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spk02: Good day and thank you for standing by. Welcome to the Outset Medical Q2 2023 earnings call. At this time, all participants are in 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 be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jim Mazzola.
spk08: Please go ahead. Jim, if you could go ahead and unmute yourself, please. Okay, good afternoon, everyone, and welcome to our second quarter 2023 earnings call.
spk09: 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 second 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 public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. With that, I will now turn the call over to Leslie.
spk00: Thanks, Jim. Good afternoon, everyone, and thank you for joining us. We are pleased to share our second quarter 2023 results, which were marked by accelerating quarter-over-quarter revenue growth, further margin expansion, and continued commercial traction across our business. On the acute side, we've been encouraged to see more customers recognizing Tableau's strong economic value proposition and make the decision to insource inpatient dialysis with Tableau. We also continue to see improvement in the broader macro selling environment with both current and prospective customers. On the home front, we achieved our goal to sign agreements with the majority of large, mid-sized dialysis providers and initiated the first Tableau Home Program with one of the country's largest health systems with plans to expand to multiple U.S. sites. With the first half of 2023 now behind us, we retain our strong conviction in the fundamentals of our business with confidence grounded particularly by a healthy pipeline and backlog with interest in and demand for Tableau strong and growing. Before I go through the details of the quarter, I'd like to begin by providing an update regarding the warning letter we received from FDA in early July. As many of you are aware, we previously disclosed that our San Jose facility was inspected for the first time in the company's history by FDA in late January of this year. We were pleased overall with the inspection process, which concluded in February and resulted in four observations that were communicated to us via Form 43. Each of those observations related to internal process improvements with none related to safety or efficacy concerns. We responded rapidly to FDA with a comprehensive work plan and our team remediated all four observations internally at the end of the second quarter. The July warning letter noted two additional observations that were not part of the original inspection findings. The first observation pertained to content on our website that referenced continuous renal replacement therapy, or CRRT, a modality not currently included in Tableau's indications for use. To be fully reflective of our most recently cleared indications for use, we've removed these materials. We believe our action plan has addressed this finding and expect no impact with customers from this remediation. FDA's second observation related to Tableau cart with prefiltration requiring 510K clearance. Although we had evaluated Tableau-Cart with pre-filtration prior to marketing and distributing the product and concluded that no marketing authorization was necessary, we've made the decision to submit a 510 and pause its distribution until a clearance has been granted. We've been in dialogue with FDA and we intend to submit the 510 by the end of this month. I want to emphasize that neither of these two additional observations pertain to safety, efficacy, or quality. And importantly, the letter did not place any restrictions on the Tableau system itself. While we were surprised by the warning letter, our intent is always to innovate in lockstep with an adherence to the highest quality and regulatory standards. And that is exactly how we've approached our response to the warning letter. We believe the actions we have taken are the right steps toward resolving these observations and further strengthening our competitive position. Turning now to a more detailed review of the quarter, our performance in Q2 once again demonstrates our ability to consistently deliver strong top-line results as well as our commitment to profitability and steady gross margin improvement. Revenues in the quarter were $36 million, representing approximately 44% growth year-over-year and approximately 8% growth sequentially. Gross margin expanded again for the ninth consecutive quarter by a little over two percentage points, thanks to our continued execution against our consistent gross margin drivers. In terms of end market performance, beginning with acute care, we were pleased to see strong council growth once again driven predominantly by momentum with insourcing initiatives. Through 2023, we have seen more and more customers recognizing the cost savings associated with bringing Tableau in-house, and this continues to be a driving factor for health system administrators. In the second quarter, we again signed new insourcing agreements with a large number of hospitals, And I'm encouraged by the pipeline of similar opportunities as we move through the second half of the year. One such example during the quarter came from a large IDN with Tableau already deployed to multiple facilities in their network. This customer wanted to expand their in-source dialysis service line to new network hospitals and ordered nearly 70 additional consoles to fulfill this need. And while nationwide we still remain low double digit penetrated, With this new order, Tableau is now deployed in over 90% of this particular health system's facilities, demonstrating meaningful and continued progress with our land and expand strategy. For those customers who are considering insourcing but are also sensitive to dialysis nursing availability, our bridge program has remained an attractive offering that provides customers the confidence to move forward while they complete the process of hiring their own permanent staff. As in Q1, we found that in situations where we sold the Bridge program during the quarter, customers were able to staff their program faster than they initially expected, enabling us to operate the program cost-efficiently. While most customers proceed without needing to purchase Bridge, particularly as we continue to see stability in hospital staffing constraints, it remains an important tool that sets Outset apart and highlights our commitment