some non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP financial measures are included in our financial results press release issued today. With respect to forward-looking non-GAAP measures, we do not provide a reconciliation of forward non-GAAP measures to the comparable GAAP measures on a forward-looking basis as these items are inherently uncertain and difficult to estimate and cannot be predicted without unreasonable effort. With that, I will turn the call over to Randall. Randall?

Good afternoon and thank you for joining us today. I would like to begin by providing some context on what we are currently seeing as it relates to the overall healthcare environment and the medication management markets that we address. We will also discuss the Form 8-K we filed today detailing additional cost savings actions we are taking in an effort to ensure we are well positioned to navigate the ongoing economic challenges we face. I then will walk through some highlights for the fourth quarter and full year 2022, as well as our priorities for 2023. Starting with the current healthcare environment, capital committees within our health system partners continue to look to be highly focused on ensuring optimal ROI for their budgetary spend and investments. We believe we are in a strong position to help our health system and retail customers realize savings and ROI as they invest in Omnicell’s connected devices and SaaS and tech-enabled services. Although it appears most customers are still in a capital constrained environment, we believe we are uniquely positioned to help health systems address many of the medication management pain points they are facing today. While we are pleased to see greater stability within our customer base, we remain mindful of the potential ongoing headwinds given the continued macroeconomic uncertainty for us and our customers. As a result, we intend to take what we believe is a cautious stance on how we manage the business. In November 2022, we disclosed that we were reducing our workforce by approximately 9% across a majority of our functions. We are continuing to refine our cost structure and are maintaining a focus on expense management to align with our anticipated revenues. Now in view of that, today we announced we will be further reducing our workforce…

Thank you, Randall. As Randall noted, we are encouraged that demand conditions within health systems and hospitals appear to be stabilizing. Our customers continue to face labor constraints, and in many cases, remain under capital budget freezes, and while we have seen this environment primarily impact our point-of-care business, we are continuing to see strong demand for our Advanced Services. Advanced Services are a key part of our intelligent medication management infrastructure, which is intended to help customers address problems in their medication management processes from the in-patient bed to the home. Let’s walk through a few of our recent wins that we believe highlight the power of our offering. First is an Ohio-based health system that has chosen to partner with us for central pharmacy dispensing service, IV compounding service and our inventory optimization service. Additionally, this health system will convert to our XT automated dispensing system. We believe that the comprehensive nature of our solution was critical to winning this competitive conversion. Also in Q4, one of the largest integrated healthcare networks in Tennessee, an existing customer, upgraded its ADCs to our XT dispensing system and also contracted for central pharmacy dispensing service, IV compounding service and our inventory optimization service. Again, the health system has indicated that they partnered with us because of the potential total value creation of our solution across their medication management care delivery model. Also, as part of our Advanced Services portfolio, our recently acquired Specialty Pharmacy Service continues to gain traction with health systems that are looking for a partner that can help to quickly stand up or optimize their Specialty Pharmacy operations. For example, in Q4, the largest private teaching hospital in Florida chose to partner with Omnicell to establish a new Specialty Pharmacy Program, citing our Specialty Pharmacy expertise and managed services model as key reasons for the partnership. Overall, we are very pleased with the demand that we are seeing for Advanced Services, and as such, in 2023, we will continue R&D investment across the portfolio. Additionally, for EnlivenHealth, in 2023, we will focus on integrating the technology platforms of the two companies that we acquired in late 2021. We believe that the strong demand we have seen for our Advanced Services, coupled with our continued R&D investment should position us well for growth in the future. With that, I will turn the call over to Peter.

Thank you, Scott. Good afternoon. 2022 was a challenging year for the company. We found that many health systems and hospitals reacted to the ongoing macroeconomic challenges by implementing capital budget freezes and additional capital approval requirements, resulting in elongated sales cycles. This mostly impacted our point-of-care business and resulted in the company lowering its full year 2022 guidance. I am pleased to note that we have not seen further deterioration in the healthcare environment in the last quarter of 2022 and so far in 2023. For fourth quarter 2022, we delivered results that generally exceeded our revised 2022 guidance ranges. Our healthcare system and retail pharmacy customers look to continue to rely on and partner with Omnicell to help them deliver improvements in-patient care, to achieve return on investments and build long-term strategic relationships in an effort to realize the industry vision of the autonomous pharmacy. Our fourth quarter 2022 GAAP and non-GAAP revenues were $298 million or $3 million above the top end of our revised 2022 guidance range. A full reconciliation of our GAAP to non-GAAP results is included in our fourth quarter and full year 2022 earnings press release and is posted on our Investor Relations website. Our fourth quarter 2022 earnings per share in accordance with GAAP were a loss of $0.64 per share, compared to income of $0.37 per share in the previous quarter and income of $0.28 per share in the fourth quarter of 2021. The fourth quarter 2022 earnings per share in accordance with GAAP includes the impact of $70 million for severance-related expenses as disclosed in the Form 8-K we filed on November 30, 2022, as well as the impact of $4 million for the impairment of operating lease right-of-use assets as we rationalized our office space as part of the…

