Outset Medical, Inc.

Good day and thank you for standing by. Welcome to the outside medical Q2 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Brian Johnston from the Gilmartin Group, please go ahead.

Thanks, operator. Good afternoon, everyone, and welcome to our second quarter 2021 earnings call. Participating from the company today are Leslie Trigg, President and Chief Executive Officer, and Nabil Ahmed, Chief Financial Officer. During the call, we will offer commentary on our commercial activity and review our second quarter financial results released after the close of the market today, after which we will host a question and answer session. The press release can be found in the investor relations section of our website at outsetmedical.com. This call is being recorded and will be archived in the investor section of our website. Before we begin, I would like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events, market trends, results, or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information and OUDSAT assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section of Outset's public filings with the Securities and Exchange Commission, including Outset's latest annual and quarterly reports. With that, I'll now turn the call over to Leslie.

Thanks, Brian. Good afternoon, everyone, and thank you for joining us to review our second quarter 2021 results. Before summarizing our second quarter performance, I'd like to formally welcome Nabeel Ahmed as our new permanent chief financial officer. Nabeel originally joined Outset as our controller and as a CPA and MBA was directly responsible for building and managing all of the financial operations of the business. He has been a critical component of our success, both personally and professionally, and we could not be more thrilled to announce his appointment. It is a true pleasure to describe our team's exceptional performance this quarter together with Nabeel as a partner. And speaking of our results, I am pleased to report that through the second quarter, our team continued to build on our momentum, delivering another quarter of significant revenue outperformance, continued gross margin improvement, and an outlook for the remainder of 2021 that leads us to raise our fiscal year 2021 revenue guidance. For the second quarter, we reported $25.2 million in total revenue, representing 115% growth year over year and 10% growth sequentially. Similar to previous quarters, we continued to add new customers while also benefiting from existing customers expanding their Tableau fleets to new sites across their networks. New order placements on the acute side continue to be driven by health systems recognizing Tableau's economic value and ease of use, in addition to their interest in insourcing their inpatient dialysis program to take back control over patient quality, compliance, and cost. which has never been more important than in today's environment. Earlier this year, we communicated a goal to secure sales agreements with seven of the eight largest national health systems by the end of this year. I'm pleased to report we met this objective earlier than promised in the second quarter. We also made meaningful progress toward our other stated goal for year end, which is to sign agreements with a third of the top 100 regional health systems. By securing agreements with new customers, inclusive of major academic medical centers, regional health systems, and leading home dialysis providers, we also continue to see significant Tableau expansion amongst existing customers, validating our land and expand strategy. Our success in adding new customers and in expanding within existing customers resulted in more new site installs in the second quarter than in any other quarter in the company's history. On the home front, new home console bookings grew more than 90% sequentially, primarily attributed to multi-year sales agreements with providers seeking to materially expand their home hemodialysis programs with Tableau. Our home contracts to date have spanned the diaspora of providers from health systems to progressive dialysis operators to new entrants in the space that are focused both on upstream CKD education and downstream ESRD care management. One of these new customers is a leading kidney care organization that is focused on driving home hemodialysis adoption rates within its network of dialysis facilities. As part of the multi-year sales agreement, this customer will purchase and utilize Tableau systems for new home hemodialysis patients as we also work together to collaborate on education and training initiatives to boost patient awareness and adoption of home dialysis options. In addition to new customers, we also saw existing home customers purchase more Tableau. One example is a prominent progressive dialysis provider in the Northeast. This customer sent an initial cohort of patients home in the first quarter of 2021, and after seeing enthusiastic patient adoption of Tableau, placed in order for additional consults in the second quarter. This expansion speaks volumes to how quickly the value proposition of Tableau resonates with our customers and how eager they have been to expand our partnership as they grow their home program. We've talked consistently about 2021 being a go slow to go fast year of getting everything right first to ensure an exceptional patient and caregiver experience in the home before more rapidly scaling. I'm very pleased to report that our efforts against this goal remain on track. To measure our progress, we closely monitor leading indicators of patient experience that down the road may yield measurable clinical and economic benefits. For example, we look at treatment adherence. How often are patients completing their prescribed number of treatments per week? Thus far, the adherence rate for patients prescribed three times a week treatment on Tableau at home is 99%. which is important because the published literature demonstrates that when patients miss prescribed treatments, their hospitalization risk is higher. Additionally, we continue to monitor patient training times and retention rates, both of which continue to trend in an overwhelmingly positive direction relative to historical industry standards. In addition to driving 115% year-over-year growth this past quarter, we also strengthened our team in some important areas, most notably data analytics and machine learning. As the only hemodialysis system on the market with FDA clearance for two-way wireless data transmission, Tableau is a powerful data engine, both before, during, and after treatment in the hospital, in the home, and everywhere in between. The system sends patient treatment data seamlessly to electronic medical record systems, as well as to Tableau Hub, our proprietary cloud-based provider portal that aggregates both treatment information and uniquely, all Tableau fleet maintenance information, which