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spk05: Good day, and thank you for standing by. Welcome to the Outset Medical Q1 2024 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'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To answer your question, please press star 11 again. Please be advised that today's conference is being recorded. And I would like to turn the conference over to your speaker today, Jim Zola, Head of Investor Relations. Please go ahead.
spk03: Okay, thank you, and good afternoon, everyone. Welcome to our first quarter 2024 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 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 will be protected under the Private Securities Litigation Reform Act of 1995. These statements relate to expectations or predictions of future events, are based on our current estimates and various assumptions, and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section of Outset's public filings with the SEC, including our latest annual and quarterly reports. One quick note before we get started, Nabeel is feeling a bit under the weather today, so I'm going to cover the financial section in our prepared remarks. Nabeel is here with us and will handle Q&A as normal. So with that, let me turn the call over to Leslie.
spk20: Thanks, Jim. Good afternoon, everyone, and thank you for joining us. With our most challenging recent headwind now behind us with the FDA clearance of Tableau CART, demand for Tableau that has never been higher, 12 consecutive quarters of gross margin expansion, a strong recurring revenue model that represents more than 50% of our total revenue, tipping point adoption in the acute, strong home growth with an industry-leading patient retention rate, and significant decisive steps now taken toward reaching cash flow breakeven without needing additional capital, Outset's outlook and conviction in its future has never been stronger. Earlier this week, we announced the receipt of FDA clearance for Tableau CART with pre-filtration ahead of our guidance for clearance during the second half of the year. I want to thank the incredible cross-functional team here at Outset that accomplished this milestone. Tableau Cart provides another unique differentiator to Tableau's ecosystem, and we look forward to the impact we expect it will have during the remainder of the year. In terms of quarterly performance, we delivered revenue of $28.2 million in the quarter, which was lighter than we had originally anticipated, due primarily to ongoing headwinds from the Tableau Cart ship hold and some associated orders again being postponed out of the quarter. With the clearance of Tableau Cart, this factor is now behind us. Additionally, several customers experienced disruption from the Change Healthcare cyber attack, which slowed reimbursement payments and resulted in several of our customers deferring both treatment and console purchases until their cash flow normalized. We believe this factor is now behind us as well, as evidenced by treatment ordering in April rebounding to expected levels. Taking a step back, over the past quarter we reflected on the complete alignment between our desire and that of shareholders to reach cash flow break even more quickly and with the cash already on hand. And as a result, we took action. We undertook a meaningful restructuring of the business, which we anticipate will reduce our cash use through 2027 by over $100 million and reduce our 2024 non-GAAP OpEx by roughly $20 million. As a result, we expect to reach our profitability goals sooner than previously projected and without the need to access the capital markets to get there. Importantly, our cost reductions were carefully planned to protect two key goals. One, continuing to meet or exceed the expectations of patients and customers, and two, achieving our long-term revenue and gross margin expansion guidance. To be very clear, we do not anticipate the restructuring to have an impact on our near-term or long-term ability to grow revenue and expand gross margin. In fact, we believe our ability to exceed our gross margin goals as we have today will continue to play an important role in our path to profitability. Headcount reductions, CapEx, and associated program spending in R&D comprise the largest portion of the savings. Prior to making this decision, we were investing heavily in hardware and software engineering projects with long development time horizons. Given Tableau's already deep and wide proprietary technology moat, we are refocusing our dollars and energies on penetrating our $11 billion U.S. market opportunity with the Tableau we enjoy today. We are not sacrificing projects required for longer-term growth, but rather pacing those programs to more closely match the longer timeline in which we believe they will be important to our product and technology lead. Additionally, we examined ways to reduce management spans and layers where it did not affect the customer experience and revisited plans to expand over time internationally, determining that our focus over the long-range plan period should remain in the largest dialysis market in the world, the United States. As a result of our restructuring, we expect to reach cash flow breakeven several quarters ahead of our prior estimate without the need to access the capital market prior to reaching breakeven. At a high level, we continue to see patients and providers benefiting from the differentiated clinical, operational, and financial advantages Tableau can deliver. Our moat is wide and deep with proprietary insourcing know-how, a differentiated technology platform, actionable data, EMR interoperability, service excellence, and regulatory experience through our successful clearance of nine 510Ks during the past nine years. As a result, the universe of providers and patients experiencing the advantages Tableau can provide continues to grow. We also generated additional momentum with skilled nursing and subacute providers and grew an already record pipeline of opportunities in the acute care setting. We believe this momentum sets us up well for a strong year and supports the confidence we have in our financial guidance for 2024. On the operational front, our efforts to replace the silicone tubing in Tableau consoles with PCBA-free material is substantially complete. Looking ahead, we are in the process of completing one additional field action near term to upgrade Tableau cart power cords. We are proud of our collaboration with FDA across the board and look forward to continuing our partnership with them. As we look at progress in our end markets beginning in the acute care setting, our focus on enterprise selling and dialysis insourcing have continued to elevate the financial benefits and strategic importance of Tableau to provide our customers. Even with the first quarter being historically lighter for new console placements, we made good progress expanding within health systems we landed in 2023 and continue to build and advance our pipeline of opportunities nationwide. More than 60% of our acute pipeline consists of deals greater than $1 million each, and more than half of our total acute pipeline represents new potential customers. One of our key new customer wins during the quarter was with a hospital in the Southwest associated with a large health system. Like many other customers, this provider was facing increased costs and inadequate service levels from its outsourced dialysis provider and wanted to take charge of their dialysis program. In partnership with the hospital's chief financial officer and chief nursing officer, our team was able to demonstrate the compelling financial, clinical, and operational advantages of an in-source program with Tableau, which resulted in an early termination of their contract with the outsourced provider. Several of these consoles are equipped with our Tableau ProPlus software for use in the ICU. which continues to have a strong attach rate across consoles shipped in the acute setting, and this customer is also taking advantage of our bridge program to assist with their rapid program standout. The summary here is we continue to feel very good about the opportunity and our momentum with acute care customers. We forecasted a softer first half of the year as we managed through an elongated sale cycle and worked toward 510K clearance of Tableau cart with refiltration. And that's how the quarter played out. And with Tableau Cart now cleared for sale, we continue to anticipate growing into our guidance range as we move through the year. 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. Turning now to the home end market, our progress in the quarter was highlighted by the multi-year agreement we completed with U.S. Renal Care. We 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. US Renal Care is the largest of the progressive MBOs and committed to accelerating home dialysis with Tableau. Our initial home programs with US Renal Care have been very successful and our early direct-to-consumer marketing has revealed strong interest in many other areas of the country previously underserved by viable home hemodialysis options. We also see an opportunity to help patients transitioning from peritoneal dialysis. PD-related infections are a major cause of dropout for patients who initially chose home dialysis. Creating a seamless transition from PD to HHD enables patients to maintain the control they enjoy at home where many report a higher quality of life. Advances we are making with home providers are driven by the fundamental differences Tableau can provide for their patients. For example, during the quarter, we continue to see our already strong patient retention rate continue to improve. Patient retention has been the Achilles heel of the incumbent home hemo system and a prior attempt to keep patients dialyzing at home. Our most recent data shows that 90 plus percent of patients who dialyze at home with Tableau remain on treatment at 90 days. This is a nearly 40% improvement over the 90 day retention rate for the legacy home hemo system as cited in the last USRDS report. Additionally, we continue to see controllable attrition of patients on Tableau remaining in the low single digits, which we believe to be well below historical data. For home dialysis to work, patients, caregivers, providers, and payers all need a technology that is easier to set up, to maintain, and to treat on. And this is exactly what Tableau delivers. In terms of our efforts to increase channel access and expand the provider universe, we added a new provider of size in the Midwest, a strategic regional MDO in the Northwest, and several new home-only providers. Our top of the funnel progress in Q1 also included ongoing expansion within one of the largest and fastest growing subacute providers serving more than 60 facilities in the U.S. This provider partners with skilled nursing facilities to offer on-site dialysis treatment to residents, which delivers substantial benefits to the SNF operator by reducing the risk and expense associated with transportation to an outsourced dialysis clinic. More importantly, this approach can provide a life-changing benefit to residents who often spend eight to 10 hours a day being transported to a clinic, waiting to dialyze, treating, and then finally returning home, often missing meals, medications, other therapies, and adequate rest as a consequence. After our initial rollout with this provider early last year, the program has grown significantly and now includes more than 200 Tableau consults with the potential to continue to grow substantially during the next several years. Importantly, this new model for dialysis reflects a broader trend of providers seeking to enhance patient care by offering in-house and home dialysis services. Our results across home, acute, and subacute continue to highlight the strength of our recurring revenue, which increased 24% over the first quarter of 2023, driven by consumable sales to a larger and growing fleet of Tableau consoles and a very high renewal rate for Tableau service contracts. This recurring revenue stream continues to provide us with visibility into a large portion of our 2024 and longer-term financial guidance. As a reminder, Tableaus in the home generate roughly $15,000 per year through their useful life. Tableaus in the acute setting generate roughly $20,000 per year as there are more treatments performed on each device in the hospital than with a single patient at home. Before I turn the call over to Jim, I'd like to reiterate a few key points about the quarter. First, we understand the importance of execution this year and remain confident in our plan. The foundation is in place to grow through the year with the return of Tableau CART, the continued expansion we see in our pipeline, the success we've had with new home providers, and the strong adoption of Tableau within our large base of acute care customers. Second, our entire team is focused on the drive to profitability. We've demonstrated that commitment through 12 quarters of consecutive growth margin expansion to the 31.1% non-GAAP growth margin we reported today. In addition to the operating leverage we are demonstrating, and the actions we took this quarter that we believe will lead us to reach cash flow breakeven several quarters ahead of schedule and without the need for additional capital. And finally, the business model remains strong and our value proposition compelling. We've made the investments in hardware, software, analytics, manufacturing, and a nationwide service infrastructure that all scale well as we grow this business. With recurring revenue now consistently exceeding 50%, of total revenue and growth margins continuing to expand, I am more confident than ever of the value we can deliver to providers, patients, and shareholders well into the future. With that, I'll turn it over to Jim.
