Outset Medical, Inc. (OM) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. We're going to continue the Med tech conversations here at the Goldman Sachs Healthcare Conference. My name is Amit Hazan. I'm the Med tech analyst at Goldman. I'm actually joined on stage this time by my -- one of my partners on the team, Phil Coover over there, also Med tech. And we're -- well, more excited probably. We were already excited. Now we're more excited to talk to our next guests. We have Outset Medical. And so we've got both the CEO, Leslie Trigg; and the CFO, Nabeel Ahmed with us. So first and foremost, welcome. It's great to see you live. I have seen you live and most people here, we have not seen you live for a long time. You and I have. But -- we really appreciate you coming here. I know it's probably been a very long day for you, and I imagine. So I thought what we could do is address the elephant in the room first, get it out of the way and then get back to talking about the business after you guys straighten all these things out, which we know you'll do.

Sure. Yes, absolutely.

So let's talk about -- I don't know if Leslie, if you want to just take a crack at a quick summary of what you disclosed yesterday, and then I've got a couple of questions. And I think that my effort here is going to be to try to clarify confusion that I think folks had after yesterday and it's not surprising. It's a short call, not a lot of information, but let's try to do that and see how far we can get.

Sure. Happy to do that and hi everybody in the room. So let me, I guess, start with a little bit of the background summary to your suggestion, and then you can take us in different directions. So we have had a long-standing practice of continually updating and innovating on devices. We've done that on the acute side, we've done that on the home side. We have consistently and successfully utilized a mechanism called letter to file to -- internally test and document these changes. Most medical device companies at least that have a device cleared through the 510(k) pathway, utilized letter to file over time. We also have had a practice successful and effective of periodically summarizing those changes that were made through the letter to file mechanism and updating FDA. In May of 2021, we filed such a roll up. This is a colloquial term, but kind of a roll-up submission that summarize the aggregated changes for FDA that have been made to the device. And as a reminder, this is 1 hardware platform. That's part of the kind of the magic and the beauty of Tablo. It is 1 hardware platform, regardless of where it's used from the acute all the way to the home, also means we have a single labeled indication. Our labeled indication covers the use of Tablo, "in acute chronic and home settings", which means that when we aggregate changes, some of the changes may pertain to the acute environment. Some of the changes may pertain to the home user. And we routinely file as part of our submissions, these roll-ups submissions, human factors validation test data. We've done that for a long time. This submission was no different. The 1 that was submitted in May of 2021. We also filed 2 sets of human factors test data on that. 1 for the health care professional user, again, because our labeled indication is both hospital and home and then a second human factor study for the patients. What was different this time, what was different about our experience because we had, for example, a Cartridge 510(k) that was cleared in 2021. We had another roll-up submission mostly of acute changes that was cleared in 2021. I mean we've had a successful history with this. I think what was really different this time around I alluded to it on the call about this new higher bar for human factors. When the FDA reviewed the human factors test data, which was done to the same level and rigor as we had previously been doing it, their commentary and feedback back to us was, hey, we'd like to see more. We want to see more expansive human factors data both with health care professionals and with patient users. And I don't want to get into too much nerdy detail in human factors testing, but I have become a human factors nerd myself through this process. But that might involve, for example, we want to see more patients. We want to see more user tasks tested. We want you to create a greater diversity of types of patients. We want to see patients who have been home on the incumbent device or who have never been at home who have been on PD and now going home on HHD like a greater diversity of types of patients and what you're doing in human factors testing as a quick aside, you're basically testing does the user, whether it's a health care professional or patient, does the user have the aptitude to successfully complete these tasks like pretreatment set up. Somebody has to get the disposables on Tablo, of course, you have to work with the touch screen and get into treatment. Can the user do that? If you've made changes, for example, to wording that's used. We made -- I'll give you 1 example. We made a change to some of the words on the screen. It used to say, self-clean. We changed that to heat disinfect because we thought heat disinfect was more clear. The screen used to say deep clean. We changed that to cab disinfect, because cab disinfect seemed more clear. It's those types of changes that do have to go through usability testing. So fast forward, FDA, this is now bringing us current to 2022. They had said, "Hey, we'd really like to see it more." We worked actually really hard and collaboratively with the FDA. This is the human factors team. This is a separate and distinct group within the FDA that sits outside the branch. All human factor studies across all medical devices go through 1 central group, the human factors group. So we worked collaboratively with them on this protocol because we wanted to make sure we knew what is the new goalpost that we need to cross. We gained their alignment on the protocol. We ran those studies. We're now getting into Q2, and we had absolutely terrific results. On that point, I am very, very sure. These were exceptional results for a protocol that was very comprehensive and thorough. And in fact, we will be publishing this data when we get through this period with FDA. And I think this will be a landmark and kind of a definitional human factor study, the likes of which has not been done yet, at least in our space. So through conversation with FDA then as they were going through their review, they have communicated to us that this is the final piece of the puzzle, if you will, they have completed their review on all the other elements of the submission, but that the human factors team had requested more time on task. To put a little bit of context around this and in fairness to the agency, this was not like a review of a book report. Each study report itself with hundreds of pages. So together, this is closer to think about this like much closer to 1,000 pages of test data than 500. It's a lot. They asked for a lot. We delivered a lot and they communicated a need to put more time on the clock to complete that with you.

