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spk03: Good day, and thank you for standing by. Welcome to the Outset Medical Q3 2023 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 11 on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, 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 first speaker today, Jim Mazzola, Head of Investor Relations. Please go ahead.
spk09: Okay, thank you. Good afternoon, everyone, and welcome to our third quarter 2023 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer, and Nabil Ahmed, Chief Financial Officer. 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 on 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. These statements relate to expectations or predictions that 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. With that, I will now turn the call over to Leslie.
spk01: Thanks, Jim. Good afternoon, everyone, and thank you for joining us. A few weeks ago, we provided our preliminary third quarter results and shared details on the headwinds that will continue to affect our business through this year and into next. Today, we will review our results for the full quarter, share an update on the actions we have taken to adapt and respond to the current environment, and provide our outlook for 2024 and the longer term. We will also discuss what has not changed. Despite some recent setbacks, all the structural tailwinds remain in place. We are on the front end of growth into two very large end markets anchored by 36 million patients living with chronic kidney disease. Our pipeline continues to expand, and our value proposition remains compelling. Tableau's ability to disrupt an $11 billion U.S. market with a better solution in the acute and home environment is firmly intact. To begin, revenues for the third quarter were balanced between our acute and home end markets. with a roughly equal number of consoles shipped to acute and home providers. In the acute end market, our land and expand strategy continues to support a strong pipeline and growing install base. 30% of console placements during the first three quarters of 2023 came from accounts we won during 2022. The other 70% are from expansion sites. Tableau is now used in more than 650 acute and post-acute facilities including contracts with top national health systems where we have about 20% penetration, and also within the top 50 regional IDNs where we are less than 10% penetrated today. Further, we continue to see success with initiatives such as expanded physician education and published cost reduction data, which are all having a positive impact in the acute setting. During 2023, we have reached more than 400 nephrologists and dialysis professionals with our peer-to-peer educational programs. This is in addition to the more than 10,000 nurses already trained on Tableau. Physician and nurse awareness and belief in Tableau continues to be bolstered by published clinical, operational, and economic data. To date, over 70 abstracts and 15 manuscripts on Tableau have been generated. Building on this strong foundation, last week's American Society of Nephrology annual meeting produced numerous abstracts on Tableau. In the acute setting, these abstracts continue to demonstrate Tableau's differentiated potential to reduce costs and enhance care in both the ICU and at the bedside. One large health system reported achieving more than a 50% reduction in their treatment cost per hour while also reducing length of stay in the ICU. A hospital in Alaska presented data showing that Tableau dramatically reduced the number of patients they had to transfer out of their hospital for care. After adopting Tableau, the hospital only had to transfer one patient out in 12 months compared to 70 patients transferred out the prior year before using Tableau. Several abstracts related to the use of Tableau in the home, including data from the first 500 patients home on Tableau, which demonstrated a very broad demographic spectrum of adopters, and in a separate abstract, showed improvements in physical and mental health scores over 12 months of using Tableau at home, including improvement in sleep, which is among the most frequently cited issues among patients on dialysis. In terms of our home sales in the quarter, orders and shipments were weighted toward mid-sized dialysis organizations and new home market entrants. where we continue to see a strong response to Tableau's economic value proposition, positive patient feedback, faster training time, and higher retention rates. We have made progress this year, landing or expanding within several new innovative alternative providers, evidence that our strategy to broaden the access to home hemodialysis while in the early stages is working. Overall, for 2023, we expect to place approximately 1,400 new Tableau consoles split two-thirds in the acute setting and one-third in the home setting. With these new placements, we would exit 2023 with approximately 5,400 units in the install base, which we project will reach $100 million in recurring annual revenue over time. We felt it was important to provide investors with this annual update on compo placements earlier than normal, as it is relevant to the financial guidance we will also provide today. In terms of the broader competitive market, our sales team has been working diligently over the past several weeks to address misconceptions created by competitors as a result of the FDA warning letter issued in July. While we expect this competitive response to continue through Q4, our team is better prepared to respond and is doing so accordingly. As noted previously, we believe we have addressed concerns regarding promotion, and the Tableau cart with pre-filtration 510K has been submitted with interactive 510, excuse me, with interactive FDA review underway. We have not factored in its clearance into our 2023 outlook. As we look beyond 2023, we would like to take this opportunity to share our perspectives on how this business scales over the longer term. Three years post-IPO, we recognize the need to update investors on what we believe the next several years will look like relative to revenue growth, growth margin expansion, and cash flow break even. And being in the market now at some level of scale for several years has given us a lot more data and experience from which to project forward with confidence and clarity. While the progress path won't always be linear across all our key goals, we've also heard investors loud and clear on their desire for more metrics, particularly around the install dates and use settings. And so we intend to do that going forward, starting with today's call. And finally, we are acutely aware of shareholders' desire for outset to reach profitability, and we remain committed and urgent around getting there. Cash consumption is obviously a big part of that equation, and to that end, we have already taken prudent steps to reduce spending while continuing investments that drive revenue growth, growth margin expansion, and operating leverage. Nabil will lay out the specifics in greater detail, and so with that, I will now turn the call over to him.
