Good morning again, everybody. I'd like to welcome the Outset Medical Team, Leslie Trigg, Chairman and Chief Executive Officer, and Nabeel Ahmed, Chief Financial Officer. It's great to be with you again, and thank you for joining us here for this year's Stifel Healthcare Conference. You know, just Leslie, as I think about the Outset story again, and perhaps in an oversimplified but boiled down way, I think to myself that priorities are to get acute growing again. Number two, to create, keep creating and building an ever clearer path to profitability. It's pretty simple and pretty boiled down, a complex topic, but is that a good way to summarize just to get us going? Do you like that summation?
I do. I feel like you're interviewing for a job at Outset. Did I get that right?
After today, I might be ready to take that job.
If it's offered.
Thank you. Oh, oh. Depends on how the rest of the discussion goes.
Yeah, no, all kidding aside. Yes, yes, and I will add something to that.
Okay.
Yeah, look, I mean, we have had a fair number of headwinds, some of which were self-induced, to be sure, in the last year, but all of which are behind us at this point. Maybe I draw upon, to me, I sort of think about three Rs. One, in the last year we had to right-size our operating expense structure, which we have done. We've taken out on an annualized basis $70 million of spend, which is non-trivial and was tough to do, but the right thing to do on the journey to trying to accelerate our time to break even. So that's behind us. We had to realign our sales force. We had a sales force that was great at selling into kind of the early adopter customer base and not as great with a new segment of the customer, a more mature customer, mainstream adopter customer.
And that's a very different type of sales profile. We can get into that later if you want. So that's behind us. We have completely realigned the sales team and our sales process behind that. And then we had to get past some, my third R would be regulatory. We had to get past some regulatory headwinds. I do feel that those are also firmly behind us. We have remediated the warning letter. We got Tablo Cart 510(k) cleared and back on the market. And yet at the same time, we are seeing some strength, particularly in Q3. You know, Q1 does not a trend make, but it was a nice start. Another R, recurring revenue. We do have this base of recurring revenue. It's north of 60% of our total revenue now, which gives us a lot of good visibility and predictability.
A growing ASP, an installed base that still grew almost 15% year over year, despite a tougher year. So all of those things, kind of again, the headwinds behind us and the parts of the business that continue to work really, really well are what give me confidence as we look ahead to 2025.
That's great. No, it's a wonderful base to talk from. And the number of acute sites increased 15% year over year. Help me think through your Q3 comments about acute sites increasing. What's happening? Acute console placements were lower year over year. So how do I understand, think through your comments about the number of large Tablo console orders being lower, but sites penetrated? I'm confused at how to make sense of it all.
Yeah, yeah. Well, I think where we're seeing a lot of strength in the acute segment is, well, I'll say acute and post-acute. And so just to define the terms, acute for us could be large national players, regional IDNs, et cetera. That's probably pretty straightforward. Post-acute are rehab facilities, LTAC, long-term acute care facilities. And then on the home side, skilled nursing facilities. And we may get to this later, but you know, I think skilled nursing facilities will end up probably being our largest driver on the home side because we're seeing really, really good uptake. All of the acute and the post-acute customers are adopting or expanding for the same reason, which is really, again, cost reduction. The ability to change their service model, in-source the service of dialysis for which these facilities are not reimbursed. So it's a pure play cost center.
It's a big pain point. It's robbing them of margin, taking that over and delivering the care with their own team enabled by a technology that's a lot easier and less costly to use. And so again, through the headwinds of 2024, we acquired new customers and we saw existing customers expand to new hospitals within their network. 2024, just to touch on, hey, why was the growth slow? The warning letter certainly did not help. Not having Tablo Cart on market certainly did not help. And then our own need to kind of sort of reframe the skill sets and the profile of our own team took some time. But again, with those headwinds and changes behind us, nothing about the market opportunities to actually change. The value proposition of Tablo has not changed.
I think one thing that's continued to get stronger is our kind of reference account circle of friends. The more hospitals that adopt Tablo and publish on their cost reduction, we've had a number of white papers and abstracts and papers published. That really does help us start to accelerate into 2025 because nobody's doing this for the first time anymore. You know, we started our commercial journey in the acute side in 2019. So with well over, well north of 700 different sites using Tablo in the acute and the subacute setting. As we look again at almost a million treatments a year now run rate, that's to me the strongest leading indicator of kind of promises made, promises kept.
We would not be seeing this strong kind of 20-plus% growth and strong sequential growth in treatment sales if the device were not performing as intended.
