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

Great. I think we're live now. So good afternoon, everybody. Outset Medical is up next. I'm Travis Steed, the Bank of America medical device analyst, and we have Leslie Trigg, Chairman and CEO; and Nabeel Ahmed, Chief Financial Officer. So thanks for coming.

So maybe just to start out, you just reported Q1 last week, maybe high level kind of talk about the quarter kind of what you saw in -- as the quarter progressed in January, kind of versus March, April trends, things kind of improved over the course of the quarter. Just maybe level set the conversation there.

Sure. Well, I'll give some broad remarks. I think, first and foremost, we feel great about the quarter. It was a really strong start to the year. We always look for kind of 3 levers in the business every quarter, which is how did consults perform, how did treatments perform, how did ASP perform. And across all 3 of those dimensions, it was a really strong performance with some actually overperformance on the ASP side, which is great. I always look at ASP as kind of the leading indicator of demand and is the value proposition resonating. And in this case, it continues to. I really like the performance in acute. Strong performance in home. I think it was a really well-balanced quarter on both sides. And that overperformance allowed us to lift the midpoint of the guidance range, such that we're now projecting 25% to 30% growth year-over-year. I think last highlight from the quarter is gross margin performance. This is our eighth quarter now of consecutive gross margin improvement. We've just been putting kind of one foot in front of another, I think, in a very consistent predictable way. And we were able to deliver a gross margin that significantly beat even our own expectations, coming in at 20.3% for the quarter.

And how much of the price uplift was from the TabloCart?

Yes. So we saw ASP strength from 3 areas really. So first of all, just we have always maintained disciplined pricing, meaning not doing large discounts, not sort of being held hostage to end-of-quarter deals. We saw that continue, and we saw our pricing discipline continue to hold. Number two, we saw continued strong attach of our 24-hour software feature, which is an upgrade for Tablo that we launched in Q4 of 2020. And then we saw really strong uptake, Travis, of our carts, which is the new accessory -- hardware accessory that we launched the late last year. And so the 3 kind of factors combined to lift ASP. We're really pleased with sort of the performance on carts. It is early innings, that is a new product, but sort of really nice reception out of the gate.

I think acute and home utilization treatments per week were pretty stable over the course of the quarter. When you think about where they were in the quarter versus what you're guiding to for the year, are you assuming stability utilization over the course of the year?

Yes. So just to unpack that a little bit. We think of utilization 2 ways. One is we have most of our consoles are connected to the cloud. We know how they're behaving. And sort of the mature installed consoles are treating in the acute right around 5x a week and right around 3.5x a week in home. In terms of build utilization, we have the effects of new consoles that we've sold. And for those of you who follow the story, we saw a large acceleration in our installed base back half of last year. And then in Q1, again, the impact of those consoles has sort of suggests that acute is between 4 and 5, and home is right around 3 treatments per week. In terms of our guidance range, Travis, guidance for us really is about console placement. And so utilization, yes, it's factored in, as we've described. But guidance for us really is about console placement as we move through the year.

And on console placements, I guess if pricing was up a little bit, units were down sequentially versus Q4. Is that right with the seasonality aspect?

I'll comment a little bit about the seasonality. So short answer, no. They were down. I think consoles came in just almost right on the postage stamp of where we thought they were going to come in for the quarter. Going way, way, way back in time to February, I think on our Q4 call, for those of us that have a background in capital equipment, we anticipated maybe some kind of calendar-driven cyclicality. Most hospitals tend to kind of spend through the capital budget in Q4 and then take some time in Q1 to kind of reset, reload and finalize their operating budgets. And we did actually see a little bit of that around the edges. But given that and given that we're in sort of this Q1 cycle, the consoles came in right as we had hoped that they would. So I feel great about the console placements.

The only thing I'd add is console revenue has now grown for 3 quarters sequentially, right? So we're really pleased with how console revenue has behaved, if you will, over the last.

Is the seasonality comments more acute, not home? Is that correct?