spk06: Thanks, Leslie. Hello, everyone. I'd like to talk today about three things. First, 2023, including our Q3 performance, guidance for the remainder of the year, and actions we've taken here early in the fourth quarter to reduce our rate of cash consumption. Second, our 2024 guidance, our longer-term view, and our path to cash flow breakeven. And third, our balance sheet and our cash positions. With respect now to Q3 and 2023, our third quarter revenue of $30.4 million is a 9% increase over the third quarter of 2022 and a sequential decline compared to Q2 2023. The sequential decline in revenue is driven by fewer console placements for the factors that we outlined in October. Consumable revenue was $11 million, up 14% from the prior quarter and 62% versus the prior year. Cartridge utilization continued to perform well and in line with our expectations, highlighting the strength of our recurring revenue model. Based on our cloud data, we see console utilization in the hospital setting of around five treatments per week and home consoles at just about three per week. Service and other revenue of $6.8 million was up 1.8% from the prior quarter and higher by 13.4% compared to the prior year. Excluding service revenue from our HHS agreement that was included in Q3-22 and did not repeat this Q3, service and other revenue increased by 42.6%, demonstrating the high renewal rate in our recurring service contract. 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 third quarter gross margin was 25.6%, a sequential improvement of 312 basis points and an improvement of just above nine percentage points versus the prior year period. Gross margin expanded for the 10th consecutive quarter with our mix of higher margin recurring consumable revenue and service and other revenue representing roughly 60% of total revenue as compared to 45% in QQ of this year. As expected, Service and other gross margin increased sequentially to 15.4%, and our expectation remains that it will continue to improve again in the fourth quarter. Operating expenses of $42.3 million in the third quarter were roughly flat sequentially, and up 11% versus the prior year period. We reported third quarter gap net loss of $46.2 million, resulting in a net loss of 93 cents per share compared to a net loss of $40.8 million, or 85 cents per share for the prior year period. Non-GAAP net loss was $35.3 million, or 71 cents per share, compared to a non-GAAP net loss of $33.4 million, or 70 cents per share for the same period in 2022. We ended the quarter with approximately $197.3 million in cash, cash equivalents, short-term investment, and restricted cash. Moving now to our full year 2023 outlook, we are reiterating our expectation for revenue to be approximately $130 million, which represents 13% growth over fiscal year 2022 revenue. We continue to expect gross margin to be in the low 20% range and to exit the fourth quarter in the mid 20% range. Further, we continue to expect to consume less cash in 2023 than we did in 2022. and to exit 2023 with approximately $160 million of cash, cash equivalents, short-term investments, and restricted cash on our balance sheet. I want to take a moment now to talk about the cost reduction we implemented in the fourth quarter to better align our operating expenses with our expected rates of revenue growth and with our commitment towards driving towards profitability. we will record a charge of approximately $2.5 million in our statement of operations in the fourth quarter, composed largely of severance and related benefits. These actions, combined with other cost savings initiatives we have put in place, mean that our expected OPEX in 2024 will be $20 to $25 million less than we expect it to be in 2023. Now, turning to 2024. For the full year 2024, we expect revenue growth in the mid-teens as compared to fiscal year 2023 revenue. This is a conservative expectation based on the following assumptions. One, we place a similar number of consoles in 2024 as we have in 2023. Two, recurring revenues, again, contribute to our growth in the same manner as they have in 2023. And three, that Tableau cart with pre-filtration is approved in the second half of the year. As always, over performance in any year could be driven by a variety of factors, including greater console placements in our large acute and home end markets, higher ASP of our consoles, driven by increased uptake of Tableau ProPlus software and Tableau carts, as well as higher volume consumable sales. We expect gross margin for the full year 2024 to be in the low 30% range, and to exit the fourth quarter of 2024 in the mid-30% range. The drivers of gross margin improvements are the same as we have discussed for the past three years. Console cost time programs, the pull-through of higher margin products and consumables as consoles are placed, and service leverage. With the cost reductions we are undertaking in 2023 and the further actions we're taking to manage our OPEX, We anticipate OpEx in 2024 of $140 to $145 