Omnicell Inc

NASDAQ:OMCL

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Omnicell Inc., Fourth Quarter Fiscal 2021 Earnings Call. 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.

Kathleen Nemeth, Head of Investor Relations, you may begin your conference.

[Kathleen Nemeth, Head of Investor Relations]

Good afternoon, and welcome to the Omnicell Fourth Quarter and Full Year 2021 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, targets 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 24, 2021, 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. Our results were released this afternoon and are posted in the Investor Relations section of our website at Omnicell.com.

Additionally, we'd 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.

With respect to forward-looking non-GAAP measures, such as guidance and targets, we do not provide a reconciliation for 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.

I will now turn the call over to Randall.

[Randall Lipps, Chairman, President, CEO, Founder]

Good afternoon, and thank you for joining us today. 2021 was another outstanding year for Omnicell as strong customer demand for our differentiated technical enabled and cloud based medication management products and enhanced solutions exceeded our expectations across all metrics. We believe our business is resilient and our innovation growth strategy is delivering results.

We delivered a record $1.22 billion in bookings for the full year compared to $1.0 billion for 2020. This was a year-over-year increase of 21%, exceeding the top end of our guidance by $47 million. Demand for our advanced services portfolio was exceptionally strong and exceeded our plan for the year. As a reminder advanced services includes our SaaS, subscription software and tech-enabled services.

Our 2021 non-GAAP revenues of $1.13 billion were also a record for the company, increasing $241 million or 27% from 2020. Now we are entering 2022 with a record backlog of $1.25 billion. We increased our total number of long term Sole-Source partnerships to 151 of the top 300 U.S. Health Systems, an increase of six from 2020. Many of these were competitive conversions.

In addition to increasing the number of Sole-Source partnerships, we're seeing an increase in average booking size. In fact we booked three of the largest deals in our history in 2021. As a trusted partner, we develop solutions that we believe will continue to elevate our critical role in the pharmacy health system.

To that end, we're excited to announce that Omnicell is partnering with Long Island University to launch pharmacy simulation centers that prepare the next generation of pharmacy leaders. This immersive experience goes live later this year, and will provide the opportunity for more than 200 pharmacy residents and technicians to become certified in the innovative technologies, systems and workflows that will help them navigate the challenges of medication management and shift their focus to clinical care.

These centers will also be used to train and certify Omnicell Pharmacy Technicians, as well as pharmacy students who will go on to support our customers and their technology on site. We're excited to launch this initiative and look forward to providing updates on our progress on future earnings calls.

The critical role automation and digitization play in addressing the healthcare labor shortage, ensuring access to care and improving patient outcomes is becoming recognized by our health care system partners and retail customers even more strongly today. The pandemic led to increased demand for care causing heavier workloads for healthcare and pharmacy workers, which in turn resulted in worker burnout and resignations.

According to the U.S. Bureau of Labor Statistics, from February 2020 to September 2021 the healthcare sector lost 524,000 workers from an already aging work force, and with the continued high demand for administering COVID 19 vaccines, tests and treatments, the nationwide acute shortage of pharmacy technicians has adversely impacted both hospitals and retail pharmacies.

Moreover, patient volume is projected to rebound and exceed pre-pandemic levels. McKinsey & Company survey of 100 large private sector hospitals, which was conducted several months prior to the emergence of the Omicron variant concluded that on average hospitals in-patient admissions have returned to 2019 levels and predicted that in-patient admissions would increase by 4% in 2022 relative to 2019.

Thus not surprisingly, a recent American College of Healthcare Executives Survey of 310 community hospital CEOs found that personnel shortages were their top concern in 2021, marking the first time since 2004 that financial challenges were not executives’ primary concern.

We believe we are uniquely positioned to assist our customers in addressing these labor challenges by implementing an automated and cloud based comprehensive medication management and enhanced platform, reducing the manual processes within pharmacy workflows and enabling pharmacists to practice at the top of their license.

In 2019, at our investor day at the ASHP Midyear Clinical Meeting, we outlined our plan to fundamentally transform our business toward building the IoT of Medication Management, to support the industry vision of the fully autonomous pharmacy. We believe the results we achieved in 2021 demonstrate that our strategy is working, and while we still are in the early innings of the strategy, we were very pleased with the level of customer interest, which is ahead of our initial expectations as well as the value we find we are already creating for healthcare system partners and retail customers.

In our opinion, the broad adoption of these new services and cloud enabled SaaS Solutions validates our decision to take the path toward transforming the pharmacy care delivery model.

Now, turning to how we expanded our advance services portfolio over the past year with three strategic accretive acquisitions: FDS Amplicare, MarkeTouch and Reset. We are pleased with the early momentum and progress we are making in strengthening our market position through value enhancing M&A. In December we announced our agreement to acquire Reset which is a leading provider of Specialty Pharmacy Management Services for health systems, clinics and physicians' groups. This acquisition is expected to open a new market for Omnicell and will expand Omnicell’s portfolio of capabilities and advanced services that are designed to address the significant need to improve access to and management of complex medications.

In January we announced our acquisition of pharmacy software solutions provider MarkeTouch, which will expand and deepen EnlivenHealth’s footprint across key pharmacy segments. Each of these acquisitions are strong additions to our EnlivenHealth and 340B solution sets. Scott, will speak more about how these companies have strengthened our competitive offering in just a moment.

Looking ahead, we also intend to continue strengthening our market position through our robust innovation pipeline. From next generation products to new SaaS and connected device capabilities, we are very proud of the advancements we have made. We expect to launch new next generation IV Robotics in the coming months and are very excited about the years ahead.

