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

Hi, everyone. My name is Denise Liu. I am an associate here in health care investment banking at JPMorgan. We're excited to be continuing the Annual Healthcare Conference today with Leslie Trigg, Chair and CEO of Outset Medical. We'll have time for Q&A at the end of the presentation and will also be joined by Renee Gaeta, CFO; and Jim Mazzola, VP, Corporate Communications and IR. So with that, I will turn it over to Leslie.

Thanks for being here, and thanks again to JPMorgan for including us in the conference. Really appreciate it. For those of you that may not be as familiar with Outset, we're a California-based med tech company focused on enabling dialysis care that meaningfully improves patient outcomes while dramatically lowering the cost and also the complexity of care. What I'd love you to think about and hopefully take away from today are really 5 kind of key facts about where we are today and what our future looks like. Fact number one, we are now operating at scale with a very large footprint in the $2.5 billion acute and post-acute market. Nearly -- well, not nearly over 1,000 hospitals now are using Tablo in the inpatient environment on a daily basis to deliver about 1 million treatments a year. In total, Tablo has been used to deliver well over 3.5 million treatments here in the U.S. We also have an emerging presence in the $8.9 billion home market, which has been in want of a better technology solution for quite some time, and I'll talk about that a little bit in a little bit. The second thing I think that's important to maybe touch on is what's changed since the time of our IPO in 2020. And I think perhaps the biggest change is that we've really moved from a device to a solution. When we first entered the market in 2019, we had a great device, and it offered many firsts to the market, and I'll go into that in a second. I think where we've evolved to now is a full kind of enterprise-level dialysis solution through data analytics, through EMR connectivity through exceptional field service and support in ways that really kind of build on and amplify the impact of the technology. So I'll talk a little bit about that more as well. These benefits and the moats that we've continued to add around the core device have resulted in, I think, an enviable business model, one in which 70% of our total revenue is actually derived from recurring revenue. And lastly, we entered 2026 with a very, very strong balance sheet, one that is designed to take the company to cash flow breakeven and beyond. So we'll touch on that a little bit, too. So this is sort of a company in a nutshell where we are today and propelling us forward. I want to talk mostly about the future. I'm going to take a quick step back and talk a little bit about the landscape in the market for those of you that may not know as much about it. The most important thing, a couple of things for you to know about the dialysis space. It is one of the largest sectors of our health care system. It is one of the most expensive and oddly because of #1 and #2, it's surprising, it's the least changed. You would have thought that given its size and given its expense that we would have seen more innovation here, both in terms of equipment and the service model, but that's actually not the case. As we sit here today, about 90 million, 90 million dialysis treatments are delivered every single year. That's for people doing the math, almost 250,000 treatments that were done just today as we've been sitting here at JPMorgan or standing here at JPMorgan. Now that all comes at a great cost. About $71 billion. This is U.S. only. Medicare is picking up about $55 billion of that tab. And that is about 5% of the entire Medicare budget being spent on about 1% of the population. Unfortunately, this is a problem, cost, complexity, scale that is getting bigger, not smaller, as we look forward here into the coming 5 years. So where is all this dialysis happening? Again, I want to set the stage for you. So dialysis is delivered in 3 settings, 3 markets, if you will, submarkets. Outset is focused on 2 of those 3 submarkets. But the 3 settings of care are: number one, in patient dialysis. This is dialysis has delivered inside the hospital or an LTAC or a rehab, it's delivered in the ICU. It's delivered outside the ICU and the floors of the hospital. That's inpatient dialysis. The second setting of care submarket is the chronic outpatient dialysis market. That's dialysis that takes place in any one of 7,000-plus dialysis clinics here in the U.S. And the third market is dialysis that's actually delivered in the home. We are focused, as I just said, in -- on 2 of the 3 markets. We are very focused on penetrating the inpatient market, in the hospitals and the post-acute health care facilities and home. And I'll talk more about how those things kind of play together and they're interconnected in a second. So I'll start with in patient dialysis, market #1. Market #1 is about 85-ish percent of our revenue every year. How exactly dialysis is delivered in the inpatient setting has also remained unchanged for quite some time. Most hospitals outsource the dialysis. They outsource it to a separate third-party company and when patients need dialysis, whether it's in the ICU or outside the ICU, the hospital will call one of these third-party companies and one of their nurses will come on site, set up the machine, get the patient on treatment, off treatment and leave. That's the old model. There are some challenges with this model, and the first challenge is cost. And I want to explain what the cost conundrum is. Dialysis is completely unreimbursed in the hospital. If you remember one thing from this