Q4 2022 Outset Medical Inc Earnings Call

Speaker 1: Good day and thank you for standing by. Welcome to the outset medical Q4 2022 earnings conference call. At this time all participants are in a listen-only mode.

Speaker 1: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jim Mazzola, Head of Investor Relations. Please go ahead.

Speaker 2: Okay, thank you and good afternoon everyone. Welcome to our fourth quarter and full year 2022 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer and the BLM Ed Chief Financial Officer.

Speaker 2: During the call, we will discuss our fourth quarter and 2022 operational and financial results, provide an update on our outlook and host a question and answer session. We issued a news release and filed an AK after the closing market today and updated our investor presentation, all of which can be found on the investor relations pages about setmedical.com.

Speaker 2: This call is being recorded and will be archived in the investor section of our website.

Speaker 2: It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. These statements relate to expectations or predictions of future events, are based on our current estimates and various assumptions, and involve material risks and uncertainties that could cause actual results or events.

Speaker 2: to materially differ from those anticipated or implied. I would say that it seems no obligation to update these statements. For a list in the description of the risks and uncertainties associated with their business, please refer to the Risk Factors section about the public filing with the Securities and Exchange Commission, including our latest annual and quarterly reports.

Speaker 3: And with that, let me turn the call over to Leslie. Thanks, Jim. Good afternoon, everyone, and thank you for joining us. We're very pleased with our performance in the fourth quarter, which capped off an important year for outset. During 2022, we significantly increased the number of Tableau consoles in hospitals and homes. For more information report on our account, please Go ahead and click the

Speaker 3: surpassed one million treatments, and helped healthcare providers continue to deliver exceptional lower cost care in a challenging labor environment.

Speaker 3: We also fundamentally strengthened our platform for growth by innovating and extending Tableau's technological advantages, adding key talents, and strengthening our balance sheet.

Speaker 3: As a result, we have entered the year with a lot of conviction in our plans to further expand Tableau's footprint with good visibility to continue sales growth across both our home and acute end market.

Speaker 3: And in addition to growing the top line, we also remain committed to meaningfully expanding non-dapt gross margins this year toward our next milestone of 50%.

Speaker 3: Beginning with a review of our home performance, at a high level, home represents the single largest market opportunity for outset. In 2022, we saw a growing demand for Tableau as an enabling technology for home dialysis programs fueled by exceptional clinical outcomes.

Speaker 3: positive patient experiences and retention, and the increasingly recognized economic benefits for patients and providers.

Speaker 3: While our overall year-end install base across both markets increased 54% year-over-year to approximately 4,000 consoles, our fourth quarter performance contributed to a particularly strong year for home. Exiting the year, we achieved a more than doubling of our home install base to 800 consoles in 2019.

Speaker 3: with sales to home care providers at roughly 20% of total 2022 revenue ahead of our original goal of mid-teens as a percentage of total revenue.

Speaker 3: In addition to Tableau's continued growth with mid-sized dialysis providers, which we discussed for several quarters, we were also successful in initiating home programs with both health systems and new adjacent specialty providers entering the state.

Speaker 3: This is an emerging segment of the home market we believe will continue to be an important growth vector in 2023.

Speaker 3: As a reminder, we define a home program as a location offering tableau for home dialysis and we were pleased to exit the year with roughly 100 such programs in place.

Speaker 3: Historically, 60% of home programs have spent between one and five patients home.

Speaker 3: While early, we are now starting to see multiple programs sending low-double-digit numbers of patients home on tablo.

Speaker 3: We believe the keys to profitable sustained growth in home moving forward are first, reaching higher than historical home patient numbers per home program, and second, maintaining higher than historical retention rates.

Speaker 3: In 2023, we are employing a similar land and expand strategy in the home market as has been successful for us in the acute end market. It's our goal to land the majority of the largest mid-sized dialysis operators and initiate home programs with two of the top national IDNs.

Speaker 3: We believe the progress we made in 2022 and the new programs we plan to land in 2023 will provide a foundation from which to further expand the number of patients dialyzing at home on Tableau.

Speaker 3: Central to the success of our expansion in the home is a consistently positive and highly differentiated patient experience.

Speaker 3: We learned over time that the home dialysis experience for patients is tied both to the product and the people behind the product.

Speaker 3: In other words, the art of how we support patients greatly contributes to tableau success and we believe creates a separate, protected competitive advantage along with our technology itself.

Speaker 3: To that end, in early December , we were able to provide a firsthand view into the home patient experience through an educational virtual panel webinar that included two patients currently dialyzing at home with Tableau and a caregiver of one of the patients. Those patients were previous users of the incumbent home hemo device.