Absolutely. On the Q3 call, you mentioned that one of the largest inpatient rehab facilities in the U.S. had in-source Tablo at 100 facilities. And it was really intriguing to me because it sounds like, because I went and looked at it a little bit, they've been very vocal about the, on their earnings calls about in-sourcing Tablo and highlighting the cost savings potential. Is that positive experience that they're having so vocally and publicly helping to drive new customers your way?
Yeah, of course. I think so. I mean, we are now contracted with all 10 of the largest 10 post-acute operators of LTACs and rehabs. And I think, yes, their success, which can be dollarized, right? This isn't just sort of a better patient experience. That's important, but these are like day one, dollar one savings that they have quantified and validated on their own that other customers now use as references in their own potential buying process. Yeah, that certainly helps a lot. And seeing them expand is, by the way, they've expanded to 100 facilities roughly in the last 18 months. So it's been a rapid rollout as well. So I think that kind of for us also serves as kind of the blueprint or the template of what we expect many, many large operators to do now.
Just to help me think through it and just to take, this is, I believe you haven't said maybe this is Encompass Health, just reading their public comments. So their initial system order and utilization, is there an opportunity in these sites, and I'll just use them as an example, or these top, these 10 of the top 10 to go deeper now? I mean, is that the next phase of growth in that segment?
Deeper and wider. And so even in a, we'll use them as an example where we have really meaningful penetration. There's still runway to go. And that's also partially because many of these post-acute operators, as you all know, they're growing themselves. You know, they're not standing still. And so as they continue to open more facilities and they've really standardized the way that they deliver dialysis care now and have seen good results from that, we grow as they grow, part one. And then part two, we still have facilities in their network and many other facilities in the broader TAM base that we haven't yet penetrated. So we still see a very long runway in post-acute and of course in the acute setting as well. I mean, we are all in probably low double digit penetrated in the acute and subacute market.
As we sit here with, again, well north of 700 sites and thousands of consoles. That's what excites me is, hey, it's great we've gotten to that kind of low double digits, 10%-12%, but we still have 88%-90% to go, which is exciting.
Yeah. You called out the regulatory progress and I keep making the case to people that as painful as some of the lumps and bumps were, I think you've, I personally think you've emerged much stronger, more evolved, more mature, greater leadership clarity. How do we think about the, is really the regulatory thing sort of behind you completely at this point?
Yeah. Well, as I'm stating the obvious, we're never going to be done with regulatory as we're a regulated business, but I do feel like we have matured substantially, and I think that, you know, it's hard to say I have no regrets about some of the challenges that we've had, but I do see an upside. We have gotten nine 510(k)s cleared in the last eight years. I recently had somebody on our regulatory team pull the data for me, like when have our competitors last filed? One of our competitors had last filed on one of their products in 2015, and then on another product, the last time they filed was 2018, and another product was 2020, so you know, that's five years of not filing right there, and then you go back almost 10 years. We have another competitor. The last time they filed was 2011.
So there is a forcing function as you're innovating and as you file. Like we are forced, we are being held to the highest standard of new guidance on human factors, new guidance on biocompatibility, new guidance on cybersecurity. And it is painful at times. But for the most part, we've had great success with FDA. As I said, nine clearances in eight years. And number two, it has created a very significant product and regulatory moat for us because we are the only device and company in our space to be able to meet all of the latest FDA guidances in these areas. And that's difficult to do. So I do feel like while painfully pursued at times, we have a very, very significant lead in a space, again, that still has a pretty significant paucity of competition to begin with.
That's great. You touched on, and I mentioned earlier, you touched on acute console growth and some of the unique factors in 2024, which seemed to me, again, also behind you. But the question I often get, maybe I get most often is, why aren't you growing faster in acute? And I think that the setup for 2025 is that you will. You have relatively easy comps, these issues resolved. But talk to us, how should we think about this topic looking ahead? You know, feel free to give, you know, Nabeel said you would give very specific guidance today, but feel free to comment as you will and whatever color you want. But help us think about just how you would have us frame it looking ahead.
Yeah. Well, growth on the acute and the post-acute side for me always starts with pipeline. And well, really it starts with the current revenue base. Let me build up from there. You know, at north of 60%, we have, if we continue to do our job well as a team and as a technology, that has been a very, very stable percentage of our total revenue. So as you look ahead at any given year, you've already got 60% plus of your revenue sort of dialed in. Then we look at the 40% that would be capital sales. And that's again where we've had to get through some pretty difficult things in 2024, which are now behind us.