enables real-time, compliance-friendly, automated record-keeping for customers. At the same time, Tableau captures more than 500,000 machine performance data points during every treatment, which is then used to fuel data analytics and machine learning algorithms that drive our R&D pipeline and make Tableau smarter over time through wireless software updates. While these features are already industry-leading, we are just getting started. And to power our vision, we welcomed J.O. Racine, who prior to Outset headed engineering and science for Amazon Web Services Health AI. J.O. brings an incredible knowledge of the development of high-scale and high-availability services for the storage of health data, which will be critical to the innovation we intend to pursue to further empower patients and healthcare providers. His background in designing scalable and performant cloud architectures for at-home health and consumer products, such as Amazon Halo and Fire TV, and in using machine learning for retrieving health insights from data will be invaluable to our ambitious plans for the future. As I reflected on the first half of the year, one of the other areas of notable strength for Outset was our policy and advocacy efforts. With dedicated government affairs leadership in Washington, we continue to make important investments to advance progressive, patient-centric policies. One example this past quarter was the launch of the Innovate Kidney Care campaign, alongside several partners, including the American Society of Nephrology, the National Kidney Foundation, CVS, Anthem, and others. This campaign is specifically focused on expanding access to home dialysis and aims to collaborate with CMS on guidance updates and clarifications to the conditions for coverage that will enable a greater flexibility, convenience, and care setting choice for patients. We believe initiatives like this will help bring much needed change to the dialysis industry, one of the largest, most expensive, and least changed sectors of healthcare in ways that improve outcomes and lower costs. As we have discussed on past calls, There are a number of new tailwinds serving to encourage more home dialysis use for the first time in well over a decade. For example, ESRD patients now can enroll in Medicare Advantage, which is changing the payment dynamics for commercial payers in ways we believe benefit home dialysis growth. The ETC model, ESRD Treatment Choices, is underway with aggressive home dialysis targets in place for providers to meet in order to benefit from higher per-treatment payment rates or to avoid penalties. Additionally, the recently released proposed rule added a new incremental payment mechanism to benefit providers that increase their home dialysis rates among disadvantaged patients. Another potential tailwind we've discussed in the past is the TAPONES program, which stands for the Transitional Add-on Payment Adjustment for New and Innovative Equipment and Supplies. CMS designed it to incent providers to adopt innovative renal technologies. We submitted a Tiponi's application to CMS for the Tableau console in the first quarter. In the proposed rule, CMS asked us to provide additional information on a few follow-up questions and invited key stakeholders, such as patients and physicians, to comment on whether they viewed giving patients more flexibility in care settings, such as home, as a substantial clinical improvement and whether Tableau itself constituted a substantial clinical improvement. Following the public comment period, we would expect CMS to publish its decision on our application as part of the final rule sometime in the fourth quarter of this year. As a reminder, we have not incorporated Chaponis into our home forecasting, nor is our expected growth trajectory at all reliant on it. And if the final outcome is not favorable for us this year, We will have the ability to consider reapplying next year with the benefit of greater insight into this new CMS program. With that, I'd like to now turn to our supply chain and manufacturing initiatives designed to lift production capacity while maintaining an exceptional level of quality and focus on our cost reduction activities which remain vital to our long-term success. On the cartridge side, we continue to engage with the FDA on our 510 application to enable our new contract manufacturing partner to produce Tableau cartridges in Mexico. Assuming FDA clearance within the expected timeframe, we believe we are on track to start production there in the fourth quarter. On the console side, the team delivered a meaningful reduction in the standard cost in the quarter, which will serve to further deliver gross margin improvements in the second half of the year. Our console manufacturing team has fully transitioned console production to our Tijuana facility ahead of schedule, and we are now manufacturing 100% of our consoles in Mexico. In addition to the financial benefits derived from our console insourcing efforts, I'd also like to highlight the environmental and social benefits we have enabled with our Mexico facility. During the site's development, we made environmental sustainability a key focus. Given that our largest environmental impact relates to water consumption, the team worked on an ambitious plan to try to achieve a water recycling efficiency rate above 50%. To date, the site has realized this target and recycled more than 200,000 liters of water. We plan to build on this success and invent additional ways to offset our environmental impact in the communities in which we operate. We also established ambitious workplace goals by promoting an all-inclusive organization where respect, collaboration, and merit-based recognition are deeply embedded, we have achieved an industry-leading employee retention rate that is 92% higher than comparable employers in the area. Additionally, we've invested heavily in employee wellbeing at our new site. For example, through collaboration with local government, we were able to achieve a COVID vaccination rate of over 90% of the onsite workforce at the end of June. In summary, we are really proud of our performance in the second quarter. LSAT continues to deliver strong revenue growth and substantial progress in achieving our top strategic initiatives for 2021 relative to expansion within the acute setting, foundation building for expansion in the home setting, and manufacturing capacity and cost reduction initiatives designed to enable sustainable and profitable financial growth. With an exceptional team, transformative technology, and the necessary capital to deliver on our commercial and innovation-focused objectives, we are more confident than ever in our near-term and long-term outlook. With that, I'll now turn the call over to Nabil to review our financials and provide more granularity on our expectations and key drivers for the remainder of 2021. Thanks, Leslie.

Hello, everyone. I've been at Outset for a little over a year now, and I am more excited than ever about our mission, our market opportunity, and our team. I'm thrilled to be here and to partner with Leslie and our entire team in my new role at this pivotal time in our company's evolution. I'm looking forward to working with all of you. Now, as Leslie mentioned, our second quarter revenue grew 115% year over year to $25.2 million, driven primarily by increased console shipments to acute customers higher consumable shipments, our HHS lease agreements, and increased services to support our growing install base. Product revenue grew 113% year-over-year to $20.6 million. Console revenue grew by 106% year-over-year to $16.9 million, driven by higher console placements and increased ASP given the availability of capital . Consumable revenue was $3.8 million An increase of 150% versus prior year as higher volume associated with our growing installed base was partially offset by the impact of a large customer working down with consumables inventory levels following a large Q1 order. Service and other revenue grew by 124% year-over-year to $6 million compared to $2 million in the prior year period. Services for our larger installed base impacted HHS service revenue contributed to the year-over-year growth. As we have previously shared, service and other revenue was down slightly on a substantial basis. Strong renewals on service contracts and new console placements were offset by the expected X3 of a portion of our HHS service. Moving to gross margin and operating expenses, I will highlight our non-GAAP results. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's renewal. Our non-GAAP gross margin was 0.4%, an improvement of approximately 45 percentage points versus the prior year period. This improvement was primarily the result of our cost reduction activities, which have meaningfully lowered console and consumable costs while enabling increased console value. As Leslie mentioned, we are now manufacturing all of our consoles moving forward at our facility in Mexico. Non-GAAP operating expenses in the second quarter were $27.1 million, up $7.6 million versus the prior year period, driven primarily by headcount growth resulting from investments in our commercial organization and G&A expenses tied to operating at the company. Compared to the prior quarter, non-GAAP operating expenses increased $2.9 million as we made investments and added headcount to support being a public company, R&D project, and our continued commercial We reported second quarter GAAP net loss of $30.2 million resulting in a net loss of $0.66 per share compared to a net loss of $26.5 million or $4.68 per share for the prior year period. Non-GAAP net loss was $26.3 million or $0.57 per share compared to a non-GAAP net loss of $25.8 million or $4.46 per share for the same period in 2020. We ended the quarter with approximately $430 million of cash, cash equivalents, restricted cash, and investments. I'd like to move now to our 2021 outlook. We project revenue for the full year 2021 to range from $97 million to $100 million, which represents approximately 94% to 100% growth over fiscal year 2020 revenue. This compares to prior revenue guidance of $92 million to $97 million. Our four-year guidance contemplates our expectation for back-cap growth to be concentrated in the fourth quarter. Moving to gross margin, we are projecting sequential improvement in the second half of the year, exiting 2021 with quarterly gross margins and below double digits. Gross margin expansion is being driven primarily by our cost-down activities and lower cost of manufacturing. Additionally, we continue to forecast sequential increases in operating expense given planned investments to drive long-term revenue growth. In closing, we are very pleased with our financial results this quarter. We remain confident in our ability to execute against our goals of growing our install base, driving top-line revenue growth, and expanding margins. We look forward to providing an update on our Q3 progress during our next earnings call. We will now move to the Q&A session Operator, please open the lines.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of requests from Stiefel. Your line is open.

Good afternoon and congratulations. It was a marvelous quarter and Congratulations to you, Nabeel. Maybe let's start with the home, just because it's such an exciting topic. Leslie, I realize you're talking about small numbers, up 90% sequentially, obviously superb, but maybe talk about how we should think about this initial year where you are going slow to get it right. We all get that. But how do we think about the progress of the year? You know, how maybe just talk about your early experience. You know, I heard you say about the high compliance and the training and the patient experience. But, you know, how is this early experience setting you up for maybe going faster next year? Thank you.

Yeah, sure. I'm happy to, Rick, and thank you. So first and foremost, we do still plan to share our install-based figures at the end of every calendar year, and that hasn't changed. So we'll certainly be able to give you that visibility at the end of fiscal year 2021 about home and together with Tableau consoles used in transitional care units. And we do still absolutely expect patients at home to grow sequentially throughout 2021 and beyond, and we expect console bookings on the home side to continue to grow sequentially quarter over quarter. So I think all that's good news. I still, I guess, reflecting on all of my experience across my medical device career launching new technologies, I still believe what matters most at such an early stage of rollout, especially with a technology that is so fundamentally disruptive, It really is doing it right at the beginning. So let me talk more about what does that mean. That means operationally, are we delivering a great experience on distribution and logistics? Are patients receiving the supplies they need on time every time? Is the console arriving in their home and being installed every time on time at the time it's been requested? You know, those details seem mundane, but I think we can all relate as consumers to There's a big value to promises made, promises kept, and we want to be a promises made, promises kept company to all of our customers, providers, patients, and families alike. So, Rick, that's one way that we're measuring ourselves operationally. Some of the other leading indicators that I talked about, let's talk about training time and how that would set us up for success for growth next year, which is really the question you're asking. if we know that patients across the spectrum, regardless of age, regardless of education, regardless of other differences, are consistently learning Tableau, let's say in 10 days or less, compared to existing systems where they previously had to spend four to six weeks, well, if we keep those training rates consistently low, that gives me a lot of confidence that we can look out and project, you know, pretty exciting patient adoption and growth rates in the outer years. And so that's why, you know, we got our eye on training time. And our trends in Q2 on training time were no different in a great way. We are still seeing training times that are ten full days or fewer. I think that the retention rate, you know, is another big one as it informs our vision of the future. if we know that we are succeeding in allowing patients to stay at home for longer, we know that we can incrementally, you know, achieve those high growth rates in the out years because your fallout rates will be lower, right? So the last thing you want is so the proverbial leaky bucket, you know, where you got patient inflow, but then you've got a lot of patient outflow. That is not our model. Our model is high patient inflow and very high retention in the home. And, Again, the trend in second quarter was no different than what we've seen and reported on in quarters past. Patients are differentiatedly, if that's a word, staying on Tableau at home for longer compared to what's been reported in the past with other devices. So that's a little bit more color about how I'm thinking about it, Rick, at least.

Thanks. And, you know, Nabil, let's pick on you a little bit. Two aspects of your guidance, if you would just give us a little more color. Your comment that sales, as we think about the second half, are going to be back half concentrated. I just want to make sure I'm understanding what you're saying. I mean, obviously, we had a nice step up here, two Q versus one Q. Are we thinking, are you sort of implying, and maybe I'm totally misreading it, that the third quarter is more for some reason sequentially flattish with the second quarter and with whatever, wherever point in your sales guidance we land, we could potentially have a very large fourth quarter. How should I understand your comment?

Yeah, Rick, absolutely. And so the comment was that our back half growth will be concentrated more in Q4. And so, you know, let me just sort of back up a little bit. You know, when we do our guidance, it's informed by the backlog we have coming into the quarter, and then the pipeline that we have as we sit here today and look forward through the back half of the year. And our pipeline and our backlog are really informed by when our customers need us to deploy our consoles, right? And so the advantage to having this backlog and this pipeline is that we have great visibility into the back half, and it also tells us that we will see sort of moderate sequential growth here in Q3, but really that the bulk of the back half growth will come in Q4.

And so you're basically saying just with orders in hand and the shipping dates, that's just the way it's going to break out this year? Yeah. Or is that, you know, say it as you will. Yeah. Go ahead, Leslie.

Yeah, Rick, it's exactly that. With orders that we have in hand, remember our backlog is committed orders that we have non-cancelable orders, And then it's also our pipeline, which is, you know, deals that we are working that we expect to close.

Gotcha. And I'm going to ask one last, if I could, selfishly. Gross margin, you commented, Nabil, that you expect to be at a low double-digit rate as you exit the year. And clearly, you are telling us in multiple ways all the set up for that meaningful gross margin improvement. But back to sort of this cadencing question. So you're not going to be at that double-digit level in the third quarter. Will the full fourth quarter get to a low double-digit rate? Or how should we think about that cadence and magnitude and direction? Thank you so much.

Yeah, right. Of course. So we are looking for sequential improvements in gross margin here in Q3. And then you are right. It is Q4 that we expect to be in the low double digits from a gross margin perspective. And again, driven by our Mexico facility that is now producing 100% of our consoles by our ongoing cost down program. And then, as Leslie mentioned, by our expectation that our cartridge production in Mexico gets approved here in the fourth quarter.

Got it. Thanks again.

Thank you. Your next question comes from the line of Amit Hazen from Goldman Sachs. Your line is open.

Hey, this is Phil on for Amit. Thanks so much for taking the question. I guess maybe starting with guidance, going back to Rick's question, I'm interested in any anecdotes that you can give over what you've seen in the last few weeks, particularly on the acute side. with what's going on in Delta, how that's kind of informed your visibility for the backlog and your expectations for 3Q and 4Q.

Hi. Yeah, this is Leslie, obviously. I'm happy to answer that. It's an interesting question, obviously a timely one. Short answer is based on what we know we see today, we don't expect any direct impact on our business. And look, I think the advantage we have today is some history, right? When we look back at 2020, our business was very resilient. And that's probably for at least two reasons. I think one, as a reminder, we operate and serve a therapeutic space that requires patients to receive this treatment at least three times a week, rain, shine, pandemic, no pandemic, you know, almost regardless of exogenous factors. So that's probably one reason. for our stability. And two, I think that the Tableau value proposition is evergreen, right? We're talking about an enterprise solution that reduces the cost and complexity of dialysis and helps hospitals expand their margin. That's in fashion, I think, whether you're in a pandemic or not. And that's a value proposition that we saw through 2020, both the highs and the lows of the pandemic, to be just as resonant with health system executives. So we don't have any reason to believe today, if we sit here today, that those dynamics and more would be any different in the back half of the year. And thus far, you know, COVID is not affecting our strong confidence about our second half of the year performance or our outlook on 2021. Okay, great.

Thanks, Leslie. Secondarily, maybe a new versus an existing customer is kind of a question, line of questioning. In the past, you've given a little bit of color around how many Tableau systems various size hospitals could support. Maybe not to that extent, but I'm just wondering with the existing customers that you have today, sort of how Penetrator would give us an idea for what that opportunity looks like and then maybe posit sort of the mix of growth from existing versus new customers today and how you see that evolving in the next quarter or so.

