Q1 2024 Outset Medical Inc Earnings Call

In This Article:

Participants

Jim Mazzola; VP, Investor Relations; Outset Medical Inc

Leslie Trigg; Executive VP, Marketing; Outset Medical Inc

Rick Wise; Analyst; Stifel

Shagun Singh; Analyst; RBC Capital

Ray Talbot; Analyst; BTIG

Kristen Stewart; Analyst; CL King

Suraj Kalia; Analyst; Oppenheimer & Co Inc

Stephanie Lomibao; Analyst; Bank of America

Joshua Jennings; Analyst; TD Cowen

Presentation

Operator

Good day, and thank you for standing by, and welcome to the Outset Medical Q1 2024 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded, and I would like to turn the conference over to your speaker today, Jim Mazzola, Head of Investor Relations. Please go ahead.

Jim Mazzola

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 the BLM ED, Chief Financial Officer. We issued a news release after the close of market today, which can be found on the investor pages of outset, medical.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 our public filings with the SEC, including our latest annual and quarterly reports.
One quick note before we get started and the deal is feeling a bit under the weather today. So I'm going to cover the financial section in our prepared remarks and to be here with us, and we'll handle Q&A as normal.
So with that, let me turn the call over to Leslie.

Leslie Trigg

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 card 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 assets.
Outlook and conviction in its future has never been stronger earlier this week, we announced the receipt of FDA clearance for Tablo 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 accomplish this milestone. Capital card 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 attack, which slowed reimbursement payments and resulted in several of our customers deferring both treatment and console purchases until their cash flow normalize. 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 data shareholders to reach cash flow breakeven 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 reduced 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 into 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, head count 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 energy on penetrating our $11 billion US market opportunity with the Tableau we enjoy today.
We are not sacrificing projects required for longer term, though, but rather pacing those programs to more closely match the longer time line in which we believe they will be important to our product and technology needs. Additionally, we examine ways to reduce management spans and layers where it did not affect the customer experience and revisited plans to expand overtime 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 estimates without the need to access the capital markets.
Why are you reaching breakeven at a high level? We continue to see patients and providers benefiting from the differentiated clinical, operational and financial advantages, Tablo and deliver. Our moat is wide and deep with proprietary in-sourcing know-how, a differentiated technology platform, actionable data, EMR, interoperability, service excellence and regulatory experience through our successful clearance of nine five 10-K during the past nine years.
As a result, the universe of providers and patients experiencing the advantages Tablo can provide continues to grow. We also generated additional momentum with skilled nursing and sub-acute 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 2020.
On the operational front, our efforts to replace the silicone tubing and Tablo consoles with TCDA. three material is substantially complete. Looking ahead, we are in the process of completing one additional field action near term to upgrade capital for powersports. We are proud of our collaboration with SCA 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 has continued to elevate the financial benefits and strategic importance of Tableau to provider 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 continued 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 a hospital in the Southwest associated with a large health system like many other customers. This provider with facing increased costs and inadequate service levels from an outsourced dialysis provider and wanted to take charge of their dialysis programs 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 insource program with Tablo, which resulted in an early termination of their contract with the outsource provider. Several of these consoles are equipped with our Tableau Pro plus 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 standards.
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 manage through an elongated sales cycle and work toward five 10K clearance of Tableau carbon-free filtration. And that's how the quarter played out and with Tableau card 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 and market our progress in the quarter was highlighted by the multiyear agreement we completed with US renal care. We've talked on previous calls about our two tiered home penetration strategy, which entails partnering with Progressive mid-sized dialysis organizations and working upstream to create greater channel access for patients by expanding the universe of health care providers offering home dialysis. U.s. Renal Care is the largest of the progressive MBOs and committed to accelerating home dialysis with Tablo.
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 option. 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 HHT. enables patients to maintain the control they enjoy at home where many report higher quality of life advances we are making with home providers are driven by the fundamental differences Tablo can provide for their patients. For example, during the quarter, we continued 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 our prior attempts 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 rates for the legacy home hemo systems as cited in the last USRDS reports.
Additionally, we continue to see controllable attrition of patients on Tablo 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 trade-off. 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 NDO. 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 sub-acute providers serving more than 60 facilities in the US. This provider partners with skilled nursing facilities to offer on-site dialysis treatment to residents, which deliver substantial benefits to the SNIP 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 as often missing meal medications or 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 consoles 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 offerings in Health & 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 Tablo consoles and a very high renewal rate for Tablo service contract. 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, Tableau's in the home generate roughly $15,000 per year through their useful life. Tablo is in the acute setting, generate roughly $20,000 per year as there are more treatments performed on each device in the hospital and with a single patient.
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 capital parts, 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 demonstrated that commitment through 12 quarters of consecutive gross margin expansion to the 31.1% non-GAAP gross 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 gross 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.