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spk00: Good day and thank you for standing by. Welcome to the Outset Medical First Quarter 2022 Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star then 1 on your telephone keypad. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star then 0. I'd now like to hand the conference over to your host today, Jim Mazzola, Head of Investor Relations.
spk07: Okay, good afternoon, everyone, and welcome to our first quarter 2022 earnings call. Participating from the company today are Leslie Trigg, Chair and Chief Executive Officer, and Nabil Ahmed, Chief Financial Officer. During the call, we will discuss our first quarter operational and financial results, as well as provide an update on our outlook for 2022. After our prepared remarks, we will host a question and answer session. We issued a news release after the close of the market today and updated our investor presentation, both of which can be found on the investor relations pages of outsetmedical.com. This call is being recorded and will be archived in the investor section of our website. I'd also 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 Litigations 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 on 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. Outset assumes no obligation to update 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 our latest annual and quarterly reports. With that, I will now turn the call over to Leslie.
spk02: Thanks, Jim. Good afternoon, everyone, and thank you for joining us to review our first quarter 2022 results. Since our last update in February, the outset team has continued to execute well across our strategic initiatives. We delivered our seventh consecutive quarter of strong top line growth led by continued momentum in the acute market as we achieved continued positive performance on growth margin expansion and made substantial progress toward our home and selection objectives for 2022. with the number of home consoles shipped in the first quarter exceeding our expectations. Total revenue for the first quarter was $30.6 million, representing 33% year-over-year growth and 8.5% growth sequentially. We benefited from strong console demand and strength in treatment utilization as we continue to capture share across acute care customers, accelerate home expansion, and broaden our install base. Overall, we maintain a high level of visibility into our business, supported by a robust backlog and strong pipeline, grounded in broad interest in Tableau, and we remain confident in our near and longer-term outlooks. I want to begin today by discussing our results in-home, where we made very strong progress against our expansion strategy, with Q1 results putting us ahead of schedule relative to our 2022 objectives. There are four metrics we look at as a measure of home growth performance. First, the number of home programs where we are ahead of plan. Second, the number of new patients who went home with Tableau where, again, we are ahead of plan. Third, how quickly patients can train on Tableau where we have a significant advantage over our competition. And fourth, the number of patients who stay at home on Tableau where we remain meaningfully higher than competitors' retention rates. On our last call, we highlighted that home consoles accounted for a significant portion of our Q4 exit backlog and our expectation that the home business would inflect beginning this year. We are pleased to report that shipments to customers at home exceeded our internal expectations in the first quarter and represented a significant portion of total first quarter shipments. In addition, we are ahead of schedule in initiating new home programs with providers against our goal to establish 100 programs exiting 2022. And importantly, we continue to deliver a highly differentiated patient and caregiver experience, resulting in an industry-leading retention rate, which we believe is essential to sustainably high long-term growth. This early momentum reinforces our conviction on delivering 2022 home revenue of roughly mid-teens as a percentage of our total revenue. To get there, we plan to continue to expand our footprint with our two customer segments, progressive dialysis clinic operators focused on substantially growing their home program, and health systems standing up new home dialysis service lines. This past quarter, we launched a new program specifically aimed at the second customer segment, health systems. The proprietary turnkey solution is called Destination Homes. and it provides a roadmap for health systems to send patients home quickly and seamlessly. Through Destination Home, Outset brings a team of qualified partners that accelerate each step of standing up the service line, from facility requirements to accreditation and certification to ongoing patient care management in the home. With one quarter behind us, we're pleased with the level of traction we're seeing. From a clinical and patient experience perspective, the data speaks for itself. In early April, three new datasets related to treatment with Tableau at Home were presented at the 2022 National Kidney Foundation Spring Clinical Meeting in Boston. These studies highlighted patient and nephrologist views on home hemodialysis adoption and the hidden costs of peritoneal dialysis. In the first dataset presented, a national survey of 202 dialysis patients found that 72% viewed the features of Tableau as a significant clinical improvement in home hemo, and 77% said that Tableau's features would make them more likely to try home hemo. Moreover, a second national survey of 184 nephrologists found that 77% said the features of Tableau were a significant improvement over existing home hemo devices, and importantly, 98% said these features would make them more likely to recommend home hemo to their patients. From prior studies and research, we found that patients identify flexibility in treatment frequency, the availability of dialysis on demand, automated data and remote monitoring, ease of use, and reduction in storage requirements as paramount decision-making considerations when choosing a home hemodialysis device. Tableau provides a compelling answer to these considerations. All of its innovative features also translate into fast training time, which historically has been a barrier to getting patients to adopt home hemo. Across the spectrum of patients who have been trained on Tableau, the average training time remains 10 sessions or less compared to four to six weeks with the incumbent machine. The third presentation at NKF was a data set that evaluated the confluence of clinical and economic outcomes related to PD failure. Market data shows that PD fails 50% of patients within two years. And the data presented at NKF show that PD failure is associated with a nearly 100% risk of hospitalization during the six months preceding