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

Awesome. Great. Thank you all for joining us today. I'm thrilled to be here with Nabeel from Outset. I'll go through some Q&A. And then if we want to, we can open it up for questions. Perfect. So maybe I'll start with -- want to first to congrats, obviously, on the early TabloCart FDA clearance. Could you spend a few minutes talking about where you are in the process of ramping up TabloCart sales and manufacturing and perhaps some color commentary on customer receptivity.

For sure. First of all, thank you, [ Leila ], for having us on this wonderful day in Miami, Weather certainly cooperated for us. With respect to TabloCart now, let me maybe say a couple of things. So first of all, One of the questions that we have gotten from others is from a manufacturing perspective, do we have inventory? Can we sort of keep up with customer demand. The good news there is, yes, absolutely, we have carts in inventory. If 1 orders a cart today, we can get you one in a couple of days. And from a customer perspective, we talked about this quarter since the approval as being 1 of reramping. We had customers who maybe had budgeted for carts in the previous period. Now they need to go and make sure that budget we procure that budget. We had to take TabloCart out of master sales and services agreements, customer purchase orders. We need to go through and update all of that paperwork and so that's the activity that's in process but customers are happy. Our teams are happy. We're sort of really focused on the ramp now and are excited to get through that and move through the rest of the year.

Maybe building on that, as you look at the pipeline for the rest of the year, how much of it is still backlog orders in terms of pausing TabloCart last year versus an acceleration of kind of new customers...

Yes, we haven't broken out that backlog number, [ Leila ]. But if it's helpful, maybe let me talk about how we did think about our guidance and particularly the second half of the year. If you look at our Q1 performance, if you look at kind of Q2 implied and you look at the implied revenue required for the second half of the year to get to the bottom end of our guidance range. Number one, half of the revenues for the second half of the year will be the recurring revenues from console -- from consumables rather and service on our larger installed base. So number one, just given the recurring revs that our business generates we get to sort of roughly half of the implied 2H revenue number. And then the remaining console revenue, again, to get to the bottom of our guidance range, the remaining console revenue number is roughly the same as the actual console revenue number we printed in the first half of '23, which was the last period, the last half in which we also had TabloCart available. So to sort of get into our guidance range for the second half we need to reperform what we did in the first half of '23. And then now to move through our guidance range, we have the same performance drivers we've always had. We can place more consoles in our 2 large end markets. Obviously, there's TabloCart sales, either pent-up demand or just new sales. There is ASP, either natural ASP or from pro plus sales, and then we can sell more consumables, Hopefully, that helps.

That's very helpful. Maybe I'll stay on the thread a little bit of the financial performance and then we'll kind of go back to some of the more of the macro utilization trends. You announced a cost reduction plan. Can you talk about why now is the right time for the restructuring? And maybe with that, also talk a little bit about how that impacts time line to profitability.

Yes, getting to breakeven has always sort of been core to our plan, getting to breakeven quickly, and we are aligned with investors around getting to breakeven quickly with the cash we have on our balance sheet. So we started this exercise with number one, can we get to breakeven with the cash we have. The answer check, yes, we can. And then two, we wanted to make sure that we executed on that plan while preserving 2 things. One, we wanted to make sure that we could preserve our ability to drive revenue growth. And then number two, we wanted to make sure we could preserve our ability to expand gross margin. And so we executed a plan that takes out roughly $20 million out of this year. It will annualize to $30 million in '25, a little bit more in '26 and '27. So over $100 million in total. That will get us to breakeven a little bit ahead of the Q4 2027 guidance that we had previously provided. So a little bit ahead of that. And then if we are able to overperform on gross margin, which we've done sort of in the past, then we get even more leverage and potentially get that to breakeven a little bit quicker.

So maybe with that, as you think about gross margin, as you think about some of the drivers there in terms of expansion towards 50% going forward? Can you contextualize a little bit about what we might -- what you guys think about in terms of [ create ] flexibility.

