Outset Medical, Inc.

Good day, and thank you for standing by. Welcome to the Outset Medical first quarter 2023 earnings 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your questions, please press star 11 again. 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, Head of Investor Relations.

Good afternoon, everyone, and welcome to our first quarter 2023 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 first quarter 2023 operational and financial results 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 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 public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. With that, I'll now turn the call over to Leslie.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. We had a strong start to 2023 with revenue growing ahead of our original expectations. and margins expanding for the eighth consecutive quarter also ahead of our plan. The momentum we had exiting 2022 carried through the first quarter and positions as well for continued revenue growth and margin expansion through the remainder of the year. Specifically, revenues for the first quarter were $33.5 million, representing approximately 10% growth year over year and approximately 5% growth sequentially. While we did see some of the capital equipment purchasing seasonality we had anticipated on our Q4 call, Tableau uptake remained strong, our install base grew in both the acute care and home markets, and we benefited from strong mix and pricing across the board. On the operational front, our ongoing cost down and efficiency initiatives continued to pay off, resulting in gross margin that expanded sequentially by another three percentage points. We maintain our conviction in the fundamentals of our business supported by a healthy pipeline and backlog with interest in and demand for Tableau strong and growing. Our success in the first quarter lays the groundwork for accelerating growth through the balance of 2023. And as a result, we are raising the midpoint of our revenue guidance and also increasing our gross margin guidance today, both of which Nabeel will elaborate on shortly. First, I'd like to begin with a review of our results in the acute market during the first quarter, another consecutive quarter of strong growth. In short, our Q1 results came in better than expected, and we were pleased with our ability to drive upside over our expectations. Our skilled U.S. commercial team continued to deploy our proven land and expand strategy during the quarter, closing new sales agreements and expansion sales within existing accounts and we continue to see customers make the decision to insource inpatient dialysis with Tableau. We're pleased to see this momentum with a growing number of providers recognizing the cost savings associated with insourcing initiatives and eager to move forward bringing Tableau in-house. We had a record number of consoles shipped to large regional IDNs, including a deployment of more than 50 Tableau consoles to a single IDN. Additionally, we added more than 30 new hospital sites to our roster during the first quarter, the largest quarterly growth in new sites since 2021. Our acute progress is a direct testament to the strong economic value proposition of Tableau. In any climate, direct, measurable cost reduction is valuable to hospitals, but never more so than it is today. Because hospitals are not separately reimbursed for inpatient dialysis in most circumstances, it's a pure play cost center for them. And because inpatient dialysis ends up being provided as part of hundreds of different DRGs, the cost of dialysis can impact the hospital's procedural profitability broadly. Because Tableau directly lowers the hospital's dialysis costs by 50 to 75%, with a typically rapid payback period, we continue to see hospital administrators prioritize Tableau in their capital spending plan. Our bridge program continued to be a strong complimentary offering for customers who are considering insourcing their dialysis service line. As we've discussed before, Bridge provides customers with the confidence to move forward by serving as a staffing backstop in case their own hiring takes longer than expected. As in Q4, we found in Q1 that most customers were able to hire on a timely basis and proceed with insourcing without needing to use Bridge. In situations where we have deployed it, we found that customers are able to staff their program faster than they expected, which also enabled us to operate the program cost efficiently. A good example is Deaconess Hospital in the Midwest. Deaconess operated a large outsourced dialysis program for more than 10 years. As they were forced to bear the rising cost of their outsourced provider and accept lower service levels, their team decided to explore insourcing with Tableau. With the Outset team and the Bridge program, Deaconess was able to hire their own staff and stand up their in-house operation in 31 days. According to the program director, the hospital has observed a 99% clinical success rate during the first five months, dramatically lowered their costs, and improved patient outcomes. And these results are not unique to Deaconess. As we continue to expand our footprint in U.S. hospitals, we're finding these results are repeatable and sustainable. Another important element of our commercial strategy is to drive utilization across the install base, and we were pleased to see positive trends in treatment volume during the quarter in line with our expectations. We also saw ASPs rise both on consoles and consumables, which serves as strong validation of Tableau's clinical and economic value proposition versus our competitors. Our ASPs benefited again from better-than-expected uptake of Tableau add-ons, including good early demand for our Tableau Cart new product accessory. More broadly, we see an acute care environment that is much more favorable relative to last year. While hospital nursing shortages continue to affect our acute customers, we've observed stabilization in staffing over the past several quarters, and Q1 was no different. Additionally, programs like Bridge have been successful in helping our commercial team address staffing concerns upfront and early, which continues to prove helpful to our sales process. I'll now turn to our