whole 30 minutes, please remember, dialysis is unreimbursed in the hospital. It is a pure-play cost center for any hospital in the country. What do I really mean by that? For example, if somebody comes in for a mitral valve replacement, the hospital is going to get paid on the DRG associated with the mitral valve replacement. If that is a chronic dialysis patient, for example, they need dialysis while they're in the hospital for this mitral valve replacement, the hospital will eat the cost of that dialysis. The hospital will be paying, for example, DaVita to have DaVita's nurse come on site and deliver the dialysis, but the hospital will not get reimbursed for that. So you can see how this might add up. And some of the statistics when an inpatient admission involves dialysis there's a 2x higher ICU admission rate. There is a 5-day longer length of stay. Overall, the cost of an admission that involves dialysis is about 2.5x higher and that in dollar terms is anywhere from $5,000 to $25,000 loss per hospital admission. Headline, it's expensive because it's not reimbursed. I think headline number 2, as to why this has become so cumbersome and so costly, is the service model because hospitals typically have outsourced this to a third-party service provider they are no longer in control of their cost structure. A couple of unintended consequences on the quality front as well with this model, again, of a third party coming on site and providing care. I mentioned an average length of stay that's about 5 days longer. There's a mortality risk when you outsource your dialysis. There's a higher infection rate. CLABSIs are catheter-based bloodstream infections. CLABSI for short. CLABSIs cost up to $50,000 for 1 infection. We have customers that have now published data where their CLABSI infection rate is 35% lower after they have changed their service model in-sourced dialysis due to Tablo. So this is a big deal, of course, in terms of quality metrics, but also cost and also from a compliance standpoint. When joint commission comes into hospitals, usually one of the first places they will look is dialysis because the incidence of citations from joint commission from a compliance standpoint is so high, most hospitals really struggle to stay in compliance with their dialysis program because they don't control it. They have turned over compliance to a third party. So setting up the problem statement, we obviously see a better way forward that we have helped over 1,000 different hospitals implement. It starts with the technology and it goes from there. I'll start with the device, and I want to talk a little bit about this in-sourcing service model. When we first introduced Tablo in 2019, there were a lot of firsts associated with this device. Tablo was the first to purify water on demand. Most dialysis machines require a massive water treatment room, 1,000, 2,000 square -- size of this room, water treatment room that has to sit behind the treatment room so that the machine can operate. We designed Tablo. It took us 7 years to tame the technology beast to do this, but we effectively miniaturize the water -- it was kind of water treatment room in a box. We were the first to do that. Tablo is the first device to make the dialysate on demand. That's the solution, the dialysis solution that's used during dialysis. We were the first to make the dialysate in real time kind of streaming dialysate while the patient was dialyzing. We were the first to transmit all of the data about 3 million data points after every treatment, every Tablo straight up to the cloud first, and then we further innovated into integration with Epic, with Cerner and many other EHR customers. So we do have a fairly long now track record of leading this industry and innovation and we're not done. And so this has evolved now over the last couple of years to where we are today, which is really from device to a comprehensive enterprise dialysis solution, Tablo is still there. It is the center of the universe, if you will, but it's now complemented by a whole suite of value and products for acute and home providers. I'll start with the data. I mentioned about 3 million data points transmitted after every treatment up to the hospitals EHR. It is also transmitted to our cloud. So as we sit here today, we have over 3.5 trillion with AT data points in our cloud. that gives us a tremendous opportunity to add clinical value back to our customer base. I have never met a Chief Nursing Officer who doesn't want to know what his or her data looks like, what -- how well are we treating patients. How do we benchmark? How do we compare to other hospitals in our IDN or other hospitals in our region? Where are we strong? Where are we weak? How do we standardize best practices, how do we improve? We have the capability through an advanced kind of clinical data analytics dashboard to actually give hospitals the tools to see how they're doing, an opportunity that they do not have with the outsourced model when somebody else owns that care. So we're putting data analytics tools that give them the opportunity to really control their own destiny, not only financially but also clinically. Second, EMR interoperability. We were the first to integrate with Epic, with Cerner and with many other EHRs, which just amplifies the clinical value because now the hospitals can connect even more dots with the outcomes from their dialysis treatments with the broader patient outcomes across the hospital system, which makes that even more valuable. Switching gears kind of over on the right here, since we have now helped more than 1,000 hospitals in-source, we kind of know what we're doing. We have done this many, many, many times. And so we've harnessed all of that kind of consultative know-how into a proprietary playbook and program where we come in upfront, and we can help the Chief Nursing Officer, the VP of the nursing leaders manage that change from we've been outsourced for 10 or 20 years to in-sourcing. How do we do that? So we've really become kind of consultants and experts in that process through a formalized program that we call implementation services. We even offer temporary staffing solutions as hospitals are kind of making the change, which has been very, very helpful for them. And lastly, we are extremely proud of the service and support that we give our customers. We have maintained a CSAT score of 95% even as we have scaled and even as we've grown, we're continuing to build on that and here comes the data back into the value fold with trillions of data points in the cloud we have and are leveraging the opportunity through AI and machine learning to move service from -- for most companies kind of react and repair to predict and prevent in the name of kind of uptime and patient access. So we're really excited about our initiatives in this area. So as I said, this is probably the biggest thing that's changed since the time of the IPO. We were very proud of our device. And now we're very proud of kind of the suite of solutions that we offer our customers, both new and existing customers who are expanding. Perhaps the most compelling case I can make for the solution that we've built are the results and the results that our customers have told us about. These are some examples of customers on the left who have published their results. I'll hit some of the highlights for one customer, a 36% reduction in their ICU length of stay. A 75% reduction in those CLABSI bloodstream infections that I alluded to earlier, a 52% cost reduction per treatment hour. A 65% reduction in supply and labor costs, a 35% decrease in therapy start delays. Okay? How are they achieving all this? Is it the machine? I get asked this question all the time. How does Tablo do this? So I want to be very clear about our role in this and Tablo's role in it. We are the tool. We are the enabling technology, what are we enabling? A service model change. And so when a hospital that has been outsourcing the care, decides to in-source with Outset, Tablo enables them to do that because it is -- it offers a lot of clinical flexibility, simplicity and automation that really allows the hospital for the first time ever to use their own nurses. They can use their own team or hire dialysis nurses to work for the health system, Advent, for example, where they control their own destiny. They control the care quality, they control how much it's costing them. They control the operating efficiency. So the service model change is what is enabled by the technology, which then results in the improvements that you see here. So we're very, very proud of being a part of these success stories. And these success stories are not one of one. When you look at our commercial success, we now are being used by all 10 of the largest 10 sub-acute again, LTAC rehab providers in this country. We are being used on a daily basis by all 8 of the largest 8 acute providers in this country. And as I mentioned, now over 1,000 sites and facilities using Tablo, 1 million treatments annually and over 3 million treatments cumulatively. We have also trained thousands and thousands and thousands of nurses and physicians, which is also helping to kind of create a future flywheel effect for commercial adoption with a growing evidence base. We now have over 70 abstracts, over 15 full manuscripts covering the financial, the clinical and the operational benefits of in-sourcing with Outset and with Tablo. So I'm going to pause and go over to the second market. That's acute, as I said, about 85% of our revenue. The other market segment that we're really excited about and focused on is home. So I'll do a little bit of a stage setting here as well. As some of you may know, the home market has always had tremendous promise and tremendous opportunity. It remains significantly underpenetrated for a couple of very specific reasons. The first one on the left there is financial. With the incumbent device that was first cleared -- originally cleared by the FDA for home use, that technology required patients to do dialysis more frequently at home. In the dialysis clinic, that middle segment that we're not focused on patients going to dialysis clinics, they go 3 times a week. Accordingly, and not surprisingly, Medicare pays for 3 times a week. With the incumbent technology that required patients to dialyze more frequently, more than 3 times a week. And so you had a mismatch between what the providers are getting paid for and what the providers are having to pay for the incumbent device at home. We looked to close that gap, and we did. Other barriers include physician education, patient education, and that actually is coming with time, and we'll continue to, I think, build. And lastly, we, for many, many, many years, had 1 device that was cleared in 2005, and it was really the only device for home hemo that was available to patients. And while it was in advance in its day, didn't necessarily offer ease of use and ease of training in a way that was modern as time were on. And so we look to close that gap as well. So here's sort of a picture, literally a picture of Tablo, kind of the more of the modern era technology versus the incumbent era. We did close that gap, that mismatch between reimbursement and treatments and designed a technology that can deliver the clinical therapy the patients need 3 times a week at the home. So that treatment reimbursement mismatch has been erased with Tablo. We did eliminate the ease-of-use burden of the incumbent technology. Our training time, as you can see, is a fraction of the measured training time with the incumbent device. And lastly, something I haven't talked about, which is really, really important in home. With the incumbent device, the patient was required to make the dialysate, that dialysis solution in advance of every treatment. That almost becomes a full-time job. You can see 16 to almost 30 hours just preparing for dialysis. And then you've got to do 5 or 6 treatments a week that are 3 hours in duration. It is a full-time job. And it kind of raises the purported benefit of home, which is getting your time back, right? It's empowering to be at home, and you get to decide which you don't get to decide in a dialysis clinic, what days, what times you want to dialyze, you do get to do that at home, which gives you the opportunity to kind of design your life around dialysis versus the inverse of that. But with so many hours spent preparing for dialysis and then dialyzing it kind of raises that benefit. And I think the most important thing, something that we're most proud about on the home side, we have given patients their time back because we designed the system to instantaneously start purifying the water and making the dialysate in real time. There is no -- effectively no preparation when the patient is ready to dialyze, Tablo is ready to dialyze them. So a lot of gap closing, I think, benefits from a patient standpoint on the home side that we feel very confident we'll continue to result in not only greater adoption of home but longer retention at home. One of the big challenges with the incumbent device was retention. The patients often struggle to kind of even make it to 90 days without dropping back into the clinic environment. We have proven now over the last couple of years, an industry-leading retention rate of well over 90% retention at 90 days, which doesn't sound like a very long time. But interestingly, the majority of the dropout actually happens at home in the first 90 days. So we are very proud of our leading indicator, well over 90% retention at 90 days and also at a year. Our mean patient time in the home is now about 1.5 years. One of our first patients who went on Tablo in the home 5 years ago is still using Tablo in the home today. So that's the metric that we're the most proud of. And those are our most important patients that we serve. So I'll -- I'm running out of time here, but I do want to touch on a little bit on the business model and how does this all work for Outset. And so we do sell the consoles, and then we have a recurring revenue stream in the acute at about $20,000 a year. And in the home, about $15,000 a year these kind of annuity revenue streams kind of flowing out of each console that's sold. In the beginning, our recurring revenue was driven really only by -- I mean, no complaints, but mostly out of consumables because there are disposables that have to be used for every treatment. And our service revenue, I mentioned we have a CSAT score of 95 and we have a very, very, very high attach rate for service, annual service renewals, which drives a very meaningful actually component of our revenue coming out of service revenue. And then over time, we've built on this. And this is a big part of our strategy is to build incremental layers of recurring revenue around the foundation. For example, there are specialized types of software that have new features and new functions that we charge more for. We have EMR subscription style revenue coming out now. We have, as I mentioned, advanced data analytics that have a subscription model attached to it and professional services that have incremental layers of revenue associated with it as well. So we see a lot of growth potential for recurring revenue in general, building on this strong foundation of about 70% of total revenue. I think the way we view our revenue strategy is from a visibility and predictability standpoint, we want the highest percentage of our total revenue to be coming from that sort of very predictable and visible recurring revenue and then console sales on top of that is the sort of the way we think about our business. And speaking about financials, I'll talk a little bit about the 2026 setup. We did close 2025 at $119.5 million. Again, I just touched on about 70% of that was recurring revenue for us in 2025. We used less than $50 million in cash last year. We are extremely focused as an organization on 2 financial goals beyond high revenue growth, one being gross margin expansion and the other being getting to profitability. This under $50 million in 2025 was a very meaningful step down in cash usage from prior year. So we're really pleased with the progress there. And then we enter, as I mentioned, '26 from a very strong cash position with a strong balance sheet, fueled by $173 million in cash as we look forward. I'll close again with an emphasis on why we are really here, which fundamentally, and I think why we're all here at JPMorgan no matter what your business, your first mission is patient-centric. And from day 1, every single joiner of Outset, I think, is truly fueled by ensuring that we give patients back their time, their integrity, their agency, their control and their ability to lead the life that they want to lead, whether that's in the hospital, coming out of the hospital post-acute or at home. And so we are determined to make sure that what Outset is really known for when the history books are written, is as a company that truly disrupted an industry that had not changed in 40 years, and we've got a pretty good start in doing so. So thanks again for everybody being here, and we'll let you ask some questions or audience questions. Thank you.

Thank you. I would love to kick off the questions. And then if anyone else has, please just raise your hand, and we have a microphone to pass around. Thinking about the 2 markets, so the acute versus the larger at home, how would you say that investors should think about your focus on these 2 markets.

Do you want to take that?

Sure. Yes, I'm happy to. I think ultimately, if you look at our financials in most recent years in 2025, we've definitely focused more on the acute side of the market, the sort of 80% to 85% of our total revenue coming from that segment. We just see a tremendous opportunity there to really change the standard of care and hit a lot of patients very quickly. On the home side, that market is still open to us. It's a little bit further down the pathway of really pushing, I would say, down on the gas pedal there. It's about 15% of our revenue. Part of that is being very strategic with regards to where we're putting the investment dollars. As Leslie just mentioned, we're very mindful of cash burn, profitability, gross margin and as anyone can appreciate on the acute side, there's better pricing power for us, more utilization of the devices on a daily basis versus the home segment has more pricing pressure and, of course, is used on a patient one-to-one basis. So we've strategically decided to focus more on the acute for now, but not leaving home behind.

I was just wondering about the growth, historical growth, projected growth, if you want to discuss that for each of those 2 segments, the acute and home setting.

Market growth or outsets growth or both. Market growth?

Market...

Yes. Yes. Sure. I'm happy to address that. Actually, acute -- so again, I'm going to break this into kind of segments where you've seen the lowest growth on an annualized basis market is in the market segment that we're not focused on, that's in center. In the dialysis clinics. That's been flat to actually declining due to what I've heard the dialysis organizations report as higher mortality over the last couple of years. So that's that's kind of been 0 to negative growth, if you will. Acutes over the last, probably, it's been very consistent really over the last 10 years, typically has grown somewhere between 5% and 7% in terms of top line kind of patient census growth. And I had this on a slide, but I didn't underscore it probably properly. That growth is coming from incident patients, more patients starting dialysis and most patients unfortunately, don't really get a lot of upstream diagnosis that they have chronic kidney disease that they have kidney failure. They kind of crash into dialysis, and they will start in the hospital and then go downstream from there. So that continues to fuel growth, unfortunately. And then you've got about 800,000 annual admissions, chronic dialysis patient admissions. The chronic dialysis patient population has actually continued to grow as well for a good reason, which is actually longer life. And we've been asked a lot about GLP-1s. And we see so far that GLP-1s are actually having a positive effect because the #1 cause of death in the kidney population, the dialysis population is actually not kidney disease, it's cardiovascular mortality. And so there is a lot of sentiment, if you were to talk to nephrologists that GLP-1s may actually see kind of the prevalent population actually continuing to grow. Lastly, I would say the home growth has been in the low single digits, and that's across both home hemo, which is what we do and also peritoneal dialysis, which is through the peritoneum, and that's been somewhere in the 5% range, those therapies combined together. .

And that 5% to 7% in the hospital setting, are you gaining share? Are you growing at that rate or faster?

We are. Yes, in the acute setting we are. Yes.

I'd like to follow that question up with -- as you think about the landscape and competitors how do you compare now vis-a-vis against other products or service providers?