to service. Beyond the traditional acute setting, we continue to see strong momentum during the quarter with subacute providers. These providers are an essential bridge for patients between acute care and ultimately receiving care in the home or in center. We now have master sales and service agreements signed with all of the top 10 subacute providers. One example of our success in this market is Encompass, which operates nearly 160 hospitals in 40 states. With more than 60 of its facilities using Tableau today, Encompass has reported a 50% reduction in its dialysis costs a measurable reduction in readmissions, and reports that patients feel better following dialysis with Tableau. As Encompass continues to expand insourcing with Tableau, the drivers for them are clear, cost reduction and better clinical care. We saw continued strength during the quarter in ASPs across both consoles and consumables. Similar to Q1, our ASPs benefited from better-than-expected uptake of our 24-hour software feature, which we branded Tableau ProPlus. From an innovation perspective, we recently improved our integration of Tableau with the hospital electronic medical record, a key benefit for providers, particularly those managing a growing fleet of Tableau systems. This offering is off to a strong start, including planned implementations at seven sites of a large regional IDN. While early, it is another example of the type of innovation we seek to deliver, providing new value to customers with new sources of revenue margins for outset. Turning for a moment to the macro environment, we've been encouraged to see a consistently improving environment relative to last year with the stabilization in hospital staffing dynamics we reported in Q1 carrying through the second quarter. For those health systems still grappling with staffing issues, temporary programs like Bridge continue to prove successful in helping our commercial team address staffing concerns upfront. Similarly, capital spending, which can sometimes affect the timing of deals, also has not been a meaningful headwind for us to date, due in large part to Tableau's economic value proposition and demonstrated ability to lower a hospital's dialysis cost by 50 to 75%. Now an update on the home front. As we've communicated in the past, our strategy for home is twofold and follows the proven land and expand model we've successfully deployed in the acute settings. In the short term, we're focused on driving the patient census in each established home program higher than historical standards by sending more patients home. And over the longer term, our strategy entails expanding the home dialysis provider universe by working with hospitals and other healthcare providers to stand up their own home programs. As it relates to this strategy, our measurable home goals for 2023 include landing the majority of the largest mid-sized dialysis operators known as MDOs and initiating home programs with two of the largest health systems in the country. In the second quarter, I am pleased to report that we have achieved the first goal, landing the majority of MDOs, and made good progress on our second goal by securing a commitment from one of the largest health systems in the country to roll out home programs. Equally important, we are gaining traction with individual hospitals setting up their own home programs. During the quarter, we closed multiple agreements on this front, and I'm pleased with the additional opportunities we see for similar agreements in the second half of the year. Key to success in the home setting is our retention rate, which we believe continues to be a central advantage of Tableau and a primary driver for further profitable expansion in the home segment. Through the first half of this year, our retention rate continued to perform well, with Tableau's patient opt-off rate consistently hovering in the 10% range, which we believe is roughly half of the historical rate associated with the incumbent home hemodialysis device. We are proud of data like this and believe it underscores why Tableau maintains an edge over competitive devices. As we continue to grow the number of patients at home on Tableau, it is also our goal to maintain our markedly higher retention rates. Finally, we are still a few months away, but I want to highlight our plans for the American Society of Nephrology annual meeting coming up in early November. Multiple abstracts have been submitted that reinforce Tableau's value across market segments, including the results from a quality improvement effort by an ICU customer. In this case, the provider demonstrated a 43% reduction in mean dialysis treatment hours per patient ICU stay and a more than 50% reduction in dialysis treatment costs per hour while achieving a roughly mid-teens percent reduction in the patient's overall ICU length of stay with no change in mortality. These economic and clinical benefits are representative of what we now consistently see and what we look forward to presenting more information at ASN, including early insights from our National Home Registry. The conference begins on November 2nd, and we're planning to host investors at our booth on the morning of November 3rd. We look forward to sharing more information as we get closer to the meeting. In tandem with solid progress in both end markets, our team also continues to make strides operationally, which resulted in another quarter of consecutive gross margin expansion, enabling us to deliver a non-gap gross margin of 22.5% in Q2, up over 6.5 percentage points above our Q2 2022 gross margin. As we continue to grow the top line, the principal drivers of margin expansion remain unchanged. and our consistent performance over the last nine quarters illustrates our ability to capture this margin expansion opportunity. As we look ahead, we remain committed to reaching our next mile marker of 50% gross margin. I'd also like to provide a brief update on our Tableau cartridge insourcing initiative. Cartridge production at our Mexico manufacturing facility, which began in the fourth quarter of 2022, has continued to ramp well against our expectations, and we are pleased with the throughput and quality we're seeing. We continue to expect the majority of the cartridges we produce to come from our plant in Mexico by the end of the year. With that, I will now turn the call over to Nabil to review our financials and provide an update on our expectations and key drivers for the back half of 2023.