discontinuation. The study found that over $72,000 is spent per patient in the three months before and the three months after a patient's transition off PD. Further, after the transition from PD to in-center hemodialysis, hospitalizations remain higher for former PD patients over time. Today, just 3% of patients transitioning off PD will start home hemo, despite the fact that they are already successfully managing kidney disease in the home. Collaborating with our provider partners, we see an opportunity in the future to create programs that access this upstream patient population and transition more of them to home hemo with Tableau, driving both cost savings through hospitalization reduction and quality of care benefits for patients. In all, we continue to see rapidly growing demand for Tableau as an enabling technology for home programs, fueled by exceptional clinical outcomes, overwhelmingly positive patient experiences and retention, and the increasingly recognized economic benefits for patients and providers. Most importantly, we are proud of the impact Tableau and Team Tableau have had on patients and their families. I recently visited several patients dialyzing at home with Tableau. First and foremost, what I observed was confidence, control, and autonomy. I listened to them describe how much more convenient home dialysis was, that it had given them their life back because they now had the freedom to decide when they wanted to dialyze. They were freed from a clinic schedule they didn't choose. They were free to pick up their kids, free to take care of others, free to work again. As one patient put it, clinic was a cattle call. I was constantly rushed, stressed, and had to orient my schedule around it. Being at home, I can take my time. I want to live my life. Perhaps even most importantly, I heard pride in their voices, pride that they owned their care, that they were independent and self-reliant. This autonomy translates into self-worth and identity in ways that change lives, families, and communities over time. I heard about Tableau being easy to learn and easy to use, and I watched people set it up for treatment with confidence. These visits also reinforce that the patient experience does not begin and end with the device. What I learned was that the experience for patients is tied both to the people and the product. Empathic listening, patience, genuine care about the person behind the patient. The art of how we support patients is a big part of our secret sauce, or now it's not so secret, as well as something we believe creates protective competitive advantage along with our technology. We are excited for all of you to also get a firsthand view into the patient experience through an educational webinar for investors we have planned for June 1st from 1 to 2 p.m. Pacific, 4 to 5 p.m. Eastern. We have two patients, a caregiver, and a leading nephrologist scheduled to participate in a panel discussion where we will also give you the opportunity to ask questions. We will release additional details in the coming weeks. As we accelerate home adoption, we also continue to see strong growth among our acute care customers. Unlike large, expensive capital equipment, the upfront investment for Tableau is relatively small, with a payback period typically measured in months, not years. As a result, hospital executives have much greater visibility to and certainty of a near-term ROI compared to other types of capital equipment. The combination of Tableau's low capital, high return value proposition has been a key driver of our continued momentum and consistent performance to fight inconsistent hospital operating environments. In the first quarter, we made headway with new sales agreements and expansion sales within our existing customer base as our land and expand strategy continued to progress. A key highlight for the quarter was landing the eighth of the eight largest national health systems. Another area where we continue to see commercial success with new sales agreements is within hospitals with fewer than 100 beds. On our last call, we highlighted how 2021 taught us that Tableau solved important problems not only for the nation's largest health systems, but also for smaller hospitals, which in many cases are part of larger health systems where Tableau is already in use. We also continue to learn about hospitals contending with challenges due to their outsourced dialysis providers struggling with staffing shortages. As we discussed in February, some hospitals are receiving service price increases, some are receiving service level decreases, and some are receiving surprise service contract terminations. In one circumstance, we were contacted by a hospital and asked to install Tableau and train its nurses within 72 hours. Our service and training team successfully met the challenge and had the hospital's own staff running Tableau treatments later that same day. In short, Tableau has proven to be a valuable solution as it allows hospitals to finally control their own destiny from cost to staffing to compliance. In concert with console placement, a vital part of our commercial strategy is to drive utilization across the install base, and we were pleased to see strong utilization during the quarter, evidence that our recurring revenue model is working well. We are pleased to see ASPs holding steady as our install base grows and we pull through a larger volume of higher margin consumables. In addition to our commercial success, our team continues to make impressive progress on gross margin expansion, delivering non-GAAP gross margin of 14.8% in Q1. We're very proud of our teams across the business in how they've effectively managed through a continually challenging macro supply chain environment and sector volatility during the quarter. Testament to this team, we have not missed a single day of demand. With no console or cartridge shortages, even as the business has continued its strong growth trajectory. We continue to have healthy inventory positions where it matters, and our backlog is reflective not of supply chain or production constraints, but of strong demand that is scheduled for delivery on the customer's timeline. In summary, the first quarter of 2022 was marked by a strong start to home inflection, revenue performance, and progress toward our gross margin goals. I'm once again very proud of the entire Outset team, and our ability to consistently deliver strong and predictable financial and operational performance. We remain highly confident in our ability to deliver against the 2022 objectives that we laid out on our last call, as we provide a transformative technology to reduce the dialysis burden for patients and all those who support them. With that, I'll now turn the call over to Nabeel to review our financials and provide more granularity on our expectations and key drivers for the remainder of 2022.