Yes. I would love to talk about that. So as I mentioned, I think in the beginning, we were very proud of the engineering behind the device. Still today, we are the only device in one integrated system that does purify water and make the dialysis demand and automates and simplifies and sends all the data to the cloud, we're still kind of first and best-in-class there. But we don't take that for granted. And I want to make sure we not only protect the moat, we extend it further. The ways in which we have moved to do that is really, again, kind of utilizing this proprietary know-how that you can really only acquire by helping 1,000 hospitals in-source and really understanding all of the ins and outs of that and how to make it a smooth experience for the nursing leaders, I think that's perhaps our most important part of our IP or really trade secret know-how which really sets us apart from other companies perhaps that haven't even started to commercialize yet. That's one. And then two, I think we first made this investment in data analytics and EMR integration in 2015. We've done plenty of things wrong. That's probably one call that we got right was making sure that we were way far ahead. And I think we have a very material lead now in using AI and machine learning overused words, not only to deliver clinical insights for customers like I talked about, but fueling our efficiency on the service side. There is no valve sensor filter inside of Tablo that we are not constantly getting data back on every treatment every day, and that really helps us on the R&D side, continue to improve the device experience performance, et cetera, for the customers as well.

And that innovation fueling the R&D side and that, I guess, positive feedback loop with all of the data, I assume it's probably one of the drivers of top line growth going forward, but I'd love to just hear any more commentary about what the key drivers would be in 2026.

Sure. Well, I think as we think about customers we have and then customers that don't know it yet, but we will have them. They just don't know yet. But -- so because I think we are so broadly contracted now, we have a huge expansion opportunity. Our longest tenured customer, just to kind of frame it up for you all, we're probably about in about half of their hospitals. And that's our longest tenure customer. And so all of these contracts and relationships that have been formed over the intervening years, we're at varying levels of penetration as low as kind of high single digits, low double digits. So we have a huge greenfield opportunity just within our existing customer base. And the advantage that we have with current customers is they know their data, they know their results. We've already got a signed master sales and service agreement. We've already got relationships. And so that I think that tends to have a shorter sales cycle. And then we have all the greenfield opportunities. Tablo is being used in roughly probably the 1/3, roughly 30% of the largest regional IDNs. So we have a tremendous amount of greenfield opportunity there. And so both new customers and expansion customers are a big part of our growth strategy for 2026.

When you say 1,000 sites, do you mean one device or unit per that site.

No.

So what's your installed base? Is that something that you can disclose.

I'll let Renee comment on installed base. But let me just frame this up for you. So we are talking about facilities, not customer. We have hundreds of customers, but the number that we were citing as a facility number. So it really -- it depends. It really depends on the hospital's volume. I'll give you an example without naming names. We signed a large -- it was a large volume hospital contract in Q4. For example, they purchased -- it was 14 or 15 Tablos. If you have a smaller like a critical access hospital, that critical access hospital in a rural location might be purchasing 3 Tablos, just to give you a frame of reference. So very large, I'd call it kind of 14 to 18 Tablos per hospital small, probably sub-5 consoles.

Yes. And from an installed base perspective, our last reported number was around 6,000 total devices, and you can think about that as again, sort of 80% to 85% in the acute, so 4,500 and then 1,500 in the home market.

Perhaps just one last question from me and deep diving a little bit more into the financials. So outside -- Outset, sorry, has made great progress expanding gross margin since its IPO. I think from the mid-negative 30s and now positive high 30s. What do you see as the steady-state margin going in the future?

Yes, it's a great question. I think over time, what we've done is we've really attacked the revenue stream -- the different revenue streams and those cost components. And so what -- what has resulted from us, as you appropriately mentioned, going from negative 30% when the company went public to now being in the high 30s, which was our guidance range for 2025. You've seen that we've attacked the console first, the hardware first, the console, the cart, then the cartridge. We fixed and expanded our manufacturing to get scale into that. And we've seen some great improvements there. Our next area of tech is really on the service side, as Leslie mentioned, our cost to serve but also continuing to optimize within our structure across all of our gross margin components, but how do we continue to drive that. Our next milestone for us is 50% company-wide gross margin, but that's not the end. That is just our next milestone, and we know that we can go above and beyond that.

That sounds great. Thank you so much for a wonderful presentation and also just thank you to Outset Medical, the entire team for that you do.

Thank you.

Thank you, everybody, for coming. Thank you.