Outset Medical, Inc.

Thank you for standing by. Welcome to the Outset Medical first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jim Mazzola, Head of Investor Relations. Please go ahead.

Okay, thanks, Victor. Good afternoon, everyone, and welcome to our first quarter 2025 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer, and Nabeel 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. And this call is being recorded and will be archived on the investor section of our website. It's 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. With that, I'll turn the call over to Leslie.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. Outset's results in the first quarter reflect the strong progress we've made with our commercial transformation, the durable competitive advantage of Tableau in both the acute and home settings, and the meaningful impact our operational execution is having on our path to profitability. Console sales grew meaningfully over last quarter, utilization remained strong, and we demonstrated continued operating leverage. Starting at the top, revenue for the first quarter of $29.8 million reflected 6% growth from the first quarter of last year. We were very pleased with the composition of revenue, which included 23% sequential growth in console revenue, which is a key metric for us this year as we look to sustainably reignite console growth. We continue to see strong utilization across the Tableau installed base, which resulted in another strong quarter of recurring revenue. Recurring revenue of $22.7 million grew 20% over the first quarter of last year. Once Tableau consoles are placed, they're used. And this utilization frequency keeps us right on track to exit the fourth quarter on a run rate of more than $100 million annually in recurring revenue alone. I mentioned last quarter that it took Outset 4.8 years to reach 1 million cumulative treatments and then an incremental 17 months to reach 2 million cumulative treatments. This quarter, we shipped our 3 millionth treatment, and it took us not another 17 months, but just over 12 months to get there. We also continue to be pleased with the progress we are making with non-GAAP gross margin, which at 37.6% continued to expand year over year as we sold more treatments and service across a larger installed base. Normalizing for the lower absorption of manufacturing overhead, which we've previously discussed, we would have seen non-GAAP gross margin of approximately 40% for the quarter, right on our path to the next milestone of 50%. Turning to our end markets, our results in the quarter were again driven by continued penetration within acute care providers who have made the decision to reduce costs and improve patient care by insourcing their dialysis service line. The clinical, financial, and operational advantages Tableau can deliver continue to resonate with the full range of acute providers, from community and critical access hospitals to regional IDNs and national health systems. For example, one large regional IDN customer deployed their 100th Tableau during the quarter as part of a system-wide insourcing implementation and continues to expand Tableau's use across multiple facilities in several states. At one of the largest health systems in the U.S., we recently expanded our footprint from insourcing dialysis in the acute setting to standing up a new dialysis service line at one of their skilled nursing facilities. We're early in this rollout, but excited by the acute to subacute expansion potential within this and other large health systems that are using Tableau inpatient and beginning to evaluate it for use at the subacute facilities in their network. Reflecting on the quarter, we were very pleased to observe continued progress with our sales transformation across both process and people. Our pipeline grew substantially again in the quarter, reflecting contributions from our enhanced capital sales team and sales process and growing market recognition of Tableau's right to win. Our team is becoming increasingly proficient at educating stakeholders at all levels of an enterprise about the benefits Tableau can deliver not only financially, but also clinically and operationally, and our forecast accuracy has improved. During the quarter, we added new customers adopting Tableau for the first time and also saw existing customers buy more Tableaus to expand their use to new locations. As we look ahead to the rest of the year in the acute end market, we remain confident in our pipeline and see evidence of continued strong market demand powered by increased Tableau brand awareness and the consistency of the results our technology and our team produces. Insourcing with Tableau saves hospitals money. It has a relatively low acquisition cost and a short payback period. Clinically, a growing number of acute care customers are sharing reductions in hospital-acquired infections, lower length of ICU stays, and higher nurse satisfaction rates post-insourcing with Tableau. While federal funding cuts have made the healthcare environment more dynamic since we provided guidance in February, customers are conveying to us that the financial and clinical case for insourcing with Tableau remains compelling as they prioritize their capital expenditures for 2025. This customer feedback fueled our confidence in Outset's plan for the rest of the year, a plan that remains unchanged and on track. Turning now to the home end market, we expanded Tableau's use among mid-sized dialysis providers and successfully contracted with one of the last remaining MDOs that hadn't yet adopted Tableau. Patient demand continues to play a key role in Tableau's home