Ladies and gentlemen, thank you for standing by, and welcome to the Business Update 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 the question during the session, you will need to press star then one on your phone. If you require any further assistance, please press star then zero. I would now like to turn the conference over to your speaker for today, Jim Mazzola, Head of Investor Relations. You may begin.
Thank you. Good afternoon, everyone, and thanks for joining today's call. I'm here with Leslie Trigg, Chair and Chief Executive Officer, and Nabeel Ahmed, Chief Financial Officer. We issued a news release after the close of market today, filed a Form 8-K, and updated our investor presentation, all of which can be found on the investor relations pages of outsetmedical.com. This call is being recorded and will be archived on the investor section of our website. After our prepared remarks, we'll host a question-and-answer session. During today's call, we will be making forward-looking statements. All forward-looking statements are based on our current estimates and assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Outset Medical 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 will turn the call over to Leslie.
Thanks, Jim. Good afternoon, everyone, and thank you for joining us. Today we announced a shipment hold on Tablo units for home use. On today's call, I'd first like to share some background information on this development, and then I'll ask Nabeel to address our updated second quarter and full year guidance. With respect to the background information, the shipment hold is related to a pending regulatory review of a 510(k) submission that summarized changes made to Tablo since its original 510(k) clearance for home use in the spring of 2020. The version of the device that is the subject of the 510(k) required human factors study data among a comprehensive suite of other test data, and it's our understanding that assessment of this human factors test data is the last residual review item.
Over the past several years, the FDA has appropriately and meaningfully raised the bar for human factors testing. We have been very responsive in acting to meet this high standard and are proud of the additional human factors data we submitted alongside this recent 510(k). Through our open and ongoing discussions with FDA, we understand the need to raise the bar for human factors testing and its critical nature to ensure a safe and efficacious experience for patients, particularly at home. It was in that spirit that we agreed to implement the ship hold pending review and clearance of our submission. We also believe that rigorous human factors testing can be a competitive advantage in the market.
Our most recent human factors studies were the sixth such studies we have conducted over the last five years, and we intend to continue striving to be an industry leader in this domain. In terms of the timing of this development, we implemented the ship hold in late May and anticipated clearance within a few weeks, which would have enabled us to remain on track to meet our Q2 goals. However, it became apparent in recent days that the review of our submission would extend into Q3, therefore materially impacting our ability to meet our Q2 revenue forecast. There are several additional takeaways related to the news we are sharing today. First, we have not identified any safety issues with Tablo. Devices that are already distributed to home users have not been removed from use, and current users can continue to work with their healthcare providers on appropriate treatment strategies.
Second, while we will not be marketing for home use during the shipment hold period, we continue to market Tablo for use by healthcare professionals in the chronic and acute care setting. As we have previously shared, we continue to see strong demand for Tablo within the acute market, and we expect that to continue. We expect to continue to help transform dialysis in these care environments. Tablo's economic and clinical value propositions continue to resonate with acute customers, and we remain ready to fulfill demand in this market. Third, with regard to the 510(k) filing currently under review, we expect to know more in Q3 as to the expected completion of FDA's review of our submission.
Finally, we anticipate revenue in Q2 of at least $25 million, which assumes some potential impact to our acute business in the intermediate term as we collaborate and educate our customers on these latest developments. I want to emphasize that our outlook in the acute setting remains very bullish for 2022 and beyond, and that we continue to see demand for Tablo at home growing. The shortfall to our expectations for Q2 primarily reflects the fact that we had many patients training through the quarter in preparation for a record month of patients going home in June. I will close by saying our confidence has never been stronger in Tablo's ability to provide a transformative option for dialysis patients. We are disappointed to have to slow our progress, but we have a high degree of conviction about the benefits we see Tablo providing in the market over time.
Now let me turn the call over to Nabeel.
Thanks, Leslie. Hello, everyone. As Leslie said, we now expect revenue for our second quarter to be at least $25 million. This guidance is below our prior expectations as we had scheduled and were ready to ship a record number of Tablo consoles to home providers and their patients during June. We have also assumed some short-term impact on our acute business in Q2 as we proactively communicate with customers about the shipment hold, particularly with health system contracts in our pipeline that involve both acute and home sales. As Leslie said, I want to emphasize that demand for Tablo in the acute setting remains very strong for the remainder of 2022. Gross margin for Q2 is expected to be approximately flat relative to Q1.
