Outset Medical, Inc.

Good day and thank you for standing by. Welcome to the Outset Medical Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jim Mazzola, Vice President of Investor Relations. Go ahead, please.

Great. Thank you, and good afternoon, everyone. Welcome to our third quarter 2022 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer, and Nabil Ahmed, Chief Financial Officer. During the call, we will discuss our third quarter operational and financial results, provide an update on our outlook, and host a question and answer session. We issued a news release after the close of market 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 will be protected under the Private Securities Litigation Reform Act of 1995. These statements relate to expectations or predictions of future events 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 about the public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. With that, let me now turn the call over to Leslie.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. We are very pleased to share our third quarter 2022 results, which were marked by strong revenue growth and a home re-ramp that outpaced our expectations. On the acute side, we were encouraged by meaningful Tableau expansion among current customers and adoption from new customers, despite lingering staffing and inflationary pressures. On the home front, the early success of our rebuilding process validated our strong relationships with home providers and patient preference for Tableau. What's more, just following the close of the quarter, we shipped our one millionth treatment for Tableau. I am immensely proud of the impact our team has been able to make in the lives of patients in such a short period of time. Based on Q3 momentum, we are raising our fiscal year 2022 revenue guidance today to reflect our continued confidence in the strong underlying market fundamentals and demand for Tableau across our acute and home end markets. Since the third quarter marks the beginning of our home re-ramp, I wanted to start by sharing an experience I recently had visiting a patient using Tableau in her home. This individual had tried every form of dialysis possible, from in-center dialysis to peritoneal dialysis to the incumbent home chemo machines. The first thing she said to me when I walked in the door was, I love my Tableau. It's quiet. It gives me the flexibility to alter my treatment schedule when I need to. It's super simple to set up. It's been extremely reliable, and I feel good on it. As I was leaving a couple hours later, I heard her and her husband discussing a weekend drive up to a festival, freedom that home dialysis affords us. This individual is just one of many who now have been dialyzing on Tableau for over a year. Her experience underscores why Tableau's retention rate continues to sit far above the historical retention rates on the home incumbent hemo system. Our real-world data indicates that at 12 months, the controllable attrition rate, excluding death or transplant, is nearly 50% lower than what is reported in the USRDS database for home hemodialysis. We believe part of Tableau's retention advantage is because patients report feeling better physiologically during and after Tableau treatment. They also report learning Tableau quickly and not feeling overwhelmed or intimidated by it. And they talk about the simplicity of managing Tableau at home with no long involved advanced preparation required and none of the space requirements that kept many of them from considering home in the past. Despite all of these advantages, we were unsure how many patients would choose to wait for Tableau through the home shift hold, particularly because the timeline was unclear and uncertain. While our information is qualitative, what we now know is that a majority of the patients decided to wait for Tableau. And anecdotally, we are aware of several patients who chose to go home on another home hemo system and then asked their provider to switch to Tableau after it became available again. Another card turned over in the quarter was customer reaction. Customers could have migrated back to primarily using another home device. What we learned was that all our provider customers returned to Tableau and quickly. The choices made by patients and providers enabled us to close Q3 ahead of our expectations for home growth. We sent a record number of patients home during the last 30 days of the quarter and entered Q4 with a healthy backlog. due to Tableau home orders more than doubling compared to Q3 2021. Our third quarter ramp also speaks to the expertise and commitment of our service and support teams, whose focus on improving the lives of dialysis patients and their caregivers is unwavering. As the number of patients who dialyze at home with Tableau continues to grow, so does our home footprint, which now covers major U.S. geographies in approximately 50% of the state. we have strong conviction around the ability to grow as we work to continue ramping our pipeline with new physicians and providers who are eager to expand the use of Tableau in the home setting. While our progress in the quarter was a positive step toward rebuilding our home order book and patient pipeline, I do want to emphasize that it's early and our work to fully reestablish our momentum will continue to build. That said, we do expect the fourth quarter to be another strong one for home placements, given our large backlog for home consoles. This visibility provides conviction in our ability to deliver on our original 2022 goal of more than doubling our home revenue, exiting the year, representing roughly mid-teens as a percentage of total revenue. Turning now to a review of our acute performance, our team executed well and continued to broaden our footprint as part of our land and expand strategy. A key highlight for the quarter was expanding within one of the largest regional healthcare systems in the country with 50 hospitals in nine states. This win represents one of the largest expansion orders in Outset's history. In concert with console placements and new sales agreements, another vital part of our commercial strategy is to drive utilization across the install base. And we were pleased to see consistent utilization during the quarter. evidence that our recurring revenue model continues to work well. The macro headwinds we discussed on our last call did persist, most notably a nationwide shortage of dialysis nurses, which we expect to extend into 2023. In addition, we continue to keep a close eye on