spk01: Thanks, Leslie. Hello, everyone. I am pleased with our great start to 2022. Our first quarter revenue grew 33% year-over-year to $30.6 million, driven primarily by higher consumable shipments, increased console shipments to acute and home customers, and increased services to support our growing installed base. Product revenue grew 41% year-over-year to $25.7 million, Console revenue grew by 22% year-over-year to $18.1 million, driven by higher console placements, with ASPs also increasing year-over-year given the demand for Tableau XT. We continue to see better uptake of our XT upgrade than we had initially projected, which highlights Tableau's clinical versatility and the clinical community's recognition of Tableau's ability to capably treat the very sickest population of patients in the ICU. Consumable revenue was $7.6 million, an increase of 121% versus the prior year. Our Q1 cartridge utilization was strong and in line with our expectations. Service and other revenue of $4.9 million was higher by 4% compared to the prior year. Our core service and other revenue almost doubled with the growth of our install base, but was offset by the planned expiry of the HHS agreements, which we previously described. 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 earnings release. Our first quarter gross margin was 14.8%, an improvement of approximately 13.2 percentage points versus the prior year period, and a sequential improvement of 280 basis points. This improvement compared to the prior year period was primarily the result of the transition of our console manufacturing to our Mexico production facility, our ongoing console cost down program, and our revenue mix, with a higher percentage of our Q122 revenues coming from our consumables compared to the prior year period. Our cartridge manufacturing transition is well underway, and our New Mexico-based vendor continues to ramp up their volumes. Operating expenses in the first quarter were $36 million, up $11.8 million versus the prior year period, and in line with our guidance. The increase was driven primarily by headcount growth resulting from investments in our commercial organization, investments in R&D, and GMA expenses tied to operating as a public company. Compared to the prior quarter, non-GAAP OPEX decreased $3.4 million primarily because our fourth quarter OPEX included certain incentive compensation payments, including sales commission, that were tied to our year-end operating performance. We reported first quarter GAAP net loss of $36.9 million, resulting in a net loss of 78 cents per share, compared to a net loss of $30 million, or 70 cents per share, for the prior year period. Non-GAAP net loss was $31.9 million, or 67 cents per share, compared to a non-GAAP net loss of $24.2 million or $0.56 per share for the same period in 2021. We ended the quarter with approximately $335.6 million of cash, cash equivalents, restricted cash, and investments. Moving on to our 2022 outlook. Given our strong performance in the first quarter and the forward visibility afforded by our backlog and our pipeline, we have increased conviction in our ability to execute as we plan to in 2022. As a result, we are updating our expected 2022 revenue guidance. We now project revenue for the full year 2022 to range from $144 to $150 million, a $2 million increase at the lower end of our prior range of $142 to $150 million. This range represents approximately 40 to 46% growth over fiscal year 2021 revenue. Our performance in the home means that we continue to be on track to deliver home revenues of roughly mid-teens as a percent of full year 2022 revenues. Moving to gross margin, our first quarter results give us increased conviction in the gross margin goals that we laid out for you at the beginning of this year. While we continue to see inflationary pressures in the macro supply chain environment around the cost of transportation and the cost of components, our cost down levers are translating as expected. All factors considered, we continue to have confidence in non-GAAP gross margin expansion to the high teams for the full year 2022 in line with what we shared with you on our last call. With that, I think we're ready for Q&A. Operator, please open the line.
spk00: If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Amit Hazan with Goldman Sachs.
spk08: Hi, this is Phil on Permit. Thanks so much for taking the question, as always. I thought maybe we'd start with guidance and try and break down the performance in the quarter, so Certainly heard all of the positive commentary on the home front, which is great to hear. I'm wondering, with very little commentary around COVID disruption, if OneQ actually came in ahead of your internal expectations or if the increased confidence and guidance in the raise at the bottom end is more a reflection on kind of the run rate that you're seeing in the exit rates. It's kind of a question on acute and how performance went and whether there was disruption in that space in the quarter.
spk02: Yeah, sure. Hi, Phil. Thanks for joining. Short answer, no COVID disruption, and really a continuation of the theme over the last two years. I think Outset has been an example of a company and a business that's continued to perform consistently well, not because of or in spite of COVID, and Q1 didn't represent any change to that pattern. So the strength that we saw in the quarter leading to strong performance on the top-line revenue side really came, again, from the core Tableau value proposition in the acute around significant cost reduction, both supplies cost reduction, labor cost reduction, and operating efficiencies for the hospital customers that are choosing to adopt it. So a lot of strength in acute from core Tableau value proposition. And similarly, a lot of strength in home and growth in the home revenue number for similar reasons. Tableau is delivering on the promises that we make to our health system and our dialysis provider customers on the home, you know, rapid training times and long retention times at home. So those are the drivers of the beef.