While our console cost down program continues to deliver benefits, as does the transition of the primary manufacturer of our cartridges to Mexico, gross margin will be impacted by the reduction in volume of consoles shipped in the quarter and the related consumables and service revenues. Next, while we are optimistic about resuming shipments of Tablo to new home patients in the near term, it is too early to provide guidance for the full year absent clarity on the timing of review completion. We expect to know more in Q3 and anticipate being in a better position to guide for the second half of 2022 on our Q2 earnings call. Until then, we are suspending our prior full year and long-term guidance. In the meantime, we have implemented a number of new operating expense controls designed to more tightly manage our use of cash.
We see these measures as a deferral of spending and not compromising our growth or margin expansion plans. Given how late we are in the quarter, we expect only a modest reduction in expenses in Q2. However, these measures will deliver greater benefits in the second half of the year. As a result, we expect to reduce expenses roughly in line with our anticipated reduction in revenue. Therefore, we do not anticipate a material change to our cash burn rate relative to what we had previously forecasted. As a reminder, at the end of Q1, our cash equivalents, restricted cash and investments totaled approximately $335.6 million. With that, we are ready for Q&A. Operator, please open the lines.
Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Rick Wise with Stifel. Your line is open.
Good afternoon. Maybe, Leslie, you could just start off, just honestly with a little background. At least selfishly, I'd like to better understand the human factors testing data required. When you say FDA is raising the bar, can you help us understand how that bar is being raised and maybe, you know, what you understand about this delay, today that you didn't understand whatever, a week or four ago?
Sure. Yeah.
Share the logic at one time. Thank you.
Yeah, sure. Maybe I'll take an even bigger step back here in the spirit of background. We have continuously made improvements and updates to Tablo over time since its original clearances for acute, chronic and home. Actually, I'm really proud of our efforts to continually innovate to try to make, you know, the experience consistently better, whether it's for patients or caregivers or healthcare professionals. We have done so through the letter to file process that's available to all medical device companies with devices that are cleared through the 510(k) process. It's been our practice to utilize the letter to file process. It's also been our practice to periodically summarize these letter to file changes into roll up 510(k)s. In fact, this is our fourth 510(k) in the last five years.
I think what's different here perhaps is the human factors element. This gets to a part of your question, Rick, about the bar being raised. Look, I think especially with devices being used in the home by patients and caregivers, we are completely aligned with very high standards. To put a finer point on that, Rick, as examples of what's a high standard, it's the population, the number of patients or the number of professionals that need to be involved in human factors, the extent of the changes that need to be tested. This is in simulated lab environments, these human factors studies are run. We are completely aligned with that. It is sensible that standards and expectations for human factors testing are high.
In fact, we've conducted six human factor studies pretty comprehensively over the last five years as we continue to work to meet this bar and raise it for ourselves. The last part of your question, I guess, is kind of what do we understand today that we didn't a couple weeks ago? It was our expectation that the review of the human factor study data was the last residual item. It was also our expectation that that would be completed in June. When it became apparent to us just in the last few days that that review would extend into Q3, we obviously want to share the development, you know, with customers and investors as quickly as possible.
Clearly, we are disappointed, but at this point, we're focused on getting to resolution and getting Tablo back into new patient homes as quickly as is feasible.
Right. Just one follow-up for you or Nabeel. Maybe help us think through at least the impact in this quarter, Nabeel. I mean, I'm not saying we had the right number, but we had some revenues approaching $34 million, and now you're talking about at least $25 million. How do I think about the mix of you being conservative on the acute side? Again, assuming I'm approximately roughly correct in the number I had before, how do I think about what is acute conservatism versus home Tablos not shipped? If you can help us understand that a little bit. Thanks so much.