As I noted earlier, 2021 was an outstanding year and yet despite the records we have set across a number of financial metrics, we are not immune to the inflationary headwinds and supply chain constraints that others are also seeing. As we indicated last quarter, we have been taking and will continue to take steps in an effort to address and offset these challenges. Despite current headwinds, we are entering 2022 with significant momentum and expect to deliver profitable growth and value creation in the year ahead.

2022 marks the 30th Anniversary since our Founding. It is a milestone we will be celebrating throughout the year. Over the last 30 years we have successfully navigated through many difficult economic cycles and believe we will do the same in this current cycle. Our focus on creating long term, enduring value for all of our stakeholders and transforming the pharmacy care delivery model continues to inspire and guide us. We are confident in the opportunities ahead of us, and look forward to updating you on our progress.

Now, before I turn the call over to Scott, I would like to say how pleased we are that the Omnicell’s environmental, social and governance efforts have been recognized by Sustainalytics, one of the largest providers of ESG Research Ratings and Analytics. In their most recent report, Omnicell ranked higher than 89% of other companies in the healthcare industry for ESG Risk Management which acknowledges our company’s tremendous efforts and improvements in this area.

Sustainalytics also rated Omnicell number one, for lowest risk among our peers. Remained focused on innovating to drive sustainability across our business, ethically and responsibly sourcing materials by adhering to international recognized OECD guidance and elevating our diversity and inclusion initiatives.

Now with that, I'd like to turn the call over to Scott to discuss the industry landscape and key customer engagements. Scott.

[Scott Seidelmann]

Thank you, Randall. As Randall stated, in our review our results demonstrate that our strategy is working. Our shift in 2018 toward tech-enabled services and cloud based services which we shared with you and 2019 is gaining traction and delivering initial results. We made this shift back in 2018, because we recognized the significant need and large opportunity to transform the Pharmacy Care Delivery model and we recognize the unique position that Omnicell had because of its high quality brand, significant customer base, and the large channel to successfully execute a land and expand strategy.

In 2018, the primary reason that the pharmacy care delivery model struggled with quality and cost problems was that its labor force was overwhelmed, overworked and under supported. COVID significantly exacerbated this people problem and in 2022 we feel better about our market opportunity than we did three years ago. We find the need to automate and digitize manual processes within pharmacy workflows is now even more pronounced.

We offer our customers an intelligent medication management infrastructure that equips and empowers pharmacists and caregivers to focus on clinical care rather than administrative tasks. This infrastructure is a comprehensive cloud based platform that combines automation, analytics and expert services.

Our intelligent infrastructure provides the foundations for realizing the industry's vision of the autonomous pharmacy, a vision defined by pharmacy leaders from proving operational efficiencies and ultimately targeting zero error medication management. Ultimately our intelligent infrastructure will enable pharmacists and caregivers to improve patient outcomes, reduce costs and reduce provider burnout.

Now, I would like to comment on some of the recent customer wins. Our Intelligent Infrastructure Platform clearly resonates with customers. For example, we are excited to announce today that we signed a long term Sole-Sourced contract with UMC Health System in Lubbock, Texas. Omnicell was selected to support key pharmacy initiatives across acute care, outpatient and retail care settings. This is a competitive conversion and the partnership includes Central Pharmacy Services, Point of Care Solutions, our Omnicell 340B service and EnlivenHealth patient engagement solutions.

We think this is an excellent example of several key elements of our strategy and demonstrates where we are winning in the market. One our comprehensive platform approach and long term vision significantly differentiate Omnicell. Two, EnlivenHealth our EnlivenHealth solution will appeal to health systems as they focus on ambulatory and retail opportunities thereby adding further differentiation; and three, our channel can successfully deliver acquired solutions such as Omnicell 340B.

Similar to UMC, I am also pleased to announce that University Health in San Antonio, Texas has selected Omnicell One along with Omnicell Central Pharmacy and Point of Care solutions to support their pharmacy care model. Our platform is aligned with university health goals and long term vision for growth.

Additionally, EnlivenHealth in Anderson, South Carolina selected Omnicell's Central Pharmacy Dispensing Service and IV Compounding Service as a comprehensive platform that can support their goals of supply chain control, approved efficiency and enhanced patient safety.

Lastly, an Ohio based health system partnered with Omnicell to help them address staffing constraints, while enhancing visibility and communication across the system. Again, this health system chose Omnicell One, Central Pharmacy Dispense Service and IV Compounding Service to help them achieve their goals to manage near term staffing challenges and support future growth. Based on the strength of advanced services bookings and robust customer demand in 2022, we are continuing to invest in our innovation pipeline, cloud platform and customer experience.

Now, I will comment a bit more in the acquisitions we made in 2021. FDS Amplicare, Reset and MarkeTouch are great examples of where we think retail pharmacies and health systems are going, and why we're so energized by the opportunity ahead. In 2020 specialty drugs totaled $269 billion and accounted for 51% of all drug sales. Furthermore, health systems on specially pharmacies are generating significant patient outcomes and profits for the health system and as such a strategic priority for the C-suite. However, managing a specialty pharmacy requires a different skill set, and increasingly hospitals are outsourcing their specialty pharmacy operations to managed service organizations like Reset.

Specialty Pharmacy is a key part of the medication management process and Omnicell can significantly scale the Reset Solution through our channel and ultimately create new value for customers through integration with other parts of our intelligent infrastructure. It is another way we are expanding our footprint within our existing customer base.