Speaker 3: and switched to Tableau for its simplicity and flexibility. They talked about getting space back from no longer having to store mountains of boxes and getting time back from no longer having to spend hours on end preparing dialyphates in advance of treatment.

Speaker 3: And more importantly, both patients said they felt better, felt less stress, were quickly able to master Cablol.

Speaker 3: These patient experiences underscore why tabloids control the nutrition rate has been consistently in the 10% range and continues to be roughly half the historical rates on the incumbent home advised.

Speaker 3: We believe one of the key drivers of retention is Tableau simplicity, which we see in our training data. Patients are able to master their Tableau learning curve in just 10 days on average, versus four to six weeks for the incumbent device.

Speaker 3: We see this advantage demonstrated in our 90-day retention rate, which shows the rate of patients choosing to transition back to in-center hemodialysis is less than half the rate of the incumbent device.

Speaker 3: It is our goal to maintain our markedly higher retention rates even as we substantially grow the number of patients at home on tabla.

Speaker 3: Turning now to our results in the acute end market, the fourth quarter was also marked by strong growth, including sequential revenue growth each quarter from Q2 through Q4.

Speaker 3: Broadly, we saw the macro acute care environment largely stable over the course of the fourth quarter and through the first several weeks of this year.

Speaker 3: We do expect staffing headwinds will persist and affect providers through 2023. And we're also keeping a close watch on hospital capital spending, which can affect the timing of deals, but today has not proven to be a meaningful headwind breath given Tableau's strong value proposition.

Speaker 3: We did see further evidence during the quarter of third-party dialysis service providers continuing to increase prices, decrease service levels, and in some cases, cancel contracts with their hospital customers.

Speaker 3: As our customers move toward insourcing inpatient dialysis with Tableau, we remain fully prepared to support them as needed with our Bridge program.

Speaker 3: The program is designed as a temporary staffing solution by providing short-term dialysis nurses who deliver Tableau treatments both in the ICU and bedside on the floor while the patient completes the process of hiring its own permanent staff.

Speaker 3: As hospitals continue to manage a challenging staffing environment in 2023, we expect the Bridge Program to continue to serve as an important staffing stopgap for providers who are eager to move forward and recognize cost savings with insourcing initiatives.

Speaker 3: From a product innovation perspective, last quarter was our first full quarter in market with Tablo-Cart, a new accessory that provides additional maneuverability around the hospital and incremental pre-siltration capabilities, precise with water quality that is far worse than the national drinking water standard. As a reminder, Tablo-Cart is sold separately at a gross margin.

Speaker 3: which is our land and expand approach.

Speaker 3: We are low double-digit penetrated in our acute base today and beginning to see larger console orders as hospitals expand and transition their dialysis service lines to Tableau. During the quarter, we closed multiple deals involving the purchase of 20 consoles or more.

Speaker 3: including a large Midwest provider who ordered nearly 30 consoles. With recent new acute customers landed in the quarter, our focus for 2023 and beyond will remain on expanding within those networks.

Speaker 3: Before turning the call over to Nabil, I'd like to briefly highlight a few operational updates.

Speaker 3: First, we took a significant step forward in our long-term margin expansion strategy by initiating production of tableau cartridges in-house at our outset Mexico manufacturing facility. This move also secures an important component of our business model and continues to improve the flexibility of our operations.

Speaker 3: well into the future.

Speaker 3: With this move, we now have three qualified suppliers of the Tableau Treatment Cartridge.

Speaker 3: I want to congratulate and thank our exceptional operations team for the work to expand our facility, build a clean room, and ensure our readiness to initiate this critical step forward for outset. It's another significant achievement from this high performing team and another example of the type of innovation we continue to drive across the organization.

Speaker 3: Second, we've talked about gaining operating leverage as we scaled the business and we made excellent progress during the quarter. In our sales organization, for example, we are gaining sequential improvements in productivity, increasing account penetration without the need for additional reps. Importantly, we are also gaining operating leverage from the investments we've made.

Speaker 3: with permission, see the system during a treatment, and assist users on a real-time basis.

Speaker 3: At the same time, we increased our install date by 50%, we also improved our remote resolution rate by 170%, lowering our cost to serve and taking full advantage of Tableau's two-way wireless communication capabilities.

Speaker 3: Not only does this approach improve our efficiency, it dramatically improves the customer experience and reduces the support burden for providers.

Speaker 3: Finally, we announced today that Martin Vasquez will retire from outset after a 30-year career in medtech.

