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.