spk03: Thanks, Leslie. Hello, everyone. Our second quarter revenue increased 7.7% sequentially and 43.8% year-over-year to $36 million. The year-over-year change was driven primarily by higher console placements and the associated pull-through of consumables used for each Tableau treatment. Product revenue was up 5.6% from the prior quarter and increased 49.5% year-over-year to $29.3 million. Console revenue grew 4.4% from the first quarter and increased by 48.8% year-over-year to $19.7 million. we had strong console placements in both our acute and home end markets. As Leslie indicated, ASP remained high during the quarter, driven by mixed, disciplined pricing, and the substantial majority of acute consoles shipping with our Tableau ProPlus software. We believe that these three factors, mix, pricing, and software sales, will continue to be the primary drivers for ASP during the second half and for the longer term. Consumable revenue was $9.6 million, up 8.2% from the prior quarter and an increase of 50.9% versus the prior year as our installed base grows. Treatment revenue and cartridge utilization performed well and in line with our expectations. We saw invoice treatments in the acute setting between four and five treatments per week and just above three in the home setting. Service and other revenue of $6.7 million was up 17.9% from the prior quarter and higher by 23.4% compared to the prior year, driven by the growth of our install base and offset by the planned expiry of the HHS agreements. As a reminder, the third quarter of 2022 saw the expiry of the final components of our HHS agreements. Moving to gross margin and operating expenses, I will highlight our non-GAAP results. I encourage you to review the reconciliation of gap to non-gap measures, which can be found in today's earnings release. Our second quarter gross margin was 22.5%, a sequential improvement of 221 basis points and an improvement of just above 6.7 percentage points versus the prior year period. As expected, service margin increased sequentially to 14.3%, and our expectation remains that it will continue to improve throughout the year. On a year-over-year basis, service margins declined in the quarter due to the HHS agreement that increased service revenue in the second quarter of last year. As Leslie pointed out, this progress marks nine consecutive quarters of consistent and substantial gross margin expansion, and once again demonstrates our commitment to reaching our next milestone of 50% gross margins. The same three key drivers that get us to our 50% gross margin milestone have enabled this track record of margin expansion. They are, one, our console cost down programs, two, the pull through of software and consumables, and three, service leverage. Operating expenses of $41.5 million in the second quarter were roughly flat sequentially and up 3% versus the prior year period. showing leverage by growing at a lower rate than revenue. We reported second quarter gap net loss of $44 million, resulting in a net loss of $0.90 per share compared to a net loss of $43.8 million, or $0.92 per share for the prior year period. Non-gap net loss was $33.9 million, or $0.69 per share compared to a non-gap net loss of $36.4 million, or 77 cents per share for the same period in 2022. We ended the quarter with approximately $226.1 million in cash, cash equivalents, restricted cash, and investments, including $100 million of borrowings under our term loan. We continue to have access to up to an additional $200 million of capital under our SLR debt facilities. We used $26.4 million of cash during the second quarter, down from approximately $38 million in the first quarter. This progress demonstrates the strengthening leverage in our model and our continued commitment to delivering on our profitability objectives. Moving now to our full year 2023 outlook. We are reiterating our 2023 revenue guidance of $144 to $150 million. Given the pause in shipments of Tableau cartwood pre-filtration, we now expect to be at the low end of this range. Our guidance assumes that we do not get clearance on our 510K in 2023. We had expected a modest revenue contribution from Tableau cartwood pre-filtration in the low single-digit million-dollar range that we now expect to be deferred out of the second half. Guidance also contemplates the potential impact of some Tableau orders being deferred until this 510 is cleared. Based on the visibility we have in our pipeline and backlog, we expect the impact to disproportionately affect the third quarter, which we believe will be roughly flat to the second quarter before growing again on a sequential basis in the fourth quarter. I want to point out a couple of important things. We do not expect to lose deals as a result of this pause on Tableau Cartwood pre-filtration. Second, our scale and clear value proposition in diverse end markets gives us the ability to accommodate disruptions such as this and enables us to maintain our guidance range with confidence in our ability to execute through the second half of the year. I also want to reiterate our 2023 gross margin guidance to be in the roughly low 20% range and that we expect to exit the fourth quarter in the roughly mid-20% range. And finally, on OPEX, we continue to expect OPEX growth for the full year to be significantly lower than our rates of revenue growth, with OPEX growth in the low double-digit percentage zone. We are on track. and continue to expect that we will burn less cash in 2023 than we did in 2022. In summary, we are pleased with the strong performance during the first half of 2023 and believe we have the momentum and visibility we need as we work to continue executing through the second half of 2023. We look forward to providing another update on our third quarter progress during our next earnings call. With that, I'll turn it back to Leslie for closing remarks.