Speaker 3: We have been extremely fortunate to benefit from Martine's expertise as we established world-class manufacturing, supply chain, logistics, and R&D capabilities, and we're pleased that you will continue to consult with the company. I really want to recognize Martine's contributions and his legacy of building and mentoring a truly incredible team of leaders, all of whom keep Outset punching above its weight.

Speaker 3: Taken together, these updates and the progress made throughout the year leave us feeling more optimistic than ever about our opportunity in 2023 and beyond. We are very well positioned in one of the largest segments of healthcare with a highly differentiated product, a growing base of customers.

Speaker 3: and a compelling recurring revenue model. And aside from our financial and operational goals, we aspire to deliver another year of deep impact for patients and their families.

Speaker 3: Dialysis patients for too long have been overlooked and served an experience that is just good enough, but they deserve great. And I want to thank the entire outset team, as well as dialysis nurses, technicians, nephrologists, and hospital leaders, an ever-expanding community of change agents focused on patients.

Speaker 3: who have fully embraced our mission to change the status quo. With that, I'll now turn the call over to Nabil to review our financials and provide more detail on our results and key drivers for 2023.

Speaker 4: Thanks, Leslie. Hello, everyone. Our fourth quarter revenue increased approximately 15.3 percent sequentially and 13.7 percent year over year to $32 million.

Speaker 4: with a year-over-year change driven primarily by higher consumable revenue and higher service and other revenue.

Speaker 4: This uptick in recurring revenue is one of the benefits of our expanded installed base and continues to be one of the key drivers of gross margin expansion.

Speaker 4: Product revenue was up 21.3% from the prior quarter and increased 11.5% year-over-year to $26.4 million.

Speaker 4: So on sole revenue grew 22.8% from the third quarter and increased by 1.5% year over year to $18.4 million.

Speaker 4: We saw console ASPs increase again year over year.

Speaker 4: driven primarily by the ongoing demand for Tableau XT and by demand for Tableau Cart, our new accessory launched in the fourth quarter of 2022.

Speaker 4: Consumable revenue was $8 million, up 17.9% from the prior quarter, and an increase of 43.9% versus the prior year as our install base grows.

Speaker 4: Based on data from consoles deployed and connected to our cloud network, we see Q4 cartridge utilization continuing to be in line with our expectations.

Speaker 4: Service and other revenue of $5.6 million was down 6.3% from the prior quarter and higher by 25.3% compared to prior year.

Speaker 4: Our core service and other revenue increased approximately 90% year over year with the growth of our install base and was offset by the planned expiry of the HHS agreements. As a reminder, the third quarter of 2022 saw the expiry of the final components of our HHS agreements. For more information, visit www.hhs.gov

Speaker 4: Moving to gross margin and operating expenses, I will highlight our non-GAAP results. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's earnings release.

Speaker 4: Our fourth quarter gross margin was 17.1%, a sequential improvement of seven basis points and an improvement of just over five percentage points versus the primary period.

Speaker 4: This progress marked seven consecutive quarters of consistent and substantial gross margin expansion.

Speaker 4: and once again demonstrates our commitment to our next milestone of 50% gross margin.

Speaker 4: The primary drivers of our margin expansion have been our ongoing on-sole cost-down program, lower freight costs as our Mexico-based cartridge contract manufacturer has taken over the majority of our cartridge production and higher margin revenue mix.

Speaker 4: We anticipate that our internally manufactured cartridges will start to reach customers in 2023.

Speaker 4: Operating expenses in the fourth quarter were $38 million.

Speaker 4: down one and a half million dollars, which is the prior year period, as we food up incentive compensation for the year and realize some of the benefit of our efforts to prudently manage spending.

Speaker 4: We reported 4th quarter GAAP net loss of $41.4 million, resulting in a net loss of $0.86 per share compared to a net loss of $41.2 million, or $0.87 per share for the prior year period.

Speaker 4: non-GAAP net loss was $34.1 million or 71 cents per share compared to a non-GAAP net loss of $36.4 million or 77 cents per share for the same period in 2021.

Speaker 4: We ended the quarter with approximately $290.8 million of cash, cash equivalents, restricted cash and investments.

Speaker 4: which include $100 million of drawings under our terminal. We continue to have access to up to an additional $200 million of capital under our XLR debt facilities.

Speaker 4: Moving now to our full year 2023 outlook starting with revenue.

Speaker 4: We project revenue for the full year 2023 to range from $140 to $150 million.

Speaker 4: which represents approximately 22% to 30% growth over fiscal year 22 revenue.

