Everyone for being here. I'm Shagun Singh, Senior Research Analyst at RBC, and I'm very pleased to have Outset Medical here with us as the next company speaking. Joining us from the company is Nabeel Ahmed, Chief Financial Officer, as well as James Mazzola, VP of Investor Relations. Nabeel and Jim, thank you so much for being here today. Really appreciate it.
Thank you, Shagun. Thanks for having us, and hello, everybody. Great to be here.
Great. So, you know, obviously, you guys just reported Q1 results, and I thought maybe we could just kick it off right there. Pretty good quarter, you know, 7% upside surprise on the revenue front. You delivered your first year-over-year increase in five quarters. I think on consoles, it grew about 23% sequentially, the first time in six quarters. You had strong recurring revenue growth as well in the double digits, and I think you made comments on the commercial transformation, which it seems like it's largely behind. I know I touched on a few big themes here, but maybe can you elaborate and talk about what is really driving this turnaround in Q1?
For sure. We were really pleased with Q1, sort of top to bottom. Again, Shagun, you pointed out a lot of the highlights: strong console revenue performance, really strong recurring revenue performance. As a reminder, recurring revenues for us are the consumables that we sell with Tablo, as well as our service offering. We had gross margin continue to do really well, 37.6% here in the quarter. Our OpEx declined year over year as we annualize some of the savings initiatives that we've undertaken in previous quarters. From a driver's perspective, Shagun, it really is that Q1 was sort of one of the first proof points that our commercial transformation is taking hold, led by kind of our console growth. We implemented a pretty comprehensive commercial transformation starting about a year and a half ago. We can talk about that at more depth, I'm sure.
Again, Q1 was a very nice proof point that it's working well. Now, we got to do it again and again and again and again, but Q1 was a great proof point that it's working.
That's great. I wanted to touch on each of the drivers, so maybe we can start with Tablo consoles. Can you maybe talk about what would you attribute historical console purchase holdbacks to? Maybe just give us some looks there. Then exactly what turned around this quarter? Have you just bottomed, or is there an increase in demand because of the sales transformation and other initiatives you have in place?
Yeah, Shagun, demand for Tablo has always been strong. If we sort of look at the value proposition of Tablo in the acute, Tablo saves hospitals money. Hospitals today, the majority of them, outsource the provision of their dialysis. By insourcing with Tablo, they can get a payback of a year, roughly, in some cases under a year. In the home, because of our high retention rate, much higher than the incumbent technology, the product is better for both patients and for providers and payers. The demand has always been strong. For us, what has really started to work well is this sales transformation, where we hired a new sales leader, changed the profile of our reps, implemented new process and tools. Q1 being the first of these proof points, it really is this commercial transformation, sales transformation, that's been kind of the determinant here.
Early innings, we're excited to do it again and again and again. Again, good first quarter of this working.
Got it. That's helpful that it's really driven by demand. On the pipeline, you called out a strong pipeline. Historically, you guys used to give a backlog number. Is there any chance you might provide that again? And any color on the pipeline, quality, quantity, how has it changed versus previously?
For sure. From a backlog perspective, we used to provide backlog when we were nascent in our commercial journey back in 2020, 2021 timeframe. The metrics that we feel are really important to talk about the health of the business now are the console sales rate, the console placement rate, and then our install base. Every console we sell, obviously, is revenue, but then that drives the recurring revenue, that drives the gross margin. The metrics that really matter for us are consoles and then the install base, and we give the install base annually. With respect to pipeline, we are really pleased with the composition, the stage, and the growth of our pipeline. From a composition perspective, we are seeing opportunities across the U.S. in all of our markets.
Again, we sell only in the United States, which is a large market, but we're seeing good participation across the country in our pipeline. Number two, from a stage perspective, our reps are doing a nice job moving opportunities through our sales stages. We talked in our call here a couple of weeks ago about a majority of our deals for 2025 that we expect to close in 2025 being in the later sales stages. That's great. Number three, from a growth perspective, our pipeline grew in Q4 and then grew again in Q1, which we're really pleased with. Again, directionally moving in the right direction.
