Edited Transcript of OMCL earnings conference call or presentation 7-May-20 8:30pm GMT

Our mission is to be the care provider’s most trusted partner, and that mission has never been more critical. As our partners navigate this challenging time, we continue to stay focused on our long-term strategy, which we believe is unchanged. We are committed to executing on the vision of the autonomous pharmacy by delivering automation, intelligence and services designed to transform the pharmacy care delivery model, helping to dramatically improve outcomes and lower costs for our health care partners. We believe COVID-19 has made the industry more aware of the significant challenges in pharmacy that could make our solutions more relevant going forward.

As a case in point, we believe our point-of-care solutions are important infrastructure that help systems to dispense medication safely during a pandemic. Our analytics and intelligence solutions can be key decision support tools for our customers to manage inventory more efficiently during patient volume surges. Our central pharmacy automation solutions are designed to help reduce the administrative burden on the pharmacy and allow clinicians to operate at the top of their license and focus on patient care in fast-changing clinical environments.

Now I’d like to briefly outline our response to COVID-19 and discuss the actions we have taken to ensure the safety and well-being of our customers, employees, suppliers and communities. In order to operate in a safe manner, we are following the health and safety guidelines of the U.S. Centers for Disease Control and local and state public health departments in each of the regions where we operate. All of our manufacturing, distribution and other facilities are operating under these guidelines.

As we are an essential business, our manufacturing facilities have remained open, and we continue to manufacture our products with limited disruption. In our facilities, we have implemented a variety of protocols to ensure the safety of our workforce. This includes scheduling staggered shifts to enhance social distancing, extensive cleaning of our surface and the use of personal protective equipment. In addition, the vast majority of our nonmanufacturing and noncustomer-facing personnel have transitioned to a work-from-home environment.

Last year, during 2019, we implemented a variety of virtual technology tools. We are now accelerating the use of these virtual tools to develop and implement virtual service, training, consultations, product demonstrations and sales processes. And as a result, the shift to a remote work environment has been essentially seamless. We’re now engaging with customers virtually, which enables us to work with customers and new ways during difficult times like these. I am grateful to the Omnicell team for their ability to transition quickly and safely so that we can continue to focus on servicing our customers during this challenging time.

Now to assist our customers on the front line of the pandemic, we quickly mobilized to develop programs and solutions to support critical care needs. Our rapid response to COVID-19 has been focused in 3 key areas: supporting infrastructure for new emergency care areas, providing tools and intelligence for medication supply chain management, and ensuring quick access and continuous support for health system training and service needs.

As our partners began to expand bed capacity for potential patient surge, our teams worked quickly to launch the Rapid Response XT Cabinet program. We successfully expedited production of preconfigured medication and supply cabinets designed with clinical input and fast-tracking — fast-track ordering, shipping and installation so that the health system could rapidly deploy these critical resources. And we’ve received a lot of positive feedback from our customers in response to this program.

Another critical need identified by our partners in the pandemic epicenters like New York City is the ability to quickly and efficiently track medication inventory. There are currently more than 75 drugs being used to treat COVID-19. Leveraging our analytics platform, we have partnered with pharmacy leaders and industry associations, including ASHP and the Society of Critical Care Medicine to offer daily reports on medication inventory levels and forecasted use rates. This intelligence can help pharmacies make faster decisions about deploying medication to areas with the greatest needs, actively plan to safeguard medications and project potential shortages and increase emergency care levels as appropriate.

We’re continuing to leverage this data to predict usage trends across regions to help health systems with preparation and planning for future surge needs. And we’re working to ensure our customers have the infrastructure to support patient influx. We are able to provide quick support with new training programs to rapidly onboard staff and provide remote service options in order to minimize the need for on-site visits suspecting social distancing requirements.

From a supply chain perspective, we have continued to work closely with our partners to ensure we are able to source key components and maintain appropriate inventory levels to meet customer demand. To date, we have experienced very little disruption in our supply chain and have not experienced any shortage of key materials at this time. This has enabled us to continue to operate our factories at full capacity and positions us well to continue to serve our customer base.

We’re also supporting the local communities in which we operate by providing monetary support to charitable organizations. Today, we made monetary donations to the American Nursing Fund, and we are implementing a company match to all donations made for our employees to support health care organizations on the front lines.

