Outset Medical, Inc.

Thank you for standing by and welcome to the Outset Medical 4th Quarter 2023 Earnings Conference 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 this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jim Mazzola, head of investor relations. Please go ahead, sir.

Good afternoon, everyone, and welcome to our fourth 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, 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 and 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 exited 2023 having made progress in building a strong foundation from which to serve providers, patients, and investors in 2024 and for the long term. We came away from the year with clarity on areas we need to continue to strengthen and scale, pride in the difference we are making for providers and patients, confidence in the lead we have with Tableau from years of innovation and our investments in service and support infrastructure, and conviction around the opportunity based on the vast unmet need for better dialysis outcomes in both the acute and home settings. In the fourth quarter, we delivered revenue of $30.5 million, right in line with the revised expectation we set in November to close the year at $130 million, an increase of 13% over 2022. As we have grown and built scale, particularly in the acute setting, our recurring revenue business model continues to distinguish itself, anchor our guidance for the future, and support our drive to profitability. As we look at progress in our end markets, beginning in the acute setting, our focus on enterprise selling and dialysis insourcing has continued to elevate the financial benefits and strategic importance of Tableau to provider customers. During 2023, 25% of our provider customers were newly landed, and 75% were existing customers who chose to expand their Tableau use within their network. This distribution highlights the progress we are making within this large market segment and the opportunity for continued long-term growth. The percent of new to outset customers increased in 2022 and 2023, demonstrating the network effect we have previously discussed. For example, as hospital administrators and clinicians move between facilities and health systems, they are ambassadors for Tableau and the benefits an insourcing program can provide. Additionally, we educated over 400 doctors last year alone, and we've amassed an extensive evidence base demonstrating the power of Tableau clinically, operationally, and economically. And on top of that, more than 10,000 nurses are now trained on Tableau. In terms of our footprint, we have shipped Tableau consoles to more than 700 sites in all 50 states, including to top national health systems where we have about 20% console penetration and within the top 50 regional IDMs, where we are less than 10% penetrated today. We estimate the acute total addressable market is roughly 40,000 consoles, and as we reported in January, we have an install base of just over 4,000 acute and subacute consoles. So we still have a lot of runway ahead of us. As dialysis insourcing with Tableau has grown, it is no surprise to us that we saw in the fourth quarter our Tableau ProPlus software purchased with more than 80% of the console shift in the acute setting, demonstrating its value in the ICU. The results Tableau can deliver in the ICU are clear when we look at customers like Covenant Health, a regional system with about 20 inpatient facilities. Prior to Tableau, Covenant patients on dialysis had an average length of stay in the ICU, the most expensive part of the hospital, of over 13 days. When Covenant measured the ICU length of stay of patients on Tableau, it was cut to eight days. These results demonstrate what's possible when providers control their own destiny. In addition to the decrease in length of stay, Covenant also saw total ICU dialysis treatment costs decline substantially from $1.3 million to $240,000, and costs for treatment cut roughly in half. These results have become very reproducible because our team has developed over the years proprietary expertise in guiding and supporting providers through the outsource to insource transition. With the essential investments behind us in creating a world-class field service, customer success, and clinical support organization, we are well positioned to deliver not just an exceptional product, but an exceptional, highly differentiated change management experience. It took us years to build this infrastructure and know-how. We consider it one of the strongest competitive advantages we have as a company. The data back that up as well. For example, we continually track customer satisfaction metrics, and I am pleased but not surprised that in 2023, our customers reported a 95.4% satisfaction rate with the performance of our field service organization. This is pretty phenomenal when you consider how rapidly our install base and treatment volume has grown. And we did it while maintaining a 97% uptime across the Tableau installed base and reducing our cost to serve by nearly 25%. Turning now to the home and market, we continue to make progress building the strong foundation we are establishing for long-term growth. In 2023, we deployed more than 500 Tableau consoles to home providers, growing our home base more than 60% to more than 1,300 consoles. We've talked on previous calls about our two-tiered home penetration strategy, which entails partnering with progressive mid-sized dialysis organizations and working upstream to create greater channel access for patients by expanding the universe of healthcare providers offering home dialysis. We saw our strategies on both fronts pay off in 2023. With the MDOs, which manage dialysis care for about 180,000 patients, which translates to our roughly $9 billion addressable market, we continue to see nice growth in the number and depth of programs offering Tableau. Exiting 2023, our largest home program managed by an MDO averaged 25 patients at home on Tableau. Most home hemodialysis programs historically have had one to five patients home with the incumbent device. Furthermore, we continue to see unparalleled retention rates. our longest tenured patient has dialyzed at home now for three and a half years, demonstrating Tableau's differentiated patient experience. High retention rates not only benefit patients, but also help minimize expensive churn for providers. In terms of our efforts to increase channel access by expanding the provider universe with new entrants, we hit some new milestones in 2023. For the first time, two of our fastest growing home dialysis providers were not previously in the home dialysis business. As we've talked about in the past, the majority of patients actually start their dialysis journey in the hospital. That means hospitals, subacute providers, others at the top of the funnel have an opportunity to direct patients home first. And many of them are starting to adopt a home first mindset where the patient could exit the hospital, a long-term care facility or skilled nursing facility and go directly home without ever entering a dialysis clinic. Like outset, these new market entrants see the opportunity to disrupt and improve care delivery for dialysis patients. We are pleased to announce that during the fourth quarter, we successfully secured several new sales agreements with skilled nursing facilities, including with one of the nation's largest SNF providers. These partnerships underscore the growing recognition of Tableau's value proposition within the post-acute sector. Furthermore, our successes throughout the year continue to position us as a trusted partner in delivering dialysis services across the care continuum. Importantly, these agreements reflect an industry trend of SNF providers seeking to enhance patient care by offering in-house and home dialysis services, which matches our commitment to innovation and meeting the evolving needs of the dialysis community. Operationally, we made progress during Q4 and 2023 strengthening our regulatory and quality organization, processes, and best practices, with lessons learned from our experiences and our ongoing focus on continuous improvement. This past quarter, we added our eighth 510 clearance to implement new PCB-free silicone tubing in Tableau. As we've disclosed in our filings, the FDA initiated an industry-wide review of silicone tubing in 2022. With the 510 clearance in hand, we are proactively integrating the changes into our manufacturing process and in the coming weeks intend to begin implementing the new PCB-free tubing in the field. Additionally, on the regulatory submission front, we remain in interactive review with FDA on the Tableau-Cart 510K submission and continue to forecast sales of Tableau-Cart with pre-filtration resuming during the second half of 2024. Our results continue to highlight the strength and potential of our recurring revenue model which provides us with visibility into a large portion of our 2024 and longer-term financial guidance. Every Tableau in the home generates roughly $15,000 per year through its useful life. Every Tableau in the acute setting generates roughly $20,000 per year, as there are more treatments performed on each device in the hospital than with a single patient at home. Recurring revenue is driven today by the sales of disposables for every treatment and our service contracts. These components will continue to grow as we place new Tableau consoles. As we announced last month, we exited 2023 with over 50% of our total revenue coming from recurring revenue and see even greater potential over the longer term through our software pipeline. Finally, we congratulate our team member Steve Williamson on his appointment to lead another public medical device company. Steve joined us at a key time when we were building our national sales and service organization. thanks to him building a team of incredibly capable and talented commercial leaders who run our sales, service, and marketing organizations today, we do not currently intend to backfill his position. Before I turn the call over to Nabil for more detail on the quarter, I want to reiterate what I believe are the most important advances we made during the year. First, we achieved scale in the acute end market by demonstrating that Tableau and insourcing with Tableau are strategic implements to reducing costs and retaking control of care for some of the most compromised patients. Second, we expanded our home footprint via partnerships both with new market entrants and existing providers who share our vision for the better patient experience that Tableau can enable. It is early, but we are laying a strong foundation for growth in one of the largest and most unchanged corners of healthcare. Third, with recurring revenue exceeding 50% of total revenue in 2023, we have proven the strength of our business model and demonstrated how it can deliver value well into the future. Fourth, we continue to expand gross margin, exceeding our guidance and demonstrating that we remain in a clear trajectory to reach our 50% milestone. At the same time, we demonstrated strong operating leverage that we expect will persist and expand in each year toward reaching our profitability goals. And finally, we widened Tableau's competitive moat across technology, regulatory, and clinical evidence in ways that deepen connections with providers and patients. Standing by customers and helping them achieve their goals requires much more than a great product, which we certainly have with Tableau. But it also requires an experienced sales and clinical support team, backed by the strength of a mature service organization, which is underpinned by software, analytics, change management know-how, and technical support. This is a very difficult to replicate ecosystem, and we entered 2024 in a strong competitive position from which to continue our growth. With that, I'll turn it over to Nabeel.