You know, I think you also mentioned that you have better surety around closing. Can you maybe elaborate on that? Because you could have a pipeline, but you may not see the closing. What exactly have you changed that gives you better clarity on that front? I think you talked about the majority of the top 25% of the deals in 2025 are at the end stages. Does that come in Q2, or is it just going to come rapidly through the year?
Yeah, with respect to the closing, what gives us the conviction is really, again, the improvements in our sales process. We implemented a new sales process. We hired a new sales leader about 18 months ago. She brought in a new sales process, new at that time. Now, our team has had more time on task in that sales process. By the way, this team is becoming more and more tenured. By definition, they're becoming more and more tenured. It is the combination of the process, the tenure of the team, and then again, our new process is more inspection-driven, where we have our sales leadership better able to work with our reps on what is happening in these deals, where do they need help, where are they stuck, whatever it might be.
It is the team's ability to move through these, if you will, and move them through the sales stages that gives us the confidence in the closing. The second part of your question?
Just the 25% of the deals, when does that come in?
Yeah, that's for the full year 2025. From a revenue perspective, we've talked about revenue building through the year. Again, that continues to be the case, and this pipeline is for deals throughout the year.
Got it. Can you talk a little bit about capital budgets? I think on the Q1 call, you guys indicated that federal funding cuts have kind of made it a little bit challenging and more dynamic, but you are still seeing the case for insourcing of Tablos. Your customers are still positive on that adoption. Can you maybe elaborate on what you're hearing? What are the risks that capital budgets may be slashed at some point? How is Outset placed?
Yeah, good news. So far, we're not seeing anything that changes our outlook. Now, we are obviously monitoring what is happening, especially as it relates to reimbursement and Medicaid changes, but nothing to report so far. Tablo's value proposition in hospitals is really to save money. At some level, we feel that we are a solution for hospitals who may be facing top-line uncertainty or whatever it might be. Short answer, Shagun, nothing to report that affects our outlook here. We're watching, and again, we believe we're a part of the solution for hospitals.
As we think about the benefits of insourcing, are there any metrics you can help us understand, the upfront acquisition cost, payback time? You guys have just maybe average cost savings on Tablo in acute versus home. Any metrics you can share? The one thing that really stands out to me is not just the financial front, but also on the clinical side. You guys do allude to that on the call every now and then. Is there any publication or something we should be looking out for?
With respect to insourcing, first of all, most hospitals today outsource the provision of dialysis to third parties. They buy Tablo and insource, and what they find, a typical hospital, again, it depends on the size, but it could be anywhere from a couple of Tablos to many, 20, 30, 40 machines, depending on the size of the facility. Most facilities see a payback within about a year. We have some facilities who have seen payback in as little as six months. I'll give you one example here. We have hospitals whose customers have told us that they were paying over $1,000 per treatment in the ICU to their outsourced provider. The marginal cost of a treatment on Tablo, so this is the supplies, our cartridge, dialyzer, whatever disposables the hospital might need, the marginal cost is under $100.
Again, then you amortize Tablo, you add in labor, there's still a lot of daylight between the $1,000 plus that they're paying to the outsourcer and the marginal $100 that you're paying on Tablo. It is sort of meaningful savings for a hospital, and that's what drives the payback of a year or less, a year or less for us.
On the clinical side, how do you leverage that information? Is there any publication we should be looking out for?
Yeah, so with respect, our team is now much more facile at talking with chief nursing officers, and chief nursing officers have realized that having control allows them to better manage the patients. It reduces wait times, reduces rates of infection. In fact, we had one hospital customer who told us that after insourcing, they saw a 75% reduction in their rates of CLABSI, which was huge. In terms of publications, I mean, Shagun, we're always looking for publications, but what we are really pleased with is that we now have a large reference account list, if you will, where for prospects or whatever, we can connect them with CFOs, chief nursing officers, heads of IT, a large reference community, if you will, to sort of help them as they make their decision.
Got it. That's helpful. You know, recurring revenue, that's a big part of the story as well. I thought Leslie's comments were interesting that you guys reached about in 4.8 years, you reached 1 million cumulative treatments. It took 17 months to reach two million, just over 12 months to reach three million. When do you get to 4?
It's really the rate of install base growth, right? Every Tablo that we sell generates a reliable, predictable stream of recurring consumable revenue and recurring service revenue. As the install base grows, the rate at which we get to that next million, that rate tightens, right? As we place consoles, those consoles get used, and that's what drives the flywheel of recurring revenues.
Anything to call out in terms of trends in utilization, treatments per week? How's that trending?
Yeah, only positive. Utilization treatments per week have been really, really predictable, really consistent, really reliable for us. In the acute setting, we've seen between four and five treatments per console per week. In the home, it's between three and four. That's what the prescription is at home, typically on Tablo. And so it's been very reliable and predictable since I've been there.
Got it. I think it's worth noting you've said that on the current install base, you still have a revenue opportunity of about $500 million in recurring revenues.
Yeah, if you look at the consoles we have based on their estimated useful life to go, there is about $500,000,000 worth of recurring revenues that we'll get over the next several years, yeah.
That's great. Just, I guess, a couple of follow-ups on the commercial transformation. You guys said that it is largely complete. What is still pending out there?
From an activity perspective, it is complete. What we need to do now is rinse and repeat and go prove to ourselves and to you all that we can replicate our success from Q1 and Q2 and Q3 and so on and so forth, right? It is just the time on task, and it is just the rinse and repeat.
You did call out making some incremental investments on the field service team side. How much spending or how many heads are you looking to add there?
Yeah, so our field service engineering team, these are the folks who install Tablo. They do the preventative maintenance. They would repair if needed. They would move the machine if needed. That team is really our face to the customer, and those folks are our face to our home patients because they would enter the patient's home if they need to do preventative maintenance. That team, one of the things I'll say is we're very proud of this. We measure customer satisfaction, and they get 90%+ CSAT scores, 95% CSAT scores. They're doing a great job. The first thing we had to do was make sure that we had people in all the right geos across the U.S. where we have consoles.
That's broadly done, and we'll continue to need to add people here and there as the volumes grow, but at a slower rate than in the past. The other areas of investment for us are in remote repair, remote diagnostics, right? Where, for example, we can use the data that Tablo generates, the data that sort of we have, and help identify problems or potential problems right when a patient calls or a customer calls so that either we can avoid a field service engineer visit or so that when they go out, it's easier for them to go fix whatever needs to be fixed. Those are the investments that you'll see.
Okay, understood. I guess a bigger picture question, Outset has had a little bit of a choppy recent history, if you will. It seems like you guys needed to retool on the commercial side, and the demand is still there. You still have a great product. I'm just wondering, what have you learned from this experience, and what are you incorporating in your process going forward that can give investors more confidence that this is a turnaround and now you can deliver that on a consistent basis going forward?
Yeah, so what we've learned is that demand for Tablo exists. It has existed, and it continues to exist because the value proposition in both acute and home end markets retains. Then we've also now done the hard work on our commercial transformation. Q1 was our first proof point that it is working. What we need to go do, again, for ourselves and for you all, is to go do that again and again and again, meaning execute the way we expect to be able to execute again and again and again.
Got it. I guess just moving on to guidance. Obviously, you guys beat in Q1. You did not raise your guidance. Why not increase it by at least the amount of the Q1 beat? Is it conservatism, or are you building in a cushion for something unforeseen, like maybe on the CapEx side? Why did you not decide to raise?
Yeah, look, we were very pleased with our Q1 performance top to bottom. Leslie and I both said, I think at our call in February, that we wanted to remain conservative for this year, and that's how we're going to remain. Q1 was a strong quarter, and we're focused on executing again in Q2 and beyond. Yeah.
Just conservatism?
Yeah, just conservatism. You know, with one quarter down, we have a lot of work to do here to get into our guidance range, and we're excited to do the work. We have a lot of confidence in our outlook, but yeah, we want to remain conservative.
What about in terms of the range? It's a pretty wide range, up 1% to up 10%. Are you tracking towards the upper end of the range? Is that a fair assumption given Q1?