million, or $20 to $25 million below where we expect to exit 2023. This combination of revenue growth, gross margin expansion, and reduced OpEx is expected to drive significant operating leverage and a further reduction in our cash consumption. We expect to use approximately 25% less cash in 2024 than we anticipate using in 2023. Now, looking out beyond 2024, we project that our business will grow at a high teams rate annually after 2024 as we gain scale, adjust to the capital spending environment, and achieve tableau cart with pre-filtration clearance. For modeling purposes, we expect this ramp to show home revenues increasing from approximately 20% of revenue in 2023 to approximately 25% of revenue in 2027. Beginning in 2024, we will share our installed base twice a year to provide additional visibility to this RAP. Our track record for gross margin expansion gives us ongoing confidence in our ability to get to our 50% gross margin milestone. At our projected revenue growth rates, we now anticipate reaching our 50% gross margin milestone exiting 2027, as full-year revenues reach $250 million. Our conviction in this gross margin ramp is driven by the same factors that have been 10 consecutive quarters of gross margin expansion. Moving to OPEX. As we have previously shared, we believe that we've already made our key structural investments in talent and infrastructure, and we plan to expand OPEX by a mid-single-digit percent annually beyond 2024. This combination of revenue growth, gross margin expansion, and operating leverage is expected to support achievement of cash flow break even exiting 2027 as we get gross margins to 50%. Now, turning to our balance sheet and our cash runway. While there are over performance scenarios that get us to cash flow break even without the need for additional capital, it is reasonable to expect that we may need to top off the balance sheet before 2027. With approximately $160 million of cash exiting 2023 and access to the next $100 million of debt under our SLR agreement, our cash position provides us with time and levers to operate and grow the business effectively for the next several years. With that, let me turn the call back to Leslie for closing comments.
spk01: Thanks, Nabil. I'd like to close by going back to the fundamentals of this market, the business model, and our products. We are penetrating one of the largest healthcare markets in the world with over 85 million dialysis treatments performed each year in the United States alone. And we have two growth platforms within it, acute dialysis and home dialysis. Our acute TAM in the U.S. is $2.5 billion. That's nearly 40,000 consoles. By year end, we expect to have sold just over 4,000 acute consoles. So a very, very long growth runway still lies ahead of us. The home cam in the U.S. is nearly $9 billion, and that's assuming only 30% of dialysis patients can or ever want to go home. And from what we've seen across the country with Tableau, this is an incredibly conservative estimate. We have barely scratched the surface. With so many tailwinds pointing toward more care in the home and more dialysis care in the home specifically, we are on the right side of healthcare with the right technology at the right time. The business model. Just four years into commercialization, roughly half of our revenues already come from recurring revenue. When Tableau consoles are sold and installed, they're used. Each console sold over time generates between $15,000 and $20,000, depending on its use setting, per year, every year. This is a business that produces operating leverage. For example, we have grown revenue more than 70% on a compounded annual basis over the last four years with the same size capital sales team. This is a business that will generate gross margin of 50% and beyond. We have 10 consecutive quarters of gross margin expansion behind us and a clear itemized execution plan that gets us there. This is a business that can be profitable and will be profitable due to inherent operating leverage, gross margin profile, and an ever-thickening foundation of predictable, sticky, recurring revenue. And the products. What we do well goes beyond the technology. Our product is not just the device, but change management and customer success expertise that is proprietary and very hard to replicate. There are high barriers to success, and we are actively elevating those barriers by expanding both our technology modes and our regulatory modes. Our economic, clinical, and operational value proposition is evergreen. Save healthcare providers money, simplify their operations, and improves the quality of living for patients. These fundamental benefits are unlikely to go out of style, and Tableau brings a highly differentiated, difficult-to-copy product-market fit to them. For all these reasons, this is a market, a business model, and a product that supports double-digit growth rates for many years to come. With that, I think we are ready for Q&A. Operator, please open the lines. Thank you.