[Operator Instructions] Our first question comes from Stan Berenshteyn from Wells Fargo Securities. Please proceed.

Hi. Thanks for taking my question. I guess, first, Peter, it’s been a pleasure working with you. I wish you the best of luck. Maybe first, I want to also say thank you for breaking down the backlog details, that’s very helpful. Maybe first, I just wanted to get a clarifying question, the announced savings that you announced today, is that also factored into guidance that you provided for the full year?

Yeah. Thank you, Stan. This is Peter. I really like working with you as well. Yes. To your last question, the impact of the cost access today across containment actions are included and factored into the guidance that we provided both for total year 2023 and also for the first quarter of 2023.

Got it. Okay. That’s helpful. And then on Advanced Services, so comments on Advanced Services from I believe last quarter seems to suggest that pacing expectations were pretty much unchanged from the Investor Day. But it seems like the guidance we provided right now, the expectations are somewhat moderated, is there anything to specifically call out of what changed from maybe a quarter or two ago?

Hey, Stan. It’s Scott. No. Not really. I think that we continue to see strong demand. We continue to be excited. I think that generally, the Advanced Services deliver a positive ROI for the customers and that’s why we continue to see demand in this macroeconomic environment. I think as it relates to the guidance in 2023, I think that, obviously, we are taking a cautious approach to this and we will go from there.

Yeah. Maybe to add to that. So really the guide for bookings for 2023, if you play down on that, we are all not breaking out limited bookings between core product bookings and trade services bookings within that core bookings are expected to be down through the year and Advanced Service bookings are expected to be increasing very well, if you will, from [inaudible] perspective.

Got it. And then maybe one quick one here on the point-of-sale XT products. So it seems like you have been upgrading them recently based on them reaching end of life. You should obviously have good visibility there as you think beyond 2023. So I am just curious, if you think into 2024 or maybe even 2025, what’s the replacement pipeline looking like in 2024 and 2025? Is it steady versus 2023 higher or lower, any guidance you can give us here?

We do have a solid pipeline of replacements over the next handful of years. I think we do look at that as -- we do have predictability to it. It is steady, it’s only a component of ADC sales in any given quarter, so it does give us nice predictability

Thank you.

Yeah.

Thanks, Stan. Next question, please?

Our next question comes from the line of Matt Hewitt from Craig-Hallum Capital Group. Please proceed.

Good afternoon and I will echo the other comments on Peter. Congratulations and best of wishes in your future endeavors. Maybe the first one for me and you talked about this a little bit, but I am wondering if you could give a little more color on the hospital budgets and capital freezes. It sounds like things were relatively stable Q4 so far into Q1. But what are you hearing from customers, how are they prioritizing, obviously, they still need equipment, they still need to upgrade some pieces even yours. I am just curious what you are hearing from them and what are their expectations as the year progresses?

Yeah. This is Randy. I think we have definitely seen a stabilization in the market and -- but people are still being pretty cautious on committing capital to more systems until they really have to. And when systems do come out of date or they do an expansion that well they go ahead and put those through. So I think it gives us comfort in that and we don’t see any decrease in the market. We haven’t seen any significant uptake yet, but I think it gives us a good starting point for the year and I think we are still going to be cautious about the macroeconomic environment, because I think it’s still assembling not having a few more quarters of positive results for these health systems.

Fair enough. And then maybe a question on the Specialty Pharmacy business. Congratulations on the win there. As you look out over the course of this year, it sounds like you are having good discussions, should we be looking at that as a nice growth driver for you this year and maybe kind of setting the stage for 2024 and beyond, but clearly a nice driver this year?

