Going, I'd like to welcome the Outset Medical team. To my left, Leslie Trigg, Chairman and CEO; Renee Gaeta, Chief Financial Officer; and in the audience, Jim Mazzola, Head of Investor Relations. It's great to have you here. Thank you for being here today. I gotta tell you, and I'm saying it, I've already warned you, I want to warn everybody. I'm going to start by talking a little more to get things going than I usually do. I want to start positively and generously at what is actually a challenging moment, obviously as reflected in the stock price. As I reflect on my positive Outset Medical thesis, I think to myself that the last 12 months have been a challenging, but at the same time, incredibly positive period in which the company has significantly transformed and positively evolved multiple aspects of the organization and the commercial engine.
Again, as I reflect on the last 12 months, you've, Leslie, and you and the team have fixed, improved, evolved, one, and resolved in some cases, FDA issues that are not only behind you, but have left a more mature, evolved regulatory organization, much more solid shape, de-risked. Two, you know, I think as you've better understood the changing nature of your acute care customer base, you've evolved a selling organization, totally transforming it, positively transforming it into an enterprise-based model where the sales team is focused on these large hospital system deals, and you've succeeded, and frankly exceeded my expectations, and I hope yours. The order pipeline, as you've said publicly, has continued to increase. In the last three months, you've indicated the average order size has risen 20%. That's meaningful. All that signals to me the success you're having.
Most importantly, it signals that the success is built on your absolutely outstanding Tablo technology foundation. I've never heard anything but just fabulous feedback from customers. I mean, it just, it's been, it's just great technology. As I often say to people, I'm as excited about Tablo today as I was at the time of the IPO. Third, at the American Society of Nephrology meetings last week, there were multiple compelling large data sets that commandingly demonstrate Tablo's compelling insourcing benefits, which again, I hear again and again from customers, dramatically reduced adverse patient events versus other technologies and approaches, and meaningful quality of dialysis care improvement, among many factors. The list is long. You presented data on your own data over a million Tablo treatments to date, attesting to Tablo's robust capabilities and utilization. Last, phew, there's a Gilbert and Sullivan thing.
The night has been long, and ditto my song, my introduction. It seems like you're still early in this journey of transforming dialysis care in acute care settings, subacute, and someday potentially again, I'm confident, more visibly in the home. Phew. All that said, Leslie, on Monday, despite all these positives, you reported a disappointing quarter and lower guidance for 2025. As a result, we took our 2026 numbers down as well.
What I hope to do today, and with the folks that are listening, is to better, even better understand what feels like temporary challenges, what I hope and believe are temporary challenges that drove the miss, what the implications are for the fourth quarter, and for investors as they look forward to not just 2026, but to the next several years, you know, better ground us on, with all these positives, why can't you get it more right right now? So Leslie, over to you. What happened the third quarter you expected and why?
Thank you for that thorough and comprehensive.
Sorry for the start.
No, no, no. I mean that genuinely. It was a really great summary because it is frustrating because the company is, and the organization is executing so well across constantly utilization, service, gross margin, operating expense management. We are getting a lot of things right, and we are not getting one very important thing right yet, and that's the predictability and the timing of deal close and the capital sale. Let's start there because that also answers part of your question around what happened in the quarter and what caused us to miss consensus by about $1.3 million. There are actually, so there are two things that were, two dynamics that were going on in the quarter, but let me hit consoles first. We had one large, still very active present in the pipeline.
We had one large deal not close in the quarter that was forecasted to close in the quarter. This is a deal that we do still expect to close. We're having active dialogue, getting the signatures from this customer, and we're getting updates on that on a daily basis. If I reflect back through 2025, we have closed many larger enterprise-level deals through the year. We closed a very big meaningful one in Q2. We actually closed a very large one in Q3, just not the one that, the second one that was forecasted to close. We are gaining ground on knowing how to do this, and I can talk more specifically what makes this so hard if that's of interest, but.
It is.
Okay. We've done it successfully. The next step is doing it successfully all of the time and getting the predictability and the consistency around close, and that's the next step for us. The second factor that I think is worth mentioning, and we'll circle back around to capital and console sales here in a second, the second factor for us in the Q3 was another mismatch around order timing, but on the consumable side, where we saw, and I'll let Renee maybe speak to it more specifically, but at a high level, we saw a mismatch between the actual underlying utilization of Tablo, which was very stable and very strong. We have always been an organization that has benefited from very predictable recurring revenue because we see the utilization streaming out of the Tablo consoles. You have purchase order kind of invoice data.