spk03: Thanks, Leslie. Hello, everyone. Revenue for the first quarter was $28.2 million. While below our expectations, revenue was aligned with the quarterly bill for 2024 that we guided to during the third and fourth quarter 2023 calls. The decrease was driven by a decline in product revenue, which was $20.4 million in the first quarter, a $2.5 million decrease from the fourth quarter. Service and other revenue increased $7.7 million, up slightly from the $7.6 million we recorded in the fourth quarter. Council revenue was $9.2 million, and consumable revenue was $11.2 million. As Leslie has already discussed, we believe the drivers of this shortfall relative to our expectations, the impact of the Tableau CART regulatory hold and the change healthcare cyber attack are now behind us. We were encouraged to see our Council ASP remain strong across all care settings as a result of our disciplined pricing and strong uptake of Tableau ProPlus offering with acute customers. Following the end of the quarter, we saw a strong April month for treatment sales, and cartridge utilization over time continues to perform in line with our expectations. Before moving to gross margin and operating expenses, I want to highlight the initiative we undertook during the quarter to restructure our 2024 and longer-term spending budgets with the goal of reaching cash flow break-even without the need for additional capital. Included in our GAAP results is a net charge of $2.5 million that we took in the first quarter associated with the restructuring. This charge is comprised of severance and related benefits offset by the reversal of bonus accruals related to impacted individuals. We have outlined the impact of this charge across our P&L in the tables that accompany our earnings release. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's earnings release. Now, moving to our first quarter gross margin and operating expenses, which as a reminder reflect our non-GAAP results. Our first quarter gross margin outperformed our expectations at 31.1%, a more than 4 percentage point sequential improvement from the fourth quarter, and a more than 10 percentage point increase from the first quarter of 2023. Gross margin expanded for the 12th consecutive quarter, driven by a nearly 350 basis point sequential quarter expansion in product gross margin to 39.8%, that was partially offset by service and other gross margin of 8%. As expected, service and other gross margin expanded in the first quarter due to investments that we made in the fourth quarter and have previously described. Operating expenses of $35 million declined 4% as compared to the fourth quarter and 16% from the prior year period, driven by the expense reductions we undertook in the fourth quarter. Non-GAAP net loss in the first quarter was $29.3 million, or 57 cents per share. slightly lower than last quarter, and $6.1 million, or 15 cents per share, less than the first quarter of 2023. We ended the quarter with approximately $230 million in cash, cash equivalents, short-term investments, and restricted cash, which we expect to fund operations to cash flow breakeven. Turning now to our outlook for the full year 2024, we are reaffirming our revenue and gross margin guidance today, starting with revenue. we continue to expect a range of $145 million to $153 million. As Tableau Cart comes back online, we do anticipate some ramp time to reengage on customer opportunities, revise contracts, and schedule installations. As a result, we anticipate Q2 revenue to be in the low $30 million range, with the full benefit of Tableau Cart's return and the lapping of the elongated sales cycle coming in the third and fourth quarters. Our strong and growing recurring revenue stream provides us a lot of confidence to achieving this second half ramp. With roughly 50% of second half revenue expected to come from recurring revenue, the remainder of second half revenue would require council sales to be roughly in line with quarterly council revenue just prior to the Tableau cart ship hold, which we believe is achievable, particularly given the substantial growth in our acute and sub-acute pipeline during Q1. Turning to gross margin, with our continued gross margin outperformance, we have increased conviction in our guidance for 2024 non-GAAP gross margin. For the full year, we expect gross margin to be in the low 30% range, exiting the year in the mid 30% range for the fourth quarter of 2024. Again, gross margin expansion is driven by council cost down programs, recurring revenue from a larger installed base and service leverage. Turning to OPEX for 2024, As a result of the actions we have announced today, we now anticipate that OPEX for 2024 will be $125 to $130 million. And finally, our long-term guidance. With our strong value proposition across two large end markets, our wide competitive moat, and our broad integrated offering of products and service, we expect annual revenue in the high teens between 2025 and 2027. We continue to expect that our ability to expand gross margin on an annual basis will be linear from our 2024 exit goal of mid 30% to our 2027 exit goal of 50%. We plan to invest in our cost down programs for both council and cartridge, and we continue to see recurring revenue growth and service leverage. We also expect that the spending cuts we're making in 2024 will add roughly another $10 million in savings in 2025 across COGS, OPEX, and CAPEX. As a reminder, our business does not require large amounts of CAPEX, which we expect to be in the low single-digit million dollar range annually through 2027. We have further opportunities for even greater savings if gross margin continues to perform better than expected. As a result of our work to realign our spending and with our anticipated levels of revenue growth and gross margin expansion, We anticipate reaching cash flow break-even several quarters earlier than previously expected, without the need to raise additional capital. The steps we've taken to further adjust our spending are logical and well-prioritized, allowing us to continue to deliver an unmatched customer experience as we accelerate our drive to profitability. We remain bullish on the tailwinds in the business and the wide and deep moat we have established with Tableau. all of which gives us confidence in our outlook for 2024 and the longer term. With that, I think we're ready for Q&A. Operator, please open the lines.
spk05: Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. We also ask that you ask one question and one follow-up. Please, as well, wait for your name and company to be announced before you proceed with your question. One moment while we compile the Q&A roster. The first question that we have today will be coming from Rick Wise of FIFO. Your line is open.
spk08: Good afternoon, everybody. Let me start with, I think, Tableau. I'm sorry, with Tableau Card. And I'm going to ask just a multi-part aspect that you've touched on a little bit. Specifically, as Jim or Jim Nabil, I'll hyphenate his name now, said, it's going to take some time to reengage and there's work to be done to install. But Leslie, maybe you can talk to us about, are there orders in hand? Are you ready to manufacture and ship to meet those orders? And in the second half, can you quantify at all, I mean, is, quote, the upside from having Tableau cart in hand Tableau cart sales specifically? Or no, it frees conversations and it's going to pull with it Tableau as well, if you follow what I'm getting at. Sorry for the multi-part question.