Sure. First of all, we've now expanded gross margin for 12 consecutive quarters. We just printed 31.1% here in Q1. And the good news is it's the same levers going forward as it has been through our history since we've been commercial, One is console cost down, so R&D and supply chain programs that reduce the [ bill of ] materials cost of our console. So cheaper components or lower cost components, different vendors, all of that sort of stuff. . Number two, as we place more consoles, we sell more consumables. And so again, that's natural pull-through of consumables on a larger installed base. And then number three, it's service leverage. So one, there's natural service leverage as we place more consoles and then number two, because Tablo is cloud connected, we have the ability to perform remote diagnostics, some remote repair capabilities on our console, which again, as the installed base gets larger, that just has more impact. So some of it is volume, some of it is activities we're doing to drive down the cost of the console. But importantly, it's the same -- we need to do the same things going forward as we've done in the past.

That's very helpful. Maybe I'll take a step back and maybe go back a little bit to what you're seeing across utilization trends across the installed base. And maybe just perspective, more holistically what you're seeing around the competitive landscape and environment.

For sure. So with respect to utilization, so first of all, over time, we haven't seen any real changes. Tablos that we placed and used in the home, we see between 3 and 4 treatments per week. Again, that's based on the patient prescription. And in the acute setting, it's between 4 and 5 treatments per week. That's been the case for a while and that's remained unchanged over the horizon. With respect to the competitive landscape, in the acute setting, we -- our value proposition is to in-source -- to work with providers to in-source Tablo and move away from an outsourced dialysis. When our customers see how much money they can save, when the hospitals see how much money they can save by in-sourcing with Tablo that conversation tends to work well. Because we save in many cases, over 50% of the cost of dialysis for providers who in-source. Tablo has a 1-year payback period in the acute setting. And in the home setting, we really haven't seen any new competitor from a device perspective. Again, the thing that differentiates us relative to the incumbent home provider, if our retention rates on therapy are much, much higher, [ Leila ]. Our device is easier to learn. It doesn't require you to batch dialysate or make dialysate and the prescription on Tablo is 3 or 4 treatments per week. And in the case of the competitive device, we've heard 5, 6 times per week. So all of that just leads to higher retention rate on those.

That's really helpful. Maybe focusing on the acute end market, as you think about progress gaining new customers, do you see any key trends amongst adoption between different hospital systems, i.e., more adoption between national versus regional or smaller hospital systems? What are you seeing across kind of the end customer base?

Yes. Our -- what I'd say, [ Leila ], is that our adoption has been broad-based. We started out in 2021, our strategy in the acute and at home, actually, but it's been land and expand. And so we started out in 2021 signing MSSAs with all the large nationals, the 8 big nationals and 1/3 of the top 100 regionals. We've done that and then obviously, we've signed more logo since, but we've also worked on expansion through the logos that we've signed. So what I'd say in the acute is that it's broad based. Right now, we are probably 10%-ish penetrated in the acute setting [ by math ], we have -- we are in 650-plus facilities across the U.S. We're doing about 1 million treatments per year in the U.S. And so we have broad adoption across the U.S. We have scale in the acute setting. And again, we talked about our acute pipeline on the last call being really strong with over 60% of our pipeline being deals of over $1 million or more, the strong progress in the acute.

And what is the tipping point as you think about that new customer acquisition. Is it a function of just time spent understanding the products and the benefit and the differentiation? Is it contracting? Is it CapEx? Like how do you think about what really drives moving from 10% ultimate penetration to 12, 15 and beyond?

Yes. Our sale is really an economic one at heart. So we start with this hospital C-suite and we work with them, number one, we literally ask them for, "Hey, show us your invoices from your existing dialysis provider. In some cases, we see them being charged $1,500 per treatment in the ICU. We then run that same math with Tablo, and we demonstrate to them 50% payback, in some cases more. We demonstrate to them a 1-year payback on the capital. In some cases, it's tighter. And so that's the starting point of our sales cycle. Our sales cycle, [ Leila ], it's been about 9 to 12 months, pretty reliably. We talked about elongating a little bit to that 12 month to the outer end of that about a year ago. But the good news is, as we exit this quarter as we get into Q3, we will have lapped kind of that sales cycle elongation to the roughly 12-month mark. And so again, as we think about the back half of the year, our sale really remains an economic one at heart.