Now turning to our results for the first quarter and our business outlook. The first quarter was very strong as the impact of COVID-19 had minimal impact to our revenue and profit. Since most of our revenue comes from the implementation of automation systems, which are often scheduled months in advance, most implementations proceeded as scheduled through the end of March. However, with respect to bookings for new sales, beginning in the second half of March, we have seen hospitals began to slow purchasing decisions. Additionally, as our customers are dealing with COVID-19, our ability to access hospitals and their staff in order to perform implementations of the equipment will likely be delayed.

Health systems are facing increased costs due to large surge expenditures to cover the COVID-19 caseload and increasing prices for needed equipment, decreased revenue due to cancellation or postponed elective surgeries and other reduced demand as well as cash flow challenges. As a result of the slowdown in purchasing decisions and our reduced interactions with our customers due to the social distancing protocols, our bookings are behind our internal estimates as of this time.

Although there are some encouraging signs for our business medium term as the country begins a gradual process to reopen a portion of the economy and elective surgeries resume, we believe hospital spending will be materially disrupted in the near to medium term, and it is not possible to predict how long this pattern will continue. We anticipate COVID-19 demand disruptions to negatively impact 2020 results versus prior guidance, and we do not believe we can provide meaningful near- to medium-term direction at this time. While this uncertainty is difficult, we remain confident in our ability to execute on our long-term strategy.

There are several favorable tailwinds for our business for the long term. First, we have a healthy backlog and a strong customer base, many of which are under long-term sole-source agreements to purchase our products and services. At this time, we have not lost any multimillion-dollar agreements, and we are not aware of any cancellations.

Second, the mix of reoccurring revenue compared to prior economic recessions Omnicell has weathered is much higher. Today, approximately 40% of our business is reoccurring. And in that, this time, we don’t expect this portion of the revenue to be materially affected by the pandemic. And lastly, our liquidity is strong. We have cash on our balance sheet, no debt and access to $500 million of committed capital on our revolving loan facility.

As we progress through the phased recovery of COVID-19, we will continue to look for innovative ways to provide solutions to help our customers navigate the current situation.

So with that, I’d like to turn it back over to Peter for first quarter results and more on the guidance.

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Peter J. Kuipers, Omnicell, Inc. – Executive VP & CFO [4]

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Thank you, Randall. We had a very strong start to 2020. Our first quarter of 2020 revenue of $230 million was up 13% over the first quarter of 2019. The increase in revenue from last year was largely due to an increase in XT Series implementations as well as annual service and maintenance revenue from a larger installed base of equipment.

As of March 31, 2020, approximately 24% of our existing installed base of previous generations for automated dispensing cabinets have booked orders to upgrade to our new XT Series. At this time last year, approximately 30% of installed base had booked orders to upgrade to XT. As we’ve mentioned in the past, we began shipping XT in 2017. And at that time, we estimated that the existing installed base of prior generation systems would be upgraded over a 9-year period. While we expect some near-term delays like we saw towards the end of the first quarter, we continue to believe that the upgrade cycle will take place over our original 9-year estimates. We will continue to monitor this and provide updates at a later time.

As Randall said and as I will discuss in more detail later, COVID-19 has had a negative impact on new bookings and has delayed implementations as our ability to access hospital systems in certain areas has become more restricted in many locations. We believe this trend will continue in the near to medium term. We believe that many hospital systems are in the process of evaluating their capacity, staffing, revenue, profitability and cash flow. And as a result, visibility in their hospital systems’ capital equipment buying behavior is limited at this time.

Now moving to earnings. The first quarter earnings per share in accordance with GAAP was $0.26 per share up from $0.08 per share in the first quarter of 2019. The increase in earnings per share is largely due to lower-income tax expense. During the first quarter of 2019, we incurred approximately $9.6 million of income tax expense related to onetime restructuring of intellectual property. This income tax cost negatively impacted EPS by $0.23 during the period ended March 31, 2019 and did not occur again in 2020.

In addition to GAAP financial results, we report our results on a non-GAAP basis, which excludes stock compensation expense, amortization of intangible assets associated with acquisitions, acquisition and restructuring-related expenses, and restructuring income tax benefits and expenses, and amortization of debt issuance cost. We use non-GAAP financial statements in addition to GAAP financial statements because we believe that it is useful for investors to understand the effects of amortization of acquisition-related costs and noncash stock compensation expenses that are a component of our reported results, as well as defense and acquisition and restructuring-related expenses, which are unrelated to our ongoing activities. Full reconciliation of our GAAP to non-GAAP results is included in our first quarter earnings press release and is posted on our website.

First quarter 2020 non-GAAP EPS was $0.66 per share compared to $0.61 in the same period last year, representing an 8% year-over-year increase. The increase in earnings per share on a non-GAAP basis is largely due to increased revenue. This was partially offset due to tax benefits realized from the excise of employee stock options, which was lower in the first quarter of 2020 compared to the same quarter last year.

Now I would like to quickly cover our cash flow and liquidity as we believe it is the strength of our business during these uncertain times. At March 31, 2020, our cash balance was $104 million, down from $127 million at December 31, 2019. During the first quarter of 2020, we repaid $50 million, 5-0, on our outstanding debt. As a result, the business is now debt-free and has access to the full $500 million available in our revolving credit facility.

Net cash provided by operating activities during the first quarter of 2020 was $25 million, down from $26 million during the same period last year. The decrease is primarily due to an $8 million decrease in net working capital, primarily attributable to increase in accounts receivables. Accounts receivables increased during the first quarter due to some COVID-19-related delays in expected collections which were received in the very first week of April as well as additional invoicing of products that were shipped but were not installed by the end of the quarter.

As a result, our accounts receivable days sales outstanding for the first quarter were 93 days, unchanged from the same period last year, and of 12 days, sequentially. The decrease in net working capital was mostly offset by cash flow attributable to higher net income in the first quarter of 2020 compared to the same quarter last year.

Free cash flow generated in the first quarter was $11 million or up $1 million from the same period last year. The increase was primarily driven by lower capital expenses in the current year, partially offset by lower cash flows generated by operating expenses. Free cash flow in the first quarter of 2020 was approximately 100% of GAAP net income for the quarter, which is in line with the long-term framework we provided in December 2019.

As Randall mentioned earlier, we believe our liquidity is strong, with our existing cash on the balance sheet, no debt, and we have access to $500 million of committed capital through the revolving credit facility that we put in place in November of 2019. We believe the business is very healthy and capable of absorbing short-term disruptions to our revenue and cash flows caused by the pandemic.

In order to preserve our liquidity, we started and will continue to take certain actions to defer costs as necessary. These cost-saving actions include but are not limited to: one, elimination of nonessential travel; two, hiring delays; three, reduction of consulting expenses; four, reduction of trade show and other marketing-related expenses; and lastly, delays in certain capital expenditures. We continue to monitor this situation closely, and we will take further actions as we feel are necessary at the appropriate time.

Moving to our guidance. As Randall mentioned earlier, we cannot predict how long the pandemic and measures intended to contain the spread of COVID-19 will continue, and what effect COVID-19 and the associated containment measures will have on our customers. As a result, we’re withdrawing our full year 2020 guidance. We have spent the last 2 months working to gain insights from our customers to help us determine how to plan for future implementations and new product bookings. But there is uncertainty and a range of possible outcomes. As a result, we do not believe we can provide meaningful direction at this time.

Looking ahead, we will continue to stay in close contact with our customers and take into account the relevant facts and circumstances as we move forward. This includes closely monitoring the ramp-up of elective surgeries, ambulatory care and other factors which impact the financial health of hospital systems.

With that, we would like to open the call for your questions. But we would like to remind everyone that we’re unable to comment on any specific financial framework for the near- to medium-term at this time. We believe we will have more visibility next quarter and look forward to providing more direction at that time. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Steve Halper of Cantor Fitzgerald.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division – Analyst [2]

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So totally understand about the 2020 guidance. But could you — where do you stand on those 5-year targets or 5-year guidance that you issued in December? Do those still hold?

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Peter J. Kuipers, Omnicell, Inc. – Executive VP & CFO [3]

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Well, if you look at the — so what we believe and we stated in the script as well is that we believe the strategy stays unchanged. We’re confident in the strategy, the long-term strategy. We believe the long-term drivers are unchanged. We believe the long-term assumptions are the same. And we’ll continue to evaluate the overall framework.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division – Analyst [4]

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And then just one follow-up question. In terms of sort of how should we think about implementation in light of recovery, let’s just say, next year, okay, if that happens, are you in a position to like implement more than what you would have implemented in sort of a normal quarter or year because you do have your resources and you slot people — you slot hospital implementations in. Do you have an ability to sort of expand those resources in order to drive implementations faster than what you normally would have?

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [5]

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Yes. This is Randy. No, I think we continue to do installations that the customer’s request, and it’s really driven by bookings. But generally, there is a significant time between when a deal is booked and when it actually gets scheduled for implementation. So there’s always time to ramp up to meet those demands. But I have to remember that the country has a lot of different — there are a lot of different places where they are on the apex of the COVID-19 curve. And so I don’t think the country is going to come back kind of all at the same time. It will be at different levels in different places. So we think that the ramp, at least, is going to come back unevenly. So I think we’ll have opportunity to respond to whatever customers need, yes.