spk20: No, no worries. Yes, I'm happy to answer all of those. And let me know if I overlook any section of your question. So I think the first part was our orders in hand. Taking a quick step back, when we decided to effectuate the ship hold, we had to pause all sales, all marketing, all contracting, and any of the sort of back office order taking or support activities. And that's exactly what we did. So all of that needs to be re-established What are to give you the next level of resolution on that? What does that look like? Those are activities like generating new quotes, redoing existing sales agreements in some cases, getting new POs generated. And of course, there's a time factor for that. And none of this is difficult, by the way. That's the good news. But it does take a bit of time. I think another factor, too, is just customer budgeting. In some cases, we expect customers will have to rebudget for it. They might have had the funds allocated and approved several quarters ago and need to go back into their internal organizations and get those funds redeployed and approved. And again, that's not difficult either, but will take a little bit of time. So I'm very confident we will have all these steps well, well underway. I do expect that to, you know, to take us through the remainder of Q2. But again, the good news is, hey, we're ready for the back half, right? And we had originally expected Tableau cart approval right around the midpoint of the year. And I think that the main benefit here of the early approval is it just gives us time to get prepared earlier than we expected, get all the pieces ready in this ramp up period. and be prepared to really take advantage of this from a sales perspective in the second half, which is a lot of what's feeding our confidence in this second half growth trajectory. Sorry, this is going to be a bit of a monologue, but it was a long question in my defense. The second part you asked about was manufacturing and are you ready to ship? That answer is definitively yes, because we already had Tableau carts in inventory at the time of the ship hold. So I don't expect any delays related to supply chain or manufacturing. And then I think the last section of your question was, hey, where is sort of the growth and is there a little bit of upside in the second half perhaps? If so, where could that come from? And Rick, you nailed it. It's both. So we do expect that Tableau Cart will be kind of finally putting wind in the sails of Tableau again, Tableau Consoles, where those Tableau Consoles were repeatedly deferred out of quarters out of Q3, out of Q4, out of Q1. Again, we absolutely believe that Tableau cart will put the wind back in those sails. And also, yes, we do expect orders for standalone cart purchases into our existing customer base and our existing installed base where customers already have been using Tableau or maybe they have the Tableau cart with the storage drawer and they want to upgrade that storage drawer to the pre-filtration version. So we do expect revenue being generated through both of those channels, if you will.
spk08: Gotcha. No, appreciate all that. A lot to unpack. And just as a follow-up, I think it'd be helpful to hear a little more about the lighter-than-expected first quarter. I mean, just based on your commentary and all the surrounding comments, I mean, in a sense, it sounds like it was actually a better period than maybe the optics, the initial optics might suggest. Can you help us better understand when you mentioned, I think you said Tableau, the A delayed or delayed orders and the cyber attack impacts now resolved. But how do I think would, so would first quarter sales have been a million higher for Five million higher. I mean, can you help us to understand the pieces and like whether that delayed order will come back in the second quarter, et cetera?
spk11: Yeah. Hey, Rick, it's DeBeal. The first quarter really played, you know, largely as we had guided. We had expected a soft first quarter and then recovery in Q2 and really ramping in the back half of the year. That's kind of the guidance commentary we gave entering, you know, entering this year and back in Q1. So, you know, we'd always said the first half of this year will look more like the back half of last year because, again, in both periods, we didn't have CART. So, Q1 performed largely as we expected. Having said that, in Q1, specifically, we did see the continued deferral of console sales and CART sales, which now is behind us with the CART approval. And we did also experience a little bit from this change, healthcare slowdown, which again, we believe is also behind us. So, Q1 really played largely as we expected, a little bit softer, but again, we believe we haven't lost any deals and we believe again that we're now going to ramp Q2 for a strong second half of the year, again, as we had originally guided.
spk20: I'll just add one more thing just to reiterate. two things that I think are important to mention. One is the treatment revenue and the treatment orders in April have really come back, and they were very strong, and we're very, again, we're very bullish about the direction for Q2 and the remainder of the year there. And then you had embedded in your question, Rick, asked something about, hey, have any of these orders come through on the console side, and the answer to that is yes. Actually, one of the orders that was deferred right out of Q, toward the end of Q1 because of the changed healthcare situation, actually was an order that was placed in April for the record there.
spk07: Appreciate it. Thank you.
spk20: Yeah.
spk05: Thank you for your question. One moment for the next question. And our next question will be coming from Shagan Singh of RBC Capital Markets. Your line is open.
spk16: Great. Thank you so much. A quick follow-up here. I was just wondering if there's a way to quantify the backlog. What was outstanding just waiting for Tableau Card to get approval on restructuring? Is there any way you can provide the cadence for that 20 million savings in 24? And just what are you saying on the profitability timeline? I know you said a few quarters ahead, but anything more specific? And then I guess a big picture question for you, Leslie, can you just spend some time elaborating on your commercial organization? Like just trying to understand, you know, if you have the leadership in place, you know, the feet on the street, if you will, you know, how are you really looking to, you know, re-engage these customers? Thank you for taking the question.
spk20: Sure. Maybe Nabil, you want to start off and I'll take over in a minute.
spk11: For sure. Shagan, maybe let me sort of lay out how we are thinking about the second half of the year, the full year, really, from a guidance perspective, right? And so let me go back to sort of, you know, we expect the first half of this year to look largely like the back half of last year, again, because we haven't had CART in any of those periods. So our guidance for Q2 is for revenue in the low $30 million zone as, as Leslie pointed out, we ramp back on cartwood pre-filtration. Now, Shagan, as we think of the second half of the year, there's really two components I'd point you to. So first of all, we will have the recurring revenues on our larger installed base. This is the consumables and the service revenues, which will be roughly half of our implied 2h revenue if you will if you take that and then sort of the remainder the remaining console revenue after you sort of take the second half roughly half is recurring the remaining console revenue is roughly in line with what we did in the first half of 2023 when we had carts to be able to sell so that's how we kind of thought about the back half of the year Moving on, Shagan, your second question with respect to the savings, a little over half the savings were from R&D and ops groups, kind of the R&D more broadly speaking. And again, Leslie talked about the projects that were sort of, again, deferring or that we took a second look at. The rest, so half is R&D and ops, the other half is just across the P&L. It's things like spans of control, layers of management, programs and projects that didn't have payback within our LRP horizon. So that's number two. Number three, from a profitability timeline perspective, let me first maybe talk a little bit more about the savings we've generated. So in total, we are saving through the actions we have undertaken over $100 million over our LRP period. Roughly 20 million comes out of 24, as we talked about. That annualizes to about $30 million in 25 and a little bit more than 30 million in 26 and 27. So if you propel that math through the model, you know, our initial expectation was that we'd get to break even exiting 27. You can see how, again, if you take kind of 30 million, a little bit over 30 million out of the out years, you can see how that will pull profitability forward by a few quarters.
spk20: Maybe I'll pick up on the commercial org. I think was your last question. And, you know, do we have adequate coverage out there to rapidly educate customers about capital of car and other? And the short answer is yes. We are covered actually in all 50 states. Just as a quick reminder, we have a capital sales team we have a clinical sales team, and we have a national accounts team. All three of those teams cover both acute and subacute, of course, and also home. And so we continue to get a lot of operating leverage out of this team. And I think we've talked about that in past calls, that continues to be true. But we do have sales coverage in all 50 states. And I am not worried at all about the speed with which our sales team will be sharing the news with both current customers and our potential new customers. Thank you.
spk05: Thank you. One moment for the next question. And our next question is coming from Marie Salbot of BTIG. Your line is open.
spk22: Hi, good evening. Thanks for taking the questions. I wanted to start here with a pretty high level one. I know that one headwind you've talked about in the past is a longer selling cycle and the CapEx environment being a little bit tougher. Wanted to hear how that's changed since you last spoke with us publicly. Has that gotten worse? Has it gotten better? Has it stayed the same? Any detailed commentary you can give on that would be helpful.
spk20: Yeah, sure. I would say on the capital spending environment, it's been really stable, which has been a good thing. So we have not seen any material changes in the capital spending environment. We are also advantaged because Tableau and insourcing does have a very rapid payback period, typically inside of a year for a hospital that makes the conversion. And that certainly helps ensure that Tableau rises to the top of those capital budgeting prioritization lists. But setting that aside, in general, we saw a lot of stability in the capital spending environment. No changes to speak of.
spk22: Okay. That's great to hear. And then my follow-up here on gross margins, you just continue to exceed expectations there. Nice to see another increase. On maintaining the guidance there, I mean, you are already starting the year in the low 30s, and we're expecting to have low 30s for the full year, exit mid-30s to exit the year. Should we just expect smaller incremental improvements? Was this kind of a one-time leap and we should expect a little tick down? How should we think about the cadence for the rest of the year?
spk11: Yeah. Hey, Marie. It's the Bill. So we are really pleased with our team's ability to deliver our 12th consecutive quarter of gross margin expansion. And look, we think it is going to be linear from here to that mid-30% exiting the year on our way to 50%. Yeah, really good performance, and again, we just expect to continue down the path.
spk22: All right. Encouraging to hear.
spk05: Good luck with it. Thank you. Thank you. Thank you. Thank you. One moment for the next question. Our next question is coming from Christian Stewart of CL King. Your line is open.
spk19: Hi. Thanks for taking the question. I was wondering if you could just expand a little bit more on the U.S. Renal Care announcement. and just in terms of when we could start to see an impact from that really materializing. Yeah, sure. Hi.
