Good morning, my name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Omnicell Third Quarter Earnings Call. I'll be turning the call over to Kathleen Nemeth, Senior Vice President of Investor Relations. [Operator Instructions] Kathleen, the floor is yours.

Thank you, operator. Good morning, and welcome to the Omnicell third quarter 2023 financial results conference call. On the call with me today are Randall Lipps, Omnicell Chairman, President, CEO and Founder; and Nchacha Etta, 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, strategy, objectives, goals, expectations, cost savings 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 March 1, 2023, 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 morning and are posted in the Investor Relations section of our website at ir.omnicell.com. Additionally, we would 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 financial results press release issued today. With respect to forward-looking non-GAAP measures, we do not provide a reconciliation of forward-looking 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 morning, and thank you all for joining us today. Today, I'll walk through our high-level performance for the quarter, including our key customer wins and near-term and long-term trends we are seeing for our business and in the industry. We will provide an update on our outlook for the remainder of 2023, as well as introduce our preliminary thoughts on what we expect in 2024. Let me begin with our results, which we believe reflects solid performance and continued financial discipline from the Omnicell team. Throughout the third quarter of 2023, we continued to focus on advancing our strategy to transform the pharmacy care delivery model and deliver mission-critical medication management solutions for our customers globally. We achieved the high end of our third quarter 2023 guidance ranges for total product and service revenues, and we exceeded our non-GAAP EBITDA and non-GAAP EPS target ranges. We generated total revenues of $299 million, non-GAAP EBITDA of $41 million and non-GAAP earnings per share of $0.62. We believe these results were primarily driven by our prudent approach to managing the business. Now turning to the market environment and what we are currently seeing in the overall health care industry. As evidenced by our customer wins, which we will detail shortly, we are pleased that Omnicell's products, software and tech-enabled services appear to be resonating with the market. However, our health system customers continue to face challenges and seem to be showing signs of caution when implementing new workflows that may stress already thinly stretched nursing and IT staff, in turn, impacting the potential timing of new capital and software projects. As we continue to work through our XT upgrade cycle, we are seeing moderation in our bookings and subsequently in our revenue as it relates to point of care. While we…

Thanks, Randall, and thank you all for being here today. Let me start by expressing my deep appreciation to the Omnicell team who have made my transition into the Chief Financial Officer role as smooth as possible over the past four months. They are a team of incredibly talented professionals who are passionate about and fully committed to working to deliver on our long-term strategy of transforming the pharmacy care delivery model. We have a long history of profitability, and our team remains laser-focused on building on our strong track record to deliver for our stockholders. Having settled in my role in the last few months, I have now spent a considerable amount of time speaking with our global teams, numerous customers and other key stakeholders to learn more about the ins and out of our business, while bringing my own fresh perspective regarding how we manage the business. I have taken a deeper look at our financials and how we are planning and forecasting. I have given a lot of thought to how I think we can strengthen and refine certain processes. And I'm committed to further advancing our existing processes. Today, I will discuss our third quarter financial performance, the current demand environment, and our fourth quarter and full year 2023 outlook. I'll also provide an initial perspective on 2024, which will be high level and qualitative because we are in the early stages of our 2024 planning. I would like to begin with an overview of our financial results for the third quarter. Our third quarter 2023 total GAAP revenues were $299 million, near the top end of the previously provided guidance range, reflecting strong execution within the quarter. Total revenues in the quarter were down 14% compared to the third quarter of 2022, reflecting lower point…

[Operator Instructions] Your first question comes from the line of Stan Berenshteyn from Wells Fargo. Your line is open.

Hi. Thanks for taking my questions and I appreciate the color on 2024. First, maybe on cost containment actions, you said it's going to be across organization. But can you detail any particular areas you plan to focus on when thinking about these cost cuts?

Stan, thanks for the question. So we're looking at taking costs across the entire company. There are some specific areas where we believe we will see more costs taken out than in others. But primarily, we're looking at our enabling functions where we think there are some inefficiencies, the areas where we will not look at taking out cost because they're growth areas within our company. So for example, Advanced Services is one of the areas where we're limiting the amount of cost takeout.