Yes. Maybe just double-clicking on the sales cycle question. As you think about what are you seeing in terms of maybe from a macro and micro perspective, hospital CapEx spending environment currently? And what drives the shift or the acceleration of the sales cycle kind of back into kind of 9 to 12. Is that, again, more exogenous factors in terms of what these systems are facing themselves in terms of pressure? Or what drives acceleration.

Yes. So first of all, what we have -- what we're seeing now is stability, right? And what we are banking on from a guidance perspective is stability. So the good news is we're seeing the sales cycle stabilize. Again, what moves -- our sales cycle has always been sort of 9 to 12 months, in that zone. It's kind of crept up towards the 12-month cycle. But what's important to us is that we have that stability that persists through the rest of the year. That's what's baked into guidance that what sort of gets us our growth.

And is there anything in terms of just tonality around the hospital systems as you're in dialogue around CapEx spending? Do you feel like, to your point, it does feel like even as you -- even as you listen to the commentary for those who sit in the public domain, it does feel like there is much greater stability around that, but it has been for med tech a point of real volatility in the sector. I take it that you guys are as you think forward, it does feel like things have normalized in that?

Yes. They have normalized. Again, I'll go back to -- we are actually -- we're on the good side, if you will, in terms of helping hospitals save money. Our device, while it's nontrivial from purchase price, we're not -- these aren't the same price as robots or things of that nature. And so again, what we are looking for is [indiscernible] as we sit here today.

We'll shift to home, for a few [indiscernible] first in terms of home and then including U.S. [indiscernible] I'll go with a couple of others.

Sure. Sure. So just as a reminder, [ Leila ], maybe for of our home strategy, there's really 2 pillars to our home strategy. One, is go where the patients are. So if you look at the 600,000 patients, chronic dialysis patients today, roughly 30% of these patients are served by what we call mid-sized dialysis organization. U.S. Renal is probably the largest 1 of these midsized dialysis organization. Now these MDOs, by the way, 30% is how we size -- 30% of the dialysis market is how we sized our $8.9 billion TAM. So just if we get that 30% served by the MDOs, for example, if we get all those patients, we get the $8.9 billion cap. But the benefits to these MDOs of sending patients home on Tablo, number one, they get to differentiate themselves relative to the large dialysis organizations and the products that they offer. Number two, they get to add to their expenses without building additional clinics or whatnot. And then number three, they get the retention benefits that Tablo offers relative to the incumbent home product, right? So again, U.S. Renal is an example of these MDOs. The other leg, the other pillar of our home strategy is to go upstream above the 30% to people who are new to dialysis. So this could include health systems. It also includes people like SNFs. On our last call, we talked about skilled nursing facilities. There's 1 customer we highlighted who has over 200 Tablo, 60 facilities and who is seeing the benefits of Tablo, which include keeping the patient in the skilled nursing facility to do dialysis. Prior to sort of Tablo, these skilled nursing facilities had to transport patients out. Those patients were subject to injury potentially. The provider was incurring the cost of transportation and the patients were missing other treatments while they were out to dialysis clinic. And so by insourcing the Tablo they get to sort of do the additional treatments. The provider gets to bill for dialysis and the patient is sort of happier overall. So that's kind of how we're thinking about home.

Yes. No, it makes a ton of sense. Maybe just the next question is really how do you think about the kind of regional strategy moving forward at home? I think you talked about the initial home program is drawing a lot of sort of interest. Again, how do you think about expansion?