Hey. This is Scott. Absolutely, Specialty Pharmacy and the sort of creation or growth of in-house specialty pharmacies for health systems certainly a tailwind. The market is trending very positively there and then we are very bullish and excited about the growth of our offering there.

Great. Thank you.

Our next question comes from the line of Scott Schoenhaus from KeyBanc. Please proceed.

Thanks, guys. Thanks for taking my question. Peter, it’s a pleasure knowing and working with you over these past several years as well. I guess my first question is on the margins. Your first quarter implied margins are 3%. We haven’t really seen that since 2017 and it implies a steep acceleration throughout the rest of the year. Can you kind of walk us through what’s embedded in guidance? Is it a sequential stair stuff that’s spread evenly over each quarter or is there some seasonality with these cost cuts and orders coming in? Can you just help us walk through the steep acceleration from 3% to high-double digits to get to your 10% margins for the year, please? Thanks.

Yeah. Thank you, Scott. Great working with you as well. Yeah. I think you mentioned most of the drivers there, right? So really going through the year, the cost taxes that we announced both in November and this year, both the cost of goods sold and in operating expenses will have a more full impact to debate P&L really starting middle of the year. So we see the ramp up there if you will from a profitability perspective. Also in the second half of the year, we see more volume leverage, specifically as Advanced Services, scale more and then also we see some improvement in volume leverage in important care as well. And then, lastly, we see pricing access that we announced previously, coming through more heavily and impacting every single quarter as we go through the year. Plus then, lastly, the inflationary costs for semis, steel and freight, we expect to further moderate in 2023 and [Technical Difficulty] quarters, and for this year, we actually see pricing actions exceeding the inflationary cost for those three components.

Great. And I guess as my follow-up, how are you thinking about capital allocation from this point forward? Thanks, guys.

Yeah. So I would say from a capital allocation perspective, I think, Randall mentioned earlier, the approach for the year as far as planning and the guide. It’s fair to say that M&A and strategic acquisition is probably a little bit lower on the on the priorities from that perspective. I want to make sure we have got a large cash balance as we enter the year, of course, as well.

Our next question comes from the line of Jessica Tassan from Piper Sandler. Please proceed.

Hi. Thank you, guys, so much for the questions and Peter thanks for all the help over the last couple of years. I am sure we will be in touch between now and July, but sorry to see you go. I guess maybe for my first one, is there a difference between recurring or subscription Advanced Services revenue and what is appearing in short-term backlog for Advanced Services?

Yeah. So thanks for the question, Jess. Recurring and subscription, while subscription as part of recurring, right? So that the way to see it almost similar for Advanced Services and then you are your second question, in our prepared and then also in the investor deck that we posted. Advanced Services backlog solely or exclusively only the minimum contract commitments in Advanced Services multiyear contracts. It does not include the run rate of the installed base that are not covered minimum investor contracts.

Got it. But Advanced Services…

Yeah.

…bookings would include the run rate and then backlog only includes the minimums or how should we think about the relationship between those two service?

Yeah.

Okay.

That’s right.

Got it. So then just and in terms of the ratio of short-term Advanced Services backlog to revenue guidance we should think of that as a subscription based line upon what subscription revenue and then transactional revenue kind of layers?

Yeah. Exactly. And then you layer on the short-term effects of this backlog. I felt they have two really small expense, new implementation that are going live throughout the year, those are the…

Got it.

Yeah.

Can you guys clarify what was Advanced Services bookings in 2022 and then just I think someone may have asked earlier but seems like the growth rate expectation for Advanced Services might have moderated a little bit. And I am just curious kind of what is driving that moderation from what was like 30%-ish CAGR to about 10%? Thanks.

Yeah. So there we haven’t broken out booking within the Asia for 2022, we have Advanced Services and non-Advanced Services, that growth rate of 2023 is roughly similar we expect. The 10% is revenue for Advanced Services. So the way to think about it is really starting with bookings, of course, get into COGS [ph], AR and then you get the revenue, right? So bookings is substantially higher than the 10% we have in the guide for Advanced Services recurring revenue year-over-year increase.

Right. My understanding was that just Advanced Services revenue was going to grow at something like a 20% to 30% CAGR through 2025. And I am just interested to know like has that expectation changed, and if so, what is driving that changed expectation? And that’s it for me. Thank you, guys.

