Outset Medical, Inc.

Q2 2022 Earnings Conference Call

8/1/2022

spk03: 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.
spk09: 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.
spk04: 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.
spk05: Thanks, Leslie. Hello, everyone. Overall, our second quarter revenue of $25.1 million was in line with our guidance and non-GAAP gross margin of 15.9% exceeded our expectations. Product revenue decreased 4.9% year-over-year to $19.6 million, with the largest driver being the decline in console revenue. Console revenue decreased by 21% year-over-year to $13.2 million, driven primarily by lower console placement. As Leslie mentioned, we saw meaningful disruption in our home and acute customer base from the ship hold, as well as early signs of the broader macro headwinds impacting the business. In addition, the ship hold meant the absence of home console placements during what we anticipated would be a record June. Importantly, we have not yet had any customer cancellations out of our backlog. Consumable revenue was $6.4 million, an increase of 69% versus the prior year, reflecting our larger installed base. Our Q2 cartridge utilization continues to be in line with our expectations. Service and other revenue of $5.4 million was higher by 18.5% compared to the prior year. Our core service and other revenue doubled with the growth of our installed base, but was offset by the planned expiry of a component of the HHS agreement. 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 second quarter gross margin was 15.9%, an improvement of approximately 11.5 percentage points versus the prior year period, and a sequential improvement of 110 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 programs, and our revenue mix, with a higher percentage of our Q2 22 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 second quarter were $40.2 million, up $13.2 million versus the prior year period and in line with our guidance. The increase in OPEX was driven primarily by headcount growth resulting from investments in our commercial organization, investments in R&D, and J&A expenses. We reported second quarter gap net loss of $43.8 million, resulting in a net loss of $0.92 per share compared to a net loss of $30.2 million, or $0.66 per share for the prior year period. Non-GAAP net loss was $36.4 million, or $0.77 per share compared to a non-GAAP net loss of $26.3 million, or $0.57 per share for the same period. We ended the quarter with a strong balance sheet anchored by approximately $295.4 million of cash, cash equivalents, restricted cash, and investments, and minimal debt. Moving to our third quarter and full year 22 outlook. Starting with revenue, we are moderating our near-term growth expectations as we work to regain our home momentum and take into consideration our expectation that staffing pressures and potentially CapEx constraints on acute customers will persist through at least the second half of this year and likely into 2023. These factors have elongated both our backlog and pipeline conversion timing. As a result, we now anticipate 2022 revenue in a range of $105 to $110 million, an increase of 2% to 7% over 2021. We further expect that Q3 revenue will be roughly in line with Q2 and that our ability to move towards the top end of our guidance range is predicated on the pace of the ramp in home customers and on our ability to mitigate the acute headwinds we've spoken about. Margins will continue to expand in 2022 relative to our 7.7% gross margin in 2021, primarily as a result of our cost down programs on the console, ongoing cartridge utilization, and lower freight costs for cartridges. We expect margins for the year to expand meaningfully on a year-over-year basis and be roughly in the low to mid-teens range as a result of our lower anticipated console and consumable shipment volumes relative to our prior guidance. Further, we expect that margins in the third quarter may step down sequentially before stepping back up in the first quarter. We expect our Q3 console mix will include a higher proportion of home placements as we work to restore our presence in the home market. And we will see the X3 of the final components of our HHS agreement in the third quarter. Over the long-term, we continue to have high conviction in our ability to generate close margins . As we discussed in our June 13th call, we have implemented cost reduction measures designed to better align our spending with our anticipated 2022 results while ensuring that we continue to invest to drive long-term revenue growth and margin expansion. This mix of deferred spending and structural changes, including OPEX and capital spending, will also provide benefits into 2023. While these measures resulted in only a modest reduction in spending during the second quarter, they are expected to deliver greater benefits in the second half. As a result, we now expect 2022 spend to be roughly $10 million lower relative to our previous expectations. Lastly, turning to our balance sheet, we are fortunate to have a strong balance sheet with minimal debt that gives us the capacity to focus on our home and acute opportunities. Our revised spending forecast will also help preserve our cash runway, and we will continue to evaluate additional opportunities to defer spending in ways that preserve our cash runway without jeopardizing our ability to grow revenue and expand our gross margins. We continue to have conviction in our ability to get to cash flow great even with a timing dependent on revenue growth and reaching our milestone of 50% gross margin. To close. we remain very confident in the value proposition Tableau provides and our ability to further penetrate an $11.4 billion long-term market opportunity over time. I and every member of our outset team are pleased with the resumption of Tableau shipments in the home market and are excited about delivering on our promise to dialysis patients and providers in the acute and home settings. With that, I think we're ready for Q&A. Operator, please open the line.