Yes. So our is really based around both breadth across the U.S., we talked a couple of years about a goal being getting 100 home programs up and running. So we met that goal, and we're obviously adding more programs, but we're also focused on depth in those programs. We do things like targeted social media campaigns in locations where there are clinics to make sure that patients know that they have a choice with Tablo and that they have a clinic that can then send them home. And so what all of these programs are telling us is that there's broad-based, number one, interest in home when patients are given the choice of, hey, I'd like to go home. They are choosing home and the number two, are exposed to Tablo, especially relative to the they tend to choose Tablo. So again, Tablo is available across the U.S. We have the sales service in U.S. to make sure that patients can go home, and we're seeing broad support for Tablo at home.

You had mentioned previously the impact of sort of SNF and then I'll put subacute in that category as well. How do you think about it -- as you look forward, how do you see penetration within that market as driving kind of further expansion at home?

It will be the same. So our strategy at home or acute has really been land and expand. And so again, we highlighted 1 SNF provider on the call. There are other large SNF providers, large subacute providers. And again, the strategy will be the same, landing with these providers and then expanding, in this case, home programs with these providers. It will be no different.

Is the -- as you think about customer acquisition, is there anything unique around that experience relative to what you see in the acute setting. You talked about cost, obviously, economics being a huge driver. Is it really around convenience, patient centricity.

It's really again about cost. So if you -- in the subacute and I'll use the skilled nursing facility, again, as the example here. Prior to Tablo, what these folks were having to do would be to transport the patient to a dialysis clinic, in some cases, at the provider's cost. We have -- we had 1 patient who is a skilled missing facility patient on 1 of our [ town halls ]. And this gentleman talked about a couple of things. Number one, he talked about the fact that to do his treatments and he had to do treatments 3, 4 times a week in the clinic, he was out the whole day. He was missing meals and he was missing the other therapies that he was required -- the other treatments he was required to go get, right? And I mean, even just the missing meals, right, is not particularly helpful for these folks. And so by in-sourcing with Tablo, number one, the facility avoids the cost of transportation. Number two, the facility gets to bill for dialysis. Number three, the facility gets to undertake the other treatments for the patients and bill for those. And then from a patient perspective, the patient doesn't have to miss meals. He or she is there for all their treatments, all of that stuff. So it's a little bit of -- it is absolutely cost for the skilled nursing facilities. It's also sort of patient -- better patient outcomes because these folks are getting the full benefit of -- that hopefully answers the question.

That's it. That's very helpful. I'm going to pause for a moment to see if there's any questions in the broader room folks have. You to wait for a microphone.

Great. I appreciate your participation in the conference here. Maybe you could just talk about the acute business a little bit. Baxter had a very strong Q1 and highlighted share gains from Outset, given some of the disruptions that your business faced. What is the latest on the acute business? And how do you see that unfolding from here?

In the acute business, again, our value proposition is 1 of economic savings for the hospital. Today, prior to Tablo, most hospitals outsource the provision of dialysis to one of the large dialysis organizations. We have heard [ David ], of people -- of hospitals being charged up to $1,500 per treatment in the acute setting, in the ICU. With Tablo even when you layer on nursing or labor cost, the cost is much, much, much lower. The value proposition for Tablo remains the same economic one that we've had before. Again, the other benefit for Tablo is that the same device can be used from ICU to bedside, so it's 1 device instead of having to manage a fleet of devices. So [ David ], what I would tell you is our value prop remains unchanged. With respect to the acute, we talked about our pipeline being in really, really good shape, 60% of our pipeline is deals of over $1 million. We're seeing a lot of new customers in the pipeline. So we remain very bullish about the acute opportunity and our ability to penetrate beyond 10% as we move forward.

I have to push a little harder or harder. So the trajectory that you saw in the first quarter, how did you reflect the acute business in your guidance for the balance of the year? Do you expect to continue [indiscernible] Baxter in the acute setting in the U.S.? And how does that resolve going forward?