spk00: Thanks, Nabil. We remain well-positioned to execute against our full-year strategic goals across both the acute and home segments and look forward to advancing our commercial and regulatory initiatives in lockstep in the months ahead. Recent trends, combined with our expectation for ongoing stability in the broader macro environment, give us greater confidence in our near and longer-term growth opportunities, particularly given Tableau's differentiated value proposition, our large and growing end markets, and the positive macro tailwinds which continue to fuel our business. So with that, I think we are ready for Q&A. Operator, please open the line.
spk02: Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Our first question,
spk07: is from travis steed with bank of america securities hey thanks for taking the question um i guess just want to follow up on the the decision to say lower end of the guidance range uh given you guys beat by you know a million this quarter it's only low single digit millions you had embedded in the guidance um just curious why there was a a reason that you can't kind of offset that within the guidance range and And I also understand, like, why would Tableau orders actually be deferred here when they could probably upgrade to get the cart post the approval?
spk00: Yeah, maybe I'll just, hey, Travis, I'll start with the second part of your question. So we originally developed Tableau cart for customers that are in areas of the country with truly bad, like anomalously bad water. where they found themselves replacing the filters inside the Tableau consoles more frequently than desired. And so we designed Tableau Cart as an optional accessory that they could use to extend the life of the filters inside Tableau. So as we look at the second half, we're just thinking about, hey, if there are any new customers in these really bad water areas, they might choose to push back their console purchase until Tableau Cart is available. And so for that reason, we contemplated that option. in the guidance that we talked about today.
spk03: Hey, Travis, just a couple of other things on guidance. So first of all, when we think about the pause on Tableau Cartwood pre-filtration, we did defer the revenue, the low single-digit million-dollar revenue associated with Tableau Cartwood pre-filtration itself, and then we also contemplated the potential deferral of some of these Tableau console sales that Leslie talked about. Importantly, based on the visibility we have as we enter the second half, we believe that the low end of our guidance range is our floor, and we're going to work hard to work our way up from that. But again, based on the visibility we have, we do believe we'll be at the low end of the range.
spk00: I will add – oh, sorry. Go ahead, Travis.
spk07: No, no. Go ahead, Leslie.
spk00: I was just going to say that I will add that we – I mean, we really did – we had a fantastic quarter in Q2 and a really, really strong first half, I think we all feel very bullish about our ability to execute the second half. And the entire team here is very focused and motivated to kind of work our way up through that range as we move through time here between now and year end.
spk07: And just to confirm, you're saying that the only thing that's really changed here versus three months ago is the Tableau cart. And I don't know if there's a way to kind of parse out how much of this was the actual delays that you're factoring in, if that's like half of the guide to the lower end of the guidance range. And Nabil, can you kind of go over the Q3 commentary as well? I just want to make sure we got the message on Q3 modeling. And I'll jump back into you. Thanks a lot.
