Omnicell, Inc.
Q1 2019 Earnings Call Transcript

Published: 26 Apr 2019

[Operator:]

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

[Peter Kuipers:]

Thank you. Good afternoon and welcome to the Omnicell first quarter 2019 earnings call. Joining me today is Randall Lipps, Omnicell Founder, Chairman, President, and CEO. This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell Annual Report on Form 10-K filed with the SEC on February 27, 2019, and in other more recent reports filed with the SEC. Please be aware that you should not place undue reliance on any forward-looking statements made today. The date of this conference call is April 25, 2019, and all forward-looking statements made on this call are made based on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change. Finally, this conference call is the property of Omnicell, Inc., and any taping, other duplication or rebroadcast without the expressed written consent of Omnicell is prohibited. Randall will first provide an update on our business. After Randall's remarks, I will cover our results for the first quarter of 2019 and our guidance for the remainder of the year. Our first quarter financial results are included in our earnings announcements which was released earlier today and is posted in the Investor Relations section of our website at omnicell.com. Our prepared remarks will also be posted in this same section. Let me now turn over the call to Randall.

[Randall Lipps:]

Good afternoon, everyone. I am extremely pleased with our performance and the execution of our strategy as we continue to transition the business towards delivering on our vision of the autonomous pharmacy. Some of the key financial accomplishments during the quarter include revenue of $203 million, up 11% from Q1 2018. Non-GAAP earnings per share of $0.61, up 110% from Q1 2018 and non-GAAP operating margin of 13%, up 500 basis points from Q1 2018. As we previously announced late last year, our vision of the Autonomous Pharmacy integrates a comprehensive set of solutions powered by the Omnicell cloud data platform across three key areas

[Peter Kuipers:]

Thank you, Randall. Our first quarter 2019 GAAP revenue of $203 million was up 11% over the first quarter of 2018. The increase in revenue was largely due to

[Operator:]

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

[Matt Hewitt:]

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

[Peter Kuipers:]

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

[Matt Hewitt:]

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

[Peter Kuipers:]

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

[Matt Hewitt:]

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

[Randall Lipps:]

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

[Operator:]

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

[Mohan Naidu:]

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

[Randall Lipps:]

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

[Mohan Naidu:]

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

[Randall Lipps:]

The IVX Workflow?

[Mohan Naidu:]

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

[Peter Kuipers:]

You mean the Patient Engagement platform?

[Mohan Naidu:]

Yes.

[Peter Kuipers:]

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

[Randall Lipps:]

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

[Mohan Naidu:]

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

[Peter Kuipers:]

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

[Operator:]

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

[Unidentified Analyst:]

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

[Peter Kuipers:]

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

[Unidentified Analyst:]

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

[Peter Kuipers:]

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

[Randall Lipps:]

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

[Operator:]

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

[Bill Sutherland:]

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

[Peter Kuipers:]

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

[Bill Sutherland:]

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

[Peter Kuipers:]

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

[Bill Sutherland:]

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

[Peter Kuipers:]

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

[Bill Sutherland:]

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

[Randall Lipps:]

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

[Operator:]

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

[Randall Lipps:]

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

[Operator:]

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