spk08: Okay. So to put a finer point on it, would you say that the raise at the bottom end is attributable to home being ahead of your expectations for the year so far as you kind of characterized on the call?
spk01: Yes, Phil. Hey, it's Nabil. So Phil, our confidence in our 22 guidance is really predicated on a couple of things. So one, as Leslie mentioned, we did have a strong start to the year with Q1 performing really well on revenue and the acute and the home setting, number one. And then number two, we continue to have really good backlog and pipeline as we sit here today As we talked about, we're running this business in a backlog position, so we really have good backlog and pipeline as we sit here today. All of that gives us a lot of confidence in our ability to achieve the guidance range that we talked about. That's what drove us to tighten our range to $144 million to $150 million.
spk08: That's great. Thanks for the additional color. If I could sneak just one more in on the capital environment, we've heard from others Kind of a mixed message depending on the company in terms of the ability to install and the impact from labor shortages and absenteeism on installations. It sounds like the unique value proposition for Tableau has kind of positioned you all uniquely to kind of supersede that or supervent that. Can you just talk broadly about any changes that you might have seen from hospitals' willingness to take in capital and their ability to kind of start new programs or to take installation? Thanks.
spk02: Yeah, sure. I'm happy to comment on that. Well, I think there's maybe two parts to that question or two dynamics that are worth commenting on. One is hospital's willingness to acquire new capital. So let me comment on that. And I think the second dynamic is around staffing. In short, no, we really have not experienced any change in our business of hospital interest in acquiring Tableau. And I think it's probably worth pointing out And I mentioned this in my prepared remarks just a minute ago. The capital investment, even for a hospital that's buying a fleet of Tableaus, it really is a different ballgame. You know, it's not a couple million dollars of capital. And so this is a dollar amount that's comparatively small, number one. And number two, an investment where CFOs see a very rapid payback period. As I said just a few minutes ago, typically measured in months. I mean, sometimes as soon as three to six months, they're a break-even. And that's because they start utilizing Kablo. The cost reduction on the disposables is very, very significant. And so I think that when our sales team goes in and they're talking to the C-suite, whether it be CFO, COO, CEO, you're talking about a relatively small amount of investment, again, compared to other forms of capital with a very, very high certainty of a near-term payback. So I think that that continues to serve us well, those dynamics. So no changes in the capital acquisition environment as we sit here today as far as Tableau goes. The second dynamic around staffing, I would say on balance, staffing shortages continue to probably be, well, not probably, they are a tailwind for Tableau adoption. more than they are a headwind. On the margin, you know, in Q1, did we see a hospital or two change its timing of installation a bit? I mean, maybe, but this had a very, very marginal effect, if any. What really had a more meaningful positive effect was this dynamic, again, that I mentioned in my prepared remarks around hospitals that had previously been outsourcing dialysis to a third-party service provider And those third-party service providers, and they've been fairly public with this, are really struggling with staffing. So that's resulting in a number of hospitals getting surprised and realizing that they want more control over costs, over compliance, and over labor. And so we were kind of called to answer the bell, if you will, in a number of circumstances in Q1. I just talked about one of them. in the prepared remarks, but there were many examples of that where it really motivated, kind of lit a fire under the health system to in-source dialysis using Tableau and using their own staff.
spk08: That's fantastic. Thanks so much for all the color books. Thank you.
spk00: Sure. Our next question comes from Rick Wise with Stiefel.
spk04: Good afternoon, Leslie. Hi, Nabil. I hate to start with the generic. Talk to us about supply chain challenges. And I just feel like I have to ask Leslie or Nabil, any concerns at all on electronic component availability or chips or anything that is causing you any anxiety as you reflect on the outlook for the rest of the year?
spk01: Yeah. Hi, Rick. So Rick, you know, supply chain continues to be a dynamic environment for us as it has been over the last couple of quarters. Leslie talks about sort of our supply chain team. And let me just say that, you know, those guys are working hard and we have not faced anything so far that we have not been able to overcome. So, you know, in Q1, we delivered 14.8% gross margin. sequential expansion of 280 bits, you know, up 13.2 percentage points year on year in the face of these supply chain challenges. And as we look through the rest of this year, the momentum we have in the first quarter, Rick, combined with sort of, you know, the visibility we have into the remainder of the year, we still have confidence in our guidance of getting to high-teens gross margins. So long way of saying, Rick, that nothing that we haven't been able to overcome. Look, we've talked about leveraging our balance sheet to sort of make sure that we have large quantities of some of these longer in time or hard to procure items. So the strategies we've employed are the same ones, and they have served us well in the past, and we expect them to serve us well looking forward.