spk03: At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Travis Steve with Bank of America. You may proceed with your questions.
spk08: Hey, guys. Thanks for taking the question. I just wanted to touch on the revenue guidance. There's really no improvement in the second half versus Q2 levels, basically $25 million a quarter is what it looks like. So just why not see better momentum over the course of the year? And the second half guidance, basically about $30-ish million or more versus the last guide. Just curious why it's such a big reduction in the second half. I think staffing used to be more of a tailwind, and now it's a headwind. Just want to make sure I understand exactly what's changed in the last three months.
spk04: Yeah, should I go with, maybe I'll start with the back part of your question, you can address the guidance and bill. Hey, Travis. Yeah, so let me speak to sort of the macro impact and the impact in 2H in particular. I think first and foremost, we are contending with two challenges right now. I mean, obviously, the first is the momentum we lost on the home front as a result of being on a ship hold for the last two plus months. At the time of our June announcement, we just didn't know how many patients would wait versus choosing other home alternatives. And as time has marched on here, it became apparent that the uncertainty around FDA timing was leading most patients to choose other paths, which is completely understandable. But now that those cards have been turned over, we now know that we need to build a new patient pipeline largely, again, from scratch. And I'm not worried about our ability to do it, but I think it will take time. And we wanted to be realistic about that. as we thought through our growth expectations for the next couple of quarters. So that's kind of part one. And now our second challenge is on the nursing shortage front. This challenge is an interesting one because it did sort of start life earlier in the year as more of a tailwind for us. We had talked about it actually as more of a tailwind than a headwind. The extent to which it was affecting our sales cycle became very apparent at the end of the quarter as the team here was trying to close deals. hospitals started just delaying their contract decision making in order to do more diligence on their ability to hire their own nurses and just be really sure and gain the confidence that they would be able to do so on a timely basis. I think the impact of this macro factor on nursing was probably also exacerbated by the fact that our pipeline mix has evolved to the point where today almost all our opportunities, good problem to have, but all of our opportunities are connected to hospitals wanting to purchase Tableau for insourcing. Long story short, this is not demand-related in our view. It's case-related. And I think the reality of the new case, for however long it persists, required us to retool our expectations, at least in the near term, around growth. But, I mean, has anything fundamentally changed about our market opportunity or, you know, Tableau's advantages or ability to grow longer term? Not in the least, in my view.
spk05: And then, Travis, just to sort of address the first of your questions, so guidance and kind of the ramp here for the second half. So our guidance really depends on a couple of things. One is our and our provider's ability to ramp back home customers. Remember, as Leslie mentioned, we did have home patients who were craned and set to go on Tableau who've now gone on to other therapies. And so we need to sort of rebuild that patient identification and training pipeline. That's number one. And then with respect to the acute, it depends on our customers' abilities to mitigate these nursing shortages. At the low end of our guidance, Travis, we're assuming that these two factors take longer to sort of work through. And then as you move into the higher end of our guidance, what we're saying is that, look, Q3 is roughly a flattish quarter And then as our home and acute customers, you know, sort of prove that they can work through these issues that we talked about, that we get back to growth in the fourth quarter.
spk08: Okay, that's helpful. And I guess looking a little further out, like when you think about 2023, I realize you can't guide at this point, but when you think about bigger picture, do you think some of these staffing issues, the loss of momentum you had will still impact 2023 in a negative way? Or is maybe it's the other end, you know, more of a catch-up year. You can kind of get back from the loss of minimum this year, and so maybe it's a little bit better than the neutralized. Just kind of bigger picture thoughts on a little further out than a couple quarters. Would love that. Thank you.
