Omnicell, Inc. (NASDAQ:OMCL) Q4 2022 Earnings Call Transcript
Omnicell, Inc. (NASDAQ:OMCL) Q4 2022 Earnings Call Transcript February 28, 2023
Operator: 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.
Kathleen Nemeth: 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?
Randall Lipps: 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 across many of our functions. In addition, we are reducing our real estate footprint to align with our broader high load work strategy and to further reduce costs. To that end, we expect to reduce square footage by the end of the second quarter of 2023. Through these initiatives, including the reduction in workforce, we announced in November 2022 along with other expense containment efforts, we anticipate the annualized savings from operating expenses to be around $50 million for 2023, which does not include the expected volume based reductions within cost of sales.
While it is always difficult to make decisions that adversely impact our employees, we are not immune to the challenges companies across many industries continue to face and we are committed to taking actions we believe will help us to be well positioned for the long-term. Now turning to some of the highlights of the fourth quarter and full year 2022. Now as I meet with our customers, certain things are becoming increasingly clear to me. First, Omnicell's Advanced Services provide measurable ROI. We believe this is important to our healthcare partners, particularly in the current economic environment. In addition, our connected devices and Advanced Services improve compliance, and we believe also improve nurses and pharmacists' day-to-day work experience.
This, in turn, appears to be improving patient care. We believe this combination of factors validates our strategy and the industry vision of the autonomous pharmacy. The market demand for our service is clear to us. We are energized by our mission and believe we are uniquely positioned to help our health systems and retail partners to transition to a next-generation cloud-native capabilities that we anticipate we will ultimately transform the pharmacy care delivery model. Second, despite what continues to be a challenging macroeconomic environment, customers are continuing to convert from competitors to Omnicell. We announced two new long-term sole-source agreements during the second half of 2022 and we added a new competitive conversion during the fourth quarter of 2022.
This brings us to sole-source contracts with more than half of the top 300 U.S. health systems. We believe these new wins exemplify the customer momentum in our Advanced Services that continued throughout the end of the year. Scott will speak to our customer wins in more detail momentarily. While we are seeing stabilization among our customer's capital spend with respect to connected devices, we remain confident in our expected growth trajectory of Advanced Services, particularly our robotic based services such as IVCS and CPDS. This positive momentum reaffirms our belief and our long-term vision to transform Omnicell to an as-a-service company. While 2022 presented unprecedented challenges within the industry, we are focused on the long-term and believe we are well positioned to deliver increasing value for all our stakeholders.
Now turning to our high level financial results, 2022 bookings were $1.54 billion, compared to $1.217 billion for full year 2021, reflecting a slowdown primarily in our point-of-care bookings, particularly offset by an increase of an Advanced Services bookings. Our full year 2022 GAAP revenues were $1.296 billion and non-GAAP revenues were $1.297 billion, an increase of 14% from the prior year. Full year 2022 GAAP earnings per share were $0.12 per share and non-GAAP earnings per share were $3 per share. We intend to manage the company to deliver growth in GAAP earnings over the long-term. We expect this will require a more targeted approach to our stock-based compensation programs and overall cost efficiency. Now looking ahead to 2023, as I noted earlier, we intend to take what we believe is a cautious approach to managing the business given the current macroeconomic environment.
Our priorities for 2023 are the following; one, deploying what we think is a prudent plan to pursue our growth agenda while also working to lower cost and improve efficiencies throughout the company; two, continuing to make meaningful progress on the integration of recent acquisitions to drive expected synergies; and three, invest in R&D and innovation that is expected to drive future growth. To reiterate, while we face challenges in 2022, like conviction and Omnicell's future has never been stronger. I look forward to working alongside the Omnicell team as we endeavor to deliver long-term value for all of our stakeholders. Before I turn the call over to Scott, I would like to note that we announced today that Peter Kuipers will be stepping down from his role as CFO and will be leaving the company on July 1, 2023.
I have worked closely with Peter over the last seven years and appreciate the significant contributions Peter has made to Omnicell over that time. Peter joined the company when our revenues were just under $500 million annually and we just concluded 2022 with nearly $1.3 billion in revenue. Now we have launched the search for our next CFO and Peter will help to ensure a smooth transition. Thank you, Peter. With that, I will turn the call over to Scott.
Scott Seidelmann: 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.
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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.
Peter Kuipers: 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 efforts to align with our broader hybrid work strategy.
Non-GAAP gross margin for the fourth quarter of 2022 was 45.3%, a decrease of 220 basis points from the previous quarter primarily due to lower revenue volume leverage. Cost actions, including the previously announced headcount reductions in November 2022 generally had very little impact on the fourth quarter 2022 results. We expect to begin to see the benefit from these actions on gross margin and operating expenses more fully in the second quarter of 2023. We expect to see volume leverage beginning to return by the fourth quarter of 2023 as the revenue is projected to grow throughout the year. Fourth quarter non-GAAP EBITDA was $26 million, compared to $61 million in the previous quarter and $52 million in the same period last year. Fourth quarter 2022 non-GAAP earnings per share were $0.33 per share, compared to $1 per share in the previous quarter and $0.92 per share in the same period last year.