spk04: Gotcha. Thank you, Nabil. And Leslie, maybe turning to your comments about home shipments exceeding expectations, it may give us a little more color there. Was it a specific setting or because of a contract? Or just maybe help us understand where the opportunity came from. And I was hoping you'd break down a little more. I'd be curious to reflect a little more on your comments about two main opportunities, the clinic operators. and the health systems. Just curious, how can I phrase this? As you think about this year, you're focused on half the revenues are going to come from the clinics and half from the home health systems. Are there any unique challenges or opportunities of getting both going? Where are the headwinds that you're facing? Is one harder than the other? Just curious to learn more about this opportunity.
spk02: Sure. Yeah, I'm happy to. Well, let me talk a little bit about your first part of your question, which was whether our overperformance, at least to our internal plan on home, was concentrated in one segment or another. I mean, short answer, No, actually, I'm really glad you asked that question because it made me realize that it was really evenly distributed growth across the home customer base. So I like seeing that. That really means I like seeing even growth in general because it means that the device and the value is resonating broadly and evenly. So that's kind of point one. Point two, you asked about are there any unique challenges or opportunities between kind of the, we'll call it the progressive clinic operators versus the health system, any headwinds in one segment or another. Again, I'd say not really, not that are visible to me today. I think that we talked about this program, Destination Home, and that is targeted more toward health systems, which makes sense, right? Because the progressive group of clinic operators by and large already have home programs. They've got accreditation and certification for a home program. They have the SOPs in place. They have sort of the facility already set up for a transitional care program. That part is new for health systems for sure. If they're going to set up a new chronic service line, it's kind of a question of we want to, we're excited, how to, how to. We did see an opportunity, to use one of your words, Rick, yes, there was an opportunity on the health system side to provide kind of a turnkey solution, for lack of a better word, where we could guide, help guide the hospital through the process more quickly and seamlessly. So the Destination Home Program is really a how-to roadmap for getting a chronic home dialysis program up and running, guidance led by not only Outset, but a small team of kind of subject matter experts who can just kind of shorten the learning curve and accelerate execution. So we do see that as an opportunity within the health system segment. But broadly speaking, we're equally excited about both segments of our home business.
spk04: Gotcha. And just one last, if I could, just in terms of the ramp, where are you? I'm sorry, in the cartridge manufacturing, Nabila. Where are you in that process? When are you likely to be sort of fully ramped? How should we think about that? Thank you.
spk01: Yeah, Rick, of course. So with respect to the cartridges, you know, we got the approval in Q4. And when we last spoke to you, we said that we would be ramping over the first half of this year. And by kind of Q3, Q4, the bulk of our cartridges would be coming from our Mexico vendor. That continues to be the case. That continues to be our expectation. We're sort of ticking along to plan. And that's one of the things that, as we've talked previously about, gives us the gross margin benefits that allows us to get to our high key margin guidance for the year.
spk04: So on track. Thank you so much.
spk01: Thanks, Jake.
spk00: Our next question comes from Travis Steed with Bank of America.
spk06: Hey, thanks for taking the questions. I just want to touch on the HOME program again. I guess kind of more bigger picture. It's not quite clear what you mean by inflection, but just love to see what you need to do on the ground beyond the 100 programs in 2022 and the things that need to be put in place to really get this to a big business and your vision over the next two to three years.
spk02: Sure. Thanks for the question, Travis. I think that one key that is underappreciated to really, really significant growth over time is retention. And I know that it is important to be growing the top line, if you will, number of patients at home. But for example, if you're losing 50% off the bottom, you've got to go 100% to grow 50%. So I've always been a really sort of fervent, like perhaps to a religious doctrine level of the importance of retention. building a strong foundation from which to grow will make the growth over time much, much easier. So that's kind of the first part of the answer, Travis, is like what can we do on the ground? We can make sure every patient and every patient's family falls in love with Tableau. And that's going to happen when our team is easy, when Tableau is easy, when they feel that they can fully appreciate and enjoy the benefits of choosing when, where, and how they want to dialyze. So that's the number one thing that we can do day after day after day to ensure very, very high growth rates for a long time to come.
spk06: Right, that's fair. And then I appreciate the answer. And on gross margins, maybe just higher level as well, just kind of thinking about the path beyond the high teams that you're talking to and some of the things you could put in place that maybe you haven't thought about before, like pricing increases at some point along the future as well to offset some of the inflationary pressures. Just any color there would be great.