spk03: Yeah, Travis. So, you know, guidance for us is always based on a couple of things. One, it's based on the visibility, right? And as I mentioned, We took the low single digit million associated with CART and sort of, you know, deferred that out of 2023. And then we took an estimate for tableau deferrals, again, for the reasons that Leslie talked about. That is the only thing. As we were entering the quarter, you know, Leslie talked about the strong performance. We saw console placements do exactly what we want. We saw treatments behave the way we expect, right in line with our expectations. Ruben Duran- Service renewals remain high, so we had all of the ingredients, if you will, Travis to have a really strong print and give really, really good commentary with respect to the back half of the year falls, notwithstanding. Ruben Duran- So hopefully that helps again we do, we are guiding to the low end of our range as the floor now with respect to the quarters, given the recency of this event. we believe that the third quarter will be more disproportionately impacted. You know, we have to now go out and work with our customers on alternate plans. Those customers in bad water jurisdictions, we have to go work on alternate plans and help them with how we can work with them. So we believe the third quarter will be more impacted and that it'll be roughly flat to the second quarter, and then that we will grow in 4Q As again, we get some of the momentum out of 3Q and then some of the deals from 3Q that may be deferred land in 4Q.
spk00: I'll just punctuate what Nabil said at the beginning of your question, Travis, that nothing else has changed. And I think importantly, nothing structural has changed here. Yes, this is an unforeseen curveball. We will be able to manage it within the current guidance range. But all of the other leading indicators in acute and home are performing exactly as I hoped they would. So I think with regard to the performance of the business at large, both near-term and long-term, our bullishness has remained unchanged.
spk07: Very helpful, Collar. Thanks a lot.
spk00: Sure.
spk02: One moment for our next question.
spk06: Our next question comes from Rick Wise with Stifel. Good afternoon, everybody. Leslie, I don't want to dwell on Tableau. I mean, it's clear the business is in excellent shape and you're making a lot of positive progress. But just to make sure I'm understanding everything, it didn't seem like, and maybe I'm wrong in remembering, but it didn't seem like you were going to or you felt the necessity to file of 510 . How was the decision made in conjunction with FDA? Was this your initiative? And maybe just help us think about a potential timeline to resolution. I know there's no perfect answer, but can you just add to some more clarity around that point?
spk00: Of course. Absolutely. I'm happy to. So first and foremost, we are doing this of our own volition. As we talked about, I think, in early July, the warning letter did not require or request that we stop selling or distributing Tableau cart or the Tableau system. Our goal, I mean, job number one is to fully remediate the warning letter as quickly and as smoothly as possible. And so as we had more time on the clock, I mean, we received the warning letter July 6th, I think, and we disclosed it on July 7th. So with the benefit of more assessment and analysis time, we determined that the fastest path toward kind of a smooth and expeditious resolution was to file and pause. I just think it's the right thing to do. Again, in the spirit of job number one is resolve the warning letter as quickly and smoothly as possible. Related to the 510 itself, Taking a step back, the decision-making around Tableau Card and its regulatory approach obviously occurred some time ago. While this recent action may not reflect it externally, we really have substantially deepened our expertise and capabilities in this area, and I do feel we are well-positioned moving forward to scale quality and regulatory at the pace that our high growth rate is requiring. We have taken a lot of time, both internally and also with external experts, to develop and implement a multitude of initiatives to continue to scale and bolster quality and regulatory from people to senior leadership to processes, procedures. We have upgraded and expanded the breadth and depth of our talent. And at this point, we have examined every facet of our quality and regulatory management systems, strengthening along the way. So I feel that moving forward, and let me add one more point. While we were surprised by this warning letter, we actually really have had quite a strong track record of successful 510k submissions and clearances noted in the fact that we've received at least one 510k clearance every year for the last five years and more prior to that. I do think as a result of all of this cumulative regulatory experience and also as a byproduct of our intent to continue to innovate, we are amassing very valuable expertise about how to meet the expectations of regulators in ways that I believe, we believe, are creating competitive advantages that will be quite durable and valuable over time. Lastly, let me touch on part of your question related to forward timing. Our immediate focus is on producing the clearest and most comprehensive submission that we can. That's critical to enabling a timely FDA review, and so our entire team is focused on doing that by the end of August. Obviously, as you know, 510 s typically do follow a faster path, at least compared to PMAs, but there's always a lot of factors at play, and so we're assuming that FDA review will take us through the end of the year, which, again, is also factored into our guidance. But our focus and our strategy at this point is to provide an incredibly thorough and incredibly robust submission into the agency for review.