spk03: At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Rick Wise of Seifel. Your line is now open.
spk10: Good afternoon, Leslie. Hi, everybody. Thank you for that very clear, all those clear perspectives and numbers, the incremental guidance. You know, there's a lot to focus on. But maybe for starters, Leslie, we attended, you and Outset was there, the ASN meetings in Philadelphia this past week. I'd just be curious, from your perspective, your high-level takeaways, any updates on reactions to or the opportunities that emerged at ASN? And maybe just as part of that, we heard from one of your larger acute customers about the cost savings they're seeing. How are you driving that awareness? Clearly, there's a major customer, high volume, that's seeing significant economic benefits. How are you sort of powering that message forward as well? Thank you.
spk01: Yeah, sure. Thanks for the question, Rick. We're creating awareness of the, I would call it now, the proven and reproducible cost reduction benefits in a couple of ways. I mentioned on the descriptive remarks that we have actually reached a lot of people through these peer-to-peer educational sessions. We're doing them now amongst nephrologists, amongst nurses, and amongst health system executives, having reached over 400 professionals just in the last, call it, nine or ten months. That's been a big new focus for us this year, and I think that's really paying off. So that's one venue. The second venue is is by continuing to add to the published evidence base. I mentioned over 70 abstracts, 15 manuscripts, any number of those actually reference and document the cost reduction benefits and the operational and clinical benefits as well. And I think that's really paying off. And then lastly, in large national and regional medical meetings, like the one that you just alluded to, the ASN, where we have the opportunity to not only speak directly to customers, but also connect customers with their peer groups. So I will say that I think we are starting to see a bit of a network effect here. That network effect is certainly turning the flywheel on the accused and continues to create momentum for us in that segment.
spk10: Great. That's excellent. And just specifically, You highlight innovation. I'm just curious, you know, are there other products we should be aware of or you'd want to talk about? But specifically, can you update us at all or add an additional color? I know it's difficult on your interactions with FDA or just where do things stand with tablet cards?
spk01: With Tableau CART, sure. Well, no updates on the regulatory path. It is under review, and we feel that it was a very, very, very strong submission, one that we're really proud of. We are factoring in its clearance into 2023, and for the purposes of modeling, assume that Tableau CART is cleared in the second half of 2024, but that's not driven by anything specific or new with regard to our interactions with the FDA. We just think it's a prudent assumption to make. And then I think, yes, what we're still facing and would expect to face in Q4, some of the competitive activity, you know, around Tableau cart not being available by our choice and some competitive noise making around the other aspect of the warning letter around some case studies that were on our website. We feel that we have fully satisfied the FDA's concerns around the website. And of course, we filed on 510k on Tableau CART. Our team is absolutely better prepared this quarter. But there are a lot of customer conversations to have. You know, I mentioned again, the prepared remarks that Tableau is being used in over 650 facilities. That's thousands of users, nurses and and health system administrators and nephrologists that our team has to and wants to have conversations with just to ensure that there are no, you know, misconceptions or misinformation out there. So, I would expect that that communication process, those conversations, will certainly take us through Q4, which, again, was factored into the guidance that we've provided around year-end 2023.