As Randall mentioned, we also strengthened our EnlivenHealth solution with the acquisitions of FDS Amplicare and MarkeTouch. The addition of FDS Amplicare’s differentiated financial management analytics and population health solution, along with its nationwide network of more than 15,000 independent retail pharmacies, expands EnlivenHealth product functionality and its market footprint, and the addition of MarkeTouch Media not only expands EnlivenHealth customer base, but also adds critical mobile capabilities to the solution. With these acquisitions, Enliven adds critical functionality to its platform and expands its customer base.

We believe COVID and the current labor market have accelerated the need for a new intelligent medication management infrastructure. Omnicell is uniquely positioned to deliver this intelligent infrastructure and ultimately enable our customers to transform a significant part of the healthcare system. We are early in this journey and we are excited by our progress to-date.

With that, I'll turn the call over to Peter.

[Peter Kuipers]

Thank you, Scott. I’m pleased with the strong results for the fourth quarter and full year 2021. Our Healthcare System and Retail Pharmacy customers continue to partner with Omnicell to realize the industry vision of the fully Autonomous Pharmacy and the overall demand metrics for Omnicell remained strong.

I'm especially proud with the solid execution that our over 3,000 Omnicell team members continue to consistently deliver. During the quarter we welcomed 429 employees to the Omnicell family, 93 of whom were with the Reset and MarkeTouch acquisitions. Throughout the pandemic Omnicell employees have demonstrated their unwavering commitment to ensuring our frontline healthcare heroes received the critical medication automation management systems, and expertise they need to deliver the best patient care possible.

Before I dive into the specifics of our financial results, I would like to highlight that despite the challenges from the pandemic, 2021 was a record year for bookings, backlog, revenue non-GAAP EBITDA, non GAAP EPS and free cash flow generation. Record product bookings for full year 2021 were $1.270 billion compared to $1,002 billion for the full year 2020, and were $67 million above the mid-point of our full year guidance range, an increase of 21% over the prior year.

Total product backlog at the end of 2021 was $1.254 billion, compared to $924 million at the end of 2020, a significant increase of 36% year-over-year. Of the $1.264 billion in ending product backlog, $439 million or 35% is considered long term. This percentage is up from 33% at the end of 2020. The year-over-year percentage increase primarily reflects the growth in Advanced Services.

We believe the strong 2021 product bookings are an indication that our healthcare system and retail pharmacy customers continue to turn to Omnicell to realize the industry vision of the Autonomous Pharmacy. We saw specific strength in Advanced Services, as well as the strength in our key partnerships, including long-term Sole-Source agreements with 151 of the top 300 U.S. Health Systems.

Out of these 151, 50% has now booked at lease volatile checks [ph]. We have partnered with the majority of the 151 royalty source of partners to create multi-year investment plans for medication, management automation. These plans provide significant visibility disability into future bookings. We are continuing to see strong momentum with Advance Services and engaging with our Health System and Retail Pharmacy Customers. For the larger deals, we find that Advanced Services are a clear differentiator and one of the main reasons these partners do business with Omnicell.

Turning to our financials; our fourth quarter of 2021 revenues in accordance with GAAP were $311 million, an increase of $50 million over the prior quarter. Our fourth quarter 2021 non-GAAP revenues were $312 million, up 25% over the fourth quarter 2020 and approaching the south end of our guidance range.

The strong year-over-year non-GAAP revenue increase reflects continued strong demand for Omnicell medication management, adherence automation solutions, as well as the contribution of revenues from the FDS Amplicare acquisition in the third quarter 2021. A full reconciliation of our GAAP to Non-GAAP results is included in the fourth quarter earnings press release and is posted on our website.

We delivered record GAAP and non-GAAP revenues for 2021, reflecting strong customer demand and strong commercial execution. Our full year 2021 GAAP revenues were $1,132 billion. Our non-GAAP 2021 revenues were $1.133 billion, an increase of $241 million or 27% from 2020. As a reminder the year-over-year was partially as we revolve to the low end of fiscal GAAP and non-GAAP revenue levels of 2020 due to the COVID 19 pandemic.

Non-GAAP gross margin for the fourth quarter of 2021 was 49.8%, a decrease of 130 basis points from the previous quarter, primarily due to the mix of customer in the quarter as well as modestly higher inflationary costs.

Included in the fourth quarter gross margin is the impact of approximately $5 million of inflationary costs compared to cost base of semiconductors, other materials and freights for 2020. Excluding approximately $5 million in inflation costs, the gross margin percentage was the same 160 basis points higher.

Our fourth quarter 2021 earnings per share in accordance with GAAP was $0.28 per share compared to $0.61 per share in the previous quarter at $0.37 per share in the fourth quarter of 2020.

Fourth quarter 2021 non-GAAP earnings per share was $0.92 per share, compared to $1.08 per share in the previous quarter and $0.91 per share in the same period last year. Fourth quarter non-GAAP earnings per share were the near mid-point of fourth quarter guidance, inclusive of our favorable tax benefit and stock compensation of $0.10 per share, offset by the impact of incremental expenses related to compensation from significantly stronger product bookings and enabled expenses and certain key investments.

Our full year 2021 earnings per share in accordance with GAAP were $1.62 per share. Our full year 2021 non-GAAP earnings per share were $3.81 per share, an increase of $1.27 per share or 50% from 2020. The year-over-year was mostly driven by higher revenues volume and gross margin expansion, partially offset by the impact of inflationary costs in 2021, as well as the impact of higher shared accounts.

We delivered non-GAAP EBITDA of $52 million in the fourth quarter of 2021, resulting in a record full year non-GAAP EBITDA of $230 million. In comparison with the guidance, fourth quarter and full year non-GAAP EBITDA includes the impact of additional drive in the compensation from significantly stronger product bookings, M&A related expenses and certain key investments. Full year fiscal ’21 non-GAAP EBITDA margin was 20.3%, an increase 240 basis points from the previous year, [inaudible] of approximately 100 basis points.