Speaker 4: Our revenue guidance assumes that revenue from both our acute and home end markets will grow, and that revenue from our home end market will grow at a faster rate than cute.

Speaker 4: Given the strength of our XT feature, we're now assuming that XT is in a majority of the units we ship into the acute end market.

Speaker 4: This will translate into a slightly higher ASP.

Speaker 4: In terms of consumables, our guidance for 2023 contemplates utilization at the lower end of our four to six treatments per week in the acute setting, on average, and the three to four treatments per week in the home setting, on average, largely due to how we're seeing our customers ramp to full productivity.

Speaker 4: In terms of consumables, our guidance for 2023 contemplates utilization at the lower end of our four to six treatments per week in the acute setting on average, and the three to four treatments per week in the home setting on average, largely due to how we're seeing our customers ramp to full productivity. Now, to give you some more detail for your models.

Speaker 4: Based on what we're seeing in our pipeline and typical Q4 to Q1 capital purchasing trends, we expect that revenue growth will be flat sequentially or slightly down from Q4 to Q1 and will then accelerate from there as we move through the rest of the year.

Speaker 4: With respect to gross margin guidance for 2023, we expect our gross margin to continue to benefit from our ongoing cost on activities on the console and our higher ASP, as well as the full year impact of the primary place of manufacture of our treatments moved to Mexico.

Speaker 4: We have line of sight to non-GAAP gross margin expansion to approximately 20% for the full year of 2023. We have line of sight to non-GAAP gross margin expansion to approximately 20% for the full

Speaker 4: Given our expected revenue profile, we expect non-GAAP gross margin in Q1 to be relatively flat compared to Q422 and then expand sequentially such that we exit 2023 with non-GAAP gross margin in the mid 20% range for Q422.

Speaker 4: As a reminder, our gross margin may fluctuate from period to period based on the mix of home and the cute consoles we sell.

Speaker 4: Now, I'd like to turn to non-GAAP OPEX. Given our strong progress to date, the large market opportunity we see in front of us, and the tailwinds we continue to see in the home market, our intent is to continue to invest in our business to drive long-term revenue growth.

Speaker 4: ongoing gross margin expansion, and focused R&D to continue to extend Tableau's differentiation. Having said that, we expect to start demonstrating operating leverage of the investments in people and infrastructure that we made in 2021 and 2022 start to bear fruit.

Speaker 4: We forecast operating expenses to increase in 2023 relative to 2022 with low double-digit growth in 2023 expected.

Speaker 4: significantly slower than our expected rate of review.

Speaker 4: And finally, I'd like to make a few comments about our strong balance sheet.

Speaker 4: We have previously talked about carrying large amounts of inventory as one of our strategies to mitigate......

Speaker 4: the tough supply chain environments we operated in during 2020, 2021, and into 2022. As we look forward and see increasing stability, if not improvement in the macro environment around supply chain, we will be thoughtful in terms of managing our inventory levels and expect to be able to reduce our inventory levels relative to what we have actually.

Speaker 4: we had a strong finish to 22 that demonstrated Tableau's value proposition in our large acute and home end markets.

Speaker 4: And we have great momentum entering 23 that gives us a high degree of confidence in our ability to execute through the year as we continue to deliver on our promise to dialysis patients and providers.

Speaker 1: With that, I think we are ready for Q&A. Operator, please open the lines. Thank you. And as a reminder, to ask the question, simply press star 1 1 on your telephone. One moment for our first question, please.

Speaker 2: Any comments from the line of Travis Deeth with Bank of America, please proceed. Hey, good afternoon. Thanks for taking the questions. I heard the guidance on Q1, flat to down, sequentially. I'm curious now that we're halfway through the quarter, maybe give a little bit more context on.

Speaker 5: what's shaping that guide up for Q1. I think you had record patients in December . I'm curious how January is shaping up in terms of record patients.

Speaker 5: And for the full year, you said home would grow faster. And so you ended the year at 20% of revenue at home. Curious if that's like end of the year around mid 20s or if we're a low or high 20% range for the percent of revenue coming from home in 2023.

Speaker 4: Travis, I missed the second part of your question. I got the first part which is the Q and guidance and the back part which was the home. Can you remind me what the middle was?

Speaker 5: That was it. I guess December was record.

Speaker 5: and kind of curious for home, so kind of curious for January .

Speaker 6: in February shaping up.

Speaker 6: coming up in term of school.

Speaker 5: I heard that you sat in December .