spk06: Great. That's very appreciate the thorough answer. Two last questions. I'll answer them rather together. I think I'm correct in saying it that I was intrigued to see that despite moving to the lower end of your sales range guide unchanged, but the low end and thinking about losing revenue or possible revenue from Tableau card accessory sales, which I imagine must be higher margin, highly accreted margins to the overall company. I mean, How does gross margin stay intact when you move to the low end? The second question there is just talking about all your significant progress in landing the mid-sized accounts, and you hinted at one very large account and another one to come. How do we imagine that starts to get factored into the sales sort of, you know, your thinking on sales, is it, is it, it's going to potentially benefit fourth quarter or no, it's going to take three to six months for some reason. I'd just like to know how that all plays out. Thanks so much for both.
spk00: Sure. Nabil, you want to hit the margin question first?
spk03: Yeah, for sure. So Rick, Tableau cart with pre-filtration was and is, you know, when it gets back, expected to be margin accretive to us. Having said that, we only launched the product late last year. And again, Rick, this is a product that is really only serving customers in jurisdictions where the water is really bad. So we never expected it to be in all of our console sales or even in the majority of console sales. The drivers for us of margin expansion really are unchanged. It's continued cost down on the console. It's continued pull through of our consumables, its service leverage. And then just to double click on ASP, while Tableau cart with pre-filtration certainly was a component, the other drivers of ASP strength have been number one, our discipline pricing, which really hasn't changed since we've been commercial. And number two, it's been our sale of Tableau ProPlus, the 24-hour software, which in the second quarter was in the substantial majority of our acute consoles. And so we have a lot of other margin drivers, Rick, that continue to give us conviction in our gross margin objectives, both through the back half of this year and then to our ramp up to that 50% milestone.
spk00: I'll pick up on the home piece, Rick. So when we started the year here in January or planning for the year last December, we had those two goals in mind as we thought about our forecast and our expectations for where we wanted to land the plan on home by the end of 2023. And so we assumed, we are prone to assuming victory and reaching it no matter what obstacles in our way. So we had assumed victory on, hey, we are going to get contracts with the majority of these midsize MDOs by the end of the year. And and we will have two of the largest health systems contracted to set up home programs. So while it would be difficult to say, hey, we're going to start to see impact in this quarter versus that quarter, we certainly planned for some benefit in 2023, which we're already starting to see.
spk06: Thank you so much.
spk00: Of course.
spk08: One moment for our next question. And our next question comes from Shagan Singh with RBC Capital Markets.
spk01: Great. Thank you for taking the question. I was just wondering that with Q3 sequential growth flat, what is driving your confidence in the significant step up that you're modeling for Q4?
spk03: Shagun, it's really just the visibility that we have into the business. Remember, we've always run a high visibility business, just under half of our revenues are recurring revenues. These are from consumables and service. And then with our strong pipeline and backlog, we have a good forward visibility into console placements. So again, it's really just visibility, which is what we always anchor guidance on. that tells us both that we will achieve the low end, at least the low end of our guidance range, and that we believe 3Q will be roughly flat to 2Q.
spk00: I would echo everything Nabila said. I would only add from my vantage point and probably more editorial than anything, I mean, we have never had a bigger pipeline than we have today. And I think we've really been aided with the benefit of some time. as more and more and more health systems have adopted Tableau for insourcing and seen the cost reduction benefits and the clinical care benefits and the operating benefits, there's a network effect that starts to emerge. And so I've been present myself for a number of conversations between health system executives sort of sharing and swapping success stories. And so I think that I can sincerely say that the flywheel particularly in acute, is firmly underway. And so those are some of the factors that give me the confidence more editorially about the back half of this year.
spk01: Got it. And just as my second question, in the acute care setting, you called out strong demand from hospitals due to cost savings. I think you also referred to some data out there that seems pretty positive. Just in that setting, I guess a two-part question, are there any you know, economic or outcomes analysis, you know, that you're focused on, you know, presenting data from. And then in the acute care setting, how are you thinking about utilization versus continuing to expand within your land and expand strategy? Thank you.
spk00: Yeah, maybe I'll start, Nabila, and you can, you know, on utilization, I'll just touch on that. It's not an or, it's an and. And we have, you know, a commercial team that is very focused both on expanding the number of customers, expanding the number of facilities inside those customer networks through console sales. And then we have a large percentage of our team in the commercial organization focused on expanding utilization as the tenure of the tableaus and those accounts matures. So it will never be an or for us. It will always be an and. In terms of the economic analyses, Some of that actually will be presented in greater length at the, or in more detail, I should say, at the ASN annual meeting here in early November. And in addition to that, we continue to see, you know, customers publishing white papers, sharing their own experiences. There are a number of other, you know, conferences, et cetera, that will take place into early 2024. And it will be, it is my expectation, I think, that we'll continue to see more of this economic data being shared in those venues as well over time as more and more of it is recognized and accumulated.