So I think that one of the points of kind of confusion myself included, but I think others I've spoken to since, I think, is -- it's just the trigger. What is the exact trigger for causing the ship hold given that you're selling the product not too long before, right, you need to move it from the market at some point? But it was still on the market while these roll-up 510(k) processes were ongoing. So what is it that exactly was the trigger that made you decide that a ship hold was necessary?

Yes. So a couple of things. First of all, there was no formal trigger like a formal written letter or there is no formal communication from the FDA. So I want to be clear about that because sometimes that's the trigger. This concept was born out of a conversation actually about the review timeline as May was wearing on and the FDA had indicated to us that the review should be complete in early June. So we were getting a little bit more vigilant about inbound phone calls to FDA, hey, how is it going? Are we tracking? Any questions? Anything we can do to be a better partner? Anything we can do to be helpful? And in one of those conversations, the FDA brought up. And I'll say it was not somewhere -- it was not a light suggestion, but it was not a formal written mandate. It was -- I don't remember the exact words, it was like it would be strongly advised, hey, why don't we push the pause button on new patients. We're not concerned. We don't have any safety knowledge or reservations about the patients already dialyzing on home and Tablo. But technically speaking, 1 is not supposed to be shipping new devices, particularly into the home until the 510(k) is formally cleared. At that point, we did -- we had a decision to make. The decision is to comply and collaborate or -- which is the approach we took, we could have taken a different approach, which is wait a second. If you don't have any safety concerns, if there's nothing that's troubling you, what's the difference between patients using -- currently using the device, new patients going home. But at that point in time, it was our strong belief based on input from the FDA that the review will be completed in early June. At this point, we were in very late May, 2 weeks, okay, let's continue to be collaborative and constructive. And typically, it is not my modus operandi to be terribly antagonistic with the FDA, particularly just with what we believed were a week or 2 prior to clearance.

Okay. Okay. So that kind of brings you to the timing of thinking that it's sometime in the very near future, third quarter potentially where you'll get this approval. But is -- are you basing that on something you're also hearing in these conversations you're having with them? I know...

Correct. Yes. Yes, that's an indication that the FDA has given us. Now again, I fully realize that another elephant in the room is, well, that's the indication they gave to us about early June. And that's true. But that is the indication that we've gotten from the agency. And I don't have any new reason to believe that, that review would not be completed along the timeline that they have indicated.

Okay. Okay. So let's talk about downside risk for a second. One question I have is why the acute side is not impacted by this and whether there's a chance that it might be in the future? Can you walk me off that?