We have the full benefit of Tablo Cart back that's already showing up in ASP, which was 18% higher in Q3. A lot of that benefit was from having Tablo Cart back.
So that's already starting to pay dividends. Having the Warning Letter behind us, which removes a lot of sort of competitive fodder, which was unhelpful for us, that is now gone. The biggest change of all though is having a sales process, which has fed a substantial increase in our size of our pipeline and the quality of our pipeline is probably my biggest reason for confidence in 2025. We took the new sales process, which I would call it, is paired with a microscopic level of daily inspection. And we re-ran all the deals that were already in the pipeline through this finer sieve, if you will. And we actually moved a lot of those deals backward in the pipeline. Earlier stages that had originally been called as later stages. Again, that was painful to do. We did that at the mid part of the year.
That is a lot of the reason why we decided to reset guidance and make sure that this company was really set up for stable, predictable execution through the remainder of 2024 and into 2025. And that was done on the basis of a re-look at all the deals in the pipeline in a much more conservative way. And since that time, we have seen very good and encouraging productivity from all of the new sales reps with this new kind of, again, enterprise mindset, coming from companies like CareFusion, Becton Dickinson in the infusion pump space, which actually has a lot of similarities to what we're doing here at Outset.
So we have grown the size of the pipeline substantially with a bigger percentage of those deals kind of at 50 and 100 plus consoles for 2025, but also taken a much more conservative look at the staging of the existing pipeline.
Gotcha. And I think it's important to keep asking you about this commercial transformation. And you've described it as largely complete, and now, over the last year or so, new sales leadership. And you've hired, I don't know, you've transformed your sales team to a different with different skill sets. Skill sets, I can't say it. But talk to us about, just update us your latest thinking about where are you, not just in the process of change, clearly that's happened, but in terms of seeing the kind of performance and productivity that you aspire to achieve.
Yeah. Well, I think I was encouraged that we saw it show up in Q3. I would expect more benefit in Q4. I think at this point, I want to just see more run time. And again, we're very mindful of the fact that, hey, we had one good quarter and it was a good start, but that's just the beginning of the story. That's certainly not cause for a victory lap. I do expect to see more of that benefit to show up in Q4 and certainly into Q1 in the first part of 2025. What I'm looking for is standard performance across the whole company. Excuse me, the whole country. So we have territories that are performing to the sales process with forecast predictability exactly where we would want it.
And now I want, and I believe we will see with the benefit of a bit more time, I want to see that consistency across all the territories. And with anything that's new in life, you know, sometimes you take a couple steps forward and we got a territory or a sales rep that executes perfectly. And then we have kind of one deal that you miss something and let's go back and practice that again. So what good looks like for me is kind of every instrument in this orchestra playing to the song sheet in the same way every time.
Great. Love the musical analogies, but again, if you could break it down for me, it's like what exactly, take your best territory. I mean, it's like what are they doing differently that a year ago or two years ago just wasn't happening?
Yeah. Well, I would say, you know, I talked a little bit about this, and this probably might be too nerdy on sales and marketing that nobody's interested in except for me as I'm a sales and marketing person, but I would say in the 2019, 2020 era, it was, you know, in the startup phase, a lot of your sales. It's just a different profile. These, and I'll just say guys generically, you know, these guys want to get in and just sell devices, sell devices, sell devices. What we're now selling is, again, at the enterprise level, we're selling a health system. Like I'm thinking about a deal right now. They're going to convert all 10 hospitals at the same time. So you have to go and you have to get 10 CNOs and 10 CFOs and 10 CEOs.
And then you got to map the implementation of that because they're not just going to start with one hospital. And that's a big shift in a good way. In 2019, 2020, 2021, and set aside COVID, but a lot of these health systems, they'd start with like one hospital. It was experimental. And now this is no longer experimental. There is a very significant evidence base that this works. You will save money. You can staff it. You will have greater operational and compliance control. Like the evidence base is there. And so health systems are now to the point where they want to convert numerous hospitals all at the same time, which is a good thing. The upfront coordination of that, the implementation, the planning requires a sales professional who is a bit more of a strategist and a quarterback more than a sharpshooter.
I'm going to go in and sell, you know, one robot into one hospital and move on. That's the best way I can explain it to you. I hope that's helpful. But it is a very, very, very different profile of a sales professional skill set.
That's great. Again, you talked about the order pipeline and the recurring revenue model in multiple ways. Just remind me just from a numbers and a projection and confidence, why is this so important to the Outset revenue formula? How much visibility does the order pipeline quality give you into the future outlook? And just how does it play into your confidence and projections and accelerating growth at this point?
Maybe if I may, with respect to the recurring revenues, Rick, so just as a reminder for us, consumables and service are recurring revenues and they represent roughly $80 million if you look at our guidance for this year. You know, year to date, recurring revenues for us are up about 22-23% year on year. In the quarter, they were up 17%. And so that has been steady growth. As we think about any forward year, our recurring revenues will grow just as the installed base grows, right? And so from a foundational perspective, that's the first thing we look at is this $80 million of recurring revenues, again, based on our guidance, what does that grow? And then that leaves the implied console amount that we have to go get.
Again, as Leslie talked about earlier, that's where we leverage the pipeline that we have and the sales transformation that we're undergoing. Recurring revenues is really where it starts. I mean, if you look at our recurring revenues, the $80 million, you grow that a bit, you can see, Rick, that it doesn't take a lot of console growth to get total revenue growth of double digits or whatever.
Recurring revenue is growing double digits.
22% year to date. 22%-23% year to date.
So in that spirit, when I think about 2025, Nabeel, again, your favorite topic of the next year, it'll be 2026 we're talking about at this time. I mean, I look at the Street, you know, look at $124 million. When I think about that $80 million growing, let's say 20%, I mean, it seems like, I don't want to say that there's a low bar to upside. I sort of like that phrase. Maybe that's my title on my note today. But it does seem, and I'm being serious, it does seem like you're well positioned to have a much better year. Is that too much to say?
Let me maybe talk about the construct to 2025, if that makes sense. Again, as much as Rick might want it, we're not going to give guidance for 2025 today.
Stop it, Nabeel. Stop it.
I thought about it, Rick, just for you, but then, you know, Jim held me back. But so as we think about 2025, so the first thing is indeed the $80 million of recurring revenues and growing that with a larger install base. And then if you look at, you know, flat consoles, if you assume we place the same number of consoles in 2025 as in 2024, there will still be total revenue growth led by these recurring revenues. And so again, it doesn't take a lot of incremental console growth to move the top line meaningfully. Again, so we can sort of see if you look at where consensus is, we can see what people have done with respect to getting to those numbers, again, without commenting on the numbers or giving guidance, if that's helpful.
Do you agree with Nabeel's characterization?
I think you're going to follow up with me. I would just say, because you think I'm the vulnerable party. I would say that one of the things that we were most proud of about Outset is since the time of our IPO, we had many, many, many, many, many quarters of meeting and beating, and often raising. Our focus as we sit here, and then we had a very, very, very tough stretch. Our focus as we sit here today, which started at the midpoint of the year, is to ensure that we could go back and deliver that consistency for shareholders.
Okay. I'll take it. A couple of other elements about the setup for next year is gross margin improvement. You've been delivering it, we're seeing it, and you know, the new facility and efficiencies. Talk about gross margin outlook from here. You know, you've talked about reaching a 50% gross margin at $200 million sales. Is that still true? And talk about the math that might get us there or the actions or the fundamentals that might take us there.
For sure, Rick. So with respect to gross margins, you know, as we sit here today, we've already expanded gross margins by roughly 70 percentage points from our IPO. We went public sort of with a negative 35%-36% gross margin, and we just printed sort of, we're guiding rather to a mid-30% gross margin for the full year this year. So we've made a lot of progress there. And the way we expand going forward is the same things we've done sort of in the past, right? One, it's the pull through of recurring revenues. The consumables are high margin products for us. Service on the margins is margin accretive, right? So one is just the recurring revenues. Two, it is service leverage. Again, we've talked about now having our service professionals largely in all the right places across the U.S.
We'll have to grow them, but not at the same rate as we would expect the install base to grow. So there's service leverage. And three, we'll be cost down on our console, which is again something that we've done a lot of in our past and we will continue to do. So those levers remain the same, Rick. Now in the near term, we talked about this on our last call, there's a little bit of headwind from pulling down our build plan and there's some absorption that we have to deal with, but that is temporal and that sort of works itself out. So we continue to expect a linear ramp up on gross margin, getting to that 50%. And as a reminder, 50% is not a peak for us, right? That's just the milestone we're focused on.
And I mean, the same levers will push us beyond 50% as we move forward.
Just continue on.
Just continue on.
