Outset Medical Inc. Q1 2023 Earnings Call

Speaker 1: Good day and thank you for standing by. Welcome to the outset medical first quarter 2023 earnings call.

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Speaker 1: I would now like to hand the conference over to your speaker today Jim Nuzola, Head of Investor Relations. Good afternoon everyone and welcome to our first quarter, 2023 Ernie's call.

Speaker 1: Here with me today are Leslie Trigg, Chair and Chief Executive Officer and Nabil Ahmed, Chief Financial Officer. During the call, we will discuss our first quarter, 2023 operational and financial results, and host a question and answer session.

Speaker 2: We issued a news release after the close of market today and updated our investor presentation, both of which can be found on the investor relations pages aboutsetmedical.com. 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 Security's 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.

Speaker 2: that could cause actual results or events to materially differ from those anticipated or implied. I would say that assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section about the public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. With that, I'll now turn the call over to Leslie. Thank you Jim. Good afternoon everyone and thank you for joining us. We had a strong start to 2023 with revenue growing ahead of our

Speaker 3: While we did see some of the capital equipment purchasing seasonality we had anticipated on our Q4 call Tableau uptake remains strong our install days grew in both the acute care and home markets and we benefited from strong mix and pricing across the board

Speaker 3: We're pleased to see this momentum with a growing number of providers recognizing the cost savings associated with insourcing initiative and eager to move forward bringing Tableau in health. We had a record number of consults shipped to large regional IDNs, including a deployment of more than 50 Tableau consults to a single IDN. Additionally, we added more than 30 new hospital sites to our roster during the first quarter, the largest quarterly growth in new sites since 2021.

Speaker 3: but never more so than this today.

Speaker 3: Because hospitals are not separately reimbursed for intational dialysis in most circumstances, it's a pure play cost center for them. And because intational dialysis ends up being provided as part of hundreds of different DRGs, the cost of dialysis can impact the hospital's procedural profitability broadly. Lets give volunteers a high???

Speaker 3: Because Tableau directly lowers the hospital's dialysis cost by 50 to 75 percent with a typically rapid payback period, we continue to see hospital administrators prioritize Tableau in their capital spending plan.

Speaker 3: Our bridge program continued to be a strong complimentary offering for customers who are considering insourcing their dials to service line. As we discussed before, a bridge provides customers with the confidence to move forward by serving as a staffing backstop in case their own hiring takes longer than expected. The bridge program continued to be a strong complimentary offering for customers who are considering

Speaker 3: As in Q4, we found in Q1 that most customers were able to hire on a timely basis and proceed with insourcing without needing to use bridge. In situations where we have deployed it, we found that customers are able to staff their programs faster than they expected, which also enabled us to operate the program cost efficiently.

Speaker 3: A good example is Deaconess Hospital in the Midwest. Deaconess operated a large outsourced dialysis program for more than 10 years. As they were forced to bear the rising cost of their outsourced provider and accept lower service levels.

Speaker 3: Their team decided to explore in-sourcing with Tadlow. With the outset team in the bridge program, Deaconis was able to hire their own staff and stand up their in-house operation in 31 days. According to the program director, the hospital has observed a 99% clinical success rate during the first five months.

Speaker 3: to dramatically lower their costs and improve patient outcomes. And these results are not unique to deepness. As we continue to expand our footprint in US hospitals, we're finding these results are repeatable and sustainable.

Speaker 3: We also saw ASPs rise both on consults and consumables, which serves as strong validation of Tableau's clinical and economic value proposition versus our competitors. Our ASPs benefited again from better than expected uptake of Tableau add-ons, including good early demand for our Tableau cart new product accessory. More broadly, we see an acute care environment that is much more favorable relative to last year. While hospital nursing shortages continue to affect our acute customers, we've observed stabilization and staffing over the past several quarters in Q1 was no different.

Speaker 3: Additionally, programs like Bridge have been successful in helping our commercial team address staffing concerns up front and early, which continues to prove helpful to our sales process.

Speaker 3: I'll now turn to our progress in the home, which represents another very large market opportunity for outset. Our strategy entails growing the number of home programs offering Tableau while simultaneously working to drive the patient's senses in each program higher than historical standards. I'll now turn to our progress in the home.