Moving to cash flow. Full year 2021 free cash flow of $173 million was a record and reflects the overall increased demand in the business, strong cash collections and working capital management. At the end of the fourth quarter of 2021 our cash balance was $349 million, down from $482 million as of September 30, 2021 a $133 million decrease in cash is the result of financing activities related to our recently completed acquisitions of Reset and MarkeTouch partially offset by operating cash flow in the quarter. Free cash flow during the fourth quarter of 2021 was $42 million compared to $27 million from the previous quarter and $65 million in the fourth quarter of 2020.

In terms of accounts receivables, day sales outstanding for the fourth quarter ‘21 was 70 days, excluding the impact of Reset and MarkeTouch acquisitions which were completed in the last few days of ‘21 and therefore does not contribute significant revenue in the quarter. The day sales outstanding in the fourth quarter of 2021 reflects a decrease of three days over the last quarter and a decrease of one day for the fourth quarter in 2020.

Inventories as of December 31, 2021 were $120 million, an increase of $60 million from the prior quarter and an increase of $22 million for the fourth quarter of 2020. It's important to note that the inventories as of December 31, 2021 include approximately $10 million of advanced purchases and receipt of semiconductors that we believe will help reasonably secure supply for future customer implementation timelines. We continue to execute very well on our global supply chain process improvements, and inventory management.

Now moving on to our full year 2022 guidance. All guidance includes our recently announced acquisitions, including FDS Amplicare, Reset and MarkeTouch. As we look to the rest of the year, we continue to expect strong revenue growth in customer demand and a record backlog. Our record 2021 product bookings reflect strong market demand including momentum in Advance Services. We continue to have high confidence that we have secured supply for semiconductors and critical components through 2021 in order to deliver our mission critical systems and connected devices to help the customers.

Our global supply chain and procurement teams have done a great job addressing these challenges and minimizing the disruptions to our customers. We expect 2022 product bookings to be between $1.370 billion and $1.430 billion. We expect total GAAP and non-GAAP revenues to be between $1.385 billion and $1.210 billion. We expect GAAP and non-GAAP product revenue to range between $950 million and $965 million.

We expect GAAP and non-GAAP service revenues to be between $435 million and $445 million. At the mid-point this reflects an increase in total non-GAAP revenue of $265 million or 23% over the prior year. We expected service revenue as percentage of total revenues to increase 10% for 2021 to approximately 15% in 2022.

We expect total year 2022 non-GAAP EBITDA to be between $243 million and $265 million. This non-GAAP EBITDA guidance reflects; one, the expected impact of inflation and secondly, integration costs for recent acquisitions.

As we noted for the last two quarters, we are experiencing the impact of inflationary headwinds. This continues to be primary due to semiconductor and other component costs, and to a lesser extent freight and steel and other raw material costs.

The total year non-GAAP EBITDA guidance includes the impact of approximately $30 million to $35 million of cost inflation in 2022 as compared to cost base for semiconductors, other materials and freight in 2020. The 2022 non-GAAP EBITDA guidance also includes $8 million of integration costs with the FDS Amplicare, Reset and MarkeTouch acquisitions.

As we have noted, we have had a particularly active year in terms of M&A. As expected, there are integration expenses associated with this activity. Generally the majority of integration expenses are incurred in the first year after acquisition.

We have a strong balance sheet which we believe positions us well for future growth and we look forward to continuing our plan to execute on our full year enhancing, disciplined M&A strategy.

Well, I’ll provide some color and the gross margin outlook for 2022. We are working through product backlog and pipeline prior to pricing options. As a result, we expect that the pricing options we have put in place will begin to have a greater impact near the end of ‘22 and as we move into 2023.

Included in our non-GAAP EBITDA guidance is the favorable impact of these pricing actions. We expect gross margins to modestly expand in the second half of 2022 as compared to the first half of 2022. We expect 2022 non-GAAP earnings to be between $3.75 and $3.95 per share. This takes into account the higher expected blended tax rate in 2022 and the expected share count increase from employee stock plans. For full year ’22 we are assuming the effective blended tax rate of approximately 6% in our non-GAAP EPS guidance compared to 4% in 2021 actuals.

For the first quarter of 2022, we are providing the following guidance: We expect total first quarter 2022 GAAP and non-GAAP revenues to be between $312 million and $318 million. The GAAP and non-GAAP product revenues between $216 million and $219 million, and GAAP and non-GAAP service revenue between $96 million and $99 million.

We expect first quarter 2022 non-GAAP EBITDA to be between $45 million and $49 million and we expect first quarter non-GAAP earnings per share to be between $0.65 per share and $0.72 per share. In 2021 we made the decision to secure what we believed is an adequate supply of semiconductors and other key components being the direct buys and pre-buys from brokers and OEMs to support our customers.

We are confident in our supply of our semiconductors and other key components through 2022 to support our health system customers that are critical to healthcare.

We are anticipating supply totalities and inflationary cost impacts, [inaudible] spot markets to continue throughout 2022. As I noted earlier, the majority of our current backlog and product line reflects pre inflation pricing. As a result we expect that the pricing acts that we have put in place will begin to have a greater impact near the end of 2022 and as we move into 2023.

We believe that we have built a company that's able to adapt and scale quite well and believe it’s well positioned to deliver on the 2025 total revenue growth targets driven by a number of factors, including growing Advanced Services revenue, benefits from long-term Sole-Source customer partnerships, including multi-year co-development plans and increased average deal size.