Yeah, Rick, for sure. With respect to our guidance, we did take our number down to at least $25 million, as I talked about, and that's comprised largely of a couple of things. First of all, Rick, it is obviously the impact of the ship hold on the home consoles. You know, in Q2, we were really looking forward to another strong quarter of home performance. We talked about home exceeding our internal expectations here in the first quarter. We talked about exiting Q1 ahead of our home program's goal, and all of that feeds into sort of this funnel we had building to send patients home in Q2. You know, April and May were strong training and sort of development months, if you will, and we were gearing up for a really strong June in the home.
There is a significant amount of home revenue that we are foregoing. Similarly, you know, on the acute side, what we're modeling, Rick, is that we will see some softness in acute, largely as our acute customers may choose to defer shipments as they digest this news, you know, particularly customers who were looking to roll out home and acute programs kind of at the same time, right? We don't have a finer lens on that that we're sharing, Rick, other than to say that we would have otherwise had an outstanding home quarter in Q2. I hope that helps.
Thank you, Nabeel.
Thank you. Our next question comes from the line of Josh Jennings with Cowen. Your line is open.
Hi. Good evening. Thanks for taking the questions. Just a follow-up on the ship hold and whether that was voluntary or mandated by the FDA. I think in your filings, you've disclosed that once you filed for the human factors study, the FDA would decide if the home environment, if there's any new concerns about the safety and effectiveness of the product or that the 522 order requirements were met or unmet, they may need to make changes to the Tablo system. Should we be thinking that this is simply a review of the human factors data or that it is the catch-up 510(k) just incorporates new filings for changes to this system that's being used in the home?
is there a risk that the human factors study wasn't deemed effective and there's some safety issue? I guess you already said no safety issue, but that there's a chance that you need to run another human factors data before this submission is actually approved. Sorry, a lot of questions in there, and I'm just trying to get my bearings in terms of what actually is happening.
Yeah, no, I understand. I can appreciate all the questions. Let me and if I miss a component of it, Josh, please remind me. First and foremost, our understanding today is that the remaining element of the review process is the review of the human factors study data. Now, we were very, very proud of the studies that we ran and the study reports that were submitted and feel that the data are very strong. That's our opinion. I certainly don't want to speak for the FDA in speculating what view they're going to take of the study or the data. In our view, the studies were very, very successful. It is our understanding that we are down to simply a review of this information.
I do want to stress, and you touched on, hey, is it possible that there are safety issues? I do really want to stress, and I think it's important, really important to reiterate that there are no observed or identified safety issues with its use in the home. I think it's also really important to reiterate that the Tablo console is already being used in patients' homes. They are not being removed. Look, I think as the conversations with FDA evolved in the first part of your question, it was determined that a ship hold was appropriate as the FDA worked through the final pieces of its review.
Again, it's our understanding that the final residual component of the review pertains to what we feel are very comprehensive human factors study data that we share with them as part of our submission. We are aligned with FDA on the importance and the need for human factors testing, particularly for home devices. We do intend to continue to lead in this area and be an industry leader in this way.
Excellent. Thank you for that. Just thinking about the design enhancements or software upgrades that have been incorporated in the system since the March 2020 approval of Tablo in the home, anything meaningful that where the filing could be complicated and the FDA would extend the time of review for this by the FDA outside of the human factors testing? Sorry for a third question here, but just wanted to make sure that the Tablo XT launch that we can't find a 510(k) approval for Tablo XT and whether there's a risk that you'll need to file 510(k) for that 24-hour dialysis feature that's incorporated in the Tablo XT. Thanks for taking all the questions.
Sure. Yeah. Well, I guess that I think the first part of your question was about design enhancements and what were some examples of those. I'll give you just a few examples on the hardware side. These are all related. Just to, I guess, zoom back out for a second. These were all related on the device hardware and software side around ease of serviceability, manufacturing, some design simplifications, some performance optimization. For example, on the hardware side, we have removed an integrated heparin pump that was rarely if ever used. We had improved the console door design to make the door easier to open and close.
On the software side, some of those modifications were around just generally improving the user experience, enhancing some workflows, addressing bug fixes, enhancing cybersecurity and, updating alarms and again, general system reliability and serviceability. For example, one of the changes was providing the ability to support over-the-air software updates. Another example was adding two different modes, kind of self-care or patient user mode and professional care mode, and I think we've talked about this in the past, but. Those are some of the examples. Could they, you know, extend the time of their review? Look, it is always going to be the FDA's prerogative to complete their review when they feel it's appropriate to complete.