spk20: Well, U.S. Renal Care has been a good partner to us, continues to be a good partner to us, and our initial home programs with them were very successful. As I mentioned, it's one of the largest of these mid-size dialysis organizations. They manage roughly 36,000 patients across the United States and increasing their home population and growing home is really central to their mission moving forward. I think what they were able to confirm for themselves is a much faster training time with Tableau, which made it easier to convince patients to adopt home. Our training time, our average duration Despite a much wider and wider and wider demographic of patients, adopting home has still remained remarkably consistent at under 10 sessions, roughly two weeks, equivalent to PD. So that's been a real selling point that I think has been recognized by many provider organizations. And really this retention rate has been key. It is so much higher than other alternatives out there. And that's really the point. You know, the point isn't to train as many people as you can to go home. The point is to keep as many patients as you can at home. That's really where the economics bloom and, of course, the clinical outcomes manifest themselves. And so we view U.S. Renal Care like all of our other partnerships within this MDO. segment as really critical to our own home growth, and we're privileged to be able to be a strategic weapon in their hands as well as they try to grow home.
spk19: Perfect. Thanks for taking the question.
spk05: Of course. Thank you. One moment for the next question. And our next question is coming from Shiraj Kalaya of Oppenheimer. Your line is open.
spk06: Good afternoon, Leslie. Jim, Nabeel, can you hear me all right?
spk17: Yes.
spk06: Perfect. Hey, Leslie, a lot of commentary provided. If you could quickly, the 90-day, 90% retention rate, if I were to extrapolate those curves at the one-year time point, do you have visibility into what the retention rates are? And also specifically on workforce reduction, Leslie, Was there any reduction in the sales and marketing division? Thank you.
spk20: Sure, yes. So let me speak to that. I'll talk about the patient retention rate, and then I'll go to your second question. Yes, we do have data on the one year, and it is also markedly, markedly higher at one year on Tableau compared to the legacy home hemo system. So we've been really pleased at the one-year retention as well. And actually, I'll make another remark, it has been very, very stable. So not only has it been much, much higher, it's been really stable. And Suraj, we've offered in the past that at one year, what we call our controllable attrition, there's the uncontrollable attrition, which is out of our hands, unfortunately, that's death and transplant. And then there's what we call the controllable attrition, which is the patient's just opting off. They want to go back and center, let's say, or something in their life changes. We should be able to affect that. We challenge ourselves to affect that. And so we really focus on doing a great job as an organization in the controllable attrition rate. And for us, that controllable attrition rate at 12 months has remained very stable at about 10%. despite our pretty significant growth in the denominator of patients home on Tableau. So those results, Suraj said differently, are holding between 90 days and a year. Regarding the reduction of our team, the lion's share of the people, as well as programs and CAPEX and other forms of OPEX, were in, as Nabil said, the operations and the R&D area. with the remainder of those reductions spread across the organization. When we thought about the approach here and the philosophy around reducing our spend, we really had two non-negotiables or sort of sacred cows in mind. Our core tenants were, number one, we have to preserve the patient and the customer experience. That is what is driving Tableau's adoption growth. And two, we have to ensure that we continue to deliver on our growth margin expansion initiatives, which continue to pay off. So we very, very, very carefully planned our cost reduction to avoid affecting those areas.
spk05: Thank you. One moment for our next question. Our next question is coming from Stephanie Piazzolla of Bank of America Securities. Your line is open.
spk17: Hi, thanks for taking the question. I appreciate the color on the guidance you've given and how we should think about the first half versus the second half of the year, but just wanted to follow up a little bit. I guess with Q1 coming in a little light and not changing the outlook for the second half, is there anything getting better maybe in the second half to offset Q1 versus previous expectations and maybe any difference in how we should think about the low versus the high end of the guide now. Thanks.
spk11: Yeah. Hey, Stephanie. So with respect to Q1, again, it came in largely as we guided, a little softer. Q2, we'd always expect it to be a ramping quarter, for lack of a better word. for all the reasons that Leslie talked about in terms of getting customers reactivated with Tableau Cartwood pre-filtration. So we do expect Q2 to step up a little bit in that low $30 million zone, as we said. Now, when we think about the back half, a couple of things. So one, we will have Tableau Cartwood pre-filtration for the full half because we expect to be ramped and are working to be ramped in the second quarter so that we're fully sort of ready in the second half. Let me talk a little bit about the second half and some more specificity. And really, Stephanie, it's two components. So one, we do have our recurring revenues, consumables and service, of a larger installed base as we enter the second half. And if you assume kind of at even the low end of guidance that half of our 2H implied revenues come from recurring revenues, the other 50% coming from consoles, is the same, roughly the same amount of console revenue as we did in 1H23, which was the last, you know, half year when we had Tableau-Cart with prefiltration. Does that make sense?
spk15: Yes, thank you.
spk11: And then, Stephanie, and then so sort of, okay, so that's part one. And then as you think about moving through the guidance range, we've always had the same performance levers, right? So we can place more consoles. in both our large home or acute end markets. We have ASP. We have Tableau Pro Plus penetration or sales. And of course, we have Tableau Cart sales, both to our existing install base and to new customers. So those are kind of how we think about guidance in the background.
spk20: I can add just a few points that came to mind while you're talking. I think in addition to Tableau Cart, which is the big, again, the big propellant heading into the second half, but I will also reiterate that we did see very significant pipeline expansion in Q1. And we have talked before about our sales cycle, you know, being in the nine to 12 months zone. Some deals come in earlier than nine months and other deals go a bit longer than 12 months. But generally speaking, it's nine to 12 months. So with this significant pipeline expansion, I think I mentioned, I want to reiterate it, a higher percentage than ever of our deals in the pipeline are over a million dollars in size each and over half are from potential new customers. So this pipeline is looking a little different to us in a very, very good way. And so that's another kind of tailwind for Q, excuse me, second half. And then, of course, the third tailwind, which is related, is that lapping of the sales cycle from Q3, Q4 of 2023 coming online in that second half of 24. So that's how I think about the three tailwinds kind of propelling us to this growth trajectory through the back half of this year.
spk04: Okay, thanks, Stephanie. Next question, operator.
spk05: Thank you. And the next question is coming from Joshua Jennings of TD Calwin. Your line is open.
spk23: Hi, thanks for taking the question. I was hoping to just get an update on the Tableau enhancements that have been brought forward over the past 12 to 18 months. It sounds like the CTO departed as part of the restructuring. Imagine there's a deep bench there, but any plans to replace that head of that group and then anything we should be looking for in terms of technology enhancements on the Tableau system as we move through this year?
spk20: Yeah, sure. Hi, Josh. Happy to answer that. One of our, if not our CTO's greatest gift and legacy to Outset is the team that he put in place here and he's leaving us with. We have an absolutely stellar vice president of software, very, very deep bench strength on cyber and data analytics and EMR operability. As we noted in the script, we have spent the last any number of years making very significant enhancements and investments in all dimensions of software, data, data transmission, cyber, and EMR interoperability. And now is our moment to harvest those investments. And as I said, kind of really maximize the tableau that we have today. We do have an advantage in this market, which is We are light years ahead. We have a very, very meaningful technology advantage, both hardware and software. And I know this has been pointed out to us by investors and shareholders that, hey, you guys have an incredible, incredible lead. Should you just be maybe taking a pause and really selling and marketing what you have? And I think that there's a lot of merit to that. And we reflected on that a lot. we will never stop being sort of the imaginative, ambitious people that we are. I can't change the personality of the organization. However, we do have an advantage in the lead that we already have, both software and hardware. It will be our focus over the course of this LRP period to make the best use of that. But no, we are not going to stop dreaming. And as I mentioned, we are just going to probably more pace investments in the future better aligned to the timeline at which they might pay off, which is probably, you know, maybe toward the end of the LRP period or beyond. Hopefully that helped.
spk23: Definitely. And just thinking about the evolution of the Tableau system and thinking about the LRP, what are the pricing assumptions both on the capital and on some of the disposables? Should we be thinking about price increases year over year or is stable pricing the name of the game within that LRP guidance? Thanks a lot.
spk11: Yeah, Josh, I mean, we've so look, we've always talked about Tableau, about our ability to protect our pricing on the low end and then offering these value added accessories, including Tableau ProPlus. And now back with Tableau-Cart with pre-filtration. So again, that's how we think about pricing broadly now and over the LRP period.
spk02: Okay. Thanks, Josh. Operator, any further questions for us?
spk05: At this time, there are no more questions in the queue. I'd like to go ahead and turn the call back over to Leslie for closing remarks.