progress in the home, which represents another very large market opportunity for Outset. Our strategy entails growing the number of home programs offering Tableau while simultaneously working to drive the patient census in each program higher than historical standards. Key to both planks of this strategy is maintaining our industry-leading retention rate which we believe is a central benefit of Tableau and a primary driver for further profitable expansion in this market segment. Specifically for 2023, our home goals include landing the majority of the largest mid-sized dialysis operators, known as MDOs, and initiating home programs with two of the top national IDNs. During the quarter, we made good progress against these goals, including establishing a new relationship with another of the top MDOs, and first-time shipments to several other regional home providers. As we land relationships with new providers, we remain equally focused on the expand part of our strategy by deepening our penetration in existing accounts. For example, during the quarter, we increased the number of home programs that have a Tableau home census of more than 10 patients. While the number of these larger programs is still relatively small, we are encouraged by the early indicators that Tableau can significantly increase the number of home hemo patients per program. During the quarter, I was again able to spend time with patients dialyzing at home on Tableau. One visit struck me in particular for a couple of reasons. First, this individual was in her mid-70s and spoke of how easy and effortless it was for her to master Tableau. Our internal data continues to support that Tableau mastery is not defined by age. The patient I visited began dialyzing in-center, but quickly realized how much more freedom and flexibility home dialysis would afford. However, her dialysis clinic provider didn't offer Tableau, so this patient chose to switch clinics and switch physicians in order to access it. While it's still early, we are beginning to see examples of patients who learn about Tableau and are very willing to switch physicians and clinic providers to be able to dialyze on it. Our recent home progress was validated from a clinical perspective at last month's National Kidney Foundation Spring Clinical Meeting, where five new abstracts were presented that highlighted a range of clinical and financial benefits of home hemodialysis with Tableau. For example, one study estimated the five-year savings for a Medicare Advantage plan generated by prioritizing Tableau home hemodialysis versus in-center hemodialysis. The study found that a Medicare Advantage plan with 500 dialysis members could drive $4.2 million in estimated savings over five years. Another study modeled the monthly per-member costs for a health system assuming risk for a dialysis population from a Medicare Advantage plan and the five-year savings from establishing a home dialysis program. The study determined that a health system assuming full risk on Medicare Advantage dialysis members could generate $10.7 million in estimated savings over five years. We're proud of data like this and look forward to continuing to build Tableau's clinical evidence base over time. In short, we continue to see growing demand for Tableau at home, fueled by shorter training times, exceptional clinical outcomes, overwhelmingly positive patient experiences, and a differentiated retention rate. Our team also continues to make solid progress operationally, which has resulted in consistent gross margin expansion and enabled us to deliver non-GAAP gross margin of 20.3% in Q1, more than five percentage points over our Q1 2022 gross margin. The first quarter represented our eighth consecutive quarter of increasing gross margins as we move toward our next mile marker of 50% gross margin. Our drivers of margin expansion remain unchanged, And our performance over the last eight quarters illustrates our ability to capture this margin expansion opportunity. From a product innovation standpoint, we are very pleased with demand for Tableau CART, a new product accessory we introduced in Q3 of last year that provides additional maneuverability around the hospital and incremental water pre-filtration capabilities. Tableau CART is sold separately at a gross margin accretive ASP and is proving to be a valuable solution to many of our acute care customers. And finally, I'd like to provide an update on our Tableau cartridge insourcing initiative that we touched on during our last update in February. To date, cartridge production at OMM has progressed very well against our initial expectations, and we're very pleased with the throughput and quality we're seeing. Cartridge insourcing remains an important lever of gross margin improvement over the longer term, and we look forward to providing future updates in quarters ahead as production continues to ramp. And speaking of our operations in Mexico, we were very proud this past quarter to hear that OMM was recognized as a great place to work for 2022, scoring an 88 out of 100 points in its first survey. We believe these results reflect the rewarding, inclusive, and merit-based environment our team has worked hard to cultivate and is one of the reasons our employee retention rate at OMM is consistently among the highest compared to similar companies in the area. In summary, our momentum and performance through the first quarter reinforces the conviction I have in our mission and the high confidence I have in our ability to meaningfully grow both near-term and long-term. We have a differentiated technology and tableau that every quarter gains even wider recognition for the clinical, operational, and financial benefits it can provide. And we are encouraged by our progress across both of our end markets, as well as the continued stability in the macro environment. We're at the front end of penetrating very large and growing end markets. We are confident in our ability to execute through the balance of the year and believe we are very well positioned to capitalize on the many tailwinds supporting our business and fueling Tableau adoption. With that, I will now turn the call over to Nabeel to review our financials and provide more detail on our expectations and key drivers for the remainder of 2023.