Speaker 4: Yeah, got it, got it, Travis. So thanks for the question. So on the Q1, look, a couple of things. One, our guidance is always informed by what we're seeing in our pipeline. And what we're starting to see is that, you know, these capital purchasing decisions that other companies talk about where, you know, Q4 is a strong quarter and Q1 comes off of...

Speaker 4: we were pleased that home came in at roughly 20%. We have said that home is going to grow faster in 23 than in 22. And so if you look at home growing at even contributing 20% of full year revenue, if we even concede that off a higher base, home is going to grow significantly faster.

Speaker 4: and be a big part of 23 Revenues.

Speaker 5: Okay, and you didn't give a backlog this year, right? In terms of backlog number like you did in your past?

Speaker 4: Yeah, Travis, you know, backlog still continues to be a big part of our business. We run our business in a backlog position, and it certainly is the first thing we look at when we think about guidance for any period. Now, as we've talked before, our backlog has been shifting more and more to home consoles, which have a longer, sort of 10 or longer cadence to deployment. And so it's less and less of a relevant metric.

Speaker 4: to sort of disclose as we move forward. What we did give and what we think is relevant is our installed base which we talked about growing 54% to 4000 consoles entering 23. We talked about our expected revenue growth of 22 to 30% for the full year, and then sort of given shape in terms of the fact that we expect home to grow faster than it used.

Speaker 5: And so we think that those are the right metrics to model the business moving forward. All right, that's helpful. And then I guess a last question on margins. There's a little bit of a reset on the 2023 margin guide.

Speaker 5: last month and just want to make sure there's any color you can provide on does that change the pathway.

Speaker 7: over three years.

Speaker 5: at a linear pathway.

Speaker 5: When you think about this...

Speaker 5: this year's margins, the four levers that you've talked about on driving margins, where you think you can pull the levers a little harder this year, and if revenue growth comes in a little better than expected, how well that's going to flow through in the margins for 2023.

Speaker 4: Yeah, look Travis, the levers are unchanged. So it continues to be console cost down. It continues to be consumable pull through, and it continues to be service leverage as well as sort of scale and revenue growth. So those levers are unchanged. We continue to have confidence in our ability to get from…

Speaker 4: The 16% reprinted for the full year of 2022, so roughly 20% for 2023, and exiting the year again in that mid 20% zone.

Speaker 2: And I thought I'd be, Travis you're cutting in and out a little bit for us. I thought I heard him ask is it still kind of a linear pattern?

Speaker 4: to 50%? Yeah, yeah, try to start again with cutting in and out. Yes, and it continues to be a linear path to that 20% to that 50% next milestone that we have.

Speaker 1: All right, great. Thanks for taking the questions. Thank you. One moment for our next question, please. It comes from the line of Rick Weiss with CIFO. Please go ahead.

Speaker 8: Good afternoon, Leslie Heineveel.

Speaker 8: I guess I'll, let me come back to the question that Travis was asking about the sequential change and Nabil I totally get that you're telling us what you're seeing and, but I just wanna make sure that I'm really understanding.

Speaker 8: why the sequential direction first quarter versus fourth and why you're so confident in acceleration after that. I mean, is that just the way that customers are saying they're going to take systems, i.e.

Speaker 8: they're going to move a little more slowly in the first quarter, and they're committing to accelerating thereafter. And it does seem like a slight, in the short term, slightly greater pressure.

Speaker 8: I'm just not exactly understanding why and exactly where it's, who's moving more slowly to decide about what, the acute setting or the home. If you could just expand on your comments, that'd be great.

Speaker 4: Yeah, Rick, I mean, it's spot on what you said. Sort of again, when we said guidance for any period, we look at our backlog, how that's rolling off, and then we look at our pipeline and what our customers are telling us. And it's exactly what you said in terms of what we're hearing is folks are looking for a slower start to the year and then accelerating beyond.

Speaker 4: And that's based again on the backlog pipeline and the conversion that we have sort of baked in.

Speaker 3: I'll add, Rick, I'll add a little bit of color too.

Speaker 3: I'll add that we aren't seeing any worsening of staffing or any worsening of the capital spending environment. There's really nothing in the macro that has changed from Q4 or really from our pre-announce at JP Morgan. From my vantage point, we are entering, we have entered Q1.

Speaker 3: just in other capital equipment businesses, that Q1 sometimes can be a little bit classed to Q4. So I just wanted to add that there's really nothing in the macro fundamentals that is new or different here. Yeah, good, good. Leslie, the bridge program is obviously...

Speaker 8: been a huge success based on the customers I've spoken with. But I had the sense maybe if we heard, when we heard from you three months ago or so about it, that you thought it was going to be very short-term in nature. I don't know, am I misreading you? It sounds like it's going to be a little longer.

Speaker 8: I think that's excellent. So I guess my question is maybe talk about where you are, how long does it go on? Is this, and maybe in the best sense, a permanent program? And just wondered about the impact on margins from this program, good or bad? Sure, yeah, I'm happy to talk about that.

Speaker 3: I think there's two questions when you talk about duration or two aspects of duration. One is the program duration and then the other is the duration of each implementation. And so when I talk about short-term and nature so far, that remains true and that speaks to the duration of each implementation itself.

Speaker 3: We offer our partners the option of using Bridge for up to 90 days. However, I think the great news is that almost to a customer, they have been able to hire dialysis nurses faster than they originally feared it would take. And so most of our implementation

Speaker 3: have been on the shorter side, well less than 90 days. So that was the point I was making a few weeks ago. In terms of the duration of the program, I think it's gonna be a part of our portfolio, a part of our sales process for as long as it adds value. We in no way, shape or form intend to or want to be a staffing company, but we don't need to be.

Speaker 3: A lot of the value here, probably the majority of the value, is in our ability to just give health system executives comfort, but sort of, I think I said psychological safety in the past, that if they have trouble staffing, if it does take longer than they expect it to, we're there for them.

Speaker 3: and it's a stopgap, a lever that they can pull as needed. So I think what I love about Bridge is that we're getting a lot of value for it without really much material cost to it at all. So we'll see more to be revealed Rick, but I could see it a part of our portfolio, you know, for sometime in the future in 23, but not necessarily

Speaker 8: you were something like 30 states and you hoped to be in or expected to be in 50 states by year-end 2022. I just want to be clear, did you achieve that number one and number two maybe relate that back to

Speaker 8: an aspect of operating leverage that struck me that you can now, because of the size of your Salesforce, you can now penetrate accounts, if I heard you correctly, without adding new reps.

Speaker 8: So if you have to add new states, how would you not need to add new reps? And maybe just expand on that because I think it's an important point. Will the sales force not need to grow from here? Thank you. Oh, sure. Yeah, sure. I'll give them some color and then kick it over to be able to get specific. I think what we were trying to point out

Speaker 3: Well, I'll start on the acute side with Salesforce productivity, is that when you have a really, really strong foundation of an a large base of existing customers, has they start to proliferate Tableau programs across other hospitals in their network, you know, they're sort of a formula there. You know, you don't need to invent the wheel every single time.

Speaker 3: as a health system is expanding to hospital 8, 9, 10, 12, 25, et cetera. And so that makes our team much more efficient because we've really got quite a good recipe book down in terms of how do you insource with Tableau and how do you make it a success. And so that's just an example of how our team has become much more efficient, which

Speaker 3: necessarily making a lot of additions to the Salesforce. We absolutely will continue to add to the team as needed, but those will be variable expenses that are tied to expansion revenue. So we don't foresee big, big jumps in the size of Salesforce, which is great news. And we've always talked about from an operating margin perspective, the fact that at scale, we would start to see advances in these types of looking forward changes, but also to start to want to see big jumps in quality. There are all sorts of new Awesome objectives, but we will not

Speaker 1: one moment for our next question please.

Speaker 1: It comes from the line of Shagon Sane with RBC Capital Markets. Please proceed.

Speaker 9: Great. Thank you so much for taking the questions. One for Leslie and one for Nabil. Leslie, could you talk about your home strategy in 2023 in maybe a little bit more detail? Maybe the different buckets, the US hospitals expanding to the home, as well as how you're thinking about opportunities with the dialysis clinic, perhaps with partnerships.

Speaker 9: executing the home strategy. And then I have a question for Nabil.

Speaker 3: Okay, sure, I'll go ahead and answer this one and then flip it back to you, Shaygan. On the home strategy, I think that there's sort of two layers, I guess, that I could describe our strategy with. Layer one is what matters most. What matters most is making sure that people have a great experience.

Speaker 3: a focus, a premium on making sure that we retain these super high retention rates even as we're trying to obviously push the accelerator down further and grow even faster. So is there a risk? Well, maybe that we don't manage to push retention rates up to these historic levels, but I can tell you that every single individual in this company is focused on doing so.

Speaker 3: So retention is at the top of the list strategically, followed by, of course, a never-ending effort to expand channel access, make sure that Tableau is offered in more and more and more home program locations so that the patients who want it have access to it. And third, we do now have a really...