Okay. That's helpful. And maybe sticking with Advanced Services, can you share with us what products or services specifically under Advanced Services are contributing to growth in that segment?

The specialty services continues to be a growth engine for our company. We're also seeing some growth in some of the solutions and services that we're providing in the retail space, but not as robust as specialty services.

Okay. And then maybe one final question, on the bookings guidance. Any chance you can share with us what percentage of the mix of your guidance is product-related bookings?

Yes. So I would say the majority of the - close to about 20% is related to the mix.

I'm sorry, 20% is product bookings?

No. Sorry, can you repeat the question?

So the bookings that you're guiding for this year, $850 million to $950 million, what percentage of that bookings is product-related bookings.

We don't disclose that. We do - probably do a summation at the end of the year. So the best you could do is kind of look at our K from last year. But I would say that most of the headwinds in our bookings have been on the inpatient point of care.

Okay. Thanks so much.

Next question please.

Your next question comes from the line of Scott Schoenhaus from KeyBanc. Your line is live.

Hi, team. Thanks for taking my question. First I wanted to talk about the macro. It seems like it's a mix of both budget constraints and staffing shortages on the point of care side. What are your conversations with these hospital systems? Is it, once they get staffing levels up, they should be able to have enough capital to make these - execute on these orders? What is their conversations to you in regards to forward demand and the current environment at the hospital level?

Yes. I think the providers have the tough equation, right? Their revenues are fairly flat, payer contracts haven't gone up much. So potentially next year, that will help a little bit. But labor costs have risen, and so have the volume. So particularly on inpatient is where most of the headwind is in these big providers. Outpatients, they're actually doing a lot better. And so of course, point-of-care systems is primarily used in the inpatient world, and that's where we have the strongest headwind. So the margins were squeezed due to the inflationary costs, the flatness of the revenue, and just the overall general increase in cost. And we, ourselves, we're on the second half of our XT upgrade cycle. And customers need to upgrade, they have to upgrade, but there's a lot of resistance there because of this inpatient macroeconomic headwind, that has improved slightly, stabilized and improved slightly, but not significantly.

Okay. And then my next follow-up question is on the retail side. What are you seeing from your retail pharmacy customers? There's obviously been a lot of headlines regarding store closures across all the big pharmacy chains. There's been staffing shortages and staffing challenges there as well. Is this a headwind to EnlivenHealth?

Well, it's a headwind, but it's also an opportunity. Some of the services that drive more demand to pharmacies for medication management, sometimes that could be perceived as a headwind. But if you look at our communication solution set, it really takes workload off of pharmacists, to allow them to take fewer calls. And med synchronization also eliminates less visits to the pharmacy and allows more transactions to be consolidated. So that is also a big lift. And we're also excited about our digital medication cards, notices that we give out, now we can give out with the pharmacists, which is also a big time saver and easier to administer for patients. So I think it's a little bit of a mix. The headwinds do sometimes prevent the starting up of new services, but I believe most people look at these services as helping their pharmacy achieve what they want, which is more revenue, lower cost, more throughput.

Thank you.

Your next question comes from the line of Jes Tassan from Piper Sandler. Your line is live.

Hi, guys. Thank you for taking my question. And thank you also for the 2024 just commentary. I want to start with Randall. I think you mentioned some additional regulatory requirements on the IVX. Our understanding was that this device was FDA approved in March '22. So just would appreciate any comments on the additional regulatory hurdles on IVX and then time line to resolution?

Yes. I think it's a complex situation because you not only have the FDA, which is national, you have local pharmacy boards in each state that also have to put their spin or interpretation of those FDA rules and what they will allow to be compounded or mixed with the robot on site or what they won't allow. And so as those rules get clarified, then ROI calculations can be more accurately done for each installation, which gives them the confidence of how fast they want to progress with and the rollout of the robots. So some states are a lot clear, some aren't. And it just takes time because people are, of course, conservative in these kinds of decisions as they move forward about regulations and what they can do and what they can't do. But we're very enthusiastic about the robot. We continue to make progress. We have just - I think we're doing our next install pretty soon here. So we're getting a lot more enthusiasm as we start to have broader-based feature sets, which allow us to do more types of compounding, to increase the ROI. So we're starting to make progress. We're not exactly where we'd like, but I think the enthusiasm in the pipeline is definitely growing.