spk20: Great. Well, I would like to thank everybody again for joining us
spk05: afternoon and wish everybody a very good evening thank you this concludes today's conference call thank you for joining you may all disconnect Thank you. Thank you. Thank you for watching. Thank you. Good day, and thank you for standing by. Welcome to the Outset Medical Q1 2024 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'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To answer your question, please press star 11 again. Please be advised that today's conference is being recorded. And I would like to turn the conference over to your speaker today, Jim Zola, Head of Investor Relations. Please go ahead.
spk03: Okay, thank you, and good afternoon, everyone. Welcome to our first quarter 2024 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 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 will be protected under the Private Securities Litigation Reform Act of 1995. These statements relate to expectations or predictions of future events, are based on our current estimates and various assumptions, and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section of Outset's public filings with the SEC, including our latest annual and quarterly reports. One quick note before we get started, Nabeel is feeling a bit under the weather today, so I'm going to cover the financial section in our prepared remarks. Nabeel is here with us and will handle Q&A as normal. So with that, let me turn the call over to Leslie.
spk20: Thanks, Jim. Good afternoon, everyone, and thank you for joining us. With our most challenging recent headwind now behind us with the FDA clearance of Tableau CART, demand for Tableau that has never been higher, 12 consecutive quarters of gross margin expansion, a strong recurring revenue model that represents more than 50% of our total revenue, tipping point adoption in the acute, strong home growth with an industry-leading patient retention rate, and significant decisive steps now taken toward reaching cash flow breakeven without needing additional capital, Outset's outlook and conviction in its future has never been stronger. Earlier this week, we announced the receipt of FDA clearance for Tableau CART with pre-filtration ahead of our guidance for clearance during the second half of the year. I want to thank the incredible cross-functional team here at Outset that accomplished this milestone. Tableau Cart provides another unique differentiator to Tableau's ecosystem, and we look forward to the impact we expect it will have during the remainder of the year. In terms of quarterly performance, we delivered revenue of $28.2 million in the quarter, which was lighter than we had originally anticipated, due primarily to ongoing headwinds from the Tableau Cart ship hold and some associated orders again being postponed out of the quarter. With the clearance of Tableau Cart, this factor is now behind us. Additionally, several customers experienced disruption from the Change Healthcare cyber attack, which slowed reimbursement payments and resulted in several of our customers deferring both treatment and console purchases until their cash flow normalized. We believe this factor is now behind us as well, as evidenced by treatment ordering in April rebounding to expected levels. Taking a step back, over the past quarter we reflected on the complete alignment between our desire and that of shareholders to reach cash flow break even more quickly and with the cash already on hand. And as a result, we took action. We undertook a meaningful restructuring of the business, which we anticipate will reduce our cash use through 2027 by over $100 million and reduce our 2024 non-GAAP OpEx by roughly $20 million. As a result, we expect to reach our profitability goals sooner than previously projected and without the need to access the capital markets to get there. Importantly, our cost reductions were carefully planned to protect two key goals. One, continuing to meet or exceed the expectations of patients and customers, and two, achieving our long-term revenue and gross margin expansion guidance. To be very clear, we do not anticipate the restructuring to have an impact on our near-term or long-term ability to grow revenue and expand gross margin. In fact, we believe our ability to exceed our gross margin goals as we have today will continue to play an important role in our path to profitability. Headcount reductions, CapEx, and associated program spending in R&D comprise the largest portion of the savings. Prior to making this decision, we were investing heavily in hardware and software engineering projects with long development time horizons. Given Tableau's already deep and wide proprietary technology moat, we are refocusing our dollars and energies on penetrating our $11 billion U.S. market opportunity with the Tableau we enjoy today. We are not sacrificing projects required for longer-term growth, but rather pacing those programs to more closely match the longer timeline in which we believe they will be important to our product and technology lead. Additionally, we examined ways to reduce management spans and layers where it did not affect the customer experience and revisited plans to expand over time internationally, determining that our focus over the long-range plan period should remain in the largest dialysis market in the world, the United States. As a result of our restructuring, we expect to reach cash flow breakeven several quarters ahead of our prior estimate without the need to access the capital market prior to reaching breakeven. At a high level, we continue to see patients and providers benefiting from the differentiated clinical, operational, and financial advantages Tableau can deliver. Our moat is wide and deep with proprietary insourcing know-how, a differentiated technology platform, actionable data, EMR interoperability, service excellence, and regulatory experience through our successful clearance of nine 510Ks during the past nine years. As a result, the universe of providers and patients experiencing the advantages Tableau can provide continues to grow. We also generated additional momentum with skilled nursing and subacute providers and grew an already record pipeline of opportunities in the acute care setting. We believe this momentum sets us up well for a strong year and supports the confidence we have in our financial guidance for 2024. On the operational front, our efforts to replace the silicone tubing in Tableau consoles with PCBA-free material is substantially complete. Looking ahead, we are in the process of completing one additional field action near term to upgrade Tableau cart power cords. We are proud of our collaboration with FDA across the board and look forward to continuing our partnership with them. As we look at progress in our end markets beginning in the acute care setting, our focus on enterprise selling and dialysis insourcing have continued to elevate the financial benefits and strategic importance of Tableau to provide our customers. Even with the first quarter being historically lighter for new console placements, we made good progress expanding within health systems we landed in 2023 and continue to build and advance our pipeline of opportunities nationwide. More than 60% of our acute pipeline consists of deals greater than $1 million each, and more than half of our total acute pipeline represents new potential customers. One of our key new customer wins during the quarter was with a hospital in the Southwest associated with a large health system. Like many other customers, this provider was facing increased costs and inadequate service levels from its outsourced dialysis provider and wanted to take charge of their dialysis program. In partnership with the hospital's chief financial officer and chief nursing officer, our team was able to demonstrate the compelling financial, clinical, and operational advantages of an in-source program with Tableau, which resulted in an early termination of their contract with the outsourced provider. Several of these consoles are equipped with our Tableau ProPlus software for use in the ICU, which continues to have a strong attach rate across consoles shipped in the acute setting. And this customer is also taking advantage of our bridge program to assist with their rapid program standout. The summary here is we continue to feel very good about the opportunity and our momentum with acute care customers. We forecasted a softer first half of the year as we managed through an elongated sale cycle and worked toward 510K clearance of Tableau cart with refiltration. And that's how the quarter played out. And with Tableau Cart now cleared for sale, we continue to anticipate growing into our guidance range as we move through the year. 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. Turning now to the home end market, our progress in the quarter was highlighted by the multi-year agreement we completed with U.S. Renal Care. We 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. US Renal Care is the largest of the progressive MBOs and committed to accelerating home dialysis with Tableau. Our initial home programs with US Renal Care have been very successful and our early direct-to-consumer marketing has revealed strong interest in many other areas of the country previously underserved by viable home hemodialysis options. We also see an opportunity to help patients transitioning from peritoneal dialysis. PD-related infections are a major cause of dropout for patients who initially chose home dialysis. Creating a seamless transition from PD to HHD enables patients to maintain the control they enjoy at home where many report a higher quality of life. Advances we are making with home providers are driven by the fundamental differences Tableau can provide for their patients. For example, during the quarter, we continue to see our already strong patient retention rate continue to improve. Patient retention has been the Achilles heel of the incumbent home hemo system and a prior attempt to keep patients dialyzing at home. Our most recent data shows that 90 plus percent of patients who dialyze at home with Tableau remain on treatment at 90 days. This is a nearly 40% improvement over the 90 day retention rate for the legacy home hemo system as cited in the last USRDS report. Additionally, we continue to see controllable attrition of patients on Tableau remaining in the low single digits, which we believe to be well below historical data. For home dialysis to work, patients, caregivers, providers, and payers all need a technology that is easier to set up, to maintain, and to treat on. And this is exactly what Tableau delivers. In terms of our efforts to increase channel access and expand the provider universe, we added a new provider of size in the Midwest, a strategic regional MDO in the Northwest, and several new home-only providers. Our top of the funnel progress in Q1 also included ongoing expansion within one of the largest and fastest growing subacute providers serving more than 60 facilities in the U.S. This provider partners with skilled nursing facilities to offer on-site dialysis treatment to residents, which delivers substantial benefits to the SNF operator by reducing the risk and expense associated with transportation to an outsourced dialysis clinic. More importantly, this approach can provide a life-changing benefit to residents who often spend eight to 10 hours a day being transported to a clinic, waiting to dialyze, treating, and then finally returning home, often missing meals, medications, other therapies, and adequate rest as a consequence. After our initial rollout with this provider early last year, the program has grown significantly and now includes more than 200 Tableau consults with the potential to continue to grow substantially during the next several years. Importantly, this new model for dialysis reflects a broader trend of providers seeking to enhance patient care by offering in-house and home dialysis services. Our results across home, acute, and subacute continue to highlight the strength of our recurring revenue, which increased 24% over the first quarter of 2023 driven by consumable sales to a larger and growing fleet of Tableau consoles and a very high renewal rate for Tableau service contracts. This recurring revenue stream continues to provide us with visibility into a large portion of our 2024 and longer-term financial guidance. As a reminder, Tableaus in the home generate roughly $15,000 per year through their useful life. Tableaus in the acute setting generate roughly $20,000 per year as there are more treatments performed on each device in the hospital than with a single patient at home. Before I turn the call over to Jim, I'd like to reiterate a few key points about the quarter. First, we understand the importance of execution this year and remain confident in our plan. The foundation is in place to grow through the year with the return of Tableau CART, the continued expansion we see in our pipeline, the success we've had with new home providers, and the strong adoption of Tableau within our large base of acute care customers. Second, our entire team is focused on the drive to profitability. We've demonstrated that commitment through 12 quarters of consecutive growth margin expansion to the 31.1% non-GAAP growth margin we reported today. In addition to the operating leverage we are demonstrating, and the actions we took this quarter that we believe will lead us to reach cash flow breakeven several quarters ahead of schedule and without the need for additional capital. And finally, the business model remains strong and our value proposition compelling. We've made the investments in hardware, software, analytics, manufacturing, and a nationwide service infrastructure that all scale well as we grow this business. With recurring revenue now consistently exceeding 50%, of total revenue and growth margins continuing to expand, I am more confident than ever of the value we can deliver to providers, patients, and shareholders well into the future. With that, I'll turn it over to Jim.