Sure, yeah, that's a great question. Maybe I'll work that one in reverse chronological order. I think, you know, when I was thinking about this quarter, preparing for the call, I think there were, to me, like three really interesting aspects about it. One, we had a really healthy blend, which we hopefully characterized for you in the script, but a really healthy blend between new customers and existing customers that, you know, was really balanced. And I think we all understand the benefit of new customers, But for me, I really assign a tremendous amount of value to existing customers. We do talk about our commercial strategy as land and expand, right? And I think for any medical device company, eventually you run out of land. And so my philosophy has always been commercially that you should really focus on doing an exceptional job at the expand part as early as you can. And so what I liked about Q2, what I liked about the whole first half of 21 was What they think that we're showing that expand is working as well not only happens if you're creating a consistently good experience For customers and patients again along the lines of promises made promises kept so that was that was one interesting aspect to the quarter was very balanced blend of new customers and then expansion with an existing customers who decided to deploy tableau to new hospitals within their networks and I think that You know, the other interesting part to me, of course, was the significant increase in home console bookings. And that continues to give us confidence that home demand will continue to grow for Tableau. And lastly, of course, we were very, very pleased to see seven of the eight national health systems now having signed agreements with Tableau, again, a quarter or two earlier than we had communicated. So those are the things that really stuck out to me in terms of, you know, customer mix and contract signed, if that's helpful.

Yeah, that's great. Thanks so much. I'll come back and keep.

Next question comes from the line of Drew Ranieri from Morgan Stanley. Your line is open.

Hi, Leslie, and congrats, Nabil. Thanks for taking the questions. Just to go back on gross margins for a second, just hearing more and more medtech companies talk about inflationary costs and freight being a burden here. I appreciate that you gave guidance talking about sequential increases and low double digits by the fourth quarter. But just can you give us a better sense for your confidence in gross margin expansion for the back half? If you kind of look at the upper end of your revenue range, we kind of be thinking that would be the higher end of low double digits for gross margins, just trying to get a better sense there. And also if you are seeing any supply constraints or semiconductor shortages as you're building out the installed base here.

Yeah, happy to. So with respect to our gross margin sort of guidance here and the sequential increase that I alluded to, we have a high degree of confidence in that trajectory. And it's really for the three reasons I mentioned with Rick. It's really the fact that now our plant in Mexico is up and running. And obviously, as we build more consoles and get better absorption sort of out of that facility, we will see improvements in margin. It's our cost down strategy that our supply chain team is pursuing. And then finally, it's the treatment. So, we have a high level of confidence. Now, with respect to your supply chain question, you know, are definitely on top of and not immune to sort of what you are seeing in the market in terms of supply chain challenges. Now, we have a great supply chain team who is laser focused on this issue, and we have not seen disruptions in our supply chain at all. And sort of our strategies here to mitigate have been placing purchase orders with suppliers for long lead time items, making sure we have committed supply. You know, it's making sure that we have inventory of raw materials, components, particularly long lead time items. And then it's also making sure that on our balance sheet we're carrying finished tableaus, having a buffer stock of finished tableaus with which we can sort of service near-term demand if there is, if something happens. But to be clear, high confidence in our ability to deliver these double-digit gross margins in Q4, low double-digit gross margins in Q4, and sort of just a rocking supply chain team that's keeping us in good shape.

And just one follow-up there, with the cartridge approval expected in the fourth quarter, is that actually contemplated in your sequential increase commentary for gross margins?

It is, but remember that the real benefit from the cartridge cost down will be in 2022. So there's a little bit of benefit here in 4Q, but honestly, the real benefit is going to be in 2022 for us.

Okay. And Leslie, maybe this one's for you, but with ETC for a moment, can you just maybe talk about if you're seeing kind of that being a direct impact as you're approaching customers and building out the market? Is it still very early days? Are you seeing an impact? Is more yet to come? Just any help there would be appreciated. Thank you.

Yeah, sure. I would say with respect to the ETC market, that it is, in our experience, right, which is all we can comment on, I think it is very much top of mind for all the providers that we work with and talk to. I would characterize it very broadly as still in the preparatory and planning phases. I still think, and I think I've probably communicated in the past, that we're really excited about the ETC. We project that having a bigger impact on home dialysis market expansion probably more like 2023, 4, or 5 than we would expect it, certainly not in 21 or even in 22, because I think in all fairness, providers need time, right, to understand how they want to increase their home dialysis numbers, what programs, what new technologies they want to start using to try to reach these targets and benefit from the advantages of the ETC. So I continue to be very, very optimistic about that the ETC will have an impact. I would just guess that its impact will be probably, as I said, more in the 23 and beyond period rather than nearer term.