Sure. And a little bit of this will have to be speculative on my part because I can't speak for obviously for the FDA. But I think what I have observed in our prior submissions in the states all the way back to the original home clearance of Tablo, the FDA appears to have a much greater and significantly heightened level of interest and sensitivity to the home environment. You're talking about a professional user in an ICU, a nurse, a tech who has formal training and decades of experience, I believe that the FDA perceives that risk -- it's all about risk assessment, that the risk assessment that the FDA would consider in that use environment is quite different from a home use environment with a lay person, any one of us -- well, a wide diversity of users who have no formal training and don't have a professional caregiver in that environment. So I think they just consider in human factors, the risk assessment is quite different depending on the user group and also the use environment.

Okay. But it is technically the same product, right, that goes into acute then the home? Is there...

Same hardware, and then there's 2 versions of the software. And so you have a professional care mode, which had -- and a patient mode. Now the patient mode again, is really designed for safety. There are, in the patient mode, many, many, many fewer things that you -- one can change. Pretreatment during treatment, alarm parameters are tighter, you don't have nearly as much latitude. Tablo in the home is like a one-lane highway. And I would say Tablo in the ICU has more latitude because, again, you have a different use environment with a different user involved.

Okay. Okay. So the other side of the downside, which question could be -- could you backtrack this? Like could you go back to wherever -- what other iteration of device you had that was approved and is all good to go. And if you needed to, could you do that tomorrow? Is that -- there's nothing wrong with the device that got approved in 2020. Can you backtrack if you need to so as to say like if someone is thinking about your home opportunity and they want to say, okay, we want to take the downside off the table here, they could always go back to that device.

Yes, maybe I'll separate your question into 2 parts. You say could you go back and then tomorrow. So I -- so my answer would be, yes, in the theoretical, no, it would not be tomorrow. Now again, I don't mean to indicate that going back would be 5 years from now, but there is understandably a body of work that's going to be more than just pressing the send button on the old version of the software. But yes, in the theoretical, we're not there yet. I don't think we're -- we have not spent an immense amount of time playing out that scenario. But yes, there is no technological or technology-related limitation to doing that.

Okay. Okay. So last one for me. I think this has been really helpful to clarify. It's just on the guidance piece. And I think here, it's really the acute side actually that people are asking about and trying to understand why would there be an impact to the acute. I think it's just understanding of how the purchase that have made that you think will impact your acute business, too, and that we can -- we're trying to kind of absorb the risk that there's something else going on in the acute side too, given everything going on in the world and hospitals and challenges and things like that. So what color can you add to and why you had to adjust your acute.

Yes. So look, let me first of all say that we haven't seen anything so far that would cause us to believe there is any change in demand for Tablo in the acute. In the acute setting, Amit, Tablo cells based on the economic value proposition. We reduced the cost of dialysis for hospitals compared to their in-sourced dialysis providers, number one. And then number two, it's the clinical versatility, right? It's the same box that 1 could use in the ICU that 1 could use at the patient bedside and sort of it's only 1 set of training, it's simple to use all of that stuff. So nothing there has changed. We continue to see very strong demand in our acute end market. That's part one. Part two, we have delivered some pretty tough news here yesterday, right? So the reactions that we are all having in this room could be the same reactions that are happening in the hospital [indiscernible] I mean Tablo cells basically [indiscernible] and all of that. So as we sat down and thought about our own forecast, and remember, we use our forecast as a starting point. It's based on the visibility we have. It's based on where we are with backlog, where we are with the pipeline. Quick reminder backlog is deals that we have inked. Pipeline as deals that are at various stages of negotiation, signature or whatnot. What we felt is that we could not in good conscience, say that, hey, this will just pass over without any incremental conversations in the acute, right? So the way we thought about it is that, look, in our base business, we obviously have the home that kind of goes on pause. We then have customers who are doing home and acute deals. So these are single deals with home and acute in very simple terms, if they're getting ready to sign a contract and now we can't deliver on a part of that contract. They'll have to call their lawyers, we have to rewrite that piece of paper, right? So that's very tactical, but like there is a subset of deals that look like that, where we have to go back their lawyers, our lawyers, and that's going to take time. And then we have, hey, we have acute customers who may just want to have incremental conversations, right? I mean nothing could come out of it again. The demand is still there, but they may choose just to have an incremental conversation. And so what we felt for our forecast for the guidance that we shared is, look, what we're going to model is that some of these deals are going to push. We don't expect any deal to disappear. As we've talked about before, it's not like we're doing RFPs where there are multiple competitors. It's not like we are up against the clock or whatever you might want to call it. These are just -- this is just our modeling of look, people are going to have conversations. People may want to take a pause, whether we like it or not, let's acknowledge that. And then let's give ourselves collectively the space to go do that in a way that makes sense. So there's nothing sort of fundamentally changed in our acute business. It's just an expectation that we think our sales cycle in the short term will take a bit longer.