spk05: For sure. So, Travis, let me first say that, you know, our end markets are large and growing. We're in a strong competitive position, and as Leslie pointed out, we haven't seen any abatement of end market demand. So, Our foundational growth drivers are alive and well as we look sort of far, far into the future. Now, having said that, the visibility we have is for the second half, and we're really focused on executing through the second half on both our home ramp and helping our acute customers work through these staffing shortages. We will guide to 2023 as we always have, which is when we print our Q4 results, But look, based on the visibility, the little visibility we have today into 2023, we would expect that our 2023 growth rates to moderate relative to what we had previously thought.
spk08: No, that's a helpful color. Thanks for taking the questions, and I'll hop back in the queue. Thanks, Travis.
spk03: Our next question comes from the line of Josh Jennings with Cowan. You may proceed with your question.
spk01: Hi, good evening. Thanks for taking the questions. I wanted to just start off and ask about the human factors data. And has that been formally submitted to the FDA? I think you had referenced on a prior call earlier in the year that it had a couple months ago. But just wanted to make sure that the full submission was in. And is there a timeline for the FDA to sign off on the data set and close out that requirement?
spk04: Sure. Yeah, let me take that. So Josh, yes, we had to formally submit the human factors data as part of that 510 submission. And what the FDA communicated to us back in early June was that their review of the human factors test data was the final remaining gating item or the item gating their ability to clear. And so with the clearance that we received here late, late on Friday, the FDA is indicating that they have reviewed all of that human factor data formally and signed off on it and granted clearance on the basis of that.
spk01: Excellent. Excellent. And just any thoughts on pricing just as you're looking to regain momentum and remove some of the risk associated with the capital spending slowdown in hospitals and acute channel? Have you implemented any pricing changes or considered pricing discount strategy to potentially moderate some of the headwinds you're facing? Thanks a lot.
spk05: Yeah. Hey, Josh. So, Pricing is certainly one of the levers that's available to us in our contracts. You know, we are really focused on getting back into both of our home and acute markets as expeditiously as possible. And there are a bunch of levers that are available to us. I don't want to go into what specific actions we may or may not take, other than to say that sort of we've baked all of that into guidance.
spk04: Do you mind if I add something? One thought that comes to mind, Josh, is just maybe for some more color around kind of the CapEx spending environment. You know, I think what's probably most important to take away is Tableau is a solution. It's an important solution. And I think the value proposition around capital spending, which is kind of, you know, day one, dollar one savings, has never been more relevant. So while we are seeing hospitals take, you know, just take a second and a third look at the financials, sharpening and resharpening the pencil, we have not seen any deals fall out of our pipeline or out of backlog because of it. And I want to be really clear about that. Again, what we are seeing, maybe let's say earlier this year, last year, it was probably more of a measure once, cut once conversation on capital investments with hospitals. It really wasn't. It was a short conversation. Today, it's probably, you know, we're seeing is more of a measure three times, cut once behavior, you know, in hospitals evaluating capital proposals. But what we do continue to hear over and over again is that Tableau pretty quickly rises to the top of that capital spending priority list because of the very real and tangible cost reduction benefits it has. All that said, again, we don't see a demand problem or one that would be related to pricing or other. I think it's really just case related more than anything else.
spk12: Great. Thanks for taking the questions.
spk03: Our next question comes from the line of Suraj Kalia with Oppenheimer. You may proceed with your question.
spk06: Good afternoon, Leslie and Nabil. Can you hear me all right?
spk02: Yeah.
spk06: Perfect. Congrats on resolving this whole issue. So jumping in between many calls, guys, just bear with me. So, Leslie, I remember the number 1200 or 1251, something in that ballpark in terms of backlogs. And in Nabil's prepared remarks, there was this comment about no cancellations and backlogs. So I'm just trying to connect the dots. The home contribution, if my memory serves me right, it was expected to double in FY22. And the math was suggesting roughly around 20 million, a little over that in home revs. So first, can you tell me if we are approximately right? And if you're starting to build the funnel again, I'm curious as to your confidence level, given the remaining four months and the quarter, and where do you all still stand on the 100 active home programs by end of FY22?