At the midpoint of our guidance range, we assumed that our install base would grow by roughly 10% and that recurring revenues would grow by roughly 10% year on year. Now, again, we do not guide to quarters, but what I will tell you is we remain confident in that outlook for the full year without giving you any more shadow.
Recurring revenue was up 20% in Q1 versus guidance implying 10%.
For the full year, yeah, recurring revenue was up 20% year on year, yeah.
How should we think about Q2 sequential step-up through the year given the initiatives in place?
We don't guide specific quarters. What I'll tell you is we expect revenue to build throughout the year, led by recurring revenues on our growing install base and then based on console placements.
Got it. You know, gross margins has been a very consistent, positive story, part of your story. You guys delivered about 37.6% in Q1. I think if you adjust for or normalize for the lower absorption, it's almost 40%, and you're looking to exit the year at 40%. So is it fair to assume that you're tracking way ahead of that guidance that you've given on gross margins or other percent takes to consider?
Yeah, so our guidance remains exiting the year in the high 30% and with a four handle, excluding the effects of this under absorption. You know, the one dynamic that does affect gross margin is product mix, whether it's consumables or consoles, and then home versus acute. Acute consoles have a higher gross margin than home, so there's a little bit of mix to factor as we move through the year, but we remain confident in our outlook here of exiting in the high 30% zone.
You guys have an outlook to get to plus 50% exiting 2027. Can you maybe give us a breakdown of where would you be on capital versus consumables, and where do you peak on capital and consumables margins over time?
Yeah, so we have, going back to our IPO, we've expanded gross margins significantly every year, and we remain on this journey to expand gross margins in a roughly linear way, getting to that 50% milestone and then beyond. With respect to the individual products, consumables are our highest gross margin product. As the install base grows, we pull through more consumables, and then we pull through more service, which is marginally, has a high contribution because we're not adding people at the same rate. The one big driver of margin expansion for us is just the growth in install base and the pull-through of recurring revenues. Number two, we talked a little bit about the investments we're making in remote repair, remote diagnostics.
Those investments are bearing fruit, and you'll see further leverage from our field service engineering teams, from our service offering, and you'll see service gross margins expand. Finally, on the console side, we've had what we call console cost-down programs, where we reduce the cost of individual components in the console, either through R&D or supply chain strategies. Again, you'll see the cost of the console decrease and the console gross margin expand over time. We remain on track for this linear expansion to 50% gross margin within our planning horizon.
there any specific metrics in terms of numbers in terms of what the 50% split is between capital and consumables, and where could it peak even beyond the 50%?
Yeah, as we move beyond 50% and as the install base continues to grow, we will pull through these higher margin recurring revenues. 50% is not a peak. There's no reason why we cannot be in the 60% gross margin or higher as we move forward in time. Again, it just depends on the install base growing and the pull-through of recurring revenues. Nothing new needs to happen.
Got it. You know, I thought it was interesting. You said that you expect to get to adjusted EBITDA+ at less than $200 million in sales. You know, I think we are there, I think in the 2028 timeframe. Just what is your reaction to that? And just curious, what are the assumptions around gross margins and OpEx levels to kind of get you there?
Yeah, so I don't want to comment on the timeframe, but I can tell you the most important thing for us is getting gross margin to 50%. Again, we're on a linear journey there. Number two, our OpEx guidance for this year, roughly $90 million of OpEx, that'll grow at inflationary rates at most. If you think about roughly $90 million of OpEx, if you think about 50% gross margin, we can break even on an EBITDA basis at a revenue run rate of under $200 million. The structure works, and again, we do have that within our planning horizon.
Nabeel, I think you guys have had a lot of initiatives on the P&L, really balance sheet. You've done a series of transactions on the debt front, significant cost containment, I think $80 million in annualized spending you guys have kind of taken out. Can you just comment on profitability? I think you've said that you don't need to approach capital markets. Just give us a look into the health of the balance sheet and the company financially.