We have the benefit as a medical device company of actually seeing exactly when every console everywhere around the country is being used and for how long. We have this exquisite level of data. We did not do a great job this past quarter of applying said utilization data to pre-identify that our customers were actually using more inventory than they were purchasing, which is something that we have an opportunity to get right here starting in the fourth quarter, but I'll maybe kick it over to you.
Yeah, I mean, I would just to add to that, she's validating all the points of why we feel so good about the utilization and sort of the foundational base of our recurring revenue because we can see the data. We know the instruments are being used, the consoles that are placed out there, and they're active and they've been consistent month over month for a very long period of time. That's great. What we need to do is to get closer to understanding the difference between purchasing versus usage for the quarter and what are the inventory buying patterns, what are their supply chain inventory expectations. One of, again, a very small handful of larger volume customers that this impacted too and for different reasons for each of them.
One of them, you know, we know that they carry a 30-day supply and they were good as the end of September. They had purchased during the quarter, but just did not make that one final purchase at the end of September where they normally would have. That is them predicting out forward to what they would use for the next 30 days.
Let me understand that, Renee, just a little more carefully.
Sure.
You understood if you had looked or the right people had been looking in the right way at the right time and something. You understood internally the data was there to see what was being consumed and supplied. More optimally and going forward, you're just going to say, "Oh, they're whatever, five days, five or five weeks, whatever away from." The replenishment will happen more automatically. That's the consumable issue. Am I saying it right?
That is absolutely one asect of it. It is getting closer to the customer in those communications, in those business readouts, where are they at, what are they predicting for the next month. We, you know, with our forecasting process on treatments historically, when we've been off, we've been off to the upside and that they purchased more than we had anticipated. In any one quarter, they can be plus or 5%. That is not unreasonable. Specifically for this quarter, we had two or three customers who were managing their balance sheet and their inventory levels and just did not make that additional purchase. It needs to be better communication, alignment with the data within our finance team, our sales team, and the customer.
Again, just trying to understand. You would have, so in a more optimal world, you would have known that they were managing their balance sheet, but what could you have done if they were managing their inventories down to make the quarter in a more optimally managed world better?
Yeah, I can maybe comment on that because as our customer base has gotten larger and larger, big large health systems, what they need from us and what we have the capacity to give them is visibility. A large customer where many dozens of their hospitals are using Tablo at the corporate level, they aren't necessarily aware of what their utilization looks like. We have the ability to give them utilization data and then bring this to light and say, "Hey, customer A, your utilization is running 20% or 100% in the case of these couple large customers ahead of what you've purchased. Let's take a look at that and give us some visibility in where your inventory levels are at so that we can help make sure that you're not running out of supply." That's where we have the opportunity.
I think, and we mentioned this on Monday in the call, important to note, we have seen Q4 normalize in terms of that historic relationship that we've seen between utilization and purchase data. October and into November has looked really, really good.
All things equal, and this is where I was going to end up anyway, all things equal, it's not too much to say fourth quarter, you know, these trends are more in balance and in a normal, whatever I'm searching for the words, and more normally as expected.
That's right.
Yep.
Right. And just to tie the proverbial bow on this topic of timing, it's not that there was sort of extraordinarily too much purchasing in some previous period that hospitals were working down, and that was the problem. That's not what I'm hearing at all.
No, I mean, we've seen a, when we look back on our purchase, so again, very stable, consistent utilization. And when we look back on our purchase data for a couple of these larger customers quarter and past quarters, that's also been pretty very stable and very predictable. In the third quarter, both of those dimensions got misaligned for some specific reasons specific to those three customers. But we appear to be past that and seeing normal behavior, if you will, in the fourth quarter.
Gotcha. Coming back to the prolonged console sales timing, when, how, why does this get better? Leslie, apologize, I got to put you back on the hot seat again and say it just feels like since 2023, this topic of extended sales cycles, unexpected console sale closing dynamics repeatedly have been a driver of downward revision and delay and frustration for us all. Why are we at the point where that part of it is behind you? Again, just unpack why that's going to stabilize and get better.
I'm happy to. I'm going to take a quick step back and then we're going to go forward. Overall, our revenue strategy as an organization is to have the highest percentage possible of our total revenue coming from recurring revenue. Recurring revenue for us is the consumables, its service, and our next frontier in recurring revenue is actually EMR because we are fully connected with Epic and Cerner and many other EMRs, which is very unique and differentiated amongst dialysis systems. You will see us continuing to put kind of additional incremental kind of concentric rings of recurring revenue around our business over time. That is because capital equipment sales for all medical device companies is always going to be lumpier than recurring revenue, which you can count on most of the time asterisk except Q3 of 2025.