spk03: Thanks, Leslie. Hello, everyone. Revenue for the first quarter was $28.2 million. While below our expectations, revenue was aligned with the quarterly bill for 2024 that we guided to during the third and fourth quarter 2023 calls. The decrease was driven by a decline in product revenue, which was $20.4 million in the first quarter, a $2.5 million decrease from the fourth quarter. Service and other revenue increased $7.7 million, up slightly from the $7.6 million we recorded in the fourth quarter. Council revenue was $9.2 million, and consumable revenue was $11.2 million. As Leslie has already discussed, we believe the drivers of this shortfall relative to our expectations, the impact of the Tableau CART regulatory hold and the change healthcare cyber attack are now behind us. We were encouraged to see our Council ASP remain strong across all care settings as a result of our disciplined pricing and strong uptake of Tableau ProPlus offering with acute customers. Following the end of the quarter, we saw a strong April month for treatment sales, and cartridge utilization over time continues to perform in line with our expectations. Before moving to gross margin and operating expenses, I want to highlight the initiative we undertook during the quarter to restructure our 2024 and longer-term spending budgets with the goal of reaching cash flow break-even without the need for additional capital. Included in our GAAP results is a net charge of $2.5 million that we took in the first quarter associated with the restructuring. This charge is comprised of severance and related benefits offset by the reversal of bonus accruals related to impacted individuals. We have outlined the impact of this charge across our P&L in the tables that accompany our earnings release. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's earnings release. Now, moving to our first quarter gross margin and operating expenses, which as a reminder reflect our non-GAAP results. Our first quarter gross margin outperformed our expectations at 31.1%, a more than 4 percentage point sequential improvement from the fourth quarter, and a more than 10 percentage point increase from the first quarter of 2023. Gross margin expanded for the 12th consecutive quarter, driven by a nearly 350 basis point sequential quarter expansion in product gross margin to 39.8%, that was partially offset by service and other gross margin of 8%. As expected, service and other gross margin expanded in the first quarter due to investments that we made in the fourth quarter and have previously described. Operating expenses of $35 million declined 4% as compared to the fourth quarter and 16% from the prior year period, driven by the expense reductions we undertook in the fourth quarter. Non-GAAP net loss in the first quarter was $29.3 million, or 57 cents per share. slightly lower than last quarter, and $6.1 million, or 15 cents per share, less than the first quarter of 2023. We ended the quarter with approximately $230 million in cash, cash equivalents, short-term investments, and restricted cash, which we expect to fund operations to cash flow breakeven. Turning now to our outlook for the full year 2024, we are reaffirming our revenue and gross margin guidance today, starting with revenue. we continue to expect a range of $145 million to $153 million. As Tableau Cart comes back online, we do anticipate some ramp time to reengage on customer opportunities, revise contracts, and schedule installations. As a result, we anticipate Q2 revenue to be in the low $30 million range, with the full benefit of Tableau Cart's return and the lapping of the elongated sales cycle coming in the third and fourth quarters. Our strong and growing recurring revenue stream provides us a lot of confidence to achieving this second half ramp. With roughly 50% of second half revenue expected to come from recurring revenue, the remainder of second half revenue would require council sales to be roughly in line with quarterly council revenue just prior to the Tableau cart ship hold, which we believe is achievable, particularly given the substantial growth in our acute and sub-acute pipeline during Q1. Turning to gross margin, with our continued gross margin outperformance, we have increased conviction in our guidance for 2024 non-GAAP gross margin. For the full year, we expect gross margin to be in the low 30% range, exiting the year in the mid 30% range for the fourth quarter of 2024. Again, gross margin expansion is driven by council cost down programs, recurring revenue from a larger installed base and service leverage. Turning to OPEX for 2024, As a result of the actions we have announced today, we now anticipate that OPEX for 2024 will be $125 to $130 million. And finally, our long-term guidance. With our strong value proposition across two large end markets, our wide competitive moat, and our broad integrated offering of products and service, we expect annual revenue in the high teens between 2025 and 2027. we continue to expect that our ability to expand gross margin on an annual basis will be linear from our 2024 exit goal of mid 30% to our 2027 exit goal of 50%. We plan to invest in our cost down programs for both council and cartridge, and we continue to see recurring revenue growth and service leverage. We also expect that the spending cuts we're making in 2024 will add roughly another $10 million in savings in 2025 across COGS, OPEX, and CAPEX. As a reminder, our business does not require large amounts of CAPEX, which we expect to be in the low single-digit million dollar range annually through 2027. We have further opportunities for even greater savings if gross margin continues to perform better than expected. As a result of our work to realign our spending and with our anticipated levels of revenue growth and gross margin expansion, We anticipate reaching cash flow break-even several quarters earlier than previously expected without the need to raise additional capital. The steps we've taken to further adjust our spending are logical and well-prioritized, allowing us to continue to deliver an unmatched customer experience as we accelerate our drive to profitability. We remain bullish on the tailwinds in the business and the wide and deep moat we have established with Tableau. all of which gives us confidence in our outlook for 2024 and the longer term. With that, I think we're ready for Q&A. Operator, please open the lines.
spk05: Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. We also ask that you ask one question and one follow-up. Please, as well, wait for your name and company to be announced before you proceed with your question. One moment while we compile the Q&A roster. The first question that we have today will be coming from Rick Wise of FIFO. Your line is open.
spk08: Good afternoon, everybody. Let me start with, I think, Tableau. I'm sorry, with Tableau Card. And I'm going to ask just a multi-part aspect that you've touched on a little bit. Specifically, as Jim or Jim Nabil, I'll hyphenate his name now, said, it's going to take some time to reengage and there's work to be done to install. But Leslie, maybe you can talk to us about, are there orders in hand? Are you ready to manufacture and ship to meet those orders? And in the second half, can you quantify at all, I mean, is, quote, the upside from having Tableau cart in hand Tableau cart sales specifically? Or no, it frees conversations and it's going to pull with it Tableau as well, if you follow what I'm getting at. Sorry for the multi-part question.