Yeah. Okay. So that second part of the last part of your question. So we really look at the business from a lens point-of-care is down from a bookings perspective and a revenue perspective and the delta with the Advanced Services revenue, there’s a lot of delta there because that is growing, right? So and I think it’s fair enough to say that the expectations are slightly lower for the time being, also given the current market economic environment, but they are growing nicely. And again, we are somewhat conservative in our approach for planning for the year for 2023 as well. So those are things to take into consideration.

Our next question comes from Bill Sutherland from The Benchmark Company. Please proceed.

Hello, everybody. Peter, I am not going to say goodbye to you. Okay, we will get around to that. So, Scott, I think on a recent conference about improving the forecasting just capabilities. I am curious kind of what got you -- you have taken?

Bill, you kind of broke up there a little bit. Could you repeat that?

I am sorry.

That’s okay.

Mobile phones. I was just curious about what kind of things you have done to just further improve the forecasting and planning functions that you guys, I think, alluded to was something you want to focus on?

Sorry, can you repeat it, again. We couldn’t hear it.

Oh, boy. I don’t want to hold up the call. Am I still fading in and out?

Yeah. We missed the exact point of improving. Was it cash? We couldn’t quite hear.

I was -- okay. You know what, I will just get on my call back. I will take care of that. Thank you.

Yeah. Thanks. You bet.

Our next question comes from David Larsen from BTIG. Please proceed.

Hi. Can you give an update on how far along your base is with regards to the XT upgrades? Are you 60% of the way through, 70% of the way through? And then just broadly speaking, like, over what time period does that entire upgrade process happen, is it like a 10-year process and you are on year six, which means that over the next three years, rest of your base is going to have to upgrade to the XT? And then do people have to upgrade to the XT or can they choose not to, and yeah, so thanks.

Yeah. Thank you, David, for the question. So a couple of questions in your one question there. So, yeah, we are above 60% of the great cycle for XT specifically. However, I think, Scott, earlier indicated that there are more growth drivers than only a good cycle, but we also have expansion and competitor convergence as well. After 10 years, we do not provide technical services anymore. It means no more software upgrades and no rate fixed maintenance support you. So for custom work to say compliance they generally upgrade the prior generation equipment.

Okay. So what I think I just heard was about 40% of your base still needs to upgrade to the XT and that was going to have to happen at some point over the next three years?

Correct. But I think what we said is we are above 60% now. It’s a little less than 40%.

Okay. Great. And then for semiconductors, is pricing locked in for all of your semiconductor needs for 2023 and what about 2024? And then like if things heat off in Taiwan, between China and Taiwan, are you protected from that type of an event in terms of your COGS? Thanks.

Yeah. I think, David, so we pointed out in the prepared remarks that we have $80 million of previous seats of semiconductors and into so that gets us a good way into the year to sell customer demands and we have locked in pricing for the remainder of the year as well. I would say, we are not from a risk factor perspective, we are not excluded from any geopolitical impact, and as our risk goes up, we will continue to manage it as actively as we can.

Okay. And then just in terms of like the hospital clients, I guess, Scott, what are you seeing on the ground? Is there enough labor available in terms of nurses and technicians to actually deploy these cabinets or is labor so tight, people just aren’t available to deploy these things?

Thanks, Dave. Look, I mean, hospitals are still struggling with labor challenges. I think labor expenses continue to be higher than they were back in 2021, 2022, but it seems to be getting better. I think hospitals like any other business or any other organization just takes a bit of time to figure out the new operating reality and that’s certainly what it feels like. We are not seeing at this point sort of major pushback on implementation, timing, et cetera, as a result of those labor constraints. Like we said, I think, the environment stabilized, our processes have stabilized, we know what’s working, what’s not working, which is the basis of our forecast or guidance in 2023.

Okay. And then it’s my understanding that there were some very favorable rulings by the Supreme Court and other courts that are positive for like the entire 340B program and hospitals should be getting a pretty significant…

Right.

… windfall from those rulings. Any sense for if and/or when that might happen and I would think that, that could drive some demand for your solutions?

I think there’s a lot of activity in the courts regarding 340B, some good, some bad. I think that it continues to favor our Specialty Pharmacy Service and our 340 BPA business, we are taking a cautious outlook this year on and expect it relatively to be flat year-over-year.