Okay. Conservative modeling, but not based on conversations you've had with your customers.

We dropped our bombs, forgive my language, yesterday. And so those conversations have started, as you can imagine, just like these conversations have started yesterday.

Okay. I think I'm going to move on from this topic, do see -- is there any questions? Anyone wants to ask on that before I move on. Okay. So let me just get back on track. We'll ask a couple macro questions and then get back to all the good stuff, assuming you're going to get back on the market. So otherwise, we have less to talk about. So I assume you get back on the way. So supply chain first. I mean you guys have done a good job, a great job. I think you just haven't had any impact from electronic component issues or anything like that.

It had impact. We've been able to mitigate it. I just want to be clear, we've seen all the issues, freight component shortages, price increases. We have a great team. We've been doing this for a while, we've been able to mitigate that. But those headwinds certainly exist and our team, as you know, it's trench warfare. So we're going through it, yes.

And then prior to this challenge that came up were you able to deliver product as you had been with any challenges.

Absolutely able to deliver products at any point in time. We have finished Tablos in inventory. We have components. We've talked in some cases. We have years' worth of components in stock because we bought them to make sure that we're not going to run out and whatnot. So yes, we have -- we still have, as we sit here today, finished Tablos in inventory and will for a while. So no, we have not had any challenges that we can't mitigate.

Okay. I'll ask one more and pass it on to Phil for a lot of the other questions. Just hospital, health of hospitals, your customers staffing and things like that, other shortages. I mean -- just talk to us about what you're seeing out there, whether that's a good guide for your business. I mean, not good for them, obviously, but is it helping your business or how you think about that question?

Yes. I think there's a couple of dynamics if you don't mind, I'm going to expand beyond that one. I think the first dynamic during COVID, post-COVID, and I think that this is going to be for some time to come. The appetite for cost reduction is even higher. I mean it's probably higher than it's ever been. As health systems that we talk to, have you -- been less confidence in their ability to drive incremental revenue. I mean, how are you going to improve your financials, it's going to be top line or bottom line. And I think there's a lot less confidence amongst the health system executives that I talk to, that they can do that through incremental growth. And so therefore, you start to look at cost reduction, which has a certainty to it. And I think the way that we deliver the -- or Tablo delivers the cost reduction is very tangible. We will invoice you less money for this treatment. There's not a lot of like magical what do you need to believe and it's 1/4 of an hour last time, it's a very tangible and immediate benefit to cash flow. So I think that, that is a trend line around the popularity or the desire to continue to reduce cost that absolutely will continue to be a tailwind. I would say probably similar remarks to the ones that we've made in the past around staffing. By and large, by and large, it's a tailwind, but we certainly have had and probably will continue to have hospitals that have said, hey, and this is where we've signed sales agreements and we have training dates established and it has happened, and I'm sure it will continue to happen through 2022 would be my forecast. Can we change the date? Okay, wait a second. We just had someone we unexpectedly or we didn't count on this. So we were hoping to hire these 2 people and that pushed out a bit. But those will again be relatively, I would say, immaterial timing differences. This isn't -- we haven't heard a lot of like come back and talk to us in 3 years. Now on the upside of that, I think Tablo is a solution for staffing shortages. It enables in a couple of ways. Number one, it does enable a nurse to dialyze not -- no longer on a 1:1 ratio. They can dialyze in a 2 or a 3:1 ratio because so much of Tablo is automated, and we also have remote monitoring available. And I think Part 2 for hospitals that have been outsourcing dialysis, those third-party service providers have been struggling just as mightily with their own dialysis nurse staffing shortages. And we are still continuing to see activity in the marketplace where those service providers have broken contracts with hospitals where we have been able to step in and be a solution in a time of need. So a bit of both, but on balance, more tailwind than headwind.