Well, from an acute perspective, we talked about the first quarter. So if you step all the way back, we paused the shipment of TabloCart in the third quarter of last year, and we talked about 1Q looking a lot like 3Q and 4Q, which is what happened. Again, we still did not have TabloCart. We were under kind of this warning letter situation here. Now with the TabloCart's approval, we are back, if you will. So our focus right now is on ramping in the second quarter to get back to the second half. But again, David, the operating environment is a little bit different now that we have the full product portfolio to go and sell, right, which is why as we think about the back half of the year, we expect growth in acute and in home as we had always expected.

Any other questions from the audience? Great. Maybe -- and this is a little bit, I'll call it an umbrella question, right? Obviously, as you think about where you sit today, you obviously are sitting at a point where from a business perspective, there's a lot that we expect to inflect going forward as we think about second quarter, second half of the year and beyond. What would you highlight as being sort of underappreciated and I'll say, undervalued, as an obvious statement in the market today. And what do you think becomes kind of important KPIs around the progress as people look through the next 2 to 3 quarters in terms of moving back to that kind of normalized state of growth.

Yes. So what's underappreciated or sort of what I'd like to highlight. So number one, we have scale, going to [ David's ] question, in the acute setting. We're about 10% penetrated. We have a value proposition that addresses right at the heart of what hospitals care about, which is their economics. So 1 is scale in the acute. Number two, with respect to the home market, we have, again, the 2 pillars we have the MDOs, U.S. Renal being an example and 1 we've said recently where we're delivering real value, and we have an ability to work upstream of the U.S. Renal, for example, the SNFs and have demonstrated success in both of those pillars. Number three, what I would point to is our recurring revenue model. Roughly half of our revenues are recurring revenues from consumables and service, and that provides us with a lot of forward visibility and kind of a foundation of which to grow. And then finally, it's our gross margin expansion story. We just printed 31% on our way to 50% and which when combined with the cost reduction activities we've undertaken, [ Leila ], give us a lot more conviction in getting to breakeven without needing any more money. So that's kind of the 4 important things. What was the back half of your question?

I think you really covered it, which is just how do you think about what KPIs people should be looking forward?

Yes, it's really the same ones that we've talked about. We print our installed base annually here and we'll continue to do so. And then the gross margin progress is the other 1 on top of revenue that I plan.

Probably my last question and then again, we're happy to open it up to the room is really what didn't we ask about? As you think about your conversations with customers, as you think about what you're seeing from an operating environment perspective what is top of mind at Outset, as you think about kind of the strategy and the path forward?

Yes. Our focus sitting here today is really on execution through Q2 ramping back to where we expect to be. We're now really pleased to be behind the TabloCart situation. We're pleased to be behind the warning letter situation. And so we're really focused now on getting back to what we know Outset is, which is a differentiated product with 2 large end markets and a clear line of sight to profitability. So really what we're focused on internally here is execution in the back half of the year. And in terms of -- I think you've covered it, done a great job, covering all the things that I think we've talked about with other folks today and that are investors or clients as we talk to them.

Any other questions? I know we've got about 10 minutes left. We are really efficient out here.

From my recollection in another dialysis company, 30-plus percent gross margin is reasonably good for this business. You don't have an in-center HD business. But how should we think about the peak gross margin opportunity? Does this look like heart-lung company like what Sorin used to look like in the mid-50s and 25% operating margin. Like what is the good bogey to get to? And I'm not going to pin you down on a time line, but how should we think about the peak gross margin opportunity and what it takes to get there?

Yes. So [ David ], we're not done at 30%. Our next milestone is 50% gross margin. And there's really 2 components to that. Number 1 is just volume, if you will. So as the installed base grows, we sell more consumables and we have more service contracts. So related to that is service leverage. So again, volume. And the second thing is console cost down. So since we've launched -- since we went commercial in 2018, 2019, we've had programs to reduce the cost of components on our console. Those programs are going to continue. They're funded, they're active well into the future. So our next mile marker is 50%. Now beyond 50% -- that 50% is not a peak, 50 percentage is the next mile marker. If you go beyond 50%, if you hold the cost of consoles flat, just the volume-based margin gains, which means service leverage and consumable pull-through will inch you up above that. So could that get you to 55%? Sure. But then again, as we have more console cost-down programs, we could get even higher than that sort of 50%, 55% zone. The other thing, David, that we've talked a little bit about before is our interest in potentially new product analytics, that sort of thing, right? We've talked about EMR interoperability and products around that. which could potentially add even more gross margin over the long run. But what I would tell you is we're not done at 30%, we're not done at 50%, but 50% is just the next milestone that we can see.

Thanks. Can you talk a little bit more about the cloud connectivity of the system and the potential kind of longer-term optionality and opportunities that, that presents both from sort of a patient standpoint, but also financially. What that service revenue line could do over time?

Yes. So Tablo is 2-way cloud connected, which -- and we have our own, I'll call it, a provider portal where providers can sort of see what the machines or what their fleet is doing. We also have interoperability or connectivity with provider EMRs, right? Over time -- and we haven't announced products -- but over time, one imagines maybe there's premium EMR, maybe there's other things like that. Maybe there are fleet management tools, there's analytics tools that we could potentially provide to customers. Again, nothing that we are announcing that we're prepared to announce. But what I would tell you is that the 2-way cloud connectivity gives us a lot of options. The other thing I'd tell you that what the cloud does is from a console maintenance perspective. Today, if you call our [ 1844 My Tablo ], we can look at the consoles logs and see what a data didn't do. So we have remote diagnostics, remote repair capabilities. One imagines that those could get better, again, adding to the service leverage, adding to the gross margin expansion that [ David ] alluded to.

I guess just thinking about the acute care market and the environment for hospitals, cost pressures [indiscernible] -- what about the value proposition is most resonating acute care customers that changed [indiscernible].

Yes. The good news is it hasn't changed. And so staffing used to be kind of a thing with respect to the acute customers that no longer is an objection. We also -- when staffing was an issue for hospitals, we launched what we call our bridge program, which is where we have staff. If you need help standing up your acute program, you can hire our people. We'll help you stand it up. We'll provide temp staffing for lack of a better word for some period of time while you hire your own nurses. The staffing isn't an objection. And with respect to capital now, we talk with [ Leila ] about how that has stabilized. Again, our value prop in the acute has always been about saving hospitals money. Anytime we have pitched to a hospital, again, we start with the C-suite, that message resonates, and it becomes a how, when. I got to go hire 2 people that kind of conversation. We haven't had -- we haven't seen any customer who has dropped us, for lack of a better term, like nobody sort of said, hey, we're done with you. This hasn't worked. We also don't see customers fall out of our pipeline once we sort of engage with them around, hey, look, this makes sense to you from a cost savings perspective. So nothing has really changed from a value prop perspective in acute for us.

And then I guess, you've talked about the land and expand strategy that's been -- I guess just what are some of the differences you'd call out in accounts where there is relatively lower penetration or higher? What's unique about the accounts that are adopting higher rate of penetration.

Yes. Every hospital is sort of different. We have hospitals. We have large hospitals who are pretty prescriptive in how -- large IDNs were pretty prescriptive in how they want their rollout to go. We have some other customers who may have, again, through consolidation, acquired a bunch of different hospitals with different end dates on their existing outsource agreements. So some of it is as simple as look, my contract doesn't expire until x, I need to wait until x, right? So it's a little bit of everything. What I'll tell you is we haven't again had people who said, "Look, I don't want to do this anymore. I want out." Or anything like that. But it really -- I wish I had a better answer than it depends, but it really just does depend ?

Anything else? Thank you so much, Nabeel, for joining us. It's always great having you up here and sharing your perspective. And we're obviously really excited about everything that you guys are going to deliver.

Thank you, [ Leila ], thank you. Thanks, everyone.