spk08: Thank you. Okay, next question. One moment for our next question.
spk02: Our next question comes from Shiraz Khaliya with Oppenheimer & Company.
spk05: Hi Leslie, can you hear me all right? Yes. Perfect. Hey, so Leslie, I remember last year in your comments, there was this notion of home being approximately 15% contribution in FY23. At least I vaguely recall that number and it was triangulating to like 20 plus million in contribution. I appreciate the qualitative commentary, Leslie. Maybe can you give us some guideposts on where home hemo is currently relative to your expectations, relative to patients?
spk03: Yeah. Hey, Suraj. It's Naveel. Our comments were with respect to 2022. We had expected for the full year 22 to drive home revenue to roughly 15% of our total revenue, and we surpassed that. We actually got home revenues to being roughly 20% of our 2022 revenues for the full year last year. We give council placements annually. Yeah, thanks, Chip. And we will update you with our install base annually. We give council placements annually. that break out home and acute, and we'll update that when we print our 4Q results.
spk08: One moment for our next question. And our next question comes from Josh Jennings with TD Collin.
spk10: Hi. Great. Thanks for taking the questions. I was hoping, Leslie and Nabil, you could just help us think about drivers for 2024. drivers of either sustaining the revenue growth you're delivering in 2023 or accelerating. There's some softish comps from the recovery earlier in the year from the ship hold, and then now it's the tableau card and just a very, very minor, I guess, disruption here in the second half of 23. But outside of soft comps, it sounds like the pipeline is flush, but any other drivers you would have us think through? as we're re-forecasting after those two key results.
spk03: Yeah. Yeah, Josh. Hi, it's Nabil. So look, for 2024, as Leslie pointed out earlier, structurally nothing has changed for us. Tableau demand for both our acute and home end markets remains. And we entered the second half with a lot of momentum in both of those end markets. And we're really setting up for, had a good print, and we're setting up for a strong back half of the year. Now, none of sort of the hiccup that we're facing here, none of that demand goes away. As we've talked about, our expectation is that sales of both Tableau cartwood pre-filtration will resume once we get our clearance, and that any Tableau orders that may defer will will also come back once we get our 510K clearance. So as we think about 2024, nothing has structurally changed. Now, we're in the middle of 2023 here, and in any year, it would be early for us to give any specific commentary on 2024. Our focus is now really executing to get to the low end of our guidance range for 2023 and then to work hard to get above that And we'll come back and update you on 24 as we get more visibility as we normally would.
spk00: I agree with all that. I'd only add maybe at a more qualitative level, the drivers of demand, which will underpin obviously our performance in 24, the drivers of demand on the acute side are strong and only getting stronger. Hospitals need to, want to, must reduce costs. Hospitals want to, need to, must provide the best possible clinical care that they can for their patient community. And increasingly, hospitals are facing challenges with discharge. Their inability to find a dialysis chair in the outpatient dialysis clinic community is causing some really significant headaches and cost pain points with length of stay. If hospitals cannot find a chair in that community to discharge a patient to, they must continue to dialyze that patient in the inpatient setting for which they are not reimbursed. And so we are seeing a pretty material uptick in traction, interest, activation amongst both smaller hospitals and large health systems in standing up their own home programs. And I do anticipate that to be a major driver in 24 as well.
spk10: Great. Thanks for that detailed answer. And I also wanted to ask about, I mean, I guess a potential headwind would be in the acute channel, just the competitors having a stronger response. And our anecdotal checks suggest that some of the dialysis providers that provide that or outsourced inpatient dialysis are rolling over and just giving up. Have you seen anything on the in the marketplace with stronger competitive response from those dialysis providers, or do you expect one going forward? Thanks.
spk00: Yeah, sure, Josh. Short answer, no. We haven't really seen a significant change. What has been happening and continues to happen, and this is just giving you some color on what we hear from health system executives, is that they are continuing to receive higher pricing and lower service levels on those outsourced contracts. And so, yes, I mean, that activity does continue to be a tailwind for us, is that obviously provides additional ammunition and motivation to insource and sort of take back control of that service line, kind of controlling their own destiny, both on cost and also clinical care. So that does continue to be a tailwind for us.