Fourth quarter non-GAAP earnings per share were above our 54th quarter 2022 guidance due to higher revenue, lower cost of sales, solid expense management and lower performance-based compensation. Turning now to review our full year 2022 results, bookings for full year 2022 were $1.054 billion, compared to $1.217 billion for the full year 2021. Bookings decreased 13% over the prior year, primarily due to a slowdown in point-of-care bookings as an increasing number of health systems, implemented CapEx, budget freezes or additional CapEx approval requirements, partially offset by an increase in Advanced Services bookings. Our total backlog was $1.215 billion as of December 31, 2022, compared to $1.254 billion as of December 31, 2021. As further detail on slide 13 of our earnings presentation, in the Form 8-K we filed today and all based on our Investor Relations website prior to today's call.
We are now providing additional information about the portion of our backlog derived from both products and Advanced Services bookings. Backlog represents the dollar amount of bookings for our products and Advanced Services, which has not yet been recognized as revenue. We consider backlog that is expected to be converted to revenues in more than 12 months to be long-term backlog. Product backlog includes connected devices, such as our XT Series automated dispensing systems and the product portion of our central pharmacy, dispense service and IT compounding service. Product backlog as of December 31, 2022, was $797 million, of which $53 million is short-term product backlog and $294 million is long-term product backlog. We believe the majority of the long-term product backlog will be convertible into revenues between 12 months and 24 months.
Advanced Services backlog only includes the portion of our Advanced Services multiyear contracts, which have a stated minimum commitment within the agreement. Advanced Services include services such as our EnlivenHealth Solutions, 340B solutions, Specialty Pharmacy Services, inventory optimization service and other software solutions, as well as the service portion of our central pharmacy dispense service and IV compounding service. While we partner closely with our customers when providing Advanced Services and the majority of our Advanced Services are provided on the multiyear contracts. Only a portion of these contracts has stated minimum commitments. Advanced Services backlog, consisting of minimum contractual commitments as of December 31, 2022, was $418 million, of which $50 million is short-term Advanced Services backlog and $369 million is long-term Advanced Services backlog.
Long-term Advanced Services backlog typically represents multiyear subscription agreements usually the contractual terms of between two years and seven years. Some of which have not yet been implemented, which will be converted to revenue ratably over the contractual term. Despite the challenging macroeconomic environment, our full year 2022 GAAP revenues were a record $1.296 billion and non-GAAP revenues were a record $1.297 billion. Our 2022 non-GAAP revenue saw an increase of $164 million or 14% from 2021. The strong year-over-year non-GAAP revenue increase reflects continued demand for Omnicell medication management and adherence automation solutions as well as the contribution of revenue from scaling Advanced Services and the impact of recent acquisitions.
Our full year 2022 earnings per share in accordance with GAAP were $0.12 per share. Our full year 2022 non-GAAP earnings per share were $3 per share, a decrease of $0.81 per share or 21% from 2021. The year-over-year decrease was mostly driven by reduced operating leverage from lower than originally expected revenue during the second half of 2022. For full year 2022, total inflationary costs were $26 million, which is $4 million lower than expected at the time of the third quarter 2022 earnings call, primarily due to moderation in semiconductor steel and freight cost inflation. For full year 2022, we delivered non-GAAP EBITDA of $193 million, which is above our 2022 revised guidance range. Full year 2020 non-GAAP EBITDA margin of 15% was a decrease of 540 basis points from the previous year.
Now moving to cash flow, full year 2022 free cash flow of $17 million, a decrease of $156 million is primarily due to lower GAAP net income, as well as the impact of higher inventory and timing of cash collections. At the end of the fourth quarter of 2022, our cash balance was $330 million, up from $266 million as of September 30, 2022. The $64 million increase in cash is the result of strong free cash flow and record cash collections in the fourth quarter of 2022. Free cash flow during the fourth quarter of 2022 was $65 million, compared to $5 million from the previous quarter and $43 million in the fourth quarter of 2021. In terms of accounts receivables, days sales outstanding for the fourth quarter of 2022 was 93 days, unchanged from the previous quarter.
Inventories as of December 31, 2022, were $148 million, an increase of $1 million from the prior quarter and an increase of $28 million from the fourth quarter of 2021. It is important to note that the inventories as of December 31, 2022, includes approximately $8 million of expense purchases and receipts of semiconductors that we believe will help reasonably secure supply for future customer implementation time lines. While supply and demand for semiconductors are becoming more balanced, lead times continue to be long. The teams continue to execute well as we adjust to revise revenue volumes, particularly in point-of-care. We continue to expect with a high level of confidence that our supply chain has and will continue to procure critical components for our products including semiconductors to deliver on mission-critical systems and connected devices to our healthcare customers.