spk05: Yeah, Suraj, so lots to unpack there. Let me maybe start, and then you can jump in if you missed something. So first of all, on the backlog, so we entered the year... with 1,251 consoles in backlog and a significant number of them were home consoles. And so a backlog for us means the provider has a binding commitment to take Tableau from us. And so what has happened is as we entered the ship hold, we're set to deliver consoles out of backlog, but now we can't because these patients, because we're on ship hold. And so these patients, who were trained and ready to go on Tableau have found other therapies. So that backlog remains. Nobody has canceled the consoles out of backlog, but now our provider partners need to identify new patients. And so they need to identify patients at the top of the funnel, make sure that they're suitable for home, and then train them to get home. And so what we've talked about is that the backlog conversion elongated surage. So those consoles don't go anywhere. They just deliver on a longer cadence, if you will, than we previously anticipated. And remember that backlog for home was always longer tenured because our provider partners are signing longer term commitments to send patients home. So that's sort of part one. With respect to home revenue contribution to the full year, Our previous commentary was that home would be roughly mid-teens as a percent of our full-year revenues. And we continue to believe that within our guidance range, we continue to have a path to getting home roughly to that same percentage. Again, it just depends on our provider's ability to help, you know, train, identify patients, train patients, and then get them home over the next six months, over the next, you know, remainder of the year. Does that answer your question, Siraj?
spk06: Yep, fair enough. And Nabil, one last question, hop back in the queue. So Nabil, in your prepared remarks, again, please forgive me, jumping in between many calls, you mentioned a longer hospital sales cycle. And also, Leslie, I think so I heard something about staffing pressures. I know somebody asked about this. And now, forgive me, I did not connect the dots here. So on the acute side, Tableau was in essence, the whole value proposition argument was, you know, being a pressure relief for the staffing issues. But now there are staffing issues and they are serving, you know, and are being factored into a guidance reduction. Again, forgive me, I did not connect the dots there. Folks, thank you for taking my questions.
spk04: Sure, thanks. Well, I can jump in and address that. So, and Suraj, I don't know if you listened to this part, but just going back in time, taking a step back, There are two ways that Tablo drives cost reduction for hospitals. Way number one is just supplies cost reduction. It just literally costs less to perform a treatment with Tablo in the acute setting than it does with other choices. The second cost reduction driver can be labor. Some hospitals historically outsource their dialysis. Some hospitals have always insourced it and just used Tablo for supplies cost reduction. What I remarked on was we've actually started to see our pipeline mix shift in the mid Q2 time forward to mostly hospitals that are very, very motivated to use Tableau in order to in-source dialysis because it generates even more dramatic cost reduction. In doing so, most, not all, but most of those hospitals have to hire some incremental new staff in order to implement the program. So while Tableau absolutely is still a solution, as it is simpler, offers operating efficiencies, it is a solution for staffing shortages in the hospital. For those that choose to insource dialysis, there can be an impact just on the duration of our sales cycle as those hospitals are taking extra time just to make sure that they have visibility on how quickly they can hire their staff. I think what I've been listening for, though, really intently in customer conversation is the distinction between, for example, hey, do hospitals just not want a deal? Do they just not want to hire staff? Do they not want to insource? We haven't heard that at all. The distinction is they just have some uncertainty about how long it will take them to hire that staff. And you're not talking about hiring dozens of people. This is typically a small handful of folks. But in their decision-making process and wanting to, again, kind of measure three times and cut one, their execution speed or question marks around that has extended our sales cycle or at least started to here in the back half or back portion of the quarter.
spk03: Our next question comes to the line of Rick Wise with CFO. You may proceed with your question.
spk07: Good afternoon. Hi, Leslie. Hi, Nabil. I was just reflecting on things that maybe are a little more in your control of some of these relative to some of these uncertainties. Maybe talk us through this, the topic of rebuilding the patient pipeline. And maybe, Leslie, you could give us a little more color on what you have to do, how long it takes, what are the steps, and what are you expecting yourself? And as you said, goals internally for the organization in terms of getting back, rebuilding your momentum there.