Again, you know, it's our understanding that review is extending into Q3, and I think we'll obviously be able to give better, much better visibility as time marches on here and hope to do so in the beginning of Q3. I would say through Q3. I don't mean to convey beginning, but kind of, hopefully in the first part of Q3.
Great. Thank you. Sorry, I had that other question on XT. Just wanted to check that box.
Yeah, sure. As I mentioned, I mean, we have made continuous improvements to Tablo from the beginning. Those changes pertain to use settings from, you know, acute, chronic and home. I think, you know, our focus right now is really on reaching resolution on the 510(k) submission related to the home. We're very, I guess sort of hopeful and anticipate our ability to do that in the Q3 timeframe. Nothing on the horizon that's known today, Josh.
Thank you. Thanks a lot, Leslie.
Thank you. Our next question comes from the line of Travis Steed with Bank of America. Your line is open.
Good afternoon, everybody. I guess just to start, Leslie, I think there's some confusion with investors out there on the $25 million and how much of that's actually what you're gonna see in the home versus what you're expecting in the acute side of the business. I don't know if there's a way to kind of split that up into home versus acute or what you're assuming on the impact of acute.
Hey, hey, Travis. It's Nabeel. You know, the $25 million represents our best estimate of what we will deliver in Q2. Remember that our business sort of does have high visibility in terms of what we expect to place here over the next few weeks. We haven't broken the $25 million down any further other than to say a couple of things. One, we were gearing up for what would have been a record quarter in the home. Number two, we are expecting some amount of acute impact as we have customers who may choose to delay receipt of Tablo.
On the acute side of things, do you actually think there's gonna be an impact there? Like, and do you see that coming, like customers in the backlog delaying, or is it gonna be harder to get new customers? Like, look, what's the message that you're giving your customers right now that have kind of a backlog system that's gonna be getting an order in the next month or two months or three months?
Yeah. Travis, backlog, just as a quick reminder, is a binding order between us and our customer to take Tablo. What we're not expecting deals to come out of backlog. We're not expecting the backlog to shrink. What we are modeling is that the conversion of backlog into revenue takes a little bit longer as customers sort of digest the news that we're sharing today. Again, we're not seeing or expecting deals to go away. We continue to see really strong demand for Tablo in our acute end market, but we are projecting potential slippages in these deals out of both backlog and out of pipeline.
Okay. On the full-year guidance, like, is the expectation that you'll be able to give updated full-year guidance on the earnings call that's coming up? Or just like, how are you thinking about the puts and takes on full year, both on top line and the margins impact?
Yeah, Travis. Right now, we are focused on driving an expeditious resolution of the matter that Leslie outlined, and we're really focused on closing out Q2 with the guidance that we described. You know, we still need a couple of cards to turn. We need to know, for example, when this review gets completed. Look, I completely empathize with you around your need to sort of think about what the rest of the year looks like, but we simply don't have the information now to be able to give you any color. Our hope is to come back to you and share more about 2022 when we report Q2 earnings.
Okay, great. I'll hop back in the queue. Thank you.
Thank you. Our next question comes from the line of Drew Ranieri with Morgan Stanley. Your line is open.
Hi. Thanks for taking the questions. Maybe just to follow up on a couple that have already been asked, but as you kind of look at the dialysis market for the past decade, two decades. Do you have a sense of any precedent of this happening before, or has this been more of a new impact on potential approvals? I'm just trying to get a better sense of, like, would you, and I know you're not guiding, but would you expect this when FDA does review for it to be a month or a quarter delay from approval? Or could this actually go into a multi-quarter process for resolution?
Yeah. I mean, Nabeel, maybe I'll take that one. I think the short answer, Drew, is it is our expectation that the review should be complete in Q3. Obviously, we're hopeful that that'll be the earlier part of Q3 rather than the later part of Q3. We are continuing to, you know, have very constructive and productive dialogue with FDA and plan to continue that partnership. Again, you know, tough to crystal ball for right now, but our expectation remains that we will have clarity on the review completion here coming fairly near term in Q3.
