Outset Medical, Inc.

Good day and thank you for standing by. Welcome to the outset medical Q4 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. To withdraw your question, please press star 1 1 again. Please see advice at today's conference is being recorded. I would now like to hand the conference over to Jim Mazzola, Head of Investor Relations. Please go ahead.

Okay, thank you. Good afternoon, everyone. Welcome to our fourth quarter and full year 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 fourth quarter and 2022 operational and financial results, provide an update on our outlook, and host a question and answer session. We issued a news release and filed an 8K after the close of market today and updated our investor presentation, all 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. 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 of Outset's public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. And with that, let me turn the call over to Leslie.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. We're very pleased with our performance in the fourth quarter, which capped off an important year for Outset. During 2022, we significantly increased the number of Tableau consoles in hospitals and homes, surpassed one million treatments, and helped healthcare providers continue to deliver exceptional lower-cost care in a challenging labor environment. We also fundamentally strengthened our platform for growth by innovating and extending Tableau's technological advantages, adding key talent, and strengthening our balance sheet. As a result, we have entered the year with a lot of conviction in our plans to further expand Tableau's footprint with good visibility to continue sales growth across both our home and acute end markets. And in addition to growing the top line, we also remain committed to meaningfully expanding non-GAAP growth margins this year toward our next milestone of 50%. Beginning with a review of our home performance, at a high level, home represents the single largest market opportunity for Outset. In 2022, we saw growing demand for Tableau as an enabling technology for home dialysis programs fueled by exceptional clinical outcomes, positive patient experiences and retention, and the increasingly recognized economic benefits for patients and providers. While our overall year-end install base across both markets increased 54% year-over-year to approximately 4,000 consoles, our fourth quarter performance contributed to a particularly strong year for homes. Exiting the year, we achieved a more than doubling of our home install base to 800 consoles, with sales to home care providers at roughly 20% of total 2022 revenue. ahead of our original goal of mid-teens as a percentage of total revenue. In addition to Tableau's continued growth with mid-sized dialysis providers, which we've discussed for several quarters, we were also successful in initiating home programs with both health systems and new adjacent specialty providers entering the state. This is an emerging segment of the home market we believe will continue to be an important growth vector in 2023. As a reminder, we defined a home program as a location offering Tableau for home dialysis, and we were pleased to exit the year with roughly 100 such programs in place. Historically, 60% of home programs have sent between one and five patients home. While early, we are now starting to see multiple programs sending low double-digit numbers of patients home on Tableau. We believe the keys to profitable, sustained growth in-home moving forward are, first, reaching higher than historical home patient numbers per home program, and second, maintaining higher than historical retention rates. In 2023, we are employing a similar land and expand strategy in the home market as has been successful for us in the acute end market. It's our goal to land the majority of the largest midsize dialysis operators and initiate home programs with two of the top national IDMs. We believe the progress we made in 2022 and the new programs we plan to land in 2023 will provide a foundation from which to further expand the number of patients dialyzing at home on Tableau. Central to the success of our expansion in the home is a consistently positive and highly differentiated patient experience. We learned over time that the home dialysis experience for patients is tied both to the product and the people behind the product. In other words, the art of how we support patients greatly contributes to Tableau's success, and we believe creates a separate, protected competitive advantage along with our technology itself. To that end, in early December, we were able to provide a firsthand view into the home patient experience through an educational virtual panel webinar that included two patients currently dialyzing at home with Tableau and a caregiver of one of the patients. Those patients were previous users of the incumbent home hemo device and switched to Tableau for its simplicity and flexibility. They talked about getting space back from no longer having to store mountains of boxes and getting time back from no longer having to spend hours on end preparing dialysate in advance of treatment. And more importantly, both patients said they felt better, felt less stress, were quickly able to master Tableau. These patient experiences underscore why Tableau's controllable attrition rate has been consistently in the 10% range and continues to be roughly half the historical rate on the incumbent home hemo device. We believe one of the key drivers of retention is Tableau's simplicity, which we see in our training data. Patients are able to master their Tableau learning curve in just 10 days on average versus four to six weeks for the incumbent device. We see this advantage demonstrated in our 90-day retention rate, which shows the rate of patients choosing to transition back to in-center hemodialysis is less than half the rate of the incumbent device. It is our goal to maintain our markedly higher retention rates even as we substantially grow the number of patients at home on Tableau. Turning now to our results in the acute end market, the fourth quarter was also marked by strong growth. including