spk01: Yeah, so Travis, let me just say a couple of things there. So first of all, we continue to have conviction in our ability to get to roughly 50% gross margins in 2025. That's kind of the next milestone, if you will, that we're looking forward to Now, the drivers of that are well-known and sort of these are drivers that we are actioning on now. We've talked about our console cost down program. So that's in place now. It's given us benefit since we've had consoles and will give us benefit in the future. Second, we've talked about our cartridge. So as that transition to Mexico completes here this year, that'll give us benefit that'll continue into the future. We've talked about sort of our service margin expansion, which will come as we have more consoles deployed and as we get leverage from that team. And then finally, as we get larger install base and get more consumables pulled through, that will drive margin expansion, right? So those are the levers of margin expansion that we believe will get us to that roughly 50% target. In terms of the second part of your question on pricing, look, we have customers where we have committed pricing. For the majority of our customers, we have the ability to raise prices if and when we choose we're not going to comment on specific pricing programs or actions we may take but you know all of kind of what i described what i described here is baked into our path to get to roughly 50 margins in 2025. great thanks for taking the questions our next question comes from siraj kalia with oppenheimer
spk09: Good afternoon, Leslie. Nabil, can you hear me all right?
spk02: Yeah, I'm fine.
spk09: Perfect. Hope everyone is safe and healthy. Hey, so, Leslie, thanks for providing a lot of information. Unless I'm over-reading this, please forgive me if I am, there seems to be a distinct shift in your commentary about targeting PD patients. And the reason it caught my attention is PD patients, you know, it's a hit or miss of having a partner on site, right? Because that's, I was curious if this was sort of telegraphing a more shift in focus. And also, if I could piggyback on that question, the 100 home programs you are targeting by end of FY22, the criteria used to identify and target these, is PD really the driving factor here?
spk02: Yeah. Yep. Siraj, thanks for the question. Short answer is no. PD is not at all a driving factor. So let me back up and maybe give a little bit more color. No shift in the types of patients we're targeting. I mean, as you know, unfortunately, of the entire dialysis patient population in the United States, only 1.5% to 2% of patients are on HHT to begin with. So there is just a massive opportunity ahead of us amongst patients who are currently just sitting in dialysis clinics. So that's maybe kind of where we start. The second thing, though, is I do think PD patients over many, many years have been underserved. I think these are individuals. I've met many of them. who are already really successful at home. They're already independent. They already manage a chronic disease very well independently or with a care partner. And I do think that on a human level, it is a shame and unnecessary to see the vast majority of them, when they end PD, go straight back in the clinic. I just think that's wrong. And so we do see an opportunity in the future. Is it a targeted program or something new or a shift? Not at all, but I thought it was worth starting to talk about and have it be a part of the conversation because I think that PD patients deserve much better and greater channels through which to stay at home. So it's perhaps more of a clinical and humanitarian comment more than anything else, Siraj. But over time, yes, we probably do anticipate hopes that participating in upstream patient communication over the next couple of years to make sure that more and more PD patients who are coming off that therapy are aware of and offered opportunities to stay at home on HHT.
spk09: Got it. Let's see, the math suggests approximately 600 Tableau consoles were shipped in the quarter, and Forgive me, I must have missed it. Did you provide a backlog number exiting 1Q? Because I remember 1250 or so exiting 4Q21. I'm just trying to connect the dots, you know, just make some assumptions in terms of these many units shipped. This potentially could be home and, you know, just kind of connect the dots here. Any help would be great.
spk01: Yeah, so with respect to backlog disclosure, our practice has been and will continue to be to provide that number annually. So we printed it exiting Q4. The next time we'll print it, we'll be exiting Q4 of 22. So sort of that's that. With respect to your console ship count, I don't want to – again, we're not in the practice of providing install-based numbers in any given period, but that feels a bit high to me. I'll sort of leave it at that.
spk09: Fair enough. Hey, Leslie, I'll just throw in one more and I'll hop back into you, I promise. In a hypothetical scenario, Leslie, you guys have done very well in terms of on-demand dialysate production, right? Can this approach be morphed into a real-time on-demand PD approach and take it through the NDA process? trial and everything, is that something that potentially could be on the radar for outset? Thank you for taking my questions.
spk02: Sure, of course. Yeah, this question around PDE and generally what are we thinking about next and what might be on the future horizon is a very fair one and an understandable one. First and foremost, with 1.5% of the population on HHD and maybe just a mere 12% on home, period, our primary focus remains on the U.S. market, number one, and in giving patients more access in general to HHD. I will say this is an organization of, I think, imaginers and inventors who are probably going to continue to desire to imagine and invent The directions in which we take that DNA inside of Outset I think are still to be revealed, but we are going to remain a very ambitious group of people in ways that continue to drive differentiated growth and really meaningful quality of life and clinical improvements for patients and providers. That I can assure you.
spk00: Our next question comes from Josh Jennings with Cowan.
spk05: All right, good afternoon. Thanks for taking the questions, and congratulations to the strong starts of the year. Leslie, you were talking about hospitals kind of calling in the Calvary or Outset to help them with their staffing challenges and the retake control over their dialysis service line. I was hoping to ask about actually outsourced service providers, third-party like DaVita's. We got some actual checks suggested that they bought some Tableau systems for it, their servicing of some hospitals' dialysis units or service lines. Are you seeing that channel pick up from third-party providers purchasing Tableau consoles for one? And then just the follow-up is just on DaVita specifically with all these staffing shortages, not just for their in-hospital dialysis business, but also on the home. I mean, is there a channel in 2022 where DaVita could start purchasing more Tableau systems? Thanks for taking the questions.