spk10: Great. And just one last one from me. Just maybe an update on your home efforts, some of the key milestones from your perspective this quarter, and the setup for the home outlook for 24 a little bit. Thank you so much.
spk01: Oh, sure. I appreciate the question. Yeah, home continues to grow. We still expect it to be a very significant contributor to revenue over the long term, as we alluded to. What we're really focused on strategically is, number one, I'd say top of the funnel, expanding the provider universe, whether those are new market entrants, and we've seen actually the emergence of several new market entrants. These are sort of adjacent healthcare providers that have not previously been in the home dialysis market before and have entered, seeing the opportunity there, and are using Tableau exclusively to to drive more patient adoption in the home. So that's part one, extended provider universe, and I think we have a lot of nice proof points out of 2023 on that one and headed into 2024. The second one is to drive the depth of the home programs that we have. You know, historically, these home programs with the incumbent device typically tended to peter out at maybe low single-digit numbers of patients in the home. That has not been our experience. With the home programs that are offering Tableau, these are well, well, well into the double digits. And I would say, actually, I don't know yet where the ceiling is for how big a home program can be. Tableau was designed to really accelerate training, to really simplify operations, and therefore expand the number of patients who feel that home is accessible to them and feel that they can be successful at home. And we see it doing that. And actually, a couple of our abstracts really demonstrate that as well. So that's point two, driving depth in each home program. And then point three is always the retention rate, because the longer that Tableau patients stay at home on Tableau, the thicker that foundation for future growth is. We have continued through Q3, and as we sit here today, even in Q4, seeing a very steady and stable retention rate that is markedly higher than the retention rate seen with other home devices in the past.
spk10: I appreciate that. Thanks.
spk03: One moment for our next question. Our next question comes from the line of Shagun Singh of RBC Capital Markets. Your line is now open.
spk07: Hey, this is Avi. I'm for Shagun. Thanks for taking the question. And thank you again for the detailed longer-term outlook. It's very helpful. I had a couple. The first is, how should we think about the cadence of revenue growth and margin extension from 2024 to 2027? Do you expect it to be linear or more back-end loaded, especially as we get closer to the ETC deadline in 2027?
spk06: Yeah, hey, this is Nabil. So with respect, so let me sort of first start with the annual, and then I can dial into the quarters here. So with respect to the annual, our expectation is roughly mid-teens for 2024 and then getting into the high teens for 2025 and beyond. Now, with respect to the quarters within that, that's on revenue from a gross margin perspective. Again, in the annual, it'll be linear. Our margin expansion has been linear annually and sort of if you think about the quarters now going back for a while. Now, with respect to the quarters, from a top line, from a revenue perspective, we have historically observed this capital purchasing cyclicality where Q1 tends to be the slowest grower and we see accelerating growth as we move through the year. That sort of applied this year. That will apply in any year. In 2024, given that we expect Tableau Cartwood pre-filtration to get cleared in the second half, This first half, second half effects will be a little bit more pronounced and you'll see more growth in the back half of the year. But again, when you go to 25 and beyond, it'll be just the capital purchasing cyclicality impacting sort of a slower Q1 and accelerating through there.
spk01: Yeah, let me add on to that because I heard also something in there a little bit about home and the ETC model. So let me address that. I think, as I think about home, I would expect this home growth, again, to remain relatively linear. I mean, we'll have quarter-to-quarter variability that's to be expected, but over a period of 24 to 27, let's say, I would expect the growth rate to be relatively linear. And I also just want to make a comment. This ETC model, those incentives and disincentives are getting richer as we get closer to 2027. I think by 2027 it gets up to either plus 8% over the Medicare base rate or minus 10% under the base rate if providers are not growing their home and transplant programs to the threshold that CMS has established. So that is certainly going to remain a powerful tailwind. It is not the only tailwind, though. recently have actually seen clinic closures become a tailwind. Both of the biggest service providers in the nation have announced clinic consolidation and clinic closures due largely to their own staffing challenges. And that is, in our experience, really encouraging nephrologists and health systems and other providers to really expand their home and looking at home as a near-term and long-term solution for that problem. So that's another tailwind. And then generally, Medicare Advantage. I think, again, over the long term, this will go far beyond 27, as Medicare Advantage is now available to all dialysis patients and has been reported to be up to 40% now plus of the dialysis population. These payers, again, in our experience, have never been more motivated to send higher and higher numbers of patients home on dialysis and ensuring that they can reap the benefits, both clinical, economic, and operational in those MA plans. So those are my additional remarks on home. I hope that's helpful.