spk04: Yeah, sure. And thanks, Rick, for the question. Well, let's see. I mean, first and foremost, I'd like to say that our home providers have been incredibly supportive in maintaining their belief around the benefits that Tableau can bring to their overall home dialysis census, their goal around increasing that census and for their patients. And I do want to take the opportunity to thank the home provider customers that we have. This was certainly a setback, but nothing I would describe as permanent damage. And I want to stress that we don't see any insurmountable barriers to reengaging and rebuilding this momentum. There's no structural delays here in front of us. Now, let me get to your question, though, about, well, what does that funnel look like? And I'll try to keep it brief, but in short, it looks like providers first identifying patients who they think are candidates for home broadly. educating and influencing those patients to choose home, giving those patients an option between this technology or that technology for home. And those providers really encourage the patients to make their own choice, make their own decision. And then, of course, the final step, training those patients and getting them home. So those are the basic steps. And my expectations are not that this is years in the making, but Because we've never been through this before, quite frankly, Rick, we haven't had the experience of building up a lot of momentum, getting that flywheel going, and then having to pause it and halt it, and then having to restart again. I just don't have the experience under my belt to accurately predict exactly how long that's going to take. But I guess what gives me a lot of confidence in the theoretical is the strong results that providers have seen, continue to see with their patients who are already home, that very high retention rate. And their experience now with a very fast, predictably fast training rate gives me a lot of confidence that our home customers will, you know, effective immediately start identifying those patients at the top of the funnel and flowing them through as quickly as feasible.
spk07: Gotcha. Two other questions. I'll ask them both. Just wondered in terms of being ready to ship or ready to reaccelerate, we've heard a lot about supply chain and chip shortages, component shortages, electromechanical product shortages. I just wondered anything new there? And my last question is, I apologize for asking, and maybe you should have Nabil get stuck with this one, Leslie, but to what extent do you feel like you've given us, is this based on what you know today, like the most conservative imaginable scenario for the second half, a sort of a middle-of-the-road scenario where you've tried to incorporate You've not assumed aggressively your ability to re-ramp, etc. How do I think about what you're giving us? You're typically thoughtfully conservative, I believe, in your public communication. If you could frame that at all, I'd be very grateful.
spk05: Yeah, Rick. So with respect to supply chain, the first part of your question, so Supply chain continues to be tough in the macro, but we continue to have a strong team that's been executing through these headwinds for a while now. And so there's nothing new to report. The big thing we're focused on is our cartridge transition down to Mexico. That's going well. And honestly, there's nothing to say other than that on supply chain. With respect to guidance, I mean, Rick, look, our objective is always to give guidance based on the visibility we have borne by our backlog and our pipeline. You know, I talked in answer to an earlier question that our ability to execute through the guidance range really depends on two things. Number one is our home ramp back, which, as Leslie mentioned, you know, we haven't sort of done this before. And so we've modeled what we think the ramp looks like. Number one. And then number two, based in the acute setting on our acute customer's ability to weather or work through the staffing shortages that we've talked about. So again, if both of those go well, we will certainly move up in our guidance range, but our guidance continues, like in any period, to be based on the visibility we've got.
spk07: All right. I appreciate the color in the bill.
spk12: Thanks, Rick.
spk07: Next question.
spk03: Our next question comes from the line of Amit Hassan with Goldman Sachs. You may proceed with your question.
spk10: Thanks. It's Phil on for me. Thanks for taking the questions. Same line of questioning, a couple of slightly different angles, if I could. So, Nabil, one of your responses earlier, I believe, to Suraj's question, it sounds like just a few million dollars, maybe $5 million to $7 million of the $40 million cut versus our last guidance is going to come from the home side, just a much smaller revenue base. So, I'm wondering if we can try and parse out with all the different factors that are being talked about, the different variables on the acute side, if you can try and parse out sort of what are the factors that were attributable to the disruption from the ship hold that you called out for 2Q, obviously June, and then into 3Q, if you could try and quantify or just give us an idea of how much of the shortfall in that 30 to 35 million on the acute side is from that factor versus sort of the broader environment that you've seen evolving in front of you.
spk05: Yeah, Jamie. So first of all, sorry.
spk04: Long day.
spk05: Sorry, Phil. Sorry about that. Look, we had a couple of factors happen, right, as you pointed out. One is sort of the ship hold and its impact on both our home and our acute businesses. And second is this elongation of the sales cycle that Leslie talked about. We haven't broken out each of those components individually. but maybe to give you a bit more perspective, you know, we talked about entering Q2 and certainly entering the ship hold with a lot of momentum in the home, and we were expecting to otherwise deliver a pretty robust quarter of home shipments, right? And we expected all else being equal for that momentum to carry through the end of the year. Now, it's hard to say what would have actually happened, but that's nonetheless how we were thinking of our performance going into the ship. And so, you know, I mean, could you sort of infer that we were running on track to or ahead of our mid-teens percent of whom? That's entirely possible. Now, as we look at the remainder of the year, and based on the guidance we gave, we factored all of that in, but we haven't broken out each of those components individually.