spk02: Sure. Yeah, I'm just jotting down the order of your questions here. So the activity that we've seen year-to-date, I'm going to address the accused first, Josh, but the activity that we've seen year-to-date on the accused side is that almost entirely health systems. And that's our focus, right? Let's go back to the commercial strategy. All of our team, clinical and capital, is pointed at selling, servicing, and supporting the health systems to control their own destiny when it comes to the cost and complexity of dialysis, whether it's in the ICU or bedside dialysis on the floor. So that's what we trained our sites on, and that's where we think we deliver the greatest value, right, to the end customer. So that kind of addresses the first part of your question. The second part, you know, the last thing I would ever do is try to speak for another provider, another entity. We are, again, similarly focused on the home in two segments and seeing a lot of benefit and reward for that. I think, you know, as humans, we tend to continue to do things that are working and where we're seeing success, and we are seeing a lot of success with a number of more conventional dialysis providers, again, kind of in the mid-tier segment of the market. They're really progressive and nimble and agile and moving very fast to move as many patients home as they can possibly support as quickly as they can do so. Well, that's where we want to be. Those are the friends that we want in our circle. So that's one. And then we're obviously very, very focused on partnership with our existing health system customer base in helping them initiate their own home program service line. So that remains our commercial focus. And like I said, it's easy and fun to continue to do things that are working and benefiting all parties involved.
spk05: Great. Thanks so much.
spk10: Sure.
spk00: Our next question comes from Danielle Antolfi with SVB Securities.
spk10: hey good afternoon guys thanks so much for taking the the question um leslie it's just you know i always like to ask a question on home so i'm going to keep the home conversation going um and just curious as you are opening up these these new home centers sort of what the process is like so one of the things i you know i remember from my days covering next stage when it was a standalone company is it was really important to get the right patients on et cetera et cetera to make sure To your point, the retention was high. And it feels, though, like Tableau is such an advance from a technology perspective. Does patient selection matter and sort of what you're working with these centers on to ensure that they're starting off on the right foot and building a successful home program? And that's it for me. Thanks.
spk02: Okay, sure. Hi. Well, I think that the notion of the right patients is very 2005 thinking. And perhaps patient selection and the quote-unquote right patients was needed when the technology options that were available were less accessible, perhaps took longer to train on, were more difficult to successfully maintain in the home. Our goal, our design goal from the very beginning with Tableau was to ensure that we designed a technology that all patients, almost all patients, could be successful on, whether they had a third-grade education or a graduate degree. And so when I look at our patient population, and we've had the ability now we're running a registry where we can look at patient demographics, it is extremely diverse. It is diverse in terms of age. gender, race, socioeconomic characteristics. And I'm really proud of that because I think as part of the moral mission of Outset, a big part of that is erasing inequities in access to home health. And one way we're doing that is through a simpler technology that doesn't require a PhD to use. Another way that we're going to do that is by continuing to influence the physician mindset And this will happen over time as they do send more and more patients home, but influencing the physician mindset that perhaps once was more selective and convincing physicians that there's no need to be selective anymore. And that showed up even in our home trial, our IDE. 70% of our IDE was non-white. We published on that. The results were exactly the same. And we have seen, again, a very similar data in terms of the diversity of our patient population here in the quote-unquote real world. with equivalent retention rates and equivalent training time up front. So that's kind of point, point one. So no, we do not anticipate that this very narrow, overly narrow, constrictive patient selection process will matter at all in the future moving forward, which I think, again, is a great thing on many levels. How do we build a successful program? Part two of your question, yeah, it's not really about patient selection. It is about, though, making sure that we can support the home program in as many ways as we can. So we do and we continue to grow our customer experience team. They effectively serve as sort of the tableau concierge, if you will, not only for each and every patient, but also for the home team staff. We are always and all about... What are your obstacles? What are your challenges? Let us take that off your hands and let us make this work for you. So I think a lot of the program success points, Danielle, are in a good news way, things that are well within our control and pretty tactical, actually. There's nothing structural. There's nothing strategic. It's probably just doing more of a full service approach. that we found gives these teams the confidence to grow home programs as quickly as they need to be grown.
spk10: Thank you.
spk02: Yeah.
spk00: Our next question comes from Drew Ranieri with Morgan Stanley.
spk03: Hi, Leslie and Nabeel. Thanks for taking the questions. Sorry to break the home trend, but to go to acute for a moment, Leslie highlighted you added your eighth of the eighth largest national healthcare systems and also highlighted that you continue to capture share in the acute setting. I was just wondering if you might be able to give us an update there on kind of where Tableau is in terms of penetration at the larger healthcare systems, and are you seeing still kind of full conversions or changes some of the accounts kind of sticking with some incumbent technologies, but also augmenting with Tableau?