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Operator [6]

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(Operator Instructions) Your next question is from Matt Hewitt of Craig-Hallum Capital.

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Lucas Grant Baranowski, Craig-Hallum Capital Group LLC, Research Division – Research Analyst [7]

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This is Lucas on for Matt here at Craig-Hallum. Just a couple of questions here today. I guess the first one kind of continuing the implementation theme. Like as the news started to break about the virus, was there a rush towards the end of the quarter to get implementations done, essentially pulling forward revenue from future quarters?

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [8]

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I would just say it was very provider-dependent. Some suddenly wanted to install something they had maybe scheduled because they wanted to be more prepared for the impact of the curve. Others were more in the midst of the apex and said let’s hold off, and so that stayed in backlog. So there wasn’t any significant amount that was unduly pulled forward end of the curve. There was just a lot of ins and outs in the last couple of weeks, but not what I would characterize as dramatic numbers.

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Peter J. Kuipers, Omnicell, Inc. – Executive VP & CFO [9]

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Yes. So what I would say the impact is on 1Q revenue relatively small, and the 13% really reflects the strength of the business and the scaling of the business.

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Lucas Grant Baranowski, Craig-Hallum Capital Group LLC, Research Division – Research Analyst [10]

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Okay. Excellent. And then I guess as some of the states have started to relax their stay-at-home orders, is that giving you the access you need to get back in and to do implementations that had maybe been delayed because of those orders?

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [11]

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I’d say it’s still pretty cautious. Most hospitals don’t want additional personnel running around in their facilities creating more uncertainty about what might happen as you open up. So it’s — even though they’re opening up more for elective surgery, they haven’t, what I would say, begun to open up and relax who can come in that’s outside of really necessary needing to be in the facility. So I would say it’s still pretty early in the process.

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Operator [12]

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Your next question is from Bill Sutherland of Benchmark Company.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [13]

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Just curious as you think about things opening up and assuming we don’t get a serious COVID 2.0, do you think it’s more likely that your booking activity, the normal course of getting stuff booked, begins to come back to life sooner than implementation or vice versa or no difference?

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [14]

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I think it’s pretty hard to tell. I think that in most cases, hospital personnel for implementation, we need to have certain people on site. And you would even think the director of pharmacy, for instance, might be at the hospitals right now. Most of them are at home. The only people in a lot of these providers are the people who are actually doing the logistical task and are operating from home. So many of the project managers or key individuals required to drive implementation are still not going into these facilities.

And so that has to first take place before some of the major installs to take place with, particularly central pharmacy equipment where you’ve got to make some facility changes and those kinds of things a lot of time. So those are going to be more challenged. And probably the cabinet ones are less challenging because we can do a lot of the installing virtually and then hospital personnel could actually move it into place as the last bit.

It’s really hard to tell on bookings. I think hospitals, even if their cash flow — even if they have a lot of cash in the bank right now, they’re not sure where their cash flow is going to end up on an ongoing basis. And a lot of it has to do with just not the elective surgery but the ambulatory part of their business, which has dropped significantly because patients aren’t coming in. Now some of that’s made up by virtual visits.

But until those things become clearer as to what their cash flow ramps are, they’re not willing to commit big projects unless they’ve already been started or they have a building they’re finishing. So I think it’s still a little early for us to figure it out. I think on our next call we’ll have more information. And then I think some of the fog pieces will begin to become more clear.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [15]

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Yes. That makes sense. So it sounds — I’m kind of reading between the lines, Randy. It feels like as things — as activity in the hospitals kind of get back to the normal course and they’re making money again, bookings and implementations, it doesn’t seem like there’s a lead lag particularly.

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [16]

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Not really. I think they kind of go together. Now none of the people who have implementations are not going to do them. That’s for sure. It’s just — there’s a delay until everyone says when it’s coming on. I just want to make sure that we’re clear on that.

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Peter J. Kuipers, Omnicell, Inc. – Executive VP & CFO [17]

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Yes. And I think it’s important to remember also that most states or bigger cities, they just went through the apex for COVID-19 about 2 weeks ago. So they’re just getting back to “more normal” operating environment. So we’re getting now just getting connected with customers again. So at this time, there’s just limited visibility.