That's our overarching revenue strategy. We know that capital sales will always be a little bit lumpier and trickier. That's inherent because especially when you're operating at the level of very large health systems, and maybe I'll, you brought up a music analogy, so I'll give you another one with your concert cellist background. We have to get all of the instruments in the orchestra to play at the time of our choosing, right? I've done a lot of single-use disposables into the cath lab in my career. To get a new device into the cath lab, you might have three or four decision makers in one hospital, right? Capital, by contrast, at the enterprise level, I might have 30, 40, or more decision makers. This is not, I'm not saying this is not a beast that can never be tamed.
There are plenty of other medical device companies that have done this successfully. No excuses. We can and we will master this, but there are dozens of decision makers and dozens of signatures. That is what I mean by all the instruments. We know we want it to close by said date. You have to make sure that all of your band members are ready to play that song when you are ready to play it. We have done it successfully in 2025. We need to conduct the orchestra more consistently. I will stop with that analogy. There is more to this, again, no excuses, where we, let me address kind of why are we still not here? What about going back to 2023?
I think step one for us was we really did not even have the right foundation in place because when we first launched, excuse me, we were in more of like land, and I actually think we called it land and expand. We would kind of get our foot in the door with one hospital. That is a different sale process. It is one hospital. Then we made the turn into kind of these enterprise-wide deals where we are not being used in one hospital. We had a deal that we closed in Q2, and you know they are converting like the whole ministry at the same time. That is like 14-15 hospitals all going at the same time. That is a very different sales process. Step one for us was putting in place a new sales process, new selling tools, and a totally new sales rep profile.
We're actually really not selling a device, and I think maybe sometimes this is underappreciated. We really aren't selling a device. In our sales process, we show off Tablo, which is fun to do because it is a clear technology leader much later in the sales process. What we're really convincing hospitals to do is change their care delivery model from, "I'm going to outsource this to DaVita, Fresenius, a third party," to, "I'm going to stand up my own service line with my own nurses." That's the change. That's the behavior change. Once the health system makes that decision, now we're talking about what's the enabler. Tablo is the enabler to allowing them to do this because it's very easy.
We had to change away from kind of device-type sales reps to solution enterprise sellers, and all of the foundation has been put in place, and the roots of that are strong. What's step two to achieve consistency? We are making a change with the departure of our head of sales. We are making a change at the sales leadership level, and we're going to be thinking about a little bit of a different criteria for that sales leader that we think will be important to help kind of power our sales team to achieve this consistency and accelerate our way there.
Right. Anton, I think you had a question or no, I missed that. Understand. Okay. Good. This is unrelated. The issues this quarter are unrelated to hospital capital spending or budgets or, and should we be more anxious, less anxious? Anything changed there that we should be sensitive to?
Not that we've seen. No, that has not been a factor. We've obviously, certainly like I think all medical device companies, got a sharp focus on that for the future, and we're in major monitoring mode, but that's not something we've been hearing from our customers.
Talk about, expand on your sales leadership transition comments. I mean, it's easy for me to be paranoid and neurotic. I am those things baseline. I mean, how realistic, I mean, realistically, how big a risk is it? Do you have some other senior leaders in place? You've had this new sales structure in place for over a year. How concerned should we be about this interim period before you find this person and bring them on board?
Yeah, I'm happy to talk about that. First and foremost, we do have a strong sales leadership team in place and a strong sales team in place in general across capital and also clinical. We have a very large percentage of our sales force that's in the clinical domain, and they do a great job for us every day. We also have an incredibly strong field service team. I will answer your question, but I want to spotlight them for a second because I think another underappreciated aspect of Outset is the face of Outset to our customers is really the field service engineer because they're in there day in, day out, making sure that those machines are up and running on time.
We have maintained really high customer satisfaction CSAT scores, both in our clinical sales and also our field service organization, which we're really proud of. The sales leadership is in place. We have a VP of national accounts, strategic national accounts, a Vice President of the West, and a Vice President of the East. Those individuals have long tenure and a lot of experience in capital equipment and also now are fully immersed in our world of working with hospitals from outsourcing to insourcing. It is always possible, of course, in the theoretical when you have a change that there's going to be some distraction and some disruption.
I'm going to be doing everything in my power to make sure that that does not materialize, but it is possible and that's something we factored in and thought a little bit about as we thought about how to give some guidance for the remainder of 2025. We do have a very, very strong sales leadership team in place. In that sense, it'll be business as usual as we conduct the search.
Great. Talk about the, just briefly go back to the EMR connection. I do not know why I have not focused on this maybe enough. What percent of your install basis was EMR connected and how does Outset get paid for this? Is it a meaningful incremental underappreciated revenue driver for 2026 and beyond or?