capital spending trends. However, since our August call, we've seen positive indications of stability. And similar to our home customers, our acute customers continue to demonstrate strong preference and demand for Tableau. Additionally, on our August call, we talked about initiating a novel program aimed at mitigating the impact of dialysis nursing shortages on our sales cycle. I'm pleased to report that the early results of what we call the Bridge Program have been very positive. The Bridge Program is expected to be margin accretive and is a temporary solution designed to bridge hospitals on staffing by providing short-term dialysis nurses who deliver Tableau treatments both in the ICU and bedside on the floor, while the hospital completes the process of hiring its own permanent staff. As permanent staff is hired, the outset nurses also help with training and onboarding. While still in an early phase, we are seeing evidence of the program's effectiveness in giving health systems the confidence to move forward on insourcing initiatives. Speaking more broadly, our footprint continues to proliferate across the country both with existing health system customers expanding to new hospital sites and new health systems adopting Tableau to begin their process of insourcing across their network. The value proposition behind this growth remains cost reduction and operational efficiency. As we've outlined before, Tableau generates cost savings in two ways, supply cost reduction and labor cost reduction. Accessing the significant cost savings related to labor involves the hospital using Tableau to change from outsourcing their dialysis to insourcing and owning inpatient dialysis themselves. Insourcing dialysis delivers powerful cost reduction benefits. For example, one large regional player recently conducted an internal analysis demonstrating a nearly 40% annual cost savings by converting from an outsourced dialysis model to insourcing with Tableau. As labor rates and labor shortages continue to rise amongst third-party dialysis service providers, we continue to see a long runway of opportunity, with hospitals seeking more strategic ways of improving inpatient dialysis care and reducing their costs at the same time. Earlier in the quarter, we were also pleased to announce that Outset was awarded a VA contract aimed at improving dialysis care for our veterans. Specifically, the contract, which was awarded by the Strategic Acquisition Center of the Department of Veteran Affairs, enabled Tableau to be sold into 106 VA hospitals throughout the United States. While Tableau is already deployed in some of those facilities, this new five-year indefinite delivery, indefinite quantity contract will enable VA centers to acquire consoles to both send veterans home and expand usage in the acute setting. This partnership with the VA will help to further our mission to bring a technology-enabled, patient-centered approach to dialysis, both in the acute and home settings. And we look forward to supporting these patients across care settings as they dialyze with Tabloid. Our recent acute and home wins were validated from a clinical perspective at the American Society of Nephrology's Kidney Week meeting last week, as some of Tableau's advantages were shared through eight poster presentations that covered a wide range of outcomes, from Tableau's performance in the ICU to treatment adherence and retention among home patients. Over half of the abstracts were submitted by Tableau customers, reporting on their experiences and outcomes. For example, a 300-bed hospital, which is part of a large national IDN, reported improved nurse staffing efficiency, reduced treatment costs, and increased patient time off dialysis in the ICU, all by switching to Tableau. We also presented data from the largest human factor study ever performed on a home hemodialysis device. Healthcare professionals participating in the study were tested on 7,365 tasks with an observed use error rate of just 0.5%. Among patients and their care partners in this landmark study, the observed use error rate was just 0.9% on over 5,400 tasks tested. These data support Tableau's ease of use, which clinicians and patients tell us contribute to the higher home adoption and retention rates and stickiness in the hospital setting. To close on ASN, we came away from this conference incrementally more positive about the tailwinds driving Tableau adoption. Across three days, our conversations with providers, nephrologists, and patients reinforced more than just interest in driving home adoption, but a real call to action. Dramatic in-center staffing shortages, patient experiences during the pandemic, improved outcomes at home, and the comfort patients and providers now have with home health are all factors that replayed in nearly every discussion. We were also pleased with the recent update CMS issued in its calendar year 2023 ESRD prospective payment system final rule, which reinforced the ETC model and helping to keep home dialysis top of mind with acute and home providers. Before turning the call over to Nabeel, I'd also like to briefly highlight a new product update. As we have reiterated many times in the past, we're an innovation company at heart. We will never stop listening and acting upon the ideas and needs of our patients and providers, nor will we stop inventing new ways to surprise and delight them. To that end, we are pleased to introduce TableauCart, which is a new accessory for Tableau. TableauCart provides additional maneuverability around the hospital and incremental flexibility pre-filtration capabilities for sites that suffer from water quality that is far worse than the national drinking water standards. Tableau Cart will be sold separately at an expected margin accretive ASP. We closed Q3 exceeding our internal projections for Tableau Cart orders, indicating strong early demand for this innovative accessory. In summary, our strong Q3 was driven by significant expansion in the acute setting, and a home pipeline that is rebuilding ahead of expectations. It is clear to us that Tableau remains a highly differentiated solution in one of the largest, most expensive, recession-proof areas of healthcare. Our performance reflects the truly incredible outset team, so I would like to thank for their courage, commitment, and conviction in all they do every day to advance our mission. With that, I'll now turn the call to Nabeel to review our financials and provide more granularity on our updated outlook for the fourth quarter and the remainder of 2022.