That makes sense. That's really helpful. And then I think our follow-up is just hoping to get an update on 340B. I think 2023 was guided to about flat at $30 million of revenue year-over-year. But can you just walk us through the market environment year-to-date headwinds, tailwinds and kind of go-forward expectations, again, on 340B, the split billing solution?

Yes. Well, thanks for the question. And actually, 340B, we now approach big providers with the 340B third-party solution or the internal specialty pharmacy 340B option. So you have both options, right? You can either go, for drugs that are still processed as a third party or can be processed through a single contracted site, those most easily run through a 340B process. And for those that don't, then we say, why don't you let us spin up an internal 340B, if you will, or specialty pharmacy there. So that's why we see strong double-digit growth driving in the specialty pharmacy area, the spin-up of these things. And it's an industry opportunity, not just us. And that's because the 340B itself has been limited or restricted. So we don't see a lot of growth in the 340B, but it does give the opportunity for the internal side of the house of the services that we have to actually grow more significantly or you see in the industry uplift there. So it's just a different way to obtain the rebates, is through an internal pharmacy than the external third party, and that's why we're seeing the growth there.

Got it. Thanks, again.

Thanks, Jess.

Your next question comes from the line of David Larsen from BTIG. Your line is live.

Hi. Can you talk a little bit about the XT upgrade process I know you said you're on the second half of that, but any more detail around that would be great. And then I would think that once you get through this whole XT process, there would be an entirely new sort of version of the cabinets created since technology never sits still. Is that correct or not? Thanks for.

Yes. Thanks for the question, Dave. We're really excited about the point-of-care area, right? It's still a large portion of the business and we're absolutely focused on not just delivering the second half of the XT upgrades, but also competitive conversions, right? We continue to have those, although that market slowed down a little bit with hospitals not as willing to swap out during this environment, or it takes extra resources to do that. But we continue to get expansion. So over the time, over the last few years, our market footprint of point of care has grown tremendously, right? It's really large. So obviously, in the next generation of an upgrade cycle, will be quite significant for the company. But we just don't want to upgrade the technology from a product side. We are already investing and rolled out and will continue to roll out services around the point-of-care systems to drive outcomes. This is the part that we think is really exciting. Just like the specialty services all have ROIs and have outcomes that really excite and continue to see the growth there. We want to make that story the same for point of care, so that we're not just simply stuck in product cycles, but also in these services that allow the product cycles to deliver more. And so you're absolutely right. We don't do any pre-announcements on those products, but that certainly is the strategy. And we see the point of care market is very large, and we're extremely well positioned to monetize and optimize that market and really create a whole new go-to-market as we move forward with Advanced Services.

Okay. And then just one more quick one. Can you talk a little bit about your process of estimating bookings, your process of setting guidance, do you maintain a CRM, like salesforce.com, where each of your salespeople provide data in terms of like the deals they're working on, the timing to close, the odds of the close, rates, can you just provide some color into how you actually collect your visibility and how that drives your guidance?

Our sales team, they do a very - they have a very robust approach of forecasting our bookings throughout the year. And we manage this on a quarterly basis. They see very stringent process that we go through to ensure that we are engaging with our customers as we forecast our bookings for the year. So we continue to revise and upgrade how we forecast and how we specifically forecast of our booking. And we will see some additional changes and improvements as we go forward.

Okay. Thank you.

Thanks. Next question?

Your next question comes from the line of Matt Hewitt from Craig-Hallum. Your line is live.

Hi. This is Jack on for Matt. When looking at the $4 million the CMS payment to hospitals. Have you spoken to customers that will be receiving some of those funds? And are they expecting to buy equipment and services when they receive those funds?