spk20: No, no worries. Yes, I'm happy to answer all of those. And let me know if I overlook any section of your question. So I think the first part was our orders in hand. Taking a quick step back, when we decided to effectuate the ship hold, we had to pause all sales, all marketing, all contracting, and any of the sort of back office order taking or support activities. And that's exactly what we did. So all of that needs to be re-established What are to give you the next level of resolution on that? What does that look like? Those are activities like generating new quotes, redoing existing sales agreements in some cases, getting new POs generated. And of course, there's a time factor for that. And none of this is difficult, by the way. That's the good news. But it does take a bit of time. I think another factor, too, is just customer budgeting. In some cases, we expect customers will have to re-budget for it. They might have had the funds allocated and approved several quarters ago and need to go back into their internal organizations and get those funds redeployed and approved. And again, that's not difficult either, but will take a little bit of time. So I'm very confident we will have all these steps well, well underway. I do expect that to, you know, to take us through the remainder of Q2. But again, the good news is, hey, we're ready for the back half, right? And we had originally expected Tableau cart approval right around the midpoint of the year. And I think that the main benefit here of the early approval is it just gives us time to get prepared earlier than we expected, get all the pieces ready in this ramp up period. and be prepared to really take advantage of this from a sales perspective in the second half, which is a lot of what's feeding our confidence in this second half growth trajectory. Sorry, this is going to be a bit of a monologue, but it was a long question in my defense. The second part you asked about was manufacturing and are you ready to ship? That answer is definitively yes, because we already had Tableau carts in inventory at the time of the ship hold. So I don't expect any delays related to supply chain or manufacturing. And then I think the last section of your question was, hey, where is sort of the growth and is there a little bit of upside in the second half perhaps? If so, where could that come from? And Rick, you nailed it. It's both. So we do expect that Tableau Cart will be kind of finally putting wind in the sails of Tableau again, Tableau Consoles, where those Tableau Consoles were repeatedly deferred out of quarters out of Q3, out of Q4, out of Q1. Again, we absolutely believe that Tableau card will put the wind back in those sails. And also, yes, we do expect orders for standalone cart purchases into our existing customer base and our existing installed base where customers already have been using Tableau or maybe they have the Tableau cart with the storage drawer and they want to upgrade that storage drawer to the pre-filtration version. So we do expect revenue being generated through both of those channels, if you will.
spk08: Gotcha. No, appreciate all that. A lot to unpack. And just as a follow-up, I think it'd be helpful to hear a little more about the lighter-than-expected first quarter. I mean, just based on your commentary and all the surrounding comments, I mean, in a sense, it sounds like it was actually a better period than maybe the optics, the initial optics might suggest. Can you help us better understand when you mentioned, I think you said Tableau, the A delayed or delayed orders and the cyber attack impacts now resolved. But how do I think would, so would first quarter sales have been a million higher for Five million higher. I mean, can you help us to understand the pieces and like whether that delayed order will come back in the second quarter, et cetera?
spk11: Yeah. Hey, Rick, it's DeBeal. The first quarter really played, you know, largely as we had guided. We had expected a soft first quarter and then recovery in Q2 and really ramping in the back half of the year. That's kind of the guidance commentary we gave entering, you know, entering this year and back in Q1. So, you know, we'd always said the first half of this year will look more like the back half of last year because, again, in both periods, we didn't have CART. So, Q1 performed largely as we expected. Having said that, in Q1, specifically, we did see the continued deferral of console sales and CART sales, which now is behind us with the CART approval. And we did also experience a little bit from this change healthcare slowdown, which again, we believe is also behind us. So, Rick, Q1 really played largely as we expected, a little bit softer, but again, we believe we haven't lost any deals and we believe again that we're now going to ramp Q2 for a strong second half of the year, again, as we had originally guided.
spk20: Let me, I'll just add one more thing just to reiterate. two things that I think are important to mention. One is the treatment revenue and the treatment orders in April have really come back and they were very strong and we're very, again, we're very bullish about the direction for Q2 and the remainder of the year there. And then you had embedded in your question, Rick, asked something about, hey, have any of these orders come through on the council side? And the answer to that is yes. Actually, one of the orders that was deferred right out of Q, toward the end of Q1 because of the changed healthcare situation, actually was an order that was placed in April for the record there.
spk07: Appreciate it. Thank you.
spk20: Yeah.
spk05: Thank you for your question. One moment for the next question. And our next question will be coming from Shagan Singh of RBC Capital Markets. Your line is open.
spk16: Great. Thank you so much. A quick follow-up here. I was just wondering if there's a way to quantify the backlog. What was outstanding just waiting for Tableau Card to get approval on restructuring? Is there any way you can provide the cadence for that 20 million savings in 24? And just what are you saying on the profitability timeline? I know you said a few quarters ahead, but anything more specific? And then I guess a big picture question for you, Leslie, can you just spend some time elaborating on your commercial organization? Like just trying to understand, you know, if you have the leadership in place, you know, the feet on the street, if you will, you know, how are you really looking to, you know, re-engage these customers? Thank you for taking the question.
spk20: Sure. Maybe Nabil, you want to start off and I'll take over in a minute.
spk11: For sure. Shagan, maybe let me sort of lay out how we are thinking about the second half of the year, the full year really, from a guidance perspective, right? And so let me go back to sort of, you know, we expect the first half of this year to look largely like the back half of last year, again, because we haven't had CART in any of those periods. So our guidance for Q2 is for revenue in the low $30 million zone as, as Leslie pointed out, we ramp back on cartwood pre-filtration. Now, Shagan, as we think of the second half of the year, there's really two components I'd point you to. So first of all, we will have the recurring revenues on our larger installed base. This is the consumables and the service revenues, which will be roughly half of our implied 2h revenue if you will if you take that and then sort of the remainder the remaining console revenue after you sort of take the second half roughly half is recurring the remaining console revenue is roughly in line with what we did in the first half of 2023 when we had carts to be able to sell so that's how we kind of thought about the back half of the year Moving on, Shagan, your second question with respect to the savings, a little over half the savings were from R&D and ops groups, kind of the R&D more broadly speaking. And again, Leslie talked about the projects that were sort of, again, deferring or that we took a second look at. The rest, so half is R&D and ops, the other half is just across the P&L. It's things like spans of control, layers of management, programs and projects that didn't have payback within our LRP horizon. So that's number two. Number three, from a profitability timeline perspective, let me first maybe talk a little bit more about the savings we've generated. So in total, we are saving through the actions we have undertaken over $100 million over our LRP period. roughly 20 million comes out of 24 as we talked about that annualizes to about 30 million dollars in 25 and a little bit more than 30 million in 26 and 27. so if you propel that math through the model you know our initial expectation was that we'd get to break even exiting 27 you can see how again if you take kind of 30 million a little bit over 30 million out of the out years you can see how that will pull profitability forward by a few quarters.
spk20: Maybe I'll pick up on the commercial org. I think was your last question. And, you know, do we have adequate coverage out there to rapidly educate customers about capital card and other? And the short answer is yes. We are covered actually in all 50 states. Just as a quick reminder, we have a capital sales team We have a clinical sales team, and we have a national accounts team. All three of those teams cover both acute and subacute, of course, and also home. And so we continue to get a lot of operating leverage out of this team, and I think we've talked about that in past calls. That continues to be true. But we do have sales coverage in all 50 states, and I am not worried at all about the speed with which our sales team will be sharing the news with both current customers and our potential new customers. Thank you.
spk05: Thank you. One moment for the next question. And our next question is coming from Marie Salbot of BTIG. Your line is open.
spk22: Hi, good evening. Thanks for taking the questions. I wanted to start here with a pretty high level one. I know that one headwind you've talked about in the past is, you know, a longer selling cycle and the CapEx environment being a little bit tougher. Wanted to hear how that's changed since you last spoke with us publicly. Has that gotten worse? Has it gotten better? Has it stayed the same? Any detailed commentary you can give on that would be helpful.
spk20: Yeah, sure. I would say on the capital spending environment, It's been really stable, which has been a good thing. So we have not seen any material changes in the capital spending environment. We are also advantaged because Tableau and insourcing does have a very rapid payback period, typically inside of a year, for a hospital that makes the conversion. And that certainly helps ensure that Tableau rises to the top of those capital budgeting prioritization lists. But setting that aside, in general, we saw a lot of stability in the capital spending environment. No changes to speak of.
spk22: Okay. That's great to hear. And then my follow-up here on gross margins, you just continue to exceed expectations. They're nice to see another increase. On maintaining the guidance there, I mean, you are already starting the year in the low 30s, and we're expecting to have low 30s for the full year, exit mid-30s to exit the year. Should we just expect smaller incremental improvements? Was this kind of a one-time leap and we should expect a little tick down? How should we think about the cadence for the rest of the year?
spk11: Yeah. Hey, Marie. It's the Bill. So we are really pleased with our team's ability to deliver our 12th consecutive quarter of gross margin expansion. And look, we think it is going to be linear from here to that mid-30% exiting the year on our way to 50%. Yeah, really good performance. And again, we just expect to continue down the path.
spk22: All right. Encouraging to hear.
spk05: Good luck with it. Thank you. Thank you.
spk11: Thank you.
spk05: Thank you. One moment for the next question. Our next question is coming from Christian Stewart of CL King. Your line is open. Hi.
spk19: Thanks for taking the question. I was wondering if you could just expand a little bit more on the U.S. Renal Care Announcement. and just in terms of when we could start to see an impact from that really materializing. Yeah, sure. Hi.