spk10: Understood. Thank you.
spk08: Yeah, you bet.
spk02: As a reminder, to ask a question, please press star 1 1 on your handset to be entered into the queue. One moment for our next question. Our next question comes from Drew Ranieri with Morgan Stanley.
spk04: Hi, Leslie and Emile. Thanks for taking the questions. Maybe just to piggyback off Josh's last question there, or first question. I know that we like previously talked about home being more of a gradual type of adoption curve or like an inflection point, but maybe just to build on your answer to Josh, but is there anything in the environment at home from a provider or maybe even a patient standpoint that's getting easier in terms of your ability to drive Tableau home adoption or just even shifting care to the home from the clinic? I mean, you were just talking about the discharge issues, but is there a point where you think you just kind of hit critical mass where, I mean, adoption just becomes much more easier and maybe does influx?
spk00: Yeah, I'm happy to talk about that. That is my favorite topic, as everybody at Outset knows. I do think that the what's new, again, in the last couple of quarters, the what's new are these discharge issues. What remains strong tailwinds on the financial side are, one, the availability of Medicare Advantage for dialysis patients, which is new since 2021, and The estimates that we've heard from providers is that already at least 40%, if not a bit more, of their dialysis patient census is already on Medicare Advantage. That's a tailwind because that does have an associated higher reimbursement rate than pure Medicare. So that's helping a lot. And then the second thing is the ETC program. And that has got a long runway running through 2027. Those carrots and those sticks are starting to get steeper. as we move into 2024 through 27. So we do continue to see that as a motivator, probably more so with sort of the midsize operators than the health system, because the health systems just have a completely different cost structure. So I think all of those financial headwinds, or excuse me, tailwinds remain. If there's anything new, I think the Tableau economic value proposition has become more and more clear to providers. as they understand that whether it's a Medicare patient or Medicare Advantage or a commercial patient, the economics of Tableau on a per treatment basis make a lot of sense. And so I think we've had greater success, Drew, in sort of what's new. I think we've been more successful in our ability to show people that through financial ROIs and walk people through that story. And I think as the providers gain more and more experience in supporting patients at home That's the last piece I think that continues to change in a positive way. As they say, seeing is believing, and every time a new customer starts seeing patients preferentially choose Tableau, starts seeing patients actually really train inside of 10 days, regardless of their age, education, or skill level, and as they see their own patients stay on home for a much longer period of time than their experience had led them to believe with other devices in the past, That word is getting out. And yes, it will not be overnight. And yes, we still anticipate a gradual climb. But in those respects, again, I'll use the flywheel analogy. The flywheel is beginning to turn here.
spk04: Thanks. Appreciate the color there. And maybe one for Nabil. Just as we look at your gross margins versus the prior year period, significant step up in product revenue margins, step down in service and others. Can you just talk about maybe some of the factors there for service? Was it just the leasing agreement coming off? But anything that we should be focusing on as we think about a buildup in our gross margin lines?
spk03: Yeah, hey, Drew, on the service margin line, you are spot on. It's really just the expiry of the HHS agreement. So Q3 of 22 was the last quarter of that deal, and it'll be behind us here in a quarter even from a comp perspective. Now, if you look at our progress Q1 of this year to Q2 of this year, you'll see kind of a linear step up, and that linear step up in service margins will continue into the future. Every once in a while, we'll have to make investments in people and programs. But again, over time, you will absolutely see a linear step up in service margins. And product margin is really our cost down efforts, as well as, again, more consumables revenue as the mix shifts from growth in the installed base.
spk04: Thanks for taking the questions.
spk02: Mm-hmm. I'm showing no further questions at this time. I would now like to turn the conference back to Leslie for closing remarks.
spk00: Great, thank you. Well, I'd just like to thank everybody for attending and wish everybody a very good evening. I do want to close by thanking the entire OUTSET team. I see every day a relentless determination and a really deep belief in restoring agency and autonomy to patients and providers. And for that, I and others here are deeply grateful. So thank you again to the team, and thank you all for joining today, and have a great evening.
spk02: And this concludes today's conference call. Thank you for participating. You may now disconnect.
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