Speaker 3: pretty nice, pretty exciting base of home locations where Tableau already is offered. And we will be doubling down really focused on growing and deepening the number of patients who are sent home from each and every one of those already existing home program locations. We offered in the script.

Speaker 3: some early data that some of our programs have two and three times the average number of patients who typically are sent home per home program. So I'm really encouraged to see that. I want to see it again and again and again and again. And so we're going to be focused on scaling some of the early successes and again the recipe books that we've developed that have created the early success.

Speaker 3: I think through another lens, when you look at our strategy, and we talked about this, sort of two principal channels, one being partnerships with the mid-sized dialysis operators, and the second being partnerships with health systems and other adjacent specialty providers. The mid-sized dialysis operators we already have.

Speaker 3: growing relationships with several of these players and now we want to get ambitious because there's more room to grow. And so as we talked about our goal to be with the majority of the largest of these mid-sized operators. And also to lay a claim to partnerships with at least one or two national IDMs.

Speaker 3: and helping them stand up home programs. We have a good roster of regional health systems that have successfully created home programs with Tableau, and we want to see that expand now up at the national level. So simply put, I think elements of the strategy really are not too terribly different from 21 and certainly.

Speaker 9: said it's going to be lower in 23 any magnitude of that. And just your plans to maybe incrementally draw on the term loan and not have the need to return to capital markets. Thank you for taking the

Speaker 4: Yes, again, so cash flow looked at 2022, we went to a little over $150 million of cash.

Speaker 4: And our expectation for 2023 is that we'll burn less than that. And that's really on the strength of higher revenue, expanded gross margins, lower growth in opex year on year, and then finally our working capital management.

Speaker 4: So hopefully that's helpful there. With respect to our term loan facilities, look, we still have up to $200 million that we can draw down on. If we burn less cash year on year, we are ending last year with just under $291 million of cash.

Speaker 4: We may not need to draw on the term loan. And as we think about that line, we are going to sort of look to optimize cash we have on the balance sheet, and the cost of drawing on that line, because that does not come cost-free. So that's sort of what I tell you there. And then look, we will always make sure over the long run that we are thoughtful about making sure that we are not

Speaker 1: Star 1-1 on your telephone. We ask us a courtesy to other. And at least please limit your questions to one.

Speaker 1: One moment for our next question.

Speaker 1: And it comes from the line of Suraj Kalia with Oppenheimer. Please go ahead.

Speaker 10: Good afternoon, Leslie Niveel. and hear me all right.

Speaker 11: Yeah.

Speaker 10: Perfect. So, Lesley, one question for you and one I'll quickly throw in for Nabil. So, Lesley, the one for you.

Speaker 10: Before the home chemo hold, guide for FY22 was approximately the same.

Speaker 10: That is now for FY23. So I'm curious, your commentary then and now, there are similarities, but with the...

Speaker 10: expand more and tell us what specifically has changed.

Speaker 10: So that's for you. And Nabil, the math suggests roughly around 500 new home patients added in FY23. I was wondering if you could give us some additional color on the average number of treatments per patient in the home setting. And also, there is a lot of commentary about crossovers from next stage.

Speaker 10: if you could shed some color on how many de novo patients versus crossovers. Thank you for taking my questions.

Speaker 12: Yes.

Speaker 4: So Suraj, so with respect to our guide for 23, I mean look, our expectation is that our home, number one, we expect that both our acute and our home business will grow in 23 relative to their performance in 22. We also said that home...

Speaker 4: will grow faster than our acute business. And remember, this is off a bigger base. So even if the contribution remains the same, there is still growth, significant growth implied in that statement. So absolutely, unequivocally, we are looking for our home business to grow in 23, looking for both of our home and acute business.

Speaker 4: And then finally, Suraj, you know, where we are getting home patients, they tend to be the de novo patients because, as you know, there are large numbers of newly sort of diagnosed ESRD patients who come in every year, and we're still in relatively small numbers, all things considered.

Speaker 3: Well said. I can't top that, Nabil. Well said on the home. Hopefully that answers your question.

Speaker 3: Well said. I can't top that, Nabil. Well said on the home. Hopefully that answers your question, so you're not. Okay. Thank you.

Speaker 1: One moment for our next question, please.

Speaker 1: And it comes from the line of Drew Ranieri with Morgan Stanley . Please proceed.

Speaker 13: Hi Leslie and Nabil, thanks for taking the question. Maybe actually just to piggyback off of the last question, Leslie you mentioned you're now seeing multiple programs sending low double digits of patients home. And I mean that's really encouraging. And I understand that it's de novo mainly now.