spk02: Yeah, sure. I'm happy to talk about that. So first part of your question, what's the runway and what are the next steps? I mean, I think, look, so we sort of landed on the shores of the eight national health systems, and obviously landing on the shore is not the same as conquering. So I think we still have a lot of the continent to explore not to overdo my Columbus analogy. So I think the next aspiration is to kind of make our way across the collective continent and to grow penetration. There is a very significant console TAM just within the largest eight that we now have access to and we intend to go after. We are still relatively under-penetrated in most all of those national customers. you know, kind of high single, low double digits across, you know, and working toward this $2.5 billion TAM more broadly in the acute. So I think a tremendous runway in the largest eight still ahead of us, which I'm excited about. And then, of course, below the eight, we've got, you know, hundreds of hospitals across the country and parts of big regional health systems still ahead of us. So I think, Drew, at the risk of sounding boring and repetitive, the land and expand is really working. In this past quarter, we did land new customers. We also saw a ton of expansion within existing customers. And that's, frankly, what I care about the most, having participated in the ramps of many other medical device products over time, is if your current customers are having a great experience, they will buy more. And so I always kind of obsessively keep my eye on expansion within the current customer base. That is my personal leading indicator, and it's great, and it's absolutely fun to go and hire, excuse me, land new customers, and we're doing that. But where I take, I think, the greatest pride is that the device is delivering on its promises, leading to a lot of same-store sales, not only within specific hospitals, but across the health networks regionally and nationally. The second part of your question was, are we still seeing full conversion? Is it ad hoc? And I would say I didn't notice any new trends, to be honest, in Q1. I think we do have many customers. When they insource, that typically is a full conversion. We have many, many, many customers who are using Tableau to insource. We also do have some customers that maybe already own their own dialysis service line and patient and are using Tableau in concert with other devices. as maybe earlier in their experience, and we expect them to grow into full conversion over time. So it's still a bit of a mix.
spk03: Got it. Thanks. And maybe just for Nabil, but it looks like OPEX declined, or maybe it was about flat sequentially versus the fourth quarter. But maybe how are you kind of thinking about OPEX throughout the year? And maybe this is more for Leslie, but Can you remind us of anything on the new product side coming in 2022, whether it's the hardware or more on the software side? Any updates on international? Thank you.
spk01: Yeah, so with respect to OPEX, so you might remember when we last spoke in February, we talked about OPEX declining sequentially Q4 to Q1. That's just because we have commissions and those sorts of incentive comp payments that go out in Q4 that don't recur in Q1. So that's the decline. Alpex itself is trending right in line with what we've shared from a guidance perspective. On our last call, we said Alpex would roughly be Q4 21 times 4, and we continue to track essentially that for the full year.
spk02: Great. I'll maybe cover the new product side in international. So, Drew, on the new product side, And maybe we don't talk about this enough. I don't know. I mean, every year, at least the last two years, and this year will be no different, we have kind of a continuous updating and upgrading on the software and data analytics side. And again, yes, I do forecast that for 2022. The cool thing about where we are now is that new features and enhancements principally are done on Tableau through remote software updates. This is not and no longer a sort of a hardware upgrade story as maybe it was four or five years ago. And I love that because it allows us to deliver new and better and different to customers much more rapidly and at a much lower expense compared to hardware. So yes, I do see that in our future for 2022. We're super excited about it. And we will never, ever, ever continue or discontinue trying to improve the provider and the patient experience and offering them things that have new functionality and maybe new surprise and delight moments alongside that. International, we remain focused, obviously, in the near term on the U.S. market, which is still massive and barely penetrated for Tableau and our march toward world domination. No, I'm kidding. But we do recognize that the U.S. is about 30% of the worldwide market for dialysis. There's a lot of opportunity there, but we don't want to, and I don't think we ever have, sort of, you know, do anything other than measure five times and cut once, and same thing with OUS, because we do take our commitments on the margin side seriously and the cash spend side seriously, and so our calculus around, you know, where in the world and when and why and how is a pretty detailed thought exercise for us and one that we want to do with careful deliberation. So I would still say that, excuse me, while I don't have anything to report near term, a lot, a lot of work going on behind the scenes internally, and I would still forecast that, yes, I think he will find Tableau outside the United States, you know, more details to be revealed, and we're very, very confident about the where, when, why, and how.
spk03: Thank you.
spk02: Yeah.
spk00: That concludes today's question and answer session. I'd like to turn the call back to Leslie Trigg for closing remarks.
spk02: Great. Thank you. Well, I just want to thank everybody on the call for joining us this afternoon, and I hope you all have a really great evening. Thank you.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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