Yes. I think maybe just stick there for 1 more second on utilization. We can obviously -- we can see the numbers in the acute setting, we're still below kind of 2019 levels. So we have relative benefits of Tablo, but in absolute terms, are we -- we're still below volumes that you would expect to see over time in the acute setting. Correct?

I didn't follow the question.

What do you mean?

Well, just in terms of utilization per system, it still seems from what we can see in the model. It still seems like we're a little bit below kind of average cartridge utilization per system in the acute setting.

Yes. What you're seeing, I understand what you're saying, what you're seeing is -- remember that when we have new customers, they're ramping at some rates, right? And our more tenured customers obviously get sort of up to their utilization levels and potentially beyond. And so what happens is as we are ramping new customers, what you might see in any given period if as the ramp is going up, as the customer is going up the ramp, the utilization may look lower. So that's the dynamic you're seeing. When we look at it internally and remember that because Tablo is connected to the cloud, we can look at every connect to Tablo, and we know how that unit is behaving. We're seeing utilization for those machines right in line with what we would expect from their home or acute.

And I think what I -- I'll just add to that. I think what I look at and what I -- as a commercial operating person is really -- I am always most interested in the tenured accounts and we have visibility in that. So in our more tendered accounts, have they reached sort of studies, where are they reaching steady state, and I like what I see there. It depends on their volume and obviously, how many dialysis patients they have at any 1 time in the hospital system. But -- and we've shared this publicly in more tenured accounts, you're going to see utilization that's going to be 10, 12-plus treatments per week, and we continue to see accounts reaching that level.

Okay. All right. That's helpful. I think maybe an underappreciated part of the story is the depth and breadth of backlog of systems that you guys have visibility to. It seems to give a lot of the confidence that you guys have established for guidance each year. One of the comments that you made when we were discussing the situation was pretty interesting to me. It sounds like you have systems available. So it's going back to Amit's question, but I'm interested, how you plan to handle the backlog of customers on the home side as we kind of unwind assuming that things go according to plan in 3Q?

Yes. So look, this news is pretty new right now, obviously, for the home consoles and backlog. And just reminding the tape a bit, remember, we entered 2022 with 1,251 consoles in backlog, we see a significant part of that backlog was home console. So there's a lot of consoles there. We were looking forward to a very, very strong Q2 print in the home. And so a lot of that volume is now back and it stays in backlog, I guess. And so we're going to work with those customers once we get our approval to sort of get back on track with them. And it will depend customer by customer, how that rollout looks. But again, this is 1 of the reasons why we've had to -- why we can't give guidance for the rest of the year because we don't know what those plans look like for each 1 of those customers. It will be bespoke at some level to each 1 of them because this is somewhat of a strange exogenous situation we're in, right?

I'll just add to that. I mean, I've had a couple of customer conversations myself. So I can tell you that, number one, the tone and the tenure has been super positive and very supportive. But if you think about it, I mean, these are customers who have been conducting their own real-world human factor studies on their own patients, right? And so they have the benefit of seeing how many of their patients have benefited from Tablo, have gotten through training quickly, have retained their use at home. We continue to see a highly, highly differentiated retention rate. I think that's perhaps the most underappreciated aspect of this story about the technology is that we just have not -- we have barely seen any patients kind of raising their hand and opting off, which has been the Achilles heel of the devices of the past. And I don't think that's going to change. And so the reaction so far from our customer providers is, hey, like fingers, let's just get through this. And I think some of these -- we have very, very large number of patients ready to go home unfortunately, all in June. And I do think, again, in the spirit of kind of full transparency, I think some of those patients, if I were somebody who was really eager to go home, I think we'll be given a choice, hey, do you want to go home with another device do you want to wait? Do you want to train on the other device and have an option to go back to Tablo later? The sense I get from providers is they'll offer all of those options, but Tablo will remain an important option in their arsenal once we get past this development.