adoption, and to that end, we again drove industry-leading retention rates above 90% at 90 days. As we've said, change in the home setting will take a bit longer than the ramp we're seeing in the acute setting, but 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 a post-acute setting. From an operational perspective, the actions we have already taken to remove approximately $80 million of annualized spend delivered leverage in the quarter with our lowest non-GAAP operating loss since our IPO. I want to reiterate that we are aggressively executing against a clear path to profitability that starts with top line growth, includes gross margin expansion, is reinforced through our disciplined spend management, and shows up in the significant reduction in cash use we project for 2025 and the leverage we see at the bottom line. Also related to our operational progress, we were pleased with the vote results from our special meeting of stockholders held on March 5th. which enabled us to complete the recapitalization of the company that we announced in January. On April 11th, we filed our proxy statement for the annual meeting of stockholders scheduled for June 2nd. In this proxy, we are asking shareholders to approve a one-time increase in our stock pool for employee grants, as well as a share pool increase under our employee stock purchase plan. Both of these important programs are necessary to help us ensure we keep our team's interests tightly aligned with investors' interests and to continue to attract and retain top-talented Outset as we reignite growth and build for the long term. One final operational note, we spoke on last quarter's call about a special tariff exemption Outset received in January for medical devices that serve a chronically disabled population. With some of the new tariffs now in place, we can confirm that Tableau, Tableau Cart, and Tableau Consumables remain exempt under this special protocol. Additionally, we continue to have a tariff exemption under the USMCA and further contingencies such that we continue to expect no impact from proposed or implemented tariffs at this time. We remain very bullish on the competitive advantages Tableau and its established ecosystem offer customers in the acute and home settings. We've demonstrated time and again that once Tableau is deployed, it's used consistently. And this consistent use drives strong, growing, and predictable recurring revenue. We have demonstrated that Tableau delivers compelling clinical, financial, and operational benefits to providers in the acute, subacute, and home settings. Moreover, the competitive moat around Tableau continues to deepen. Our growing installed base is extending our reach across the country. Our proprietary data analytics ecosystem powered by Tableau's integration with Epic and Cerner, and the 3 million data points sent to the cloud after every treatment, every Tableau, every day, uniquely enables us to deliver value-added clinical and operational insights and efficiencies to our customers. Our proprietary know-how around insourcing allows us to partner with hospitals as a solution, not just a product. Our exceptional at-scale field service team drives a customer satisfaction score consistently above 95%. And our portfolio of referenceable customers continues to grow, helping to drive market adoption. With the Tableau installed base performing more than 1 million treatments annually and growing, we estimate that there is still a half a billion dollars in recurring revenue yet to be realized from the current installed base alone. I'll close by reiterating our optimism for the year ahead. We entered the year with extraordinary clarity on the vital few priorities for outset. Our team is determined to deliver on three priorities in 2025. Number one, grow console revenue. Utilization is strong on the consoles we place, creating an even more valuable recurring revenue stream as we expand the installed base and gain scale in what remain two of the largest market opportunities in healthcare. Second, increase gross margin. This has been a bright spot for Outset, and we've increased gross margin by nearly 30 percentage points since our first year following the IPO. With product margin nearing 50%, service gross margin increasing with scale, and continued efficiencies in our plan, we see a clear path to 50% and beyond. Third, driving to profitability. Our non-GAAP operating loss this quarter was the lowest it's ever been as a public company. and our plan calls for it to significantly narrow in 2025, putting us in a strong position to reach cash flow break-even and profitability within a near-term planning horizon. We fully understand the importance of consistent execution during this pivotal year and intend to remain heads down and focused on doing the work. Accordingly, we don't want to get ahead of ourselves with just one quarter down in the year and intend to maintain our conservative approach to guidance. That said, we are confident about our outlook and believe we are set up very well for the remaining three quarters of the year. Providers, including the largest health systems in the country, are seeing the enormous clinical, financial, and operational advantages that insourcing with Tableau can deliver. The market opportunity remains wide open for us, and we continue to gain ground, adding new healthcare facilities to our growing customer base and driving treatment expansion. I want to close by thanking our entire team for their commitment to the patients we serve, in addition to their commitment to driving growth, managing spend, and reaching our shared goal of profitability. And with that, I will turn it over to Nabeel.