I haven't got any update on that. In fact, we just checked before this call about what we thought would happen on there and it's kind of crickets. So hopefully, we'll hear more about that soon because it was supposed to be around the beginning of the year at our last insight. And I think it certainly will - some way had some impact on hospital spending for sure.

And then a follow-up. In your press release, you spoke to a restructuring a little bit and said to better align with anticipated top line heading into fiscal '24. Should we take that to mean at least the start of fiscal '24 will be challenging as well.

We further reduced our bookings outlook for 2023, which we expect will have an impact on our revenue. While certain portions of our Advanced Services portfolio continued to deliver solid growth, it is not expected to be enough in 2024 to offset the decline we expect in the point of care revenue. So total revenues in 2025 are expected to decline modestly. Of course, we're still working on our 2024 plan, and we'll provide a better outlook in the first quarter of next year.

Thanks. Next question.

[Operator Instructions] Your next question comes from the line of Bill Sutherland from The Benchmark Company. Your line is live.

Hi, everybody. I'm kind of curious the shape of the sales funnel, whether that is being impacted or this is just a matter of timing more than anything else as far as the bookings?

Yes, I think it's a good question. Look, the funnel is still there. Most of these are in the pipeline and have been in the pipeline. But particularly the point-of-care product line is getting deferred a lot by these hospital customers because of the low to negative margin that they have for inpatient care. They don't want to spend the capital dollars there yet, even though they're out of date on some of these systems that and they're - they need to upgrade. So the pipeline hasn't gone awry. They are going to eventually upgrade. So time just puts more pressure on them and it gives us more opportunity to finally close these deals. So these are typically just deferrals in the pipeline. And then literally, they had maybe all the approvals inside the system, except the CFO or the CEO, to sign off on the last piece, and then that gets pushed off to the next quarter or next year.

So the cycle you expect for the XT to play out kind of like the past ones? Or do you think there might be some level of - some of your providers might just look ahead to the next...

I think the shape of the curve is a little bit different, right? I think certainly, the pandemic probably sped the curve up a little bit on the XT adoption. And so instead of it being sort of more smoothed out over several years, it certainly, in 2021, was sped up a little bit. So - and now people are kind of deferring at the - as we get towards the second half of the XT adoption curve, they're trying to defer a little bit. But I think it's coming back into the shape of the curve is coming back into what we expect, I think, is - particularly as we sort of look out at the '24. And I think that that helps us run our innovation and development timing cycles when we understand what that curve is and, certainly, the pandemic kind of put a wrinkle in there.

And then last one, just curious if just your latest thoughts on capital allocation going forward.

Yes, we continue to focus on our go-to-market strategy with the recent acquisition and integration largely completed, and driving positive free cash flow. We also continue to monitor our markets for any opportunities which fit into our overall strategy. And so we will continue to invest in growth areas that we have seen robust annual opportunities. And we will continue to reassess our capital allocation dollars based on a whole portfolio view strategy.

Okay. Thanks very much.

Thank you, Bill. Next question?

There are no further questions at this time. I will now turn the call over to CEO of Omnicell, Randall Lipps for closing remarks. Randall?

Well, thanks for joining us today. As we go through this economic headwinds, particularly on an inpatient capital, we will get through this. And we're really excited about the point-of-care market, not just as we innovate product there, but as particularly as we bring in new services, which will help us to accentuate this market and take advantage of this large footprint that we have. We also want to be very focused on getting the company back to profitability. We need to get the company going so that we can deliver strong earnings, strong revenue growth and position us for this return to growth, which I think is a big opportunity for - there is a large opportunity that we're building there for us to achieve. We've got a lot of great businesses on Advanced Services and the like that are growing well, being well adopted, new potentials with IV, very exciting businesses, and we hope to bring that together in the near future to deliver for our customers, for our patients, for our employees and for our shareholders.

Of course, we are profitable now.

And of course, we are profitable today. Thank you for saying that, Kathleen. All right. Well, thank you for joining us today, and thank you for the hard working Omnicell team who continues to labor without end to help us all be successful as we move forward. Thank you.

Thanks, everyone.

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