Okay. Okay. We're unsurprisingly, a little low on time already. So maybe a little bit rapid fire. On the home side, hoping we can talk to some of the tailwinds that were behind us after strong 1Q, 2Q was going well. Just hit on the 2 or 3 key big factors we have Tiffanys. Can you give us a little bit of the details around what that benefit is going to be we have it through next year, I believe?

Yes. That's an incremental add-on payment rate for Tablo in the home. It does run through full calendar year 2023. And then the ETC model, which I really think is the even more powerful economic story here because that's running all the way through 2027. The ETC gives providers about a plus 9% or 10% benefit over the Medicare base rate of $260. But the ETC actually goes further because it also penalizes providers that don't reach certain percentages of their census at home, having observed this industry, and I don't say this with any judgment, but having observed the industry, I think it will be the stick that's more powerful than the carrot. And that stick gets pretty big into 25, 26, 27, you're getting into like minus 8%, 9%, 10%. And most clinic operators are in thinner margin terrain where that really makes a big difference. So I think in order of impact on the financial side, it continues to be sort of ETC, number one. And then beyond the financial impact, I think the biggest driver of Tablo adoption, which has been -- through Q2 was growing rapidly was the ease of training on Tablo. It's -- I think the feedback has been it's been a pain in the neck to train patients on other devices. And they had the opportunity to really see Tablo in action in their patient population and promises made, promises kept. They saw patients of all sizes, stripes and colors and shapes, learning Tablo in 10 sessions or less, and that's been very consistent. So I think that's perhaps the biggest driver.

They've also put some relatively large numbers out there for percentage of patients transitioning to the home. Maybe just speak to that. We also heard from Fresenius about some projections or some aspirations, I guess, for percentage conversion. Can you just kind of speak to the 80% number that they put out there by 2025? And then the numbers that Fresenius has also talked to. Just broadly, what are your thoughts on what you think are realistic goals with what's been put into place?

Sure. Well, I think the original executive order, which is back in the summer of 2019, put an aspiration out there to get 80% of the patients. These are new to dialysis patients, not the prevalent population, but the incident patients, there's about 120,000 new patients that require dialysis being added to the base every year. However, when CMS then developed the ETC model, the threshold that they developed to reach like the 90th percentile where you start to really get that extra payment rate is 28%. That's for this calendar year. I also believe, and we have an indication from the Biden administration that from now through 2027, those aspirations will get bigger. I think it will move beyond 28%. It's 28% this year. Do I think it will get up to 80%? That would not be my speculation. I think that they will really encourage providers to be somewhere in the 28% to 50% zone. It would be amazing. I mean if providers were hitting 50% of the population at home, it would be actually historic. And it would be -- we're already operating in a $9 billion TAM, which probably bears mentioning that $9 billion the key variable in our model is the key assumption is that only 30% of patients ever have the interest capacity or accessibility to go home 30%. And I think the ETC model is going to trend much, much higher than 30%. So -- we believe that, obviously, there is tremendous upside here during -- in the intermediate to long term.

Okay. It kind of lends itself to a competitor question. We have Medtronic and DaVita announcing not too recently. So -- just wondering if you can opine on that and then maybe on the broader landscape from a competitive front, what you're seeing?

Yes. Well, I'll go back to, first and foremost, the TAM, right? This is a large space that's gotten a lot more interesting. It was -- I got involved in the space in 2012, and I was involved before becoming CEO in 2014. And what was really remarkable to me, I remember back in '12 is like nothing had happened. I mean it was -- it really was frozen in time. And it's really only been in the last, call it, 3 to maybe 5 years, but 3 or 4 years where it's become this like super interesting, very dynamic space with a lot of tailwinds that are clearly pushing people into the home. So I am not surprised at all that there's more interest, both in investors funding the space, which really is the point of doing all of this, I think, is getting more capital into innovation for patients in the home. Not surprised, but it is a size that will sustain many competitors. I think with regard to Medtronic and DaVita, I don't have any special knowledge about the state of that program. As far as I understand it, it is focused on developing a product for the home. And beyond that, I don't know much about it. I would say, again, I think we're still at such an embryonic point in the development of this market that more is better. I think it's phenomenal that Fresenius is out there really touting and pushing how many patients that they intend to push in the home. That will have -- I think that will have a very significant impact on the market. CVS, Fresenius, those are incredibly loud voices in D.C. and also in the community and the industry, and they will encourage others to do the same.

Okay. All right. That's great. Nabeel, you made some comments yesterday also on the cost side of the equation. Maybe just reiterate what you put out there and then we can do some follow-ups on that side.

Yes, for sure. So we take our commitments to manage cash prudently very, very seriously, and we had long-term guidance out there in terms of our breakeven potential in the future. Now with respect to this year, what we have committed to is that we're going to reduce our OpEx by roughly the same amount that we take our revenue down by as we get through the situation. What we're not going to do is to jeopardize the long-term health of our business. But we are going to be extra thoughtful about how we spend it on the margins to make sure that we can end up this year as close to where we had originally projected ending up as we possibly can.

Okay. All right. That's helpful. And on the margin front, we've heard a lot about the transition of the cartridges. Can you give us a reminder of where we are today and kind of -- I think you've said vast majority is the language that you've used? Can you give us kind of an indication of what percentage of cartridges will end up being produced in that Mexico facility?

Yes. So we printed 14.8% gross margins in Q1, 12% in Q4, so sequentially expanding margins since our IPO and barring this situation would have expected sequential expansion of margins through the rest of the year. Our guidance for Q2 is now that we'll be roughly flat from a gross margin perspective on Q1. So those are sort of the numbers. With respect to the cartridge, we currently produce our cartridges, well, exiting last year in Southeast Asia. We're moving that to Mexico that is underway. By the end of the year, most of them will be made in Mexico. We are going to retain so we're going to retain the Southeast Asia manufacturer as a second source of supply. There's going to be some minimum we give them. But order of magnitude, you can think the vast majority I don't think it's a GAAP term, but we'll go with it anyway. Vast majority is in -- is going to be in Mexico. But we will have to give some minimum amount to the Southeast Asia folks to keep them economically producing.

Just one last thing, sorry, I know you want to move on. But I think it's important to mention and because I'm proud of the team, all of the cost down program elements that we've communicated on the console side are delivering. And so we have been offset to that progress in the form of lower console shipments because of the home situation and therefore, lower cartridge shipments, lower service margin contribution. But I do think it's important to emphasize like the team is right on plan with respect to the core elements of gross margin expansion with regard to the consoles.

Okay. Just one more kind of higher level on that front, the 50% gross margin. I know that it's not the end, that's the next goal, but can -- the question that we get regularly is to talk about the composition at that point in time? What are the 3 key elements going to look like from a margin perspective. Can you provide some clarity on where you're going to be from a console margin perspective when you get there?

Yes. What we have said is that, look, we think -- so the highest margin item for us is going to be consumable, as it is today, will be tomorrow or in the future rather. And then with respect to the console, console margins will be up from where they are today. If you look at sort of competitive devices, I think the margins for these capital equipment is -- it's in that round numbers, 20-ish percent zone. So that's where we expect to be. And then service will be what any service business looks like low double-digit service margins is sort of where we're looking to end up. It will be in that zone.

Well, I think we're going to have to end it there. Thank you so much for the information. I know it's been, like I said, a long day, but we know you'll get through it to. So better days ahead, but thanks so much for the information.

Yes, thank you both.

Yes. Thanks for the opportunity to communicate. Thanks, Nabeel for the explanation.

Yes, thank you.

Thanks, everybody.

Thanks.