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [18]

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We track every single customer on a significant size of 10 to 15 individual metrics on trying to do the analysis of where they are in their implementation thinking and their scheduling. And we’re just getting to the post-apex stage for many people. And so I think we’ll have good intel. We’ve got good intel on that. And as those metrics change, we’ll have a good feel for it going forward.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [19]

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And just curious as you’ve had to realign some of your operational structure workarounds, et cetera. Have you found that there are things that you may keep doing differently that you’ve had to adopt in this crisis that make sense?

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Peter J. Kuipers, Omnicell, Inc. – Executive VP & CFO [20]

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Oh, yes.

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [21]

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We had — some of these things were on the road map for the next 24 months. And a lot of the installations, we are now doing many pieces virtually and so that systems can be almost ordered and shipped immediately, and many of these cases for the XT Rapid Response Cabinet program. And the order, the configuration, the shipment and installation was done in 14 days. And now that was — and 2 things enabled that. One, we had got our teams together to create those processes, and the customers were willing to make some of those changes as well. Now that’s a little bit of an extreme, but we think we can take a lot of the learnings from that and infuse that to really improve the customer experience. And we think we’re really far ahead on that.

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William Sutherland, The Benchmark Company, LLC, Research Division – Senior Equity Analyst [22]

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How does 14 days compare with your normal [process]?

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [23]

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Well, I…

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Peter J. Kuipers, Omnicell, Inc. – Executive VP & CFO [24]

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Longer. Longer than 14 days.

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [25]

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Longer. Much longer. And I’m not sure we’re going to get everybody to go to 14 days. But when you get a mandate from your state governor to expand some beds in the current facility in 30 days, you want to work with somebody you can get you there. So it’s been an amazing accomplishment by our teams coming together and recreating the process that allows that to happen.

And what’s more important is it’s just this new understanding amongst our customers and ourselves about how do we impact medication management more effectively by reducing the steps, putting intelligence into the process. They’re really allowing us to do more work for them that they really — that we couldn’t do in the past because we weren’t really allowed in the North, so to speak.

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Peter J. Kuipers, Omnicell, Inc. – Executive VP & CFO [26]

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And then we also implemented virtual training, virtual sales processes, including virtual 3D product demonstrations also. So we made that change also. It was on a road map, like Randy said, but we accelerated the digital transformation, which we think is a positive.

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Operator [27]

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Your final question is from Mitra Ramgopal of Sidoti.

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Lalishwar Mitra Ramgopal, Sidoti & Company, LLC – Healthcare Sell Side Analyst [28]

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I was just curious how COVID has impacted your OUS operations, whether it’s Canada, obviously Europe, and even in the Middle East. And also, if there are any sort of onetime expenses you think that were associated with complying, et cetera, improving safety, et cetera, might be easing for you going forward?

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Peter J. Kuipers, Omnicell, Inc. – Executive VP & CFO [29]

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Yes. So it’s kind of — on a blended basis, international kind of roughly the same dynamics, but it differs by country, right? So we definitely also have uptake of our Rapid Response offering in the U.K., in Spain, in France and the Middle East. But also there, we saw towards the latter half of March, a delay in new bookings. And then also, to some extent, a little bit on the implementation side. Governments are providing quite aggressive funding in some of the countries in international, like the U.K. where the U.K. government has rescinded or written-off GBP 13 billion of loans to the NHS. So there’s different dynamics, if you will.

And then I think the last part of the question was on any cost related to COVID. We had some expediting additional cost for freight, about $1 million, $1.5 million in the quarter. You might know that airfreight expenses have doubled or tripled because of the lower capacity because commercial airlines are not flying their planes and they’re not, of course, providing additional freight capacity there. So it’s about $1.5 million of cost impact in the quarter from airfreight.

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Operator [30]

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I’d now like to turn the call over to Randall Lipps for any closing remarks.

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Randall A. Lipps, Omnicell, Inc. – Founder, Executive Chairman, President & CEO [31]

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Well, thank you, everybody, for joining the call today. And of course, the immense impact that the coronavirus has had on our personnel — our personnel and professional lives has just been staggering. And through these challenging times, we are honored to be a part of our customers’ fight against the pandemic.

We’ve done so much in the last 45, 60 days to mobilize our support teams, ensure business continuity for our customers, protecting the health and safety of our employees. Our manufacturing and implementation and service teams are fully meeting customer demand. And it’s just — and I would just say the adrenaline has been flowing at a very high level for us as a company in the last 60 days. And I just want to thank the Omnicell team for making it possible to impact so many people’s lives directly by what they do.

So thank you for joining us today. And we’ll see you soon. Take care now. Cheers.

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Operator [32]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.