Outset Medical, Inc.

Good day and thank you for standing by. Welcome to the Outset Medical fourth quarter 2024 earnings conference call. At this time, all participants are on 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Jim Mazzola, head of investor relations. Please go ahead.

Okay, thanks, Kevin, and good afternoon, everyone. Welcome to our fourth 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 and are based on our current estimates and various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section of Outset's public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. With that, I'll turn the call over to Leslie.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. The fourth quarter again highlighted the commitment of our entire outset team to dialysis patients and providers and showcase the financial, clinical, and operational advantages Tableau delivers in the markets we serve. The business performed well in the quarter, driven by our strong recurring revenue business model and continued sales transformation progress. We demonstrated another quarter of sequential revenue growth, a notable increase in gross margins, a decline in operating expenses driven by our cost down measures, and a significant strengthening of our balance sheet with the financing we announced on January the 6th. Revenue for the fourth quarter was $29.5 million ahead of our earlier expectations, which enabled us to finish 2024 with revenue of $113.7 million. While this was below our original plan for the year, we were pleased to finish with two quarters of progress and ahead of the updated guidance we provided in August. Strong utilization across the now nearly 6,000 tableaus in our install base drove another record quarter of recurring revenue. Recurring revenue grew 13% sequentially and 17% over the fourth quarter of last year. On a console install base that grew 10% during the year, recurring revenue grew 21% for the full year, reaching $83.9 million. At this pace, we expect recurring revenue exiting the fourth quarter of 2025 to be on a run rate of more than $100 million annually. We also continue to see strong average selling prices for our consoles and treatments, and non-GAAP gross margin continue to expand as we sold more treatments and service across a larger installed base. Turning to our end markets, during the quarter, we continued to have success with acute care providers ready to insource their dialysis service line. There are now nearly 4,500 Tableau consoles deployed in 850 acute and subacute sites in the United States. We talked about gaining scale in the acute setting as we began 2024, and we exited the year having objectively solidified that presence as we expanded the breadth and depth of Tableau's footprint with an existing large health system customers, as well as securing contracts with new marquee customers. Looking ahead to the next 10 plus months of 2025, we anticipate much of our growth to come again from this end market. We are pleased with the size and quality of the later stage opportunities in our pipeline, and our sales team has made tremendous progress establishing the business case and support for outset and tableau within each. We recently hosted the chief nursing officer from a 350-bed regional hospital in the southeast to talk about results of their insourcing program one year after its implementation. The driver for change was something we hear often. This hospital was paying what it believed to be an exorbitant cost for subpar care and service from its former outsource provider. The CNO told us that extra fees were regularly charged as a result of the outsource provider's poor operations. Our team came in as a partner to help build the business case, support the CNO in establishing a coalition for change, and then rolled up its sleeves to assist in the implementation. One year after stand-up, the CNO reported that treatments had increased by more than 280%, which she attributed to the greater confidence that nephrologists and patients had with the quality and efficiency of the facility's insourced service line. Their overall treatment completion rate is now greater than 95%, and remarkably, central line bloodstream infections One of the most serious and costly hospital-acquired infections were reduced by 75%. Despite hearing stories like this all the time, their impact never diminishes. The clinical, operational, and financial benefits Tableau delivers for dialysis and sourcing are clear, compelling, reproducible, and unique to LSAT, which is why we are so confident in our strategy and our ability to execute against it in 2025 and beyond. Turning to the home and market, we continue to expand Tableau's use among mid-sized dialysis providers and within skilled nursing facilities. We again saw industry-leading retention rates above 90% at 90 days. There are now approximately 1,425 Tableau consoles deployed through home providers. While change takes longer in this setting, we continue to make steady progress and remain driven by the stories from people who tell us their lives have been changed for the better by having access to Tableau at home or in their post-acute setting. From an operational perspective, we were pleased last week to receive notification from FDA that the warning letter from July of 2023 had been officially closed. This milestone followed a comprehensive FDA inspection in the fall, which successfully concluded with no 483 observations. Innovation will always be at our core, and therefore our quality system and regulatory compliance are essential at outset. I am very proud of how our team responded and proud of the commitment to continuous quality improvement that we have embedded across the organization. In addition to the warning letter closure, another recent accomplishment was the recapitalization of the company that we announced on January 6th. The goal of the financing was to reassure our key constituents, investors, customers, and employees, of our ability to reach cash flow breakeven based on our