Speaker 3: Key to both planks of this strategy is maintaining our industry leading retention rate, which we believe is a central benefit of Tableau at a primary driver for further profitable expansion in this market segment.

Speaker 3: Specifically for 2023, our home goals include landing the majority of the largest mid-sized dialysis operators, known as MDOs, and initiating home programs with two of the top national IDNs. During the quarter, we made good progress against these goals, including establishing a new relationship with another of the top MDOs.

Speaker 3: and first-time shipments to several other regional home providers. As we land relationships with new providers, we remain equally focused on the expand part of our strategy by deepening our penetration in existing accounts.

Speaker 3: For example, during the quarter we increased the number of home programs that have a Tableau home census of more than 10 patients. While the number of these larger programs is still relatively small, we are encouraged by the early indicators that Tableau can significantly increase the number of home hemo patients per program.

Speaker 3: During the quarter, I was again able to spend time with patients dialyzing at home on Tableau. One visit struck me in particular for a couple of reasons. First, this individual was in her mid-70s and spoke of how easy and effortless it was for her to master Tableau.

Speaker 3: Our internal data continues to support that Tableau mastery is not defined by age.

Speaker 3: The patient I visited began dializing in center, but quickly realized how much more freedom and flexibility home dialysis would afford. However, her dialysis clinic provider didn't offer tabloids. So this patient chose to switch clinics and switch physicians in order to access it.

Speaker 3: While it's still early, we are beginning to see examples of patients who learn about Tableau and are very willing to switch physicians and clinic providers to be able to dialyze on it. Our recent home progress was validated from a clinical perspective at last month's National Kidney Foundation spring clinical meeting where five new abstracts were presented that highlighted a range of clinical and financial benefits of home hemodialysis with Tableau.

Speaker 3: For example, one study estimated the five-year savings for a Medicare Advantage plan generated by prioritizing Tableau home hemodialysis versus in-center hemodialysis. The study found that a Medicare Advantage plan with 500 dialysis members could drive $4.2 million with an estimated savings over five years.

Speaker 3: Another study modeled the monthly per-member cost for a health system assuming risk for dialysis population from a Medicare-avantage plan and the five-year savings from establishing a home dialysis program. The study determined that a health system assuming full risk on Medicare-avantage dialysis members could generate $10.7 million in estimated savings over five years. We're proud of data like this and look forward to continuing to build Tableau's clinical evidence base over time.

Speaker 3: In short, we continue to see growing demands for tabloid at home, healed by shorter training times, exceptional clinical outcomes, overwhelmingly positive patient experiences, and a differentiated retention rate.

Speaker 3: Our team also continues to make solid progress operationally, which has resulted in consistent gross margin expansion and enabled us to deliver non-GAAP gross margin of 20.3% in Q1, more than 5 percentage points over our Q1 2022 gross margin. The first quarter represented our 8th consecutive quarter of increasing gross margins.

Speaker 3: as we move toward our next mile marker of 50% gross margin.

Speaker 3: Our drivers of margin expansion remain unchanged, and our performance over the last eight quarters illustrates our ability to capture this margin expansion opportunity.

Speaker 3: From a product innovation standpoint, we are very pleased with demand for Tableau Cart, a new product accessory we introduced in Q3 last year that provides additional maneuverability around the hospital and incremental water pre-filteration capabilities.

Speaker 3: TableauCart is sold separately at a gross margin of creative AFP and is proving to be a valuable solution to many of our acute care customers. And finally, I'd like to provide an update on our TableauCartridge Insourcing Initiative that we touched on during our last update in February . Thank you.

Speaker 3: Today, cartridge production at OMM has progressed very well against our initial expectations, and we're very pleased with the throughput and quality we're seeing.

Speaker 3: Cartridge and sourcing remains an important lever of gross margin improvement over the longer term, and we look forward to providing future updates in quarters ahead as production continues to ramp.

Speaker 3: And speaking of our operations in Mexico, we were very proud this past quarter to hear that OMM was recognized as a great place to work for 2022, scoring an 88 out of 100 points in its first survey.

Speaker 3: We believe these results reflect the rewarding, inclusive, and merit-based environment. Our team has worked hard to cultivate, and, as one of the reasons, our employee retention rate at OMM is consistently among the highest compared to similar companies in the area.