We continue to have line of sight and are committed to our 2025 profitability targets; however, it's important to note that we issued these targets prior to the current inflationary environment. We continue to execute pricing actions, manufacturing savings and cost efficiencies. As we continue to scale the business in the coming years, we expect to invest and redeploy some of these savings and considerably creating growth and innovation initiatives.

In summary, we are very pleased with our commercial operational financial results for 2021 and of course visibility in earnings of the business. We continue to take steps to address inflationary headwinds and supply chain disruptions in the market and we remain confident in our long term outlook. We look forward to updating you on our progress in the coming quarters.

With that, we would like to open the call for your questions.

[Operator]

[Operator Instructions] Your first question comes from Jessica Tassan with Piper Sandler. Your line is open.

[Jessica Tassan, Piper Sandler]

Hi! Thank you so much and congratulations on a great 2021. So I think we were just curious if you could maybe help us understand how the price increases worked within the context of either GPO contracts or under your Sole-Source contract and specifically is price flexibility baked into the Sole-Source contracts or do you have to negotiate each of those on a kind of one-on-one, customer-by-customer basis. Thank you.

[Scott Seidelmann]

Thanks. Hey! It’s Scott Seidelmann. So I think a couple of questions there. Your first one was really how did GPO price impact long term Sole-Source agreement. It has pricing in the long term Sole-Source agreement.

I think to the latter point, typically the Sole-Source agreement will have a price lock of maybe first couple of years, one or two years and then after the fact pricing can adjust, sometimes drive the CPI, etc., but after that initial price lock, it can adjust.

GPO pricing really doesn't come into any kind of factor in that long term Sole-Source Agreement, it’s outside of that. So long term Sole-Source Agreement should negotiate directly.

I think – I’m sorry, you had a second one.

[Jessica Tassan, Piper Sandler]

No, I think that's actually helpful on that and I guess this one is for Peter. Just what explains the improvement and adjusted EBITDA margin expansion over the course of the year? Is that mostly owing to cross the goods or is that integration cost concentrated in the first half? Any color there would be helpful. Thanks again.

[Peter Kuipers]

Yeah, great question Jessica. I’m going to go back to the additional pricing action. We do have flexibility on the service pricing. That was a pricing action that we talked about in the last earnings call, so that has started to build up and flow through as well, and we've also talked about in the prepared remarks, the last call that we have increased the margin approval levels as well.

So then to your question around the improvement in gross margins through the year, we delineated in the prepared remarks between the first half and the second half. So the way to look at this, there's really two factors there. One is the pricing action, so the majority of our product backlog is also a portion of our quotes are going to be for pricing actions, right. So the pricing actions kicked in in the quoted profit, sales process and we expect that to go into the backlog into revenue and to offset a larger portion of the inflation near the end of 2022 and as we move into 2023.

Now we expect now that pricing actions will fully offset inflation beginning in the first half of 2022, [inaudible] and then from an inflation perspective, we had initiated pre-buys initially via brokers, and then directly also a few OEMs and should we see that pricing in the cost easing over time, starting probably really near the end of 2022 and then flowing into ’23. So that – those two factors provide along the gross margin, margin improvement of currency from the first half or second half of ‘22.

[Jessica Tassan, Piper Sandler]

Got it. Thank you.

[Operator]

Your next question comes from the line of [inaudible] with Wells Fargo. Your line is open.

[Unidentified Analyst]

Hi! Thanks for taking my questions. Maybe a couple on bookings. I guess first, how much of the bookings guidance is coming from M&A. Could you quantify that number for us?

[Peter Kuipers]

Yeah, so the bookings guidance and also revenues, a couple of points from the full year impact of M&A compared to last year.

[Unidentified Analyst]

Okay. I guess one thing I looked at just in the context of your bookings guidance, can we have some insight into the conversations you're having with sales reps? You know are Sole-Source clients expressing any notable changes, maybe in the product or services roadmaps that they are contemplating or perhaps in the pacing of product implementations over the coming year? Can you comment on anything along those lines?

[Peter Kuipers]

Well we'll probably comment here, but... So what we see is really a couple of factors as we said in the prepared remarks. So first, we really see the strong momentum in advanced services and that is a clear differentiator and fairly often the vast majority of all deals are really that makes the choice for us for Omnicell; Omnicell to be the partner. We have not seen any change in implementation, timelines related to COVID or change in demand is a fairly strong from our perspective of what we see in the field. Maybe Scott, you want to comment as well.

[Scott Seidelmann]

We're not seeing from an implementation perspective, we’re not seeing any impact from COVID.

[Peter Kuipers]

Yeah.

[Unidentified Analyst]

Okay, okay.

[Peter Kuipers]

You had a second part? Did you have a second part of question as all, unless we fully answered it.

[Unidentified Analyst]

No, I think that gives me some color. I guess my decision here is, I’d like to maybe ask a question on the 340B sales that you are generating. You know qualified hospitals already have point solutions in place. I'm trying to understand what's really driving incremental growth for that business? Is it mainly technical services or are you also displacing existing point solutions as you're generating these incremental sales?

[Peter Kuipers]

Right, so our existing Omnicell 340B business, it’s a technique and service. It’s a TPA that includes the billing software and expert services advised at the hospital on how the management 340B program and how to optimize it.

It does – we are displacing other vendors and we are doing that, because as part of the portfolio is an element of the portfolio that helps us in engaging us on a much broader relationship. The 340B solution is only one of many services and products that that health system is requiring from us and we've got a thoughtful vision for how you can integrate the 340B software into other aspects of our software and synergies between 340B and opportunities such as IPN, so that’s something that our health systems are keenly aware of. And again, I’ll point you back to the health system that we recently announced; the Sole-Source Agreement with EMC in Lubbock, Texas, which engaged us, both the 340B central pharmacy point of care and derive it.