Okay. And then just the last one and I will hop back in the queue. In terms of your reported backlog, were there any changes in the way that backlog was estimated or was any backlog just kind of written-off and reversed out that might reduce like the ending backlog for 2022 or your expected backlog for 2023. Were there any changes in like the way the calculations were being done?

Yeah. So the -- thanks Dave for the question. The methodology is unchanged for 2021 and 2022. We haven’t forecasted 2023 adding backlog, which you can calculate it with the numbers that we provided today.

Okay. Appreciate it. Thanks very much, and yeah, I will hop back in the queue. Thank you.

Thanks, Dave.

Our next question comes from the line of Stephanie Davis from SVB Securities. Please proceed.

Hey, guys. Thank you for taking my questions, and Peter, I am sorry to see I am walking into the party, because you are leaving the party. It’s like must be going to something much core than I am. Some of -- I was a bit surprised by the quarter and the outlook, reflecting better than expected product revenues, while service revenues is a little bit light. Was that more a function of this arm is modeling after last quarter’s cuts or is there anything to call out there in some of the shifting demand changes versus what you were seeing last rent?

Yeah. So particularly for the fourth quarter with a solid execution by the teams, if you will. Service came in a little bit light, but overall, executed well plus the cost management came in well also for the year.

And the guidance is just kind of the same sort of thing?

Well, for the guide for the first quarter, right, so revenue is expected to be lower quarter-over-quarter to sequentially, so that’s the largest impact, if you will. And then, of course, the cost actions will start kicking in more in the second quarter. But those are the dynamics which you model out the year quarter-by-quarter I think that’s right.

Understood. And then, Randy, are you still seeing predominantly or within CapEx budgets really contained to the larger health systems, like, you mentioned last quarter or how have we seen an extension of this a little bit downstream to like a broader set of customer base? I know as were you also mentioned that these budget changes going to be more U-shaped, is that kind of recovery are playing out so far?

Well, I think, as Scott said, that I think, particularly the Q3 -- during Q3 a lot of these big health systems have realized that the cost dynamics without the CARES Act money that they had to stop their capital spend. And so I think they have now seen that adjustment in May each quarter as we move forward. They are making adjustments on lower and improve the margins. In fact, I think, last month over the last wave comp and reported some improvement in the margin.

Yeah.

So my guess is that will continue to happen as we move forward. But it’s going to take -- these are slow-moving tankers, it takes them a little bit of a while, but I -- it feels like once we hit some big macroeconomic another event that they are starting to slowly move forward and create more margin and put more investment into the institutions, which they need, which they know they need to make, particularly in pharmacy.

Got it. Helpful. Thanks.

Our final question comes from the line of Allen Lutz from Bank of America. Please proceed.

Thanks for taking the questions. I guess one for Peter and Scott. So if we just look quarter-over-quarter, both revenue segments are down sequentially. But I guess how should we think about the trough quarter, is 1Q, is it reasonable to think that 1Q is the trough quarter in terms of revenue for both of these segments or is it something that’s going to be more of a hockey stick ramp over the course of the year? Just trying to understand line of sight into the guide and what you are seeing to give you confidence in the inflection over the course of the year? Thanks.

Yeah. Thanks. Thanks, Alex. Good question. Yeah. Of course, for the fourth quarter through the first quarter is always a little bit of seasonality. So that’s -- you got to take that into account. And then we see product revenue modestly increasing through the year, mostly based on already contracted backlog that we had talked about in the prepared remarks and then the Advanced Services revenue and service revenue in totality is entirely vast majority of that is really based on the backlog of planned implementation, right? So that’s how we model it out and you can do it the same.

Yeah.

Got it. Thank you very much.

Thanks, Alex.

I would now like to turn the call over to Randall Lipps for closing remarks.

Well, thank you everyone for joining the call, and before I conclude the call, I wanted to give a shout out to the global Omnicell team for their hard work and resilience. I mean, throughout 2022, they did not waver on delivering exceptional service to our customers, pursuing our translational journey to an as-a-service business. It is a hard work and particularly supporting each other and the communities we serve. So on behalf of myself and the Board of Directors and the leadership team, I thank all of you, dear employees for the great work of 2022. We look forward to 2023 as we get back to that growth mode and get forward to transforming the pharmacy. Thanks, everyone.

Thank you.

Thank you. Thank you, ladies and gentlemen. This does conclude today’s call. Thank you for your participation. You may now disconnect.