Now moving on to 2023 full year and first quarter 2023 guidance, given the continued marketing on the concern team, we expect 2023 bookings to be between $1 billion and $1.1 billion. Bookings includes both the bookings from products, as well as the bookings from our Advanced Services. The midpoint of the 2022 bookings guidance is approximately equal to our full year 2022 bookings. For full year 2023, we expect total revenues to be between $1.150 billion and $1.190 billion. We expect product revenue to range between $740 million and $760 million, consisting of expected revenue from short-term product backlog to a lesser extent, revenue from within year bookings and for recurring consumables revenue. We expect 2023 service revenues to be between $410 million and $430 million.
Our service revenue includes both revenue from Advanced Services, as well as revenue from technical services. We expect service revenue from Advanced Services revenue to be between $200 million and $210 million, which is a 10% increase at the midpoint compared to 2022 and represents approximately 18% of 2023 revenues. The 2023 Advanced Services revenue consists of recurring revenue of the installed base of and services solutions and the expected revenue from the short-term Advanced Services backlog and to a lesser extent, expected new Advanced Services implementations. We expect service revenue for technical services, which includes our post-installation technical support, training and customer education solutions to range between $210 million and $220 million in 2023, an increase of 4% as compared to 2022.
Please see slide number 14 in our earnings presentation published on our Investor Relations website for a summary of the revenue guidance components. Today, we also announced a reduction in force as part of our cost containment measures, together with the cost containment actions we announced in November 2022 in an effort to create operating leverage and align our cost with expected revenue volume. Of the total reduction in force announced in November, as well as today's announcement, approximately half of the headcount reduction was within functions included in cost of sales, mostly from reduced volume. Of the portion of reduction in force that will reduce operating expenses going forward, nearly all of us went functions included in SG&A with very little in R&D as we continue to make key investments that are expected to drive innovation.
We expect gross margin percentage to modestly expand in the second half of 2023 due to the expected benefits from these cost containment actions, as well as expected volume leverage, increased impact of pricing actions and moderating inflationary costs. We continue to seek to balance cost containment with investing and innovation, specifically including Advanced Services and strategic next-generation automation solutions. A majority of the approximately $50 million of anticipated annual operating expense savings expected to be derived from the recent reductions in force and other expense containment efforts is from functions included in SG&A. The expected 2023 operating expense annual savings will be largely offset by the impact of year-over-year inflation in employee salaries and increases in expected performance based compensation find the cost increases and investments in R&D.
We expect non-GAAP operating expenses in total to be flat year-over-year with non-GAAP SG&A down slightly by -- offset slightly by an increase in non-GAAP R&D, which reflects our focus on cost savings while continuing investments in our growth agenda. We expect total year 2023 non-GAAP EBITDA to be between $120 million and $135 million. The total year 2023 non-GAAP EBITDA guidance includes the impact from estimated lower revenue volume, cost actions designed to create operating leverage, expect to reduce inflationary pressures and anticipated favorable impact from the pricing actions we put in place in recent years and which we expect to have a greater impact in 2023. We expect EBITDA margins to expand as we move through 2023 based on the projected timing of cost actions, pricing actions and the impact of volume leverage within gross margin and operating expenses in the second half of the year.
We expect 2023 non-GAAP earnings to be between $1.55 per share and $1.80 per share. This takes into account a lower expected blended tax rate in 2023 and the expected increase in share count as a result of new shares being issued under our employee stock plans. For full year 2023, we are assuming an effective blended tax rate of approximately 5% in our non-GAAP earnings per share guidance, compared to an actual blended tax rate of 6% in 2022. For the first quarter of 2023, we are providing the following guidance. We expect total first quarter 2023 revenues to be between $273 million and $283 million, with product revenues to be between $179 million and $184 million and service revenues to be between $94 million and $99 million. We expect first quarter 2023 non-GAAP EBITDA to be between $6 million and $12 million.
And we expect first quarter 2023 non-GAAP earnings per share to be between $0.04 per share and $0.14 per share. We are seeing strength in our customer partnerships, which include long-term sole source agreements with over 150 of the top 300 U.S. health systems. Of our customers in the top 300 U.S. health systems, more than half have contracted for at least one of our Advanced Services. As Advanced Services are scaling, we see strong momentum in the pipeline to continue to expand the adoption of our Advanced Services within the top 300 U.S. health systems. We continue to strive to deliver value for all of our stakeholders in this challenging macroeconomic environment and we remain confident in our potential long-term opportunities. We look forward to updating you on our progress in the coming quarters.
Lastly, I want to thank Randall for your kind words earlier in the call. It has been a great privilege to have worked with you, our executive leadership team, our Board of Directors and all of the incredible people who make Omnicell a great company. I am grateful to have led the finance, global supply chain, international, IT and corporate development teams and have played a part during the time of scaling and business model transformation. I am proud of being a part of the team that has created such value within healthcare. At this point, I have accomplished the objectives I have set out to achieve when I joined Omnicell over seven years ago and we are looking forward to the next chapter in my career. I will be supporting the team as the search for my successor commences and I will help to assist in a smooth transition later this year.
I know that the company is very well positioned to continue to evolve and take full advantage of the need for medication management automation solutions and I will always wish Omnicell great success. With that, we would like to open the call for your questions.
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