spk07: That's great. Thank you.
spk03: Great.
spk09: Thanks. Operator, next question.
spk03: Stand by for our next question. Our next question comes from the line of Joshua Jennings of TD Kellan. Your line is now open.
spk08: Hi, good afternoon. Thanks for taking the question. I wanted to just ask about the strategy to launch international markets and just with the updated outlook, does that seem like it includes any international expansion plans? And so would that be additional and any updates just on that international strategy, which would be helpful to think through.
spk01: Yeah, thanks for the question, Josh. The forward-looking guidance that we provided today is U.S. only, and over the near-term and the long-term, out through 2027. We have files for regulatory clearance in a small number of, by and large, English-speaking countries outside the United States, and we have had an effort underway to evaluate those markets. It's certainly a growth sector, a potential growth sector in the future, but I would call it a longer-term growth sector. Our team and our management team here remains very, very focused today on the largest dialysis market in the world, which is here in the United States.
spk08: Understood. Thanks for that. And I wanted to ask a follow up on the event at ASN. The nursing executive from HCA commented that about 145 HCA hospitals had adopted Tableau. And I was wondering if that IDN has kind of incorporated Tableau as a best practices technology for inpatient dialysis. And maybe you can just share. your view on the opportunity at HCA to more deeply penetrate their hospital network and acute setting, but also catalyze development of HCA home hemo programs. Thanks for taking the questions.
spk01: Sure. Yeah, I appreciate it. Well, let me kind of zoom back up. I mean, we talked about roughly 650 different facilities in the acute and also sub-acute. I think I talked about that more in October as really being a big grower for us is post-acute or sub-acute space as well, inclusive of very large national hospital and health systems like HCA and others and these regional kind of top 50 to 100 largest regional IDNs. HCA has been a phenomenal partner to us. They were and remain an innovator and very forward-thinking both on the acute side and also, I think, on the home side in terms of how they're thinking about the future of dialysis care. As we look at the, let's just say, the national health systems themselves, we are just 20% penetrated there. We're proud of getting to 20%, but that leaves 80-plus percent that we still have ahead of us. So we're excited about replicating the success that we've had with many of our customers, again, acute and subacute, throughout the rest of the national and these large regional providers as well.
spk09: Great. Thanks for the question, Josh. Operator, I think we're ready for the next question.
spk03: One moment for our next question. Our next question comes from the line of Travis Seed of B of A Securities. Your line is now open.
spk04: Hi, this is Stephanie Piazzolla on the line for Travis. Thanks for taking the question and providing the longer term guidance. I think that's really helpful. Just wanted to ask about first on the pre-announcement call, you talked about a few headwinds that are leading to a longer sales cycle. I know that was only a few weeks ago, but if there's any updates on those from a competitive noise or capital spending, standpoint and what is factored into the 2024 guidance for those. And I think you mentioned that the guidance you put out is maybe a conservative starting point. So maybe more detail on why you think this is the right spot to be for now and any drivers that could get you above this expectation.
