Outset Medical, Inc.

Greetings and welcome to Outset Medical Q2 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Jim Mazzola, Vice President, Investor Relations. Thank you, sir. You may begin.

Okay, thank you, and good afternoon, everyone. I'm here with Leslie Trigg, Chair and Chief Executive Officer, and Nabeel Ahmed, Chief Financial Officer. During today's call, we will provide an update on the listing of our Tableau Shippold, discuss our second quarter operational and financial results, and 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 earlier today and updated our investor presentation, both of which can be found on the investor pages of outsetmedical.com. This call is being recorded and will be archived in the investor section of our website. It is our intent that all forward-looking statements made during today's call be protected under the Private Securities Litigation Reform Act of 1995. 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 and 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, let me turn the call over to Leslie.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. Today, we were pleased to announce that FDA completed its review and cleared our previously disclosed 510K submission on updates made to Tableau. With this clearance, we have lifted our home ship hold and will resume supporting new patients in the home. Before providing more details on our ramp back into the home market, I want to take a step back and provide comments on our overall business and the guidance we are issuing today. We now expect revenue for 2022 to be in the range of $105 to $110 million, which reflects growth of 2% to 7% year-over-year. Two key factors are considered in that guidance. The first is the impact of the shiphold, which halted the momentum we had established with our home expansion and also disrupted our sales into the acute market. We had forecasted a significant inflection in sales of Tableau for home use, during 2022, and it started to build very encouraging momentum against this goal in the first half of the year. During the shift hold, there were a large number of patients who were planning to go home with Tableau and, understandably, had to make alternative choices. We are now working to ramp back up our commercial activities and reengage with our home provider customers who we feel remain eager to implement Tableau. While we have not seen any change in provider interest in sending patients home with Tableau, we anticipate it will take us a couple of quarters to rebuild the patient pipeline and regain the lost momentum. In our acute market, the shift hold created some customer uncertainty, which we are actively working to address, and a quarter end pushed out the timing of some of the deals we had expected to close in the quarter. The second factor is the impact of nursing shortages and some early signs of capital spending constraints, both of which are primarily impacting our acute market. While Tableau uniquely enables hospitals to in-source dialysis and achieve significant cost savings, doing so typically involves the hospital hiring new nurses, which has been a challenge both for national and regional health systems across the country. Toward the end of June, our average sales cycle and the timing of installations out of backlog both lengthened, and we're continuing to see that trend into this quarter. While we are not standing still and are working to help providers mitigate these issues, We expect nursing shortages and potentially tighter capital spending playing an even larger role during the second half of the year and into 2023. I will cover these factors in more detail as I review our progress in the home and acute markets, as will Nabeel in the financial section. But suffice it to say that we expect the impact to moderate our revenue growth trajectory over the next several quarters. What hasn't changed is that our total addressable market remains exceptionally large the end market demand for Tableau remains very strong, and our competitive position remains highly differentiated. Turning now to a more comprehensive update on home, our focus here is all about regaining momentum we'd established earlier in the year. As we anticipated, many patients who were in training or scheduled for training on Tableau had to make alternate plans, which means largely rebuilding a new patient pipeline. Having said that, we believe we have a solid foundation and reentry point toward engaging with home providers. Before implementing our SHIP hold, we were tracking ahead of our goal to establish 100 home programs by the end of 2022. As a reminder, we define a home program as a location offering Tableau for home dialysis, and we remain committed to this 100 program goal for the year. In addition, we have a strong contingent of physicians and providers who are eager to expand the use of Tableau in the home setting. We are thrilled that our retention rate with patients at home remained markedly high and that controllable attrition remained negligible through the shift hole. Now more than ever, we continue to believe a high retention rate is essential to high long-term growth, and we are very pleased to see that the benefits Tableau offers continue to enable patients to dialyze at home over the long term. Further, additional encouraging tailwinds continue to advance the shift toward home dialysis. For example, during the quarter, CMS issued its annual proposed rule and in it requested information from stakeholders on ways to improve access to and quality in home dialysis. In the proposed rule, CMS reinforced that dialyzing at home is associated with lower overall medical expenditures than dialyzing in center and concluded by saying, we believe that increasing the rates of home dialysis has the potential to not only reduce Medicare expenditures but also to preserve