Yes, yes. And again, not related to Tablo, but just kind of having been a part of the medical device ecosystem now for more years, and I'll just that, I will not disclose, how many years I've been part of the industry. But this is pretty typical purchase behavior for anybody who's been around capital equipment.

And expectation's step up sequentially over the course of the year in placements in acute?

Yes. Yes. I think we said and we'll reiterate, we anticipate kind of very nice sequential growth rates quarter-over-quarter for the remainder of the year.

Okay. Maybe I know home's usually more top , I'm just going to jump to acute. I guess there's a couple of comments that you made on the call that kind of stood out. So maybe we could start with thinking through like the new customers kind of versus some of the expand within the existing accounts. And where are you seeing more opportunity, more growth between kind of those expanding current customers versus opening new accounts?

Well, I would pick C, all of the above, versus more or less of. When you look at, we had given this example -- well, I'll give you the 2 examples we gave of just about the health of the acute business. One, we had talked about 30 new hospital locations that are now using Tablo. That was a mix actually of new customers and existing customers that were just proliferating their use of Tablo in sourcing and more hospitals through their network. The second example we gave was of a 50-unit order that was sold to a single customer which was a health system, that actually was an expansion order. So that was a health system that had already been using Tablo in a couple of their hospitals. Obviously, we're pleased with their outcomes on cost and operational efficiencies and then decided to, again, expand that through their network. So I think we continue to see through this year so far really good expansion in the new names and then also the new sites and existing names. So all of the above.

And the large IDNs, how much more opportunity is left like in the near term on that? Like you see a lot of things coming your way in terms of IDNs potentially signing up on this. And then the second part of that question would be utilization or in terms of the ramp for the large IDNs, how quickly do they typically uptake Tablo? Do they do like 1 center at a time or kind of go broad brushes?

Well, I'd say the short answer on how much more opportunity in the large IDNs, a lot. I mean we've talked about our generalized penetration across all acutes being in the very low double digits, maybe high, low double digits. And that would apply also to the large IDNs. Some of them we got in several years ago, some of them we've just started to penetrate. So factored all in, I think that low double-digit penetration is probably a pretty good estimation for large and then the regional. So I think we have plenty of runway. Utilization and the ramp, and I'll maybe give you kind of the end of the story before we go back to the beginning. If you're looking at a hospital that's using Tablo predominantly on the floor for sort of average regular 3- to 4-hour treatments, you might see them using it a couple of times a day, maybe 6 out of every 7 days. So that could be, and often is, double-digit treatment utilization per week. But if they're using it principally in the ICU, those are often 24-hour treatments. And so you're theoretically limited by the number of hours in a week. So you might see a hospital in the ICU using it more like 4 or 5 times a week. So take it together, it does depend on a few different variables, the location of the hospital, and then, of course, the hospital's own volume in their census. But by and large, we are seeing many hospitals in our universe using it low double digits treatments per week. But then again, we also have to factor in, as Nabeel said, Tablo that have just been shipped or just ramping up. And so overall, over the last 12 months, it stayed pretty consistent, all factors being considered around 5x per week.

Got it. And in terms of the large centers that are coming, do you see some like your conversations with a lot of large centers so that there's probably some more near-term wins coming in the large IDNs?

Well, I think we're always having a lot of conversations with IDN. So I don't know that I would want to predict some big win. What I will tell you is, as we think about our pipeline, our pipeline is bigger today than it was a year ago and it was bigger a year ago than it was 2 years ago. So the pipeline continues to get bigger, I think because the technology has proven itself, our team has proven itself. We now have many, many more customers that can serve as reference sites for others and also we publish on their results. So I am liking what I'm seeing on the pipeline. And I think the macro environment has stabilized, which helps a lot with regard to staffing in particular.

And then when you think about the awareness of the economics, it seems like a no-brainer for a hospital CFO. Just kind of curious like where do you think awareness is for the economics of Tablo, what you can do to kind of accelerate some of that awareness?