Great. Thanks for taking the questions.

Yeah.

Your next question comes from the line of Daniel and Telfie from SBB Lyric. Your line is open.

Hey, good afternoon, everyone. Thanks for taking the question. Nabil, congrats on the CFO position. Leslie, I have a question for you. We've done a lot of work on the renal space and specifically the potential for home dialysis adoption within that home hemo adoption over the last six weeks, and the feedback we're getting is incredibly positive. I've been following this space for a long time, and it really does feel like the barriers have fallen from a technology perspective, regulatory perspective. And I guess my question for you is, why aren't we today in an adoption inflection already? Because based on the data points I got, it felt like we were. And I guess if we are, is it really just you outset sort of you guys are the gating factor as far as what you are willing to or can supply the market? Are you pacing the inflection or am I missing something? Thanks so much.

Yeah, no, thanks for sharing that feedback from your own research. Look, a couple of thoughts, I guess. I think that we're not at the inflection point yet. However, I would say that if you look at the incumbent device and the incumbent services provider who owns that device, they've recorded, I would say, frankly, amazing growth in the home dialysis market within their own network of dialysis centers. I think they're doing a terrific job already at expanding the utilization of home dialysis within their own facilities. So I think it's starting to happen. What we're seeing is the rest of the providers really starting to activate and set goals and targets and objectives about where they want to be with home over the next couple of years. And that alone is major progress, Danielle, I've got to tell you. Just to even hear a provider say, hey, we want 30%, 35%, 40% of our patients at home over the next three, four, five years, that's a big deal. Now, that being said, everybody wants to do it well. Everybody wants to do a good job. And it's hardly going to help just to start to kind of push as many patients home as you can, as quickly as you can, and not really have it stick. And so we're obsessed with the stickiness of it. And the stickiness comes from the experience that you have, both with the provider and the technology. And so in my view, I think providers are ready for it. and probably taking some really smart steps. More on the how, we've moved away from the whether and the if. I think we're past that. I think it's all about how, which is really exciting. So I think we're just coming up on the inflection point.

Okay, that's helpful. And then just as a follow-up to that, Ben, as we think about embarking upon this adoption inflection process, where are the key sticking points so to that how sort of what um what still needs to be done to get the market ready to absorb or or be able to um absorb this this adoption inflection for home is it infrastructure is it just you know awareness like what what needs to happen still for the how to to be answered thanks so much sure absolutely

Two things come to mind kind of off the top of my head. I would say one is training. And I think that we're going to see a lot of invention in training, both through technologies like Tableau, simply because they are easier to learn, right? There's just fewer steps with Tableau. There's nothing to memorize. There's no mental math. The instructions are always there on the screen for the patients every time. And so one of our big, big design objectives with Tableau was to get Tableau down to sort of a PD-like training experience, which everybody, I think, sort of holds as the gold standard for a short patient training time, and we've achieved that. I think that there's more we can do, though, to probably make training even more convenient for the patient and maybe changing a little bit of the setting of the training model that I think will further accelerate the patient, frankly, the patient backlog of people who do want to go home. So I think training is an area that you'll continue to see providers and outset innovate on to loosen up that pipeline. The second thing that comes to mind is physician education, and that's probably no different than any other area of medical devices, right? When you've got something new, whether it's a new device or a new way to treat patients, that takes time. We haven't had in this country a tremendous history in deep physician education on home modalities. But again, you have now, I think, a whole community of providers and health systems that have a lot of motivation to educate the physicians that they work with about home and better outcomes and lower costs. So I think that the faster we can get out there as a community and educate physicians and find solutions, you know, continually newer, faster, better ways to train patients, I think that's going to make a big difference.

Thanks for that.

Your next question comes from the line of Shagun Singh from Wells Fargo. Your line is open.