Yeah, so I'm happy to talk about that. It's new for us. I would not call it a meaningful part of our revenue picture today. As we look over the, you know, our long-range planning horizon, yeah, we do anticipate it being a meaningful part of our planning horizon. Why do I say that? Because it has been a meaningful revenue driver for other types of medical devices like the infusion pump space. There is precedent for this. We're not breaking new ground and guessing about whether hospitals will pay for this. We know hospitals will pay for it. In fact, in 2025, we have signed a meaningful number of new customers for EMR integration.
We have a secondary product called Tablo Hub, which is our own web portal that gives the hospitals access to all sorts of information, clinical, operational, fleet management for hospitals that are not connected yet. I would tell you to answer your question, a very large percentage of our customers are on Tablo Hub. The number of customers that are getting connected either through Epic and Cerner to Tablo is small today, but growing. The revenue model is an upfront implementation fee, and then it is a subscription, again, buttressing, further buttressing recurring revenue, a subscription fee model on an annualized basis. I think you'll be hearing more about that from us in the future.
Great. The ASN Kidney Week was last week. As I said, there were a bunch of papers. I mean, you can say what you want about them or in whatever you say you like, but I'm curious, should we be, how does this translate into more interest in Tablo and help you with the selling process? And does it, you know, were these game-changing data sets? Was the reaction positive? Just any color would be great.
Sure. I think one of the things that our sales leader, who kind of has been leading this sales transformation, did a really, really good job of starting about a year ago was getting us to really focus on the Chief Nursing Officer. We've always been really strong in front of the Chief Financial Officer because the primary value proposition has been cost reduction. About a year ago, she really was leading our organization to focus on the Chief Nursing Officer and examine, do we have a clinical value proposition here? This has been, to be honest, a bit customer-led for us. More of our customers about a year ago started illuminating for us. We had a customer in the office a couple of weeks ago talking about, you know, a 35% reduction in hospital-acquired infections since adopting insourcing with Tablo. We didn't know that.
Reduction in length of stay, reduction in infections, reduction in serious cardiac and respiratory events. We are hearing about this more and more and more from a bigger and bigger percentage of our customer base. How does it help us? We had AdventHealth, one of our customers, present on that very data last week. They are just one of many examples that we have been hearing about. What are we going to do with it is the answer to how can it help us? We have been sort of, you know, unintentionally kind of keeping that under wraps probably for longer than we should without kind of bringing it to light. We are really focused on the marketing side for 2026. We will really now forward generating case studies and white papers.
We're working with our customers to do that and getting more of that data out through medical meetings, publications, et cetera. I think the next step for us is we know this clinical value proposition is here. It is real. Our next step is to promote it a little bit and act a little bit more like a sales and marketing organization and educating Chief Nursing Officers about what they can expect when they insource with Tablo. That's quite an exciting development for us that it's not just the financial cost reduction. It is also a very tangible improvement in patient care, which is what the Chief Nursing Officer is there to really care about.
Renee, when we first spoke probably five months ago and when you started, I said, what are your priorities? And you know, and I knew that whatever you said, you know, maybe the answers would change. We're five months later. Now you've seen a lot already. I'm sure you're, you know, very much a veteran. What are you focused on most intensely? What is the greatest potential for, you know, with fresh eyes that you've come in and seen that could help either cash or cash utilization was astoundingly low. I'm happy to give you full credit for that this quarter. Just talk us through some of your priorities and thinking.
Sure. Yeah. On the cash side, it is a full team effort. I'll tell you across the organization, we've done a really great job at pulling out spend, right-sizing the spend to the organization and maintaining that, which is what I think is really important for the future. I would say most importantly for me, probably on my radar is gross margin, right? We're making very good progress towards our next milestone goal of 50%. If you actually think about what we've done over time, we have really first tackled the product side. Early days through the IPO, most of our revenue was coming from product revenue and had a negative gross margin. We've now flipped that from effectively a negative 40% gross margin to over 40%. That's great. We tackled those both on the console side and the cartridge side.
Serviced is our next frontier. We.
What can you do? What's...
A bunch of things.
When are we going to see it?
You started to see it. You even started to see it this quarter, right? If you look at the performance from Q2 into Q3 on the service margin, we've got some improvements. We have a lot of other things on the list to do anywhere from ASP, the different types of service categories that we can offer, as well as looking at that cost structure, optimizing with tools and the team. How do we get to a better service margin? I mean, for the quarter, we were at right around 24% gross margin. I absolutely want to see that above and beyond and beneficial to marching towards 50% and then even hopefully beyond that. That is just our next frontier. We are actively working on it. We have a great Head of Operations who is partnering with me on those efforts.