Okay. Thank you. Just for Nabeel, I know Travis and Rick asked the question kind of on financial impact, but can you help us maybe size how large the home install base is today, just so investors can get a better sense of really the progress that you have made, since you've really launched the device? And then Nabeel, you touched on the gross margin aspect flat and, for the second quarter, but maybe kind of go into a little bit more detail on some of the puts and takes that we should be thinking about and, the magnitude there in the back half of the year. Thank you.
Yeah, Drew. I mean, if I go back to sort of our previous comments, what we had said is that we expected home revenues for the full year to be roughly 15% of our total revenue, and that we expected home growth to expand sequentially as we moved through the year. Now, we ended Q1, again, as we talked about in our last call, slightly ahead of sort of what that goal would imply. And then, you know, had we been able to execute Q2 the way we expected, we would have expected another quarter of being ahead of, you know, that trajectory, right? That's kind of how I would size our performance in the home. Again, as I said, you know, we exited Q1 with more home programs than we had expected.
We had a really strong April and May in terms of getting patients prepared to go home, getting providers lined up. We were expecting a really strong Q2 in the home. That's sort of what I can say with respect to, you know, what the home looked like, if you will, Drew. With respect to gross margin, you know, we, as you can imagine, depend on consoles and then consumables and service revenue associated with those consoles to be able to meet the gross margin expansion objectives that we had previously laid out. Given sort of our needs and given our updated revenue expectations, that's just not gonna pan out. Given again, what we can see as we sit here, we think that we will have continued progress from our console cost down trajectory.
We think we'll continue to benefit on a unit basis with the transition of our manufacturing of cartridges to Mexico, but the volume won't be there. The volume isn't there, Drew. We expect to be roughly flat with Q1.
Okay. One last one just to kind of sneak this in. Just to be clear here, with the backlog commentary, you're modeling deferrals, you're not modeling any cancellations or have there actually been cancellations in the acute care setting? Thanks.
Rick, there have not been cancellations as we sit here today in the acute care setting. We continue to see really strong demand for Tablo in the acute end market, where its clinical and economic value proposition continue to resonate. Our expectation, our modeling rather, is that this is deferral, not cancellation. I wanna also be clear the backlog is binding on both us and our customers, and so while we intend to be really good partners, there is an element there that is binding.
Great. I think we have time for one more question.
Thank you. Our final question comes from the line of Suraj Kalia with Oppenheimer. Your line is open.
Good afternoon, everyone. Leslie, can you hear me all right?
Yes. Yep.
Perfect. Hey, Leslie, forgive me for belaboring this point. We'll go back to this human factors testing, right? As I understand it, human factors testing, right, involves in an actual end user environment. But the human factors testing that you referenced in your prepared remark or your commentary, it doesn't comport with a clinical hold requirement. When did you all originally know that were gonna put a hold, voluntarily or otherwise, to this announcement today? And did you ship any home devices during this period?
Yeah. Suraj, let me see. You cut out just a bit. We have consistently submitted human factors study reports and data.
Over time. This is not, you know, a new experience for us or most medical device companies for that matter. Human factors protocols vary. They you know, can take different forms. Some human factors, many in our experience at least, are run in simulated environments, and this happened to be the nature of the human factor studies that we ran for this submission were in a simulated human factors lab environment, and other human factors studies can take place in the actual use environment. It really just depends on what the requirements are and how those discussions play out with FDA.
In this case, our human factors studies were run with a protocol that involved a simulated use environment at a human factors lab. We, you know, and again, we have been and remain very constructive and productive with FDA both on the construction of the human factors protocols and also the resulting data, which as I said, we feel very good about and confident in, and actually really proud of our work. We actually have initiated an entirely new for Outset human factors team here internally with the aspiration to be a real industry leader in this space and within the medical device industry at large.
Thank you. I would now like to turn the call back over to Ms. Leslie Trigg for closing remarks.
Thank you. I just wanted to thank everybody for joining the call, for your questions and attention. We look forward to talking with many of you in the coming days. Thanks again.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.