Speaker 13: But I guess how are you thinking about the PD opportunity and the eventual burnout that results from using that as a first-com therapy? And maybe just how are you thinking about the low-double digits growing to...

Speaker 13: even further in 23, just trying to get a better sense of that in any potential catalysts that you can point us to for 23 for new products or the VA relationships, just anything on those two topics. Thank you.

Speaker 3: Sure, happy to. I'm just joining via a new product. Let me start with the home and PD. You said we do have some examples of low double digits, and could it grow further? Sure answer, absolutely yes. We have not found the ceiling yet, which I find really exciting.

Speaker 3: I think in the past maybe there's been a historical assumption that, you know, you can only ever really send X number of patients home in a given location. And that's just not been our experience. I think it, again, speaks to the simplicity of the device. I think it speaks to the experience that our team creates for each patient. And our goal has always been to really open up the envelope and the catchment area, if you will, everyone's following our pilot every day as being our cybersecurity team. That's often the case, okay. We ed the results pretty skills that the moon and the rocks are coming from. And if we didn't do that to this patient space, we probably wouldn't have did, you know, that whole approach that you can collect as far as we want quality of the disease into direction and understanding andCompaning. And that has depended on all the call. So if you have family in your community,

Speaker 3: and how could we go further and how high could it get? More time on task, I think more to be revealed as time marches forward, but I'm very, very bullish on how big these home programs could get over time. And obviously, as they do, that makes us incredibly efficient with our own team's time. I'm also really very...

Speaker 3: very excited about PD in the future as a funnel flow into HHD. What I find unbelievable and almost criminal is that the vast, vast majority of patients who are already successful on home with PD end up in clinic, it's like 98%.

Speaker 3: transition off PD in the home into incentive dialysis. It makes absolutely no sense. They've already shown themselves to be thriving at home. What an opportunity to keep successful people at home. And at HHD, a transition from PD to HHD would be a terrific way to do that. How do we do that? Well, in partnership with providers.

Speaker 3: that population much, much earlier. That'll be, that'll take time. You know, it's a work in progress. It'll take a lot more educational time, which we intend to do with physicians, with home training nurses, with tests. I think we've got to get the mindset evolved to one in which HHD.

Speaker 3: is the first option and what is offered first to PD patients who have to transition off PD, which typically happens at around the two year plus mark. So I just see this as a big growth opportunity for HHD over time. Those are my thoughts on home. I think in terms of the catalyst for 23.

Speaker 3: and maybe I'll widen the aperture beyond new product and VA. Obviously I think our biggest opportunity is the one that we are pursuing right now in the land and expand approach to acute and home. I continue to talk with health system executives that are really seeing...

Speaker 3: and feeling the value that Tableau is delivering economically, operationally, and really eyeing this home opportunity now as a very, very compelling one for them, for all sorts of reasons. So I think that's kind of catalyst one. Catalyst two, we intend to stay very ambitious and very inventive. We are not done.

Speaker 3: with the Tableau platform and we will innovate on the Tableau platform across hardware, software, and data far, far, far into the future. I hope we do have some new things to talk about for 2023. And I think in terms of the new customer base, yes, we do have a really interesting opportunity over the next five years with the VA and with the new kind of adjacent specialty providers.

Speaker 3: very high degree of conviction around that.

Speaker 1: Thank you.

Speaker 1: One moment for our next question, please.

Speaker 1: And it comes from the line of Joshua Jennings with Cowan please proceed.

Speaker 1: And it comes from the lineup Joshua Jennings with Cowan please proceed

Speaker 14: Hi, this is Brian here for Josh. Thank you for taking my question.

Speaker 14: Just on pricing in the acute segment, I believe you commented that competitors have either raised or attempted to raise prices in recent months. Is there an opportunity for outset to increase pricing in the current environment as well, or do you see your ASP increases this year primarily coming from the continued rollout of XT?

Speaker 4: which is again, adding value to our customers and sort of monetizing that value which we like. We've also seen Tableau Cart be a big driver, or be a driver rather of ASP sort of lift in the quarter here, and are really pleased with the initial performance there. You know, the one thing we have also talked a lot about the fact that we haven't had to discount very heavily.

Speaker 1: Thank you, and I'm not showing any further questions in the queue. I will pass it back to Leslie Trigg for final thoughts.

Speaker 3: Great. Thank you, operator, and thanks to all of you for joining us today. Have a great evening.

Speaker 1: And with that, ladies and gentlemen, we conclude today's program. Thank you for participating, and you may now disconnect.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11.