or enhance the quality of care for ESRD beneficiaries. As we have discussed in the past, we benefit from a very wide competitive moat from both a regulatory and technology perspective. The results of our recent human factors study further enhance our position. As you may recall from our June update call, human factors data was the last remaining item under review by FDA at the time. With this submission now cleared, we are pleased to share some of the key results. In these studies, healthcare professionals, patients, and care partners completed a three-hour training and were then asked by an independent facilitator to perform thousands of tasks. The breadth and depth of these studies was significant. For example, the total number of tasks covered in our two studies was 10 times greater than the only human factor study ever published by a competitor. Our results were highly differentiated as well. In the healthcare professionals group, there was a 0.5% use error rate, roughly half of what was reported in the competitor's study. In the patient and care partner group, there was a 0.9% use error rate, less than a quarter of what was reported in the competitor's study. What's more, the clinical evidence-based supporting tableau continues to grow as well. For example, this past quarter, the highest number of clinical abstracts in the company's history was submitted on Tableau, many by customers, to the American Society of Nephrology's annual scientific conference taking place this fall. These abstracts cover a wide range of outcomes from Tableau's performance in the ICU to treatment adherence and retention among home patients. The breadth and volume speaks to the growing number of customers recognizing Tableau's clinical benefits in addition to operating advantages both in the acute and home environment. Taken together, these tailwinds validate our conviction in Tableau's clear advantages in the very large and growing home market over incumbent and emergent technology. Now I'll turn to a review of our acute performance. As we anticipated, we experienced disruption in the acute market in late June, which continued into Q3 as customers digested the home ship hold news. We have also started to see a clear shift toward nursing shortages playing a role in the elongation of our sales and installation cycles. As we've outlined before, Tableau generates cost savings in two ways, supply cost reduction and labor cost reduction. Accessing the incremental and significant cost savings related to labor involves a hospital using Tableau to change from outsourcing their dialysis to insourcing and owning inpatient dialysis themselves. For example, one large regional player, recently conducted an internal analysis of how much money they've saved today by insourcing with Tableau. Their analysis validated a nearly 40% annual cost savings by converting from an outsourced dialysis model to insourcing with Tableau. As our footprint has continued to expand across the country and hospitals are recognizing the benefits of insourcing with Tableau, the vast majority of our pipeline mix has shifted to insourcing opportunities. Insourcing dialysis delivers powerful cost reduction benefits, and it also requires hiring new nurses to get there. While the health systems in our deal pipeline consistently report a willingness to hire in order to access the benefits of insourcing, they remain uncertain about the timing of their ability to do so. As a result, we've seen some delays, both hospital purchase decisions and also a slower expansion cadence among current health system customers fueled by considerations about the time it may take them to hire their own staff. That said, we are in the early phases of rolling out some proactive program ideas we believe could help alleviate staffing as a headwind in the future. And beyond that, as we adapt to a longer sales cycle and the current hospital operating environment, we're also taking the opportunity to strengthen and sharpen our commercial infrastructure and improve our sales processes to address the substantial opportunities that exist and set the company up for long-term success. We weighed these factors in combination with the cautious commentary from our customers regarding their future CapEx spending in establishing our guidance for the remainder of 2022. Foundationally, Tableau provides a transformative solution in an $11.4 billion U.S. market with an incumbent dialysis technology that is complicated, burdensome, and inflexible. Our footprint in the $2.5 billion U.S. acute care market provides us with a strategic entry point to the $8.9 billion U.S. home market, which remains significantly underpenetrated and lacking innovation. The previous shitholes and current macro factors do not directly impact the magnitude of these market opportunities. In fact, we do not believe we have lost a single deal as a result of them, and no orders have dropped from our backlog to date. I also want to emphasize that we see no change in the underlying market fundamentals or strong demand for Tableau in either the acute or home end market. But we have work to do. What we are seeing is our progress load, and we now need to regain our home footing and adapt to the current environmental headwinds in the acute setting. We remain confident in the strength of our technology, our competitive position, and importantly, the need for Tableau in our large and growing end markets. I want to close by thanking the entire Outset team for all they do every day on behalf of providers and patients. As we work through this challenging period, our team's admirable focus on improving the lives of dialysis patients and their caregivers has not wavered. With that, I'll now turn the call to Nabeel to review our financials and provide more granularity on our updated outlook for the third quarter and the remainder of 2022.