spk20: Well, U.S. Renal Care has been a good partner to us, continues to be a good partner to us, and our initial home programs with them were very successful. As I mentioned, it's one of the largest of these mid-size dialysis organizations. They manage roughly 36,000 patients across the United States and increasing their home population and growing home is really central to their mission moving forward. I think what they were able to confirm for themselves is a much faster training time with Tableau, which made it easier to convince patients to adopt home. Our training time, our average duration Despite a much wider and wider and wider demographic of patients, adopting home has still remained remarkably consistent at under 10 sessions, roughly two weeks, equivalent to PD. So that's been a real selling point that I think has been recognized by many provider organizations. And really this retention rate has been key. It is so much higher than other alternatives out there. And that's really the point. You know, the point isn't to train as many people as you can to go home. The point is to keep as many patients as you can at home. That's really where the economics bloom and, of course, the clinical outcomes manifest themselves. And so we view U.S. Renal Care like all of our other partnerships within this MDO. segment as really critical to our own home growth, and we're privileged to be able to be a strategic weapon in their hands as well as they try to grow home.
spk19: Perfect. Thanks for taking the question.
spk05: Of course. Thank you. One moment for the next question. And our next question is coming from Shiraj Kalaya of Oppenheimer. Your line is open.
spk06: Good afternoon, Leslie. Jim, Nabeel, can you hear me all right?
spk17: Yes.
spk06: Perfect. Hey, Leslie, a lot of commentary provided. If you could quickly, the 90-day, 90% retention rate, if I were to extrapolate those curves at the one-year time point, do you have visibility into what the retention rates are? And also specifically on workforce reduction, Leslie, Was there any reduction in the sales and marketing division? Thank you.
spk20: Sure, yes. So let me speak to that. I'll talk about the patient retention rate, and then I'll go to your second question. Yes, we do have data on the one year, and it is also markedly, markedly higher at one year on Tableau compared to the legacy home hemo system. So we've been really pleased at the one-year retention as well. And actually, I'll make another remark, it has been very, very stable. So not only has it been much, much higher, it's been really stable. And Suraj, we've offered in the past that at one year, what we call our controllable attrition, there's the uncontrollable attrition, which is out of our hands, unfortunately, that's death and transplant. And then there's what we call the controllable attrition, which is the patient's just opting off. They want to go back in center, let's say, or something in their life changes. We should be able to affect that. We challenge ourselves to affect that. And so we really focus on doing a great job as an organization in the controllable attrition rate. And for us, that controllable attrition rate at 12 months has remained very stable at about 10%. despite our pretty significant growth in the denominator of patients home on Tableau. So those results, Suraj said differently, are holding between 90 days and a year. Regarding the reduction of our team, the lion's share of the people, as well as programs and CAPEX and other forms of OPEX, were in, as Nabil said, the operations and the R&D area. with the remainder of those reductions spread across the organization. When we thought about the approach here and the philosophy around reducing our spend, we really had two non-negotiables or sort of sacred cows in mind. Our core tenets were, number one, we have to preserve the patient and the customer experience. That is what is driving Tableau's adoption growth, and two, we have to ensure that we continue to deliver on our growth margin expansion initiatives, which continue to pay off. So we very, very, very carefully planned our cost reduction to avoid affecting those areas.
spk05: Thank you. One moment for our next question. Our next question is coming from Stephanie Piazzolla of Bank of America Securities. Your line is open.
spk17: Hi, thanks for taking the question. I appreciate the color on the guidance you've given and how we should think about the first half versus the second half of the year, but just wanted to follow up a little bit. I guess with Q1 coming in a little light and not changing the outlook for the second half, is there anything getting better maybe in the second half to offset Q1 versus previous expectations and maybe any difference in how we should think about the low versus the high end of the guide now. Thanks.
spk11: Yeah. Hey, Stephanie. So with respect to Q1, again, it came in largely as we guided, a little softer. Q2, we'd always expect it to be a ramping quarter, for lack of a better word. for all the reasons that Leslie talked about in terms of getting customers reactivated with Tableau CART with pre-filtration. So we do expect Q2 to step up a little bit in that low $30 million zone, as we said. Now, when we think about the back half, a couple of things. So one, we will have Tableau CART with pre-filtration for the full half because we expect to be ramped and are working to be ramped in the second quarter so that we're fully sort of ready in the second half. Let me talk a little bit about the second half and some more specificity. And really, Stephanie, it's two components. So one, we do have our recurring revenues, consumables and service, of a larger installed base as we enter the second half. And if you assume kind of at even the low end of guidance that half of our 2H implied revenues come from recurring revenues, the other 50% coming from consoles, is the same, roughly the same amount of console revenue as we did in 1H23, which was the last, you know, half year when we had Tableau Cart with prefiltration. Does that make sense?
spk15: Yes, thank you.
spk11: And then, Stephanie, and then so sort of, okay, so that's part one. And then as you think about moving through the guidance range, we've always had the same performance levers, right? So we can place more consoles. in both our large home or acute end markets. We have ASP. We have Tableau Pro Plus penetration or sales. And of course, we have Tableau Cart sales, both to our existing install base and to new customers. So those are kind of how we think about guidance in the background.
spk20: I can add just a few points that came to mind while you're talking. I think in addition to Tableau Cart, which is the big, again, the big propellant heading into the second half, but I will also reiterate that we did see very significant pipeline expansion in Q1. And we have talked before about our sales cycle, you know, being in the nine to 12 months zone. Some deals come in earlier than nine months and other deals go a bit longer than 12 months. But generally speaking, it's nine to 12 months. So with this significant pipeline expansion, I think I mentioned, I want to reiterate it, a higher percentage than ever of our deals in the pipeline are over a million dollars in size each and over half are from potential new customers. So this pipeline is looking a little different to us in a very, very good way. And so that's another kind of tailwind for Q, excuse me, second half. And then, of course, the third tailwind, which is related, is that lapping of the sales cycle from Q3, Q4 of 2023 coming online in that second half of 24. So that's how I think about the three tailwinds kind of propelling us to this growth trajectory through the back half of this year.
spk04: Okay, thanks, Stephanie. Next question, operator.
spk05: Thank you. And the next question is coming from Joshua Jennings of TD Calwin. Your line is open.
spk23: Hi, thanks for taking the question. I was hoping to just get an update on the Tableau enhancements that have been brought forward over the past 12 to 18 months. It sounds like the CTO departed as part of the restructuring. Imagine there's a deep bench there, but any plans to replace that head of that group and then anything we should be looking for in terms of technology enhancements on the Tableau system as we move through this year?
spk20: Yeah, sure. Hi, Josh. Happy to answer that. One of our, if not our CTO's greatest gift and legacy to Outset is the team that he put in place here and he's leaving us with. We have an absolutely stellar vice president of software, very, very deep bench strength on cyber and data analytics and EMR operability. As we noted in the script, we have spent the last any number of years, making very significant enhancements and investments in all dimensions of software, data, data transmission, cyber, and EMR interoperability. And now is our moment to harvest those investments. And as I said, kind of really maximize the tableau that we have today. We do have an advantage in this market, which is We are light years ahead. We have a very, very meaningful technology advantage, both hardware and software. And I know this has been pointed out to us by investors and shareholders that, hey, you guys have an incredible, incredible lead. Should you just be maybe taking a pause and really selling and marketing what you have? And I think that there's a lot of merit to that. And we reflected on that a lot. we will never stop being sort of the imaginative, ambitious people that we are. I can't change the personality of the organization. However, we do have an advantage in the lead that we already have, both software and hardware. It will be our focus over the course of this LRP period to make the best use of that. But no, we are not going to stop dreaming. And as I mentioned, we are just going to probably more pace investments in the future better aligned to the timeline at which they might pay off, which is probably, you know, maybe toward the end of the LRP period or beyond. Hopefully that helped.
spk23: Definitely. And just thinking about the evolution of the Tableau system and thinking about the LRP, what are the pricing assumptions both on the capital and on some of the disposables? Should we be thinking about price increases year over year? Or is stable pricing the name of the game within that LRP guidance? Thanks a lot.
spk11: Yeah, Josh, I mean, we've so look, we've always talked about Tableau, about our ability to protect our pricing on the low end and then offering these value added accessories, including Tableau ProPlus and now back with Tableau-Cart with pre-filtration. So again, that's how we think about pricing broadly now and over the LRP period.
spk02: Okay. Thanks, Josh. Operator, any further questions for us?
spk05: At this time, there are no more questions in the queue. I'd like to go ahead and turn the call back over to Leslie for closing remarks.
spk20: Great. Well, I would like to thank everybody again for joining us
spk05: afternoon and wish everybody a very good evening thank you this concludes today's conference call thank you for joining you may all disconnect
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