spk01: Yeah, sure. Thanks, Stephanie. Well, as I said, kind of in the prepared remarks, I mean, there is a lot of momentum. in both acute and home, and I think that's due to the large evidence base now around Tableau, kind of this growing network effect we just talked about in a previous question, and I think kind of the proven reproducibility of the cost reduction benefits. So those are all things that give me and us a lot of confidence in the forward projections that we've provided here near-term and longer-term. Having said that, at the same time, we are obviously going to want to be mindful of some of the changes we're noting in the capital purchasing environment. I'll get to that part of your question in one sec. And also maybe customers continuing to wait for the availability of Tableau cart potentially well into next year, depending on when clearance comes, and how that's affecting the duration of our sales cycle. And so as we look forward, we try to be considerate of both the very real upside drivers, And then some of the potential lingering headwinds in a way that allows us to have confidence and clarity in our projections. So that's maybe part one. Specifically about capital spending, as I talked about in our call about a month ago, we're just seeing more stakeholders involved in decision making kind of at all levels. It's not bad. It's very understandable and it's prudent on their part. We're seeing kind of more steps in their financial analyses and their processes and just all around more kind of eye-dotting and T-crossing. Now, the good news is we're not seeing customers or potential customers kind of turn away from expansion or turn away from insourcing or backing out of deals. We're not seeing people say that they don't want to move forward with Tableau in either the acute or the home end market. It's just rather kind of the the extra process, steps, people, deliberation that's, you know, elongating our sales cycle, kind of maybe toward the outer edge of what we've communicated in the past, which has been about 9 to 12 months. I would say we're probably closer to, you know, sort of 12-plus months. And then how did it inform our views on 24? Well, I think it is very reasonable and, yes, conservative to assume that some of these factors kind of carry forward for us. Both on some of the competitive noise making and also capital with elongated capital spending decision processes into and through 2024. But that's kind of how we thought about it. Clear upside drivers and some considerations on the headwind side as well.
spk04: Thank you. That's helpful. And then just one more on the long-range plan. Maybe if you could just provide a little bit more detail on the overall thought process of how you put this together, just generally what's assumed in the high teen's annual growth rate from a macro or micro perspective. I know you talked about some of the reimbursement factors, so anything else there? Maybe some other drivers within acute and home.
spk01: Sure. Well, I'll ask Nabil to weigh in here, too. I would say the last four years here in the marketplace have given us a lot more data and experience than we had at the time of the IPO. Our first full launch year was 2019, so we've learned a lot in a briefer fashion. We also, though, today have a lot more scale from which to build on and, again, this very predictable, very sticky recurring revenue that provides even greater visibility and predictability than we've ever had before. Our evidence-based, the thousands of nurses and physicians, you know, the hundreds of facilities, this network effect all helps a lot as we look forward. And we also have, I'll say as the same token, we also have better knowledge of the challenges and kind of the timeline associated with true disruption. And what we are doing is truly disruptive, not only in the home side, but also in the acute side. So I guess I'll use an analogy and say we've sort of seen the full moving play out, if you will, which has given us, you know, a lot more visibility both on upside and potential headwinds. So all of that informs our confidence in describing, you know, how we think this business will scale over the next few years and our expectations not only on revenue but, you know, how quickly we will achieve growth margins at 50% and cash flow break even getting to this, Third, very vital goal for us, which is reaching profitability. But anyway, Nabil, I'll pass you for any other comments.
spk06: Yes, Stephanie, I would just add a little bit more color here. So if you think about sort of placing roughly 1,400 consoles, which is what we placed in 22, what we expect to place in 23, if you think about that same 1,400 consoles sort of over time, and you think about the recurring revenues that we get from this growing installed base, That alone will get you to a roughly mid-teens CAGR between now and 2027. And then to get to the high teens in any year, you're looking for console growth. And again, for all the reasons that Leslie talked about, we do believe we can drive higher consoles. By the way, we will have placed 1,400 consoles last year and expect to place this year at in years when we have had two exogenous events kind of hit us, and so we believe that is a relatively conservative assumption as we move forward. So I say all that to say getting to roughly mid-team CAGR over the longer term here is possible with flat consoles, and for all the reasons Leslie talked about, we believe we can get to high teams.
spk09: Okay, great. Thanks, Stephanie. I think we're ready for our next question, operator.
spk03: One moment for our next question. Our next question comes from the line of Kristen Stewart of CL King. Your line is now open.
spk00: Hi. Thanks for taking my question. I was wondering if you could expand a little bit more color on the competitive landscape and maybe comment on the launch of Quanta's product at ASN as well and just your thinking on the competitive landscape going forward and your thought process for not only 2024, but the longer term as well?