spk10: Okay, I thought it was worth trying. Maybe you can remind us just kind of qualitatively what home ship hold drove acute disruption, just to give us a flavor again of what caused that disruption, if you can't quantify for us.
spk04: Yeah, I can comment on that qualitatively. I think there's, well, a couple of things that occurred, all pretty understandable from, at least from my vantage point. One, we obviously had a number of possible potential customers that just saw the news and had understandable questions about, well, what exactly does that mean and where and when does it apply? And so our sales team had to spend a healthy amount of time just laying down the fact base and answering all those questions in a responsible way. So that has some effect. Again, no permanent damage. That has some effect on a sales cycle if an extra, you know, four, five, six, seven conversations have to happen and you're two weeks before the end of a quarter. Another example of impact, we had a number, have a number of contracts that we would call enterprise solution that are covering the use of Tableau in the acute setting, sometimes in the subacute setting, sometimes in the home setting, all health system centric. And so we were also faced with the challenge of trying to separate out-home from those contracts, redo them, get all the signatures lined up, re-redline, et cetera, et cetera. And there is obviously just an administrative reality of one's ability to do that, again, with just weeks remaining in the quarter. So those are just examples. So I just, again, I'll stress none of this, all of it painful. None of it's fun, but nothing that I would consider to be permanent damage. And I feel very confident that we will be able to, you know, to remove the distraction factor of the home ship hold on the acute care in the very near term.
spk10: Okay, that's helpful. Just one last one, if I could sneak in and just maybe talk about what's happened in the FDA process since you last updated us in June, how things went. anything unexpected and then kind of what's been put in place now moving forward so that something like this doesn't happen again? Thanks.
spk04: Yeah, sure. Totally fair question. Well, so what transpired in the first part of your question, what transpired since our June update call was exactly what FDA had communicated to us, which was that they needed more time to complete their review of the human factors data. The human factors review team inside of FDA did exactly that. And so that really was the primary or the principal activity set between early June and when we just received this clearance. I think, as I mentioned, these studies were very, very robust, totaling in all, you know, closer to 1,000 pages. And so there was certainly a lot to review. You know, I think what – and speaking to what would we do differently or is there any changes that we're going to make – First and foremost, I mean, we are very proud of our track record. We have filed and received clearance on six 510Ks in the last five years, which is more than any other competitor, both in the acute and the home space. So we're obviously very proud of our track record here. What was different this time around was the human factors bar, and we learned a lot. It was, as I said, painful learning, but invaluable now in ways that create a competitive advantage for LSATs. By the way, we own this learning fully. I think we have not fully appreciated how substantially the FDA's expectations had elevated, and frankly, that's on us. We've since established a commitment internally for HF to be a core competency here, something that we're really known for, and I'm certainly not going to claim we're there yet. but that's our aspiration and our commitment. The steps we've taken so far are hiring very senior season leadership in human factors, which we had not previously had, and now understanding at a very granular level how to construct and conduct these protocols in ways that meet SBA's expectations.
spk02: Our next question is a question
spk03: Drew Rainier with Morgan Stanley. You may proceed with your question.
spk00: Hi, Leslie and Emile. Thanks for taking the questions. Leslie, maybe just for you, just in terms of thinking about the patients that might have gone to competitive systems in the near term, can you maybe talk about maybe what the switching costs would be for them to come back to Tableau? How immediate could that be if that's factored into any type of your guidance? I know it's not necessarily like maybe the top of mind thing because you have a broader market opportunity, but just kind of curious about that near term.
spk04: Yeah. Yeah. I understand the question. Drew, I will say in all transparency and honesty, our crystal ball here is very, very imprecise. Not having the opportunity to talk to each and every individual. Some patients are think have chosen to stay in center. Some patients have chosen PD. Some patients have chosen the incumbent HHD technology, et cetera. So there's a number of different pathways here that were available to them. Each perhaps has its own switching cost. Is it possible that maybe some of the patients that just chose to stay in center, where you would argue that there's the lowest switching cost, at least on a piece of paper, is it possible that some of those could be cajoled back and reenter training and relearn and get ready for home? Yes, it's absolutely possible. That's not an assumption that we've factored in. Again, just based on our lack of visibility, quite frankly, our lack of data, we always prefer to make data-driven decisions. We don't have any data or evidence that gives us that sort of confidence to say X percent would come back, but it's certainly possible.
spk00: Got it. And then just two quick questions. just kind of given the reset you're having in terms of the business and guidance, is there any way that you can just give us an update on maybe where the home installed base stands today? I understand that you're trying to get there. You're still on track to get to a hundred programs by year end, but just if you could update that number. And then lastly, Leslie, you talked about having still very high retention rates, but could you put some numbers around there? Just curious where you are. Thank you.
spk05: Yeah, for sure. So on the home installed base. So remember, we entered the year with 300 patients in their home clinic setting and then had a really strong Q1. We were gearing up for a strong Q2 when the ship hold went in place in month three, which is when we deliver the largest, typically deliver the largest amount of consoles, both home and acute. And so we definitely saw installed base growth in the first quarter, but not as much as we'd hoped in the second quarter. We still fully intend to provide that installed base number when we print our Q4 results, which has been our normal practice. That's part one. You know, with respect to home growth over time, the leading indicator really is the number of home programs And again, we are still on track to get to this 100 home programs goal by the end of this year. And again, that's going to drive install-based growth in the home moving forward.
spk04: Let me pick up on the retention question here. So I think the really good news is that retention rates have not changed materially at all and remain, you know, very highly differentiated in the marketplace. We said in the past that to anchor that a little bit more specifically, we have talked about observing about a 15% rate of death and transplant, a combination of death and transplant before, and we didn't see any new trends in that category. I would describe it as extremely negligible numbers of patients to date who have just opted off Tableau. And so those trend lines continue. We saw no deviation from that through the course of the home shift hold.
spk02: Our next question comes from the line of Josh Jennings with Cowan.
spk03: You may proceed with your question.
spk01: Hi, thanks for let me circle back. I bought my initial question earlier. I wanted to really just make sure that the 520 2022 order in regards to human factor testing that that requirement has been satisfied with the current submission. Or is there another human factors? Data set that the FDA will require post approval.
spk04: Sure, Josh, I'm happy to take that. So the human factors study that was the subject of the 522 post-market surveillance, that was in connection to the version of Tableau that was cleared in 2020. Since that version is no longer being marketed or used commercially, the FDA has notified us that we no longer have to conduct this study unless or until this old version is reintroduced into the market, which, of course, we have no intention of doing.
spk12: Okay.
spk01: I guess the confusion I think is in your filing, you guys talk about submitting the catch-up 510K and then using that version of Tableau for human factor study as required in the 522 order. But that's just – I'm just probably just a little bit confused. I apologize for that. But I'll move on.
spk04: Oh, no worries. No, no, no. It is a little confusing, Josh. And just to make you feel better about yourself, this is new information. So this information will be included in our upcoming 10Q. The calls just happen to occur before the 10Q. So this is new information about the FDA's notification that we no longer have to conduct this study.
spk01: Great. While I have it, might as well just throw one more in. I think maybe the silver lining of this, Chip, was learning that some of your orders within your acute the acute channel were tied to home console orders as well and suggesting that maybe you've had some more success convincing hospitals or hospital systems to take ownership of home patients any any updates there i know it's probably hard to to talk about uh just getting out of the ship hold but just in terms of the progress you've made prior to the ship hold and how you see that opportunity evolving thanks a lot
spk04: Yeah, sure. Well, I'll have to frame it as prior to the shiphold because we, you know, the FDA asked us not to, of course, market or distribute the device, and we were fully compliant with that. So we have not engaged in conversation recently since the shiphold with health systems regarding home. Prior to the shiphold, yes, it is absolutely fair to say that the interest in the, I call it the activations, of the health systems around the concept of standing up their own home dialysis service lines continues to grow.
spk12: Great, thank you so much.
spk02: Yeah, you bet.
spk03: Ladies and gentlemen, we have reached the end of today's question and answer session. I'd like to turn this call back over to Ms. Leslie Trigg for closing remarks.
spk04: Thanks, operator, and thank you all for joining today. Have a great evening.
spk03: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.
Disclaimer

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Q2OM 2022

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