I think that that is one area where I'm focused too. I'm absolutely focused, I would say, across the P&L and the balance sheet, but just to highlight something for you.
Yeah. No, that's great. Sooner, by the way, and bigger would be better. That's just anything you can do on that front. Leslie said that I should ask you, Renee, about the 2026 guidance and outlook. Or maybe I said it to myself figuring, you know, Leslie would say nothing. We are halfway through the quarter. I've just been, you know, reflecting in advance of this call on some of the directional comments you made on the third quarter call about guidance. You cut the full year 2025 guide by $7 million at the midpoint to reflect the softer than anticipated third quarter and the continued deal timing dynamics, et cetera. I assume, I believe that these issues are going to improve sometime in 2026. You know, so annualizing the fourth quarter sales reduction seems like overkill.
You know, when I look at consensus, when I looked yesterday at $127 million, I don't know, do deal timing dynamics, have they been appropriately reflected in the year ahead numbers as you sit here today? Does it seem like they've overbought into your conservative commentary or I'm putting you on the spot.
Yeah, thanks for that.
You could look at me and Leslie, don't look at her.
You know, I'm going to give you my formal answer is that we will provide 2026 guidance at the beginning of the year as we normally do. We are absolutely focused right now on finishing out the year and have given the commentary for the reasons why we unfortunately had to reduce guidance for 2025. As I look forward, you know, to 2026, I think that, you know, the factors that we indicated, some people have asked me, hey, is that all going to, those are all just going to come back in Q1. While I wish that they could and I had a magic wand around that, we're just being realistic in working through this process. Again, foundationally within our revenue streams, we've got great recurring revenue, great foundational base, utilization is strong, service revenue renewals are high. We've got a great foundation to start from.
It is this, on the console side, the timing of those deals, the deals have not slipped out of the pipeline. We are still actively involved. We just need to get that right and as Leslie mentioned, get that right consistently.
There has been no change in the backlog, dropout or anything that we should be sensitive to. Just to pick up on that point, as I said to you in my tortured language in the post-release discussion, it is not impossible, it is not improbable that the order that was delayed, it is not impossible or improbable that we could think about that even coming back into the revenue base in fourth quarter as soon as that. I mean, depending on.
That's right. I'll just add one thing that is probably important to note is while it is not improbable, I'll try to use a quadruple negative.
Exactly.
While it was possible. We also wanted to be cognizant of the fact that we are in the fourth quarter. From a health system standpoint, you are nearing the end of an annual budget year, right? Sometimes that can be a tailwind like, hey, we are flushing through the remainder of our available budget. I have also seen different companies and different products where that becomes a headwind. You know, the hospital, the health system makes the decision to actually put the project into 2026 with a fresh reload and refresh of their budget. Because we are coming up into the fourth quarter, that is why we were talking about some of these deals absolutely can close in Q4.
Some may end up closing in Q1, et cetera, into 2026 because again, Q4 is in a unique period of the year for health system budgeting.
Yeah. We're out of time, another minute or so, but any summary comments? I mean, you've had a lot of conversations. I'm sure these are not, could not be a pleasant moment for any leader. I'm certainly not for you, Leslie, but any thoughts you want to leave us with as we close?
Yeah, sure. Look, I mean, we were not obviously not happy with where we landed on Q3. At the same time, what matters the most has not changed. That is the size of the market, acute alone, you know, a multi-billion dollar market. We are substantially ahead and have, I think, a lot of very interesting things in the product pipeline that will ensure we continue to stay ahead. We are in a space that has not changed in a couple of decades. That's not easy to do, no excuses. It certainly has at turns taken us longer than we thought it would, changing kind of habits and behavior. Our largest competitor right now is do nothing. Sometimes it feels like you're shadow boxing a little bit, but we do not have meaningful competition.
We are not losing any deals out of the pipeline to competition, which is a unique facet of our market. We're ahead. We will be ahead. I have firm conviction remains so for quite some time. Where I think, you know, I think about what are we, what's the last piece to fall for Outset into the puzzle is the timing and predictability of capital sales. We are absolutely on the right path. My confidence has actually never been higher about our ability to turn this market, get gross margin to that 50% and beyond, and get the company profitability. I know we will do that. My focus singularly is making sure that we nail this last piece, which is the predictability of capital. The good news is it has been done. There are many examples of medical device companies that do this really well.
I know it can be done. We're not doing something, you know, for the first time. We just need to bring that to Outset. And that's what we intend to do.