sequential revenue growth each quarter from Q2 through Q4. Broadly, we saw the macro acute care environment largely stable over the course of the fourth quarter and through the first several weeks of this year. We do expect staffing headwinds will persist and affect providers through 2023. And we're also keeping a close watch on hospital capital spending, which can affect the timing of deals, but to date has not proven to be a meaningful headwind for us, given Tableau's strong value proposition. We did see further evidence during the quarter of third-party dialysis service providers continuing to increase prices, decrease service levels, and in some cases, cancel contracts with their hospital customers. As our customers move toward insourcing inpatient dialysis with Tableau, we remain fully prepared to support them as needed with our bridge program. The program is designed as a temporary staffing solution by providing short-term dialysis nurses who deliver Tableau treatments both in the ICU and bedside on the floor, while the patient completes the process of hiring its own permanent staff. As hospitals continue to manage a challenging staffing environment in 2023, we expect the Bridge program to continue to serve as an important staffing stopgap for providers who are eager to move forward and recognize cost savings with insourcing initiatives. From a product innovation perspective, last quarter was our first full quarter in market with Tableau Cart, a new accessory that provides additional maneuverability around the hospital and incremental pre-filtration capabilities for sites with water quality that is far worse than the national drinking water standards. As a reminder, Tableau Cart is sold separately at a gross margin accretive ASP. Since its launch in Q3, we've been pleased with the strong demand and positive reaction from customers. Throughout 2022, our team continued their very disciplined, determined execution to the same commercial strategy that has worked so well for us the last two years, which is our land and expand approach. We are low double digit penetrated in our acute base today and beginning to see larger console orders as hospitals expand and transition their dialysis service lines to Tableau. During the quarter, we closed multiple deals involving the purchase of 20 consoles or more. including a large Midwest provider who ordered nearly 30 consoles. With recent new acute customers landed in the quarter, our focus for 2023 and beyond will remain on expanding within those networks. Before turning the call over to Nabil, I'd like to briefly highlight a few operational updates. First, we took a significant step forward in our long-term margin expansion strategy by initiating production of Tableau cartridges in-house at our Outset Mexico manufacturing facility. This move also secures an important component of our business model and continues to improve the flexibility of our operations. We recently began production from a state-of-the-art Class A cleanroom, which our team designed and built within our existing facility in Mexico. The cleanroom fully leverages our digital manufacturing infrastructure and has capacity to carry us well into the future. With this move, we now have three qualified suppliers of the Tableau treatment cartridge. I want to congratulate and thank our exceptional operations team for the work to expand our facility, build a clean room, and ensure our readiness to initiate this critical step forward for Outset. It's another significant achievement from this high-performing team and another example of the type of innovation we continue to drive across the organization. Second, we've talked about gaining operating leverage as we scale the business, and we made excellent progress during the quarter. In our sales organization, for example, we are gaining sequential improvements in productivity, increasing account penetration without the need for additional reps. Importantly, we are also gaining operating leverage from the investments we've made in our service organization. Field service has historically been a very manual process for capital equipment, something we thought to change with Tableau. Our proprietary software and data analytics platform enables our service team to remotely access Tableau with permission, see the system during a treatment, and assist users on a real-time basis. At the same time, we increased our install base by 50%. We also improved our remote resolution rate by 170%, lowering our cost to serve and taking full advantage of Tableau's two-way wireless communication capabilities. Not only does this approach improve our efficiency, it dramatically improves the customer experience and reduces the support burden for providers. Finally, we announced today that Martine Vasquez will retire from Outset after a 30-year career in MedTech. We have been extremely fortunate to benefit from Martine's expertise as we established world-class manufacturing, supply chain, logistics, and R&D capabilities and we're pleased that you will continue to consult with the company. I really want to recognize Martin's contributions and his legacy of building and mentoring a truly incredible team of leaders, all of whom keep Outset punching above its weight. Taken together, these updates and the progress made throughout the year leave us feeling more optimistic than ever about our opportunity in 2023 and beyond. We are very well positioned in one of the largest segments of healthcare with a highly differentiated product, a growing base of customers, and a compelling recurring revenue model. And aside from our financial and operational goals, we aspire to deliver another year of deep impact for patients and their families. Dialysis patients for too long have been overlooked and served an experience that is just good enough, but they deserve great. And I want to thank the entire Outset team, as well as dialysis nurses, technicians, nephrologists, and hospital leaders, an ever-expanding community of change agents focused on patients who have fully embraced our mission to change the status quo. With that, I'll now turn the call over to Nabeel to review our financials and provide more detail on our results and key drivers for 2023.