I think awareness certainly is growing. I'll use sort of the same pattern. I mean more people know about Tablo this year than they did last year, that's for sure. And we really, to be honest, I mean, we have not put tremendous amounts of money or resources actually into marketing. And so we got to kind of $100 million in sales primarily on sales. We did not really have a very robust marketing team or medical affairs. Those are actually investments that we started to make in 2022 that I do think are starting to pay off on the awareness front, both in terms of peer-to-peer education, physician-to-physician, webinars, case studies, medical meetings and the like. So I think that as the data points are being shared more broadly, the awareness is certainly growing at the hospital level.

And when you think through, I guess, the Bridge program, sounds like not a lot of hospitals are actually using the Bridge program, but is this more like a more of an insurance policy, if you will.

I think that's right. And it couldn't have worked out better if we had tried. I did not predict this, by the way. So this is kind of like better to be lucky than smart. At the beginning, we -- I really thought this was going to be an implementation answer for hospitals that are really, really struggling with staffing. And the implementations that we have done have gone really, really well. There was actually a customer we talked about Deaconess in our scripted remarks that used Bridge and ended up standing up their own program in 30 days. The majority though really have found that they have been able to hire much more quickly than they thought they were going to be able to and at affordable wage rates. And so the benefit that we've gotten from Bridge, which kind of is free, is our ability -- the salesperson's ability to talk about Bridge as an insurance policy and sort of a backstop, which has given the health system's confidence to move forward even though there are some unknowns. Most hospitals have not hired a team of dialysis nurses before. So it's kind of a fear of the unknown. And I get it. I would be apprehensive about something I had never done before either and they are standing up a new service line. And so I think that the power of Bridge was simply in giving them the confidence to move forward with uncertainty and knowing that, hey, if you don't hire as quickly as you hope to, we got you and we can install a team of people ready to go very, very quickly.

And some of the outperformance in Q1, obviously, we talked about came from TabloCart, and that's in the acute setting. Is that something that's picking up in terms of where like the attach rates for that? I'm just kind of curious like 100%, 50% and where -- what the opportunity is there. I don't know if you disclose the ASP uplift on that as well.

Yes, the ASP, it's about $10,000 for the cart itself. It's still in early innings with the cart. We just launched that product in Q4. We are very happy with the performance we had in Q4 and in Q1 with that cart. And I'll go back to our first sort of accessory launch. We launched our 24-hour feature, Travis, back in Q4 of 2020 initially thinking we would see it in 1 in 4 consoles. And now we're seeing it in the majority of our consoles. So we've had a good track record with 1 software accessory, happy with cart's early rollout, but still early to sort of say where we think it will end up.

Are there other things you could initially put through the channel rather than have call it, ASP, but more of like a mix in terms of sales, like add-on, additional value, kind of curious. And maybe it's in the data side of things [indiscernible] side of things, may be expand upon like your vision here.

Yes. Look, I've always thought about Outset or increasingly thought about Outset as a software company that happens to have hardware. And so I think that we have been a real leader in this space, and we intend to retain that leadership position. I think there are opportunities -- well, sorry, let me back up and say one more thing. I think question mark, where are we going to be successful in using our capital sales team to sell software, to sell accessories? I think we answered that question through 2022. I think that they've proven themselves very, very effective at selling kind of core Tablo and then the optional add-ons. And so that's probably emboldened us in thinking more expansively on the software data products that might be advanced analytics, advanced dashboards. There might be a basic and a premium EMR offering, things that are delivering real value, obviously, to the customer. And also we think about competitively, things that will continue to differentiate Tablo and keep it sort of unique among its peer group.

Potentially moving to more like a SaaS model in terms of the stuff-- in terms of software [indiscernible] software.

Potentially, that's a possibility, yes.

Well, we already have a chunk of our revenues that are recurring revenue for the service and then our consumables. So we -- the business is sort of architected, Travis, already in a way where a little bit under half of it is recurring. We think as the installed base grows, that grows as well.