spk01: Sure, happy to. Well, we believe we have a better product with pretty deep expertise supporting customers. As I said in the prepared remarks, what I've really learned more than anything over the last four years is the importance of product and programs around the product. You know, what we do when we walk into an acute site, we're not selling a dialysis machine. We're not trying to convince somebody that our dialysis machine is better than somebody else's dialysis machine. You know, first and foremost, we're creating opportunities, strategic cost reduction opportunities for that hospital. We show them the financial analyses, showing the cost benefit in labor and in supplies reduction. And then step two is the how-tos. hospitals and health systems have never done this before. And therefore, they, by and large, they don't already have that roadmap for change management. They don't already have the recipe book for how do you insource inpatient dialysis. We have developed that in quite a proprietary way over the last several years. And so it's really kind of the one-two punch of a superior product, a superior team, and a proprietary playbook that I think makes our offering so compelling and so protectable. I think the other advantage here is that our footprint now is large. The Tableau evidence base is large. We do have thousands of nurses and physicians who have been trained and educated. I'll give you a quick example or anecdote from ASN. I was talking to our team there at the booth and I said, hey, how many physicians who came up to the booth this year had heard of Tableau or heard of Outset, and the answer was all. Now, that's not probably precisely accurate, but I would say even two years ago, that answer was probably more like 40% or 50%. So, you know, we made a lot of strides in just pure awareness. And so I think we have succeeded in erecting a pretty substantial commercial moat around Tableau as well as a technology moat. For example, Tableau is fully integrated with both Epic and Cerner. That interoperability is a big deal, and that is no trivial task to fully integrate with Epic and Cerner. We've just sort of done that quietly in the background. And, of course, there's a regulatory mode. We've continued to beat new and higher bars. And so I think all of those things help us to further elevate the barriers to success in addition to the barriers that we've already overcome to become the recognized leader here in the space.
spk00: Perfect. Thanks very much.
spk09: Okay, great. Thanks for the question, Kristen. Next question, operator.
spk03: One moment for our next question. Our next question comes from the line of Siraj Kalia of Oppenheimer and Company. Your line is now open.
spk05: Good afternoon, everyone. Leslie, quick question, and I'll just – I have one question. I appreciate you guys laying out the roadmap from FY24 through 27, and Leslie, just trying to understand the rationale for this roadmap at this point in time. You'll do talk about structural tailwinds for Tableau. I'm hoping you could thread the needle for us. We know GLP-1s are at the doorstep. There's a new competitor coming online next year. Just kind of walk us through putting yourself in some you know, within certain benchmarks already long-term, if you could kindly help us understand the rationale at this point in time. Thank you.
spk01: Yeah, sure. Happy to. Thanks for the question, Suraj. So, which I'll kind of interpret as sort of the why now, simply put. I think a couple of reasons. I mean, first of all, we have heard investors loud and clear about what they most care about, what matters most to them about Outset today and where Outset is going tomorrow. We're listening. And what we've heard from investors is a very strong desire to understand how and when Outset gets to profitability, how and when Tableau and Outset reaches a gross margin of 50%, and then when we start the next leg of the journey, which is going beyond 50%. And so we felt, having listened to all of our important shareholders, that we wanted to provide the information, the transparency, and the clarity that our shareholders are seeking. So that's point one. Point two is that, as I mentioned throughout, I think three years post-IPO and now four years here in the marketplace, I think we do have the data and the experience, which we didn't have at the time of the IPO. At that point, just having been in the marketplace there for maybe just a year or two, we just have a lot more insight and a lot more scale from which to build on. As I mentioned a few minutes ago, I think we've got a lot more clarity and confidence around what the upside drivers are. and also what some of the challenges are and what that timeline is likely to look like as we disrupt this market both on acute and home. So I think we're in a good position based on our experience over the last four years and also out of our genuine desire to ensure that shareholders have the information that they want, need, and deserve about the business and how it's going to scale over the next few years.
spk03: This concludes the question and answer session. I would now like to turn it back to Leslie Trigg for closing remarks.
spk01: Great, thank you. Well, thanks to all of you for joining today. We look forward to our next update on our fourth quarter call, and have a great evening. Thank you for your participation in today's conference.
spk03: This does conclude the program. You may now disconnect.
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