I would just add, I think one thing we're proud of, that the product margin last quarter was 45%. So we've made it back to Nabeel's point, I mean, we have come a long way and we know exactly how. There is no mystery about where we go from here to get to, you know, peak margins.
And just to push my luck on 2025, I can't stop. I'm on a roll here. OpEx, Q3 was the first one, I think with the full cost benefits, the restructuring, if I'm remembering I'm saying it correctly. Do we just annualize the Q3 as we think about 2025? Just keep it going?
You'd be in the zone, Rick. So we talked about doing about $120 million in non-GAAP OpEx this year and the run rate being roughly $100 million as a baseline for 2025. So yeah, you would be in the zone and you're right. We're roughly annualized with all of our restructures.
Yeah. Leslie, you highlighted, I mean, it's an interesting way to think about it. I had not before the timing of filings with FDA by some of the competition. It's interesting to think about it that way. But there's a couple of new competitive dynamics. Quanta got 510(k) clearance for home hemodialysis. Fresenius has been emphasizing hemodiafiltration benefits versus hemodialysis. I didn't say that right, but you'll say it right. But anything new on the competitive front that or worrisome or anything that should be on our minds?
Short answer, no. Fresenius, the new Fresenius machine is for the dialysis clinic market. And that's really important to know where we are not targeting that market. So again, our markets of interest are the acutes. It's kind of front end and back end, acutes and then home. So the hemodiafiltration, I just said that to make you feel worse.
Thank you.
I just said it so effortlessly.
Thank you.
The hemodialysis filtration, I'll say it again. That is for the dialysis clinic. So we don't care about that. That would not impact us. But no, I mean, we haven't really seen anything new in acutes. We're not going to take anybody for granted. And obviously, we know we'll be ready. But I think again, we have several now pretty compelling moats, both in terms of the technology features and functions, the regulatory clearances that we have, the brand awareness, and most importantly, on the home side, the user experience. What I have learned, again, the hard way, is getting the FDA clearance for home is the easy part, believe it or not. It is everything that kind of goes into driving a retention rate. And that's been our shining star is it's all about retention.
You can have an FDA clearance, but you know, we've now set the bar for everybody else at, you know, roughly 90%, above 90% retention rate at 90 days. And most of the retention in the home space, by the way, you'll be interested to know that people have studied this. Most of the retention, the fallout, sorry, most of the attrition happens within the first 90 days of somebody being home. And we are well north of 90% at 90 days. That does not happen by accident. That does not happen because you have an FDA clearance. That happens because of the totality of the user experience.
One of the things I'd mentioned on the earnings call, which is new data for us, is a Net Promoter Score, which for us on the patient side and the caregiver side, which I didn't say in the earnings script, we're both, you know, well above 90 on a scale of negative 100 to 100. I think we've learned a lot over the last four years. Infrastructure, data, data transmission, the patient experience really is the device and the team around the device more than it is kind of getting FDA clearance for something.
That's great. I'd be remiss if I didn't talk about cash flow and your progress toward cash flow break-even. I think, Nabeel, you've talked about 2025 cash usage would decline 50%, if I remember correctly. How are you feeling about that goal, and just update us on your thinking about the pathway to break-even at Outset.
For sure, Rick. So with respect to, so one of the goals we did talk about on our last call was burning roughly 50% of the cash in 2025 as we expect to burn in 2024. And now we've done the hard work behind that. So first of all, we did take OpEx, which we expect to be about $120 million in 2024, down to, as I mentioned earlier, roughly $100 million in 2025. That's $20 million right there. And then number two, again, as we mentioned on the call, we took our build plan down, a console build plan, which then allows us to defer the receipts of inventory. And again, we have roughly $60 million of inventory on the balance sheet, which we expect to burn down pretty materially as we move through next year.
That will be a source of cash to us, a contributor to cash to us. And so again, those are the two large components of this goal to get our burn down by roughly half. With respect to the long run, Rick, it's a couple of things. Number one, it's again, I'll go back to recurring revenues. The recurring revenues we generate are high margin revenues. And as the install base grows, we will get more of these high margin revenues pulling through. That's part one. Part two, we have the gross margin expansion that comes from our console. So every console that we place generates higher margin as we move forward in time. And then three is our focus on both OpEx and then again on working capital like inventory, where we expect again to make sure that we're very diligent in optimizing those.
Again, we do expect our path to profitability to be relatively linear over time.
Thank you so much. On that note, sadly, we have to stop. Thank you so much for being here and all the great comments.
Thank you.
Excited for the year ahead.
Thank you.