current projections with ample resources to prosecute our mission. We secured $172.7 million in equity financing, of which $168.8 million was from a group of marquee new and existing investors, and $3.9 million that will be invested by members of management and the board. An important element of the financing was the significant reduction in our outstanding debt, from $200 million to $100 million, which we refinanced with a new, highly regarded credit partner. The new debt agreement pushes out the maturity to 2030 and provides the option to access an incremental $25 million. We now have opened 2025 with approximately $210 million of cash, which, based on our current projections, provides the funds expected to capitalize the company through cash flow breakeven and beyond. Related to the recapitalization, we have a special meeting of shareholders scheduled for March 5th. I encourage all shareholders to carefully review the proxy and vote your shares. Among several proposals under consideration at the meeting, we ask for your support to convert the preferred shares already issued to common shares and authorize a reverse split of the shares. We believe the reverse split will benefit the company in two ways. The first is in our ability to attract new investors who may be restricted for purchasing stocks below a certain price threshold. And second, we believe the reverse split may provide commercial benefit by ensuring that how customers perceive the company's financial strength matches the company's actual financial strength. Our rationale for these and all the proposals are outlined in the proxy, and we're available to answer questions shareholders may have as they consider these important matters. I said last quarter that we expect the full dividends of our sales transformation to be realized beginning in the first half of 2025, and we remain on track to reach that goal. Three weeks ago, we brought the entire team together at our national sales training meeting with the goal of leaving with deeper competency on all aspects of our sales model and go-to-market strategies. During the week, our team learned from one another about best practices and were inspired through the participation of customers eager to share stories of the clinical, financial, and operational benefits they've realized by deploying Tableau. With the sales training meeting completed, key roles hired, and process improvements in place, we look forward to seeing the results of this highly experienced and motivated team over the coming quarters. Our guidance for 2025, which Nabeel will outline, is intentionally conservative to provide some time to help ensure the benefits of the transformation we've undertaken are durable. However, foundationally, we are very bullish on the competitive advantages Tableau and its established ecosystem can deliver. We've demonstrated time and again that once Tableau is deployed, it is used consistently, and this consistent use drives strong, growing, and predictable recurring revenue. We've demonstrated that Tableau delivers compelling clinical, financial, and operational benefits to providers in the acute, semi-acute, and home settings. And we've demonstrated our ability to expand non-GAAP gross margins, which in 2024 expanded by nearly 12 percentage points. Finally, we've demonstrated our ability to right-size our cost structure by removing approximately $80 million of annualized debt. These actions taken together have enabled us to reduce our cash use projections in 2025 by more than 50% to less than half of what was used in 2024. With all of these steps behind us, our focus in 2025 with the Transform Commercial team is on re-accelerating revenue growth, and we have a solid foundation on which to build. Despite the challenges of 2024, the Tableau install base grew by 10%, recurring revenue grew by 21%, and we are now at a run rate to perform more than 1 million treatments annually. With recurring revenue over a seven-year useful life of approximately $15,000 per year for each Tableau console deployed in the home and $20,000 per year for each Tableau console deployed in the acute market, we estimate that there is still a half a billion dollars in recurring revenue yet to be realized from the current install base. As we think about the year ahead, our priorities are clear. We are first and foremost focused on reigniting revenue growth and specifically console growth. Our sales transformation has been designed and implemented to help us do just that. During the second half of 2024, we saw some positive early indicators such as pipeline expansion and deal progression, but also recognize that our work here continues. We expect to see the full benefits of these changes reflected in console growth as we move through the year. Next, we are committed to continuing to expand our gross margin. This has been a remarkable success for outset in an area with significant incremental upside ahead. And finally, with a recapitalized balance sheet, we are focused on using every lever at our disposal to accelerate our path to profitability. While 2024 was a year of challenge and transformation for us, what has not changed is the enormity of our market opportunity the proprietary competitive advantages of Tableau, and the power of its economic and clinical value proposition. These bedrock strengths are at the heart of how we've driven a 50% increase in the number of healthcare facilities using Tableau in just the last two years, how we have increased our install base by 47% in the same period, and why we continue to see treatment expansion accelerating. For example, it took us 4.8 years to reach 1 million cumulative treatments. By contrast, it took us an incremental 17 months to reach 2 million cumulative treatments. And we are just getting started. I want to thank our entire team for their commitment to the patients we serve, in addition to their commitment to drive growth, lower expenses, and reach our shared goal of profitability. And with that, I will turn it over to Nabeel.