Thank you so much for taking the questions. I have a three-part question, and I'll just ask it up front. First is a clarification. I just wanted to make sure you said modest sequential growth. in Q3 with respect to sales, that would probably put you at the upper end of guidance. The second one is just with respect to the home setting. Can you help us understand how far do you have visibility into these orders and how are you thinking about the competitive response? And then just lastly, you talked about data science and AI on the call. Could you just elaborate on some of your specific R&D initiatives and any timelines there? Thank you for taking the questions.

Sure. Let's see, Nabil, do you want to handle the first one on sequential growth?

Yeah. So, yes, I did say it's modest sequential growth here in the third quarter and more sequential growth here in the fourth quarter. And that's precipitated or driven rather by the backlog that we have entering the quarter and then the pipeline that we've got sort of as we look forward here.

Okay, great. Anything else? Okay. So maybe I'll take the last two. Well, it's kind of two and two A. Your two was about how much visibility do we have into the forward home pipeline? And I would say quite a bit. And that's not differentiated, by the way, from the acute setting. I think we've always talked about our backlog generally giving us, you know, let's say one to three quarters of visibility. And I don't think that that's going to be any different. So far as we can tell today, I don't think that that's going to be any different from home. I think we're going to be similarly advantaged in having a lot of visibility on what home's going to look like over the coming couple quarters. So I think that's all very positive and underscored by a significant increase in the 90% increase, in fact, home bookings for this past quarter compared to the prior quarter. On data science and AI, yeah, I'm happy to give you a couple of examples. There's a lot. I mean, this could be like a whole hour-long conversation, but for example, big buckets. I mean, one big bucket for us is operational. We now have the, Tableau has the unique capability, we're the only system in the market to be able to do remote patient monitoring. That feature is enabled in the acute setting, which became incredibly important during some of the heights of COVID. so that nurses and physicians could monitor multiple patients with COVID on Tableau in multiple rooms at the same time without having to go in and out and consume PPE. We have the ability to enable remote monitoring for patients in the home, which I think has both the clinician and a very unique and differentiated consumer benefit. I think we probably all can relate to that and why that would be important. The AI and the data analytics also now allow us to do remote diagnostics and provide remote support, sort of teleporting into Tableau, if you will, and being able to have much more rapid response, giving people almost real-time help, but in a way that is operationally efficient, productive for outset. So that's kind of one big bucket, operational. And I think, too, the big bucket here would be consumer and clinical. as we look to kind of who do we want to be and what sort of value do we want to deliver in the home, I think our data in the future probably will not be limited just to the treatment flow sheet that it is today. It's very valuable to get blood pressures and arterial pressures and venous pressures and all the wealth of information that we provide today on each and every treatment. But when you think about whole person care in the home, I think we can all imagine a very robust and much more comprehensive approach data set that would allow payers, health systems providers to monitor the wellness of their patients in a much more robust way. So we're looking at a bunch of ideas in that way. And then generally, you know, how do you make dialysis prescription and management more personalized and more customized to the individual? Today, dialysis prescription is more of a one-size-fits-all, and we'd like to move to a one-size-fits-one model in the future.

That's really helpful, Color. And just with respect to the home setting, how are you thinking about the competitive response? Thank you.

Yes, I'm sorry. I forgot about that one. Well, I think first and foremost with an $11 billion TAM, you've got to expect some new entrants. I'd be surprised if we didn't see anybody else show up. The second thing I'd say is with such a large TAM, And we certainly talked about this before. I mean, it could very, very easily support many, many different technologies. Especially, excuse me, given the early innings on home. I mean, at this point, it's still to me like the more voices, the better. The more, you know, companies, industries, organizations, physicians, patients, all kind of unified around better choice, more choice, and flexibility, the better. All that being said, of course, from a technology perspective, we remain really confident. We are the only, and we believe into the future, we will be the only enterprise solution that can be used anywhere from the hospital to the home and have great confidence in our current feature set, which is differentiated today. And I think, too, our mindset is just not one of standing still. We're ambitious, and we're impatient, and we are not done. I got it. Thank you so much.

This concludes today's Q&A portion of the call. I will now turn the call back over to Leslie Trick for the closing remarks.

Thank you so much. Thanks to the operator, and thanks to all of you for joining us today. I really hope everybody has a great evening. Thanks again.

this concludes today's conference call thank you all for your participation you may now disconnect