The general impetus there was not only from a health system, which I think is a great example of health systems generally, focusing on optimizing in-patient, but also this health system might most is very much engaged and focused on optimizing ambulatory and outpatients, and when you start to see that, then services like 340B and patient engagement programs like in [inaudible] become incredibly important to health.

[Unidentified Analyst]

Got it, got it. And then on, can you comment at all on the trajectory of growth in that segment?

[Peter Kuipers]

Yes, this is Peter and I would say that is in line with the general growth of the business.

[Randall Lipps, Chairman, President, CEO, Founder]

Yeah, and just that reset of course allows us to have a different angle. Our current 340B product uses contracted pharmacies. Reset would use the pharmacies of our provider. And so that allows an additional option for 340B customers in the provider world to use either one. So we are really happy with that acquisition and it really broadens our specialty pharma offering and really allows us to – we having both the demands of providers and pharma.

[Unidentified Analyst]

Okay. And then maybe just a clarifying question. I think as Jess was asking earlier on the pricing adjustment. So as when you are commenting that towards the end of 2022 you're going to see everything kind of back to normal pricing standpoint. Are we thinking about from the perspective of the now bookings at the end of 2022 will be priced accordingly or is the mix of booking still going to have some kind of a drag, where when we're thinking about next year you're still going to have a margin impact coming from what inflationary pressures, maybe not as much as you're seeing now, but we should still factor some kind of an impact going into next year, because not the entire full year bookings have that out pricing adjustment, is that the correct way to think about?

[Randall Lipps, Chairman, President, CEO, Founder]

Yeah, I think there's actually two questions there I think. So form a ledger impact perspective, for the financial results we estimate that the pricing actions will offset a larger force of the inflection towards the end of 2022 and into 2023 and we expect these pricing actions to fully offset the inflation starting in the first half of ’23. So that's the way you to think about that.

And then we have of course analyzed, estimated our quotes in the pipeline, a portion of those are of course pre-pricing actions and when they book if you will, they'll become a net negative from a inflation pricing action perspective, but more and more of course newer quotes since we started the pricing action. And it’s still affordable and will offset most of the inflationary costs.

Now they continue to manage of course inflation as well, reduce fee and what we see in the industry and what we also are looking at, industry repots we see inflation continuing also through an extend into 2023 but to a lower extent.

[Unidentified Analyst]

Got it, thanks so much.

[Operator]

Your next question comes from the line of Scott Schoenhaus with Stephens. Your line is open.

[Scott Schoenhaus, Stephens]

Hi team! Happy Valentine's Day. So Peter, I think you said there is a $35 million impact to margins from inflationary cost pressures and then was it $15 million from integration costs? What was the second number you provided for the bridge?

[Peter Kuipers]

Yeah so, thank you for the question. So inflationary costs we estimate to be in the range of $30 million to $35 million and then the size of the market remains in the margin. $8 million of acquisition integration costs, with the copier there that most of integration costs must be modeled and then execute on integration of strategic acquisitions is in the first year. So in 2023 that number, it should be significantly lower if you will.

One other element, talking about acquisitions is that the acquisitions that we've done, the three acquisitions in general or in total are over the average lower EBITDA percentage than the core total business, right. So that’s also a headway in ’22 which you can also factor.

[Scott Schoenhaus, Stephens]

That was actually what I was getting to and where you really see leverage on the SG&A side I'm assuming.

[Peter Kuipers]

Over time we can still integrate yes, yeah over multiple years.

[Scott Schoenhaus, Stephens]

Well that helps me get to the bridge. So just another question, so services revenue, you guided to about 31% of your total overall mix for 2022. That’s a healthy increase from the end of even this past year. Should we expect that kind of momentum to continue annually going forward, Peter?

[Peter Kuipers]

Yeah, if you – the answer is we should not expect that absent any additional acquisitions. The most of the difference between the organic revenue growth and core revenue growth is of course inorganic and most of the acquisitions, most of the revenue of the three acquisitions we did in the last year are actually being recording as a service revenue, so there is quite a bit of growth there in organic basis as well.

[Scott Schoenhaus, Stephens]

Thank you.

[Peter Kuipers]

Got it.

[Operator]

Your next question comes the line of Anne Samuel with J.P. Morgan Chase. Your line is open.

[Anne Samuel, J.P. Morgan Chase]

Hi guys! Thanks for taking the question. You spoke to increase booking size and was hoping maybe you could talk a little bit about what you would attribute that to. And are you seeing any benefit yet in those numbers from some of the labor shortages that you know noted?

[Randall Lipps, Chairman, President, CEO, Founder]

Well, most of the booking size is because people have under invested in infrastructure, particularly around medication management. And as the real desire as these large providers, wan tot created standard and make a strategic investment. Just not answer some of the problems, but put an entire platform to digitize their whole network. And so once that sort of presentation gets to the right level, usually the C Suite, people want to investor strategically over many years to automate and deliver on the relief of not only labor shortages, which have become even more acute these days, but also accuracy and some of that labor shortages have to do with some of the most difficult people to find, like an experience pharmacy technician who is compounding IVs.

While moving to an automated robot that Compound IVs really just doesn't relieve some headcount, but relieves some headcount that are the most difficult to find and also in an area that is a problem there, could be problem and danger if you're not doing it properly. So, it really means that you take a strategic approach to the total partnership with Omnicell in a broader spectrum.

[Peter Kuipers]

Add to that, the strategy has been explicit on two fronts, which is one focused on the large health systems and engage those large health systems with a comprehensive portfolio, namely the advanced services, and where that's been really working for us over the last couple years and mainly last year is that we have been winning with large health systems on the strength of the differentiation provided by the advanced services, and I think what we're seeing is that over the last 14 large competitive conversion, 11 of the those have had at least one advanced service in addition to the point of care. So these health systems are engaging, because the strength, they are engaging quite heavily with us.

[Anne Samuel, J.P. Morgan Chase]

That's really helpful, thank you. And then maybe just one, I apologize if I missed it, but I was wondering given some of these near term inflationary headwinds that you're seeing, does that impact your 2025 profitability targets at 400 basis point expansion that you had called out.

[Peter Kuipers]

Yeah, it’s also a great question. In the prepared remarks, we called out on the 2025 framework. So from a revenue perspective we feel very confident on being able to achieve that. From a profitability perspective, there is a cope on inflation. However we have line of sight and fee execution of pricing actions, productivity, process improvement and cost synergies and leverage.

[Anne Samuel, J.P. Morgan Chase]

Great! Thanks very much.

[Operator]

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

[David Larsen, BTIG]

Hi! Can you provide a little more detail around the $30 million to $35 million in inflation pressure for next year? Like what portion of that is coming from semiconductors versus freight versus steel? And then it sounds to me like quotes were provided, but then after those quotes were provided the prices of the materials increased, which is why there's a margin headwind. I mean why can't you just sort of go back to the customers and be like, ‘hey! Inflation popped up, we got to adjust the quote.’ Is that possible to do or not? Thanks.

[Randall Lipps, Chairman, President, CEO, Founder]

So, great question. So on the first part of the question, so the $30 million to $35 million of inflationary costs, you should think about roughly half of that is semiconductor related and the second half is roughly, equally divided between freight cost inflation and steel cost inflation.

The on the second part of the question of going back to customers with quotes in half or orders and backlog, there is limited flexibility to do so. In terms of not to do that, again we’re focused on the long term, focused on the customers. Part of that’s also for a pre-buy or semiconductors which gives us a high level of confidence that we can supply our end customers. But it does come at transitory inflation costs here in ’22 and which you see in ’23 as well.

[David Larsen, BTIG]

Okay, that’s helpful. Thank you. And then assuming that prices do cover these inflationary costs in early ’23, then for your 2025 guidance for earnings, it seems to me like me like maybe worst case scenario, that could get pushed back by one year, right, because I mean the prices are going to offset the inflation a year from now. So maybe if you get pushed back a year, worst case scenario, is that reasonable or not?

[Peter Kuipers]

Yeah I think that’s a great part of your question. So we're working with the inflation but there is uncertainty there and of course we have the already testing year, also incrementally year-over-year in your services and clould, given the strong demand. But that has like we said earlier in the call, we are executing on these pricing actions and we believe that those pricing actions will continue or stick if you will on an ongoing basis, also in the outer years and then we’re working cost productivity, manufacturing savings and leverage, so…

[Randall Lipps, Chairman, President, CEO, Founder]

Yeah, leverage on the advanced services as well. Many of the advanced services are early stages where the margins aren’t as leveraged up as they will be as they gain scale. So certainly as we go on through 2023 to 2025 these will scale and deliver much better gross margins. Yeah.

[David Larsen, BTIG]

Great! And then just one more if I can squeeze one in. For the $8 million integration costs, are those one time in nature or will they recur in 2023. And if they are one-time in nature, I mean can we think about them as being kind of one time in nature and exclude them from adjusted EBITDA or what are the $8 million, what’s the $8 million box?

[Randall Lipps, Chairman, President, CEO, Founder]

That's a fair question. They are one time in nature and just to be clear we have not excluded those costs, we have not adjusted for that cost in our EBITDA guidance, alright. So they are a drag on EBITDA and earnings in 2022. For our integration plans and we like to integrate strategic acquisitions for the majority in the first year. So the integration cost in 2023 is significantly lower. So think about maybe $1 million or $2 million compared to the $8 million in ’22.

[David Larsen, BTIG]

Okay, thanks very much. It sounds like it's a sort of a temporary headwind here that will be overcome in ’23. Thank you.

[Operator]

Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital. Your line is open.

[Matt Hewitt, Craig-Hallum Capital]

Good afternoon. Thank you for taking the questions. A couple of different fronts here, maybe first up and sorry to keep asking about the inflation, but Peter you specifically talked about the semiconductor, trade, steel. I'm curious, you're also seeing it on the wage side as well, particularly as get more and more engrained in the services business, are you seeing it on that side as well?

[Peter Kuipers]

Yeah, that's a great question. We believe we were very an effective employer who’s been able to higher great talent. As you have seen in the last couple of questions, we haven’t seen quite any significant labor inflation. So it’s probably too early to tell. We do think our compensation is good compared to market.

[Matt Hewitt, Craig-Hallum Capital]

Okay, great. And then separately, I'm curious – and this is maybe a little bit out there. But over the past couple of years with the pandemic, procedure volumes are down, patient visits to the doctors are down, all of that, unless it was tied to CVOID and I'm curious, how that is you know – that, if you want to call it a headwind has impacted like the 340B and some of the markets that you've moved into here recently and as we come through the pandemic, is it your expectation that you'll actually start to see increased growth in those markets which you will now be the beneficiary of.

[Randall Lipps, Chairman, President, CEO, Founder]

Well, I think for sure as I said in my prepared remarks we do expect volumes of big providers particularly hospitals to go up, I think about 4%. Many of it was delayed and so – but, that really hasn't slowed down the buying from what we’ve seen. So I think it is just going to be more healthy for our customers as we move toward, because there will be more volume to go through.

And I think it's, not just the acute care, but also in outpatient areas. So just like Scott’s talking about UMC. So I think people evolved and many of the attention to some items in the healthcare that they should have done in the pandemic. And I think as you say, as the Omicron is moving away, so the volumes should be increasing.

[Matt Hewitt, Craig-Hallum Capital]

That's helpful. Thank you.

[Operator]

Your next question comes from the line of Dev Weerasuriya with Berenberg Capital Markets. Your line is open.

[Kathleen Nemeth, Head of Investor Relations]

Dev are there? Can you hear us?

[Dev Weerasuriya, Berenberg Capital Markets]

Hey! Good evening! Can you guys hear me?

[Kathleen Nemeth, Head of Investor Relations]

Yeah, we can.

[Dev Weerasuriya, Berenberg Capital Markets]

Okay great. Thanks for taking my question. So just to kick it off on this inflation, hopefully circle this out, I just want to confirm, I think you mentioned on wage inflation that it wasn't maybe considered in 2022 to 2023 in regards to your inflation $35 million impact. I just want to confirm that. I guess that doesn't include any kind of wage inflation there.

[Peter Kuipers]

Well, we always – we always kind of correspond, we plan for good [inaudible] product inflation as well. Did you say $5 million in ’21?

[Randall Lipps, Chairman, President, CEO, Founder]

Nothing extraordinary, how about that.

[Dev Weerasuriya, Berenberg Capital Markets]

Okay great. And then maybe just jump in to kind of the top line. On the revenue side, just wanted to get some more color around you know this tech enabled SaaS services, and maybe you know disaggregated by the end market. Where are you may be seeing more momentum? For example I guess Omnicell One maybe kind of a easier sell with the Sole-Source agreement that you have, you know ADS. You know the worse is maybe going after new retail customers or payers. So just any color on kind of the momentum, more disaggregated on that side would be helpful. Thank you.

[Scott Seidelmann]

Yeah, I think – this is Scott. So in terms of market, I mean the focus of the business and the channel has largely been the large health systems and that’s not exclusively acute. The large health systems are increasingly (a) expanding through other hospitals and increasingly expanding in ambulatory outpatient and now even hospital at home or home healthcare. And I think when you look at that, I mean that’s driving a lot of demand to automate pharmacy not only to fill the acute care beds, but to support a large geographic enterprise.

Omnicell One is linking that entire health system up to help them in effect access a air traffic control function to make sure that the right drugs are in the right locations, both inside the hospital and outside the hospital. Things like 340B, Reset now are helping that hospital grow the topline, whether that’s through retails meds management, the 340B business, that’s certainly the out-patient side, and then in Enliven as we mentioned with UMC Lubbock, we are seeing more and more demand from health systems to actually utilize tools and solutions, like the EnlivenHealth portfolio is not pretty comprehensive because we’ve added FDS Amplicare and MarkeTouch capabilities. That’s showing there’s real demand in the health systems.

Again those, the primary market for those are the more traditional retail pharmacy. But we're certainly seeing the vision for the strategy with always – that the world would certainly start to intertwine and that we will be well positioned with a fully comprehensive solution, so...

[Dev Weerasuriya, Berenberg Capital Markets]

Okay, that's helpful. I guess maybe taken like a customer for example on EnlivenHealth, you know Wal-Mart is an example. Just in regards to recurring revenue growth and also maybe also on like the gross margin side, a double edge question here. So on the revenue side after you do the implementation, on the SaaS side, what kind of growth drivers are there after you roll it out I guess widely? And then on a gross margin side, I would assume there's some interpretation cost in the first couple of years. Would you expect that to improve? I guess at what rate would be expect it to kind of improve on a unit economic basis per client. Just on the advanced services and tech side. Thank you.

[Randall Lipps, Chairman, President, CEO, Founder]

First point, which is really around where its growth for an Enliven customer. So very traditional fact, really on two dimensions. One dimension is that the subscription product, that subscription is tied to – call it number of stores, number one; and then number two, what services are within that subscription. So any large Enliven customer revenue would scale in two dimensions, one of which is how many stores am I adding into the platform and then how many subscript services am I subscribing within the platform, right.

And so the customer you mentioned maybe rolling out all the stores on one of the platform, one of the subscription or one of the services, call scheduling or IVR, etc. The growth comes really with that impact sale notion of engaging that customer to add more of the services. So maybe I started with IVR and now I want to add Medicine and financial analytics and scheduling and then ultimately participant in some of the payer market price and activity. So that’s how that, you can see that growth dimension.

Gross margin, we really have never commented on a particular gross margin, it would more like a scale.

[Dev Weerasuriya, Berenberg Capital Markets]

Okay, but I guess it's generally, would you expect to gross margin to kind of increase over time after you win a customer?

[Peter Kuipers]

For sure, right, because there’s even a SaaS business. It has a fixed cost associated with a give a customer that would scale at the time as you add more volume to it, sure.

[Dev Weerasuriya, Berenberg Capital Markets]

Okay, great. Thank you.

[Operator]

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

[Randall Lipps, Chairman, President, CEO, Founder]

Hey! Look everyone, thank you so much for joining us today. I mean Omnicell has always been about growth over the last few years and yes, there are some headwinds in the inflationary places and some M&A costs and the integration costs. But we've got a good game plan and most importantly we're going to get the systems installed for our customers, so that they can improve healthcare for everyone and we'll get back to our normal gross margin as we go down the road. Thank you so much. We'll see you next time.

[Operator]

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