Yeah, so we exited the quarter with $192 million in cash and $100 million of debt. This was following kind of the capital raise and the debt refinancing activities we announced in early January. We are fully aligned with shareholders here around getting to cash flow break-even, getting to EBITDA profitability with the cash we have on our balance sheet. For us, it's again tied to the gross margin expansion that I talked about, and it's tied to the OpEx discipline that we've demonstrated and will continue to demonstrate. It's all within our planning horizon. Yes, we do have the ability in the cash to get through cash flow break-even.
Is there a minimum level of revenue growth we need to see for this match to work and for you guys to approach profitability that you can share? Previously, you guys had an LRP out there. You had pulled it. Are there any plans of reinstating that in the next 12 months or so?
We still have an LRP. We still have one internally. What we pulled was the guidance for the LRP. We are not guiding to any period beyond 2025. I mean, our focus as we sit here today with one strong quarter down, shrug, is really on executing through this year and executing through the guidance range, right? We are heads down here, focused on 2Q, and then we will do the same thing for three, four. Look, we will always look at the metrics that we disclose, and at the right time, yeah, maybe we will share an LRP, but yeah, I do not want to commit.
Okay, I meant you guys had given a top-line growth trajectory previously for the LRP range. Is that something you might reinstate at some point?
We might, but again, what I would tell you is our focus is really on 2025 right now. Yeah, never say never. Yeah.
All right. You know, I also wanted to get your thoughts on just around just portfolio and M&A. How do you think about interest from larger players or partnerships? Is there any opportunity? I know you're very focused on getting things going on on a consistent basis in the U.S., but you did have an international strategy earlier. How should we think about that?
Yeah, so other opportunities may be interesting. OUS, other opportunities, OUS, all interesting in the theoretical. We have large markets here in the U.S., $11 billion of TAM that we are in the very, very early innings of addressing. And we now have the right team in place. We're really, really confident in our strategy with respect to both penetrating acute and home end markets and are really focused on executing against those, right? In the theoretical, we're absolutely open, but as a practical matter, our focus really is heads down on 2025 and executing our plan.
I mean, you do have a really massive market out there. Dialysis market is massive, I think $11+ billion . Does it make sense for you to partner with a bigger player or consider partnerships to really be able to drive into that TAM? How are you thinking about that?
Yeah, I mean, look, we'd always be open, but again, we think we have the right capital sales infrastructure, the right clinical sales infrastructure to capitalize on this market opportunity. One proof point being our performance in Q1 working well, and we want to replicate that. Another proof point being, again, our pipeline, which, as we've talked about, grew in the first quarter here and contains a number of sort of really interesting enterprise deals that we're excited to play out.
Got it. We have about a minute left. I was just wondering if you can maybe touch a little bit on the acute versus subacute versus home. Where are you in terms of penetration? I think last year it said, at least on the acute side, it was high single, low double digit. Is it teens? Where are you? Because it is a massive opportunity you're still tracking to.
Yeah, in the acute, we believe the total console TAM is between 40,000 and 45,000. So we could sell 40,000 to 45,000 consoles in the acute. Our install base entering this year was roughly 4,500 in the acute, so we're call it 10%-ish penetrated. In the home, we have 1,500 consoles sold into the home end market against 600,000 chronic patients on dialysis. That's again in its infancy. The subacute, particularly in the SNF area, is a new market opportunity for us. What we like about the subacute market is that the value proposition is the same. It's an economic value proposition for the subacute, just like it is for the acute, and it's the same sales team that we have that can address all three markets. Lots of runway to go.
Got it. I know we're out of time, but Nabeel, any last thoughts from you? Any key messages from investors? Q1 was a good proof point. The stock is really cheap still. Just any messages for investors?
Yeah, for sure. First of all, we're really pleased with our Q1 performance, and we're focused on doing that again and again and again and getting back to executing the way we know our business can execute. Number two, we are fully aligned with stockholders and all of you around getting to profitability, getting to break even with the cash we have. Number three, what we have learned through all this is the value proposition of Tablo remains very, very strong in acute, subacute, and home, and we're excited to capitalize on all these opportunities. Thank you.
Great. Thank you so much, Nabeel and Jim. Appreciate your time.
Thank you.