Speaker 3: In summary, our momentum and performance through the first quarter reinforces the conviction I have in our mission and the high confidence I have in our ability to meaningfully grow both near-term and long-term.

Speaker 3: We have a differentiated technology in Tableau that every quarter gains even wider recognition for the clinical, operational, and financial benefits it can provide, and we are encouraged by our progress across both of our end markets, as well as the continued stability in the macro environment.

Speaker 3: We're at the front end of penetrating very large and growing end markets. We're confident in our ability to execute through the balance of the year and believe we are very well positioned to capitalize on the many tailwinds supporting our business and fueling Tableau adoption.

Speaker 3: With that, I will now turn the call over to Nabil to review our financials and provide more detail on our expectations and key drivers for the remainder of 2020.

Speaker 2: Thanks, Leslie. Hello, everyone. Our first quarter revenue increased approximately 4.6% sequentially and 9.5% Eurobrear to 33.5 million dollars exceeding our expectations. The Eurobrear change was driven by both higher product revenue and higher service and other revenue.

Speaker 2: The ongoing increase in recurring consumables and service revenues is one of the benefits of our expanded install base and continues to be one of the key drivers of gross margin expansion.

Speaker 2: Product revenue was up 5.4% from the prior quarter despite some expected capital equipment purchasing seasonality and increased 8.2% year-over-year to $27.8 million. Console revenue grew 2.7% from the fourth quarter.

Speaker 2: and increased by 4.5% year-over-year to $18.9 million. We saw console ASP increase year-over-year, driven primarily by our disciplined approach to pricing and ongoing demand for Tableau accessories. Consumable revenue was $8.9 million, up 11.4% from the prior quarter.

Speaker 2: and an increase of 17.1% versus the prior year as our install base grows.

Speaker 2: Creepment revenue and carcass utilization performed well and in line with our expectations.

Speaker 2: We saw invoice treatments in the acute setting between 4 and 5 treatments per week and just above 3 in the home setting, reflecting the mix of mature consoles and newly shipped consoles that are ramping up.

Speaker 1: Service and other revenue of $5.7 million was up 0.8% from the prior quarter and higher by 16.4% compared to the prior year.

Speaker 2: Our core service and other revenue increased approximately 65% year-over-year with the growth of our install base and was offset by the planned expiry of the HHS agreements.

Speaker 4: As a reminder, the third quarter of 2022 saw the expiry of the final components of our HHS agreements. Thank you.

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 first quarter gross margin was 20.3%, as sequential improvements of 315 basis points and an improvement of just about 5 percentage points versus the prior year period.

Speaker 4: Service margin declined in the quarter due to investments we made in people and programs designed to drive service efficiency.

Speaker 4: With these investments made, we expect service margin to improve sequentially through the rest of the year.

Speaker 4: As Leslie pointed out, this progress marks eight consecutive quarters of consistent and substantial gross margin expansion, and once again demonstrates our commitment to reaching our next milestone at 50% gross margin.

Speaker 4: Primary drivers are margin expansion and the quarter were higher ASPs and lower were freight costs.

Speaker 4: Additionally, margins have, and we expect what continue to benefit from our ongoing console cost-down program and our initiative to insource cartridge production at our facility in Mexico.

Speaker 4: Our internally manufactured carcages have now started to reach customers and we anticipate that by the end of the year, most of the carcages produced will come from our factory.

Speaker 4: Operating expenses in the first quarter were $41.7 million, up $5.7 million versus the prior year period. The drivers of all PX were in our commercial organization in support of our higher revenue and gross margin and in R&D in support of our innovation driven roadmap.

Speaker 4: V&A also increased year over year as we have the full year impact of investments we made in 2022.

Speaker 4: We reported first quarter gap net loss of $44 million, resulting in a net loss of 90 cents per share compared to a net loss of $36.9 million, or 78 cents per share for the prior year period. We reported first quarter gap net loss of $44.9 million, or 78 cents per share compared

Speaker 4: non-GAAP net loss was $35.4 million or 72 cents per share compared to a non-GAAP net loss of $31.9 million or 67 cents per share for the same period in 2022. We ended the quarter with approximately $252.5 million in cash, cash equivalents, restricted cash and investments.

Speaker 4: which includes $100 million of borrowings under our term loan. We continue to have access to up to an additional $200 million of capital under our SLR debt facilities.

Speaker 4: We've earned $38 million during Q1, which we expect to be the highest cash rescuer this year. Moving now to our full year 2023 outlook, starting with revenue.

Speaker 4: Given our strong performance in the first quarter and the visibility afforded by our backlog and pipeline, we have increased confidence in our ability to execute in 2023.

Speaker 4: As a result, we are raising our expected 2023 revenue guidance.

Speaker 4: We now project revenue for the full year to range from $144 to $150 million, a $4 million increase at the lower end of our prior range of $140 to $150 million. This updated range represents approximately 25 to 30 percent growth.

Speaker 4: or fiscal year 2020 to revenue.

Speaker 4: Moving to gross margin.

Speaker 4: Our strong first quarter results give us increased conviction in the gross margin goals we outlined at the beginning of the year. We are raising our gross margin guidance, which we now expect to be in the low 20% range for the full year 2023, up from the approximately 20% that we shared with you on our last call. And we have even greater confidence in our expectation that we will exit the fourth quarter in the mid 20% range.

Speaker 4: that we continue to expect that we will burn less cash in 2023 than we did in 2022.

Speaker 4: In summary, we are very pleased with our momentum starting this year. Tableau continues to demonstrate its economic, clinical, and operational value across both acute and home end markets.

Speaker 4: and our focus on gross margins continues to pay dividends. We're looking forward to executing through the rest of the year. With that, I think we're ready for Q&A. Operator, please open the lines.

Speaker 5: A.

Speaker 6: Thank you very much.

Speaker 1: At this time, we will conduct the question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.

Speaker 1: To withdraw your questions, please press star 1-1 again. Please stand by while we compile the Q&A.

Speaker 1: Our first question comes from the line of Rick Wise from Stifle.

Speaker 7: Your line is now open. Good afternoon Leslie. Hi Nabil. Thanks for the question. Let me start off with the guidance. It's great to see a solid start to the year.

Speaker 7: And you won't be shocked that, you know,

Speaker 7: We always want more. Apologies for that. With the guide, you all are very thoughtful about providing guidance, but help us maybe think through

how to, I know you don't give quarterly guides, but help us think through.

how the quarterly flows likely to occur. Last year, we saw a step down the second quarter, but we saw steady sequential improvement in each quarter. This year, I'd started the year thinking that we'd see steady sequential increase each quarter, but.

Because of the outperformance and the way you raised the low end and not the high end.

it sort of implies maybe flat sequential growth to second quarter and maybe

looking back at past years, the one or two million sequential increase in each quarter thereafter. I know and apologize for this long off-witting statement to the jury, but how do we think about it to you know get in the right place to think about hitting that midpoint guidance. Thank you.

Yeah, thanks. Good to hear your voice, Rick. Maybe I'll share some thoughts and and her turn reveal if there's anything to add. I think, well, first and foremost, we too were really pleased with the overperformance and the strong growth that we saw in Q1 and that the strength in the business allowed us to raise the midpoint of the range. Now to reflect to 25 to 30% growth.

So I'll say a couple things. First and foremost, what we do have increased confidence in our ability to execute to the 2023 plan that we outlined at the beginning of the year as a result of the strong Q1. At the same time, I'm always mindful of the fact that it is early in the year, right? We're reporting on about 90 days into 365. So.

I think as always, we're going to stay focused on executing against a really strong pipeline and taking advantage of a mention that we did create coming out of these first 90 days. So net net, I feel really good. We also really good about how we kicked off the year and excited by our growth opportunity, both near-term and long-term, kind of getting to the second part of your question around.

You know, kind of shape of the curve. I think you hit the nail in the head, studies sequential improvement each quarter. We don't necessarily see any sort of flatness to it. And I think we called out the beginning of the year which you noted that we did expect to see this studies sequential growth rate improvement.

throughout calendar year and we don't see that any differently today. Okay, and I appreciate some of the extra color and detail. I feel like you're giving us this color this quarter. Maybe just turning to the home program, maybe you can give us even a little more color if I could be greedy.

And I'm not sure, I'm looking for some granularity that just helps us better gauge the kind of progress you're making. Can you give us any color on how many new programs were established? And the kind of...

increased patient utilization you're seeing in some of your more mature patients, more mature home programs, just trying to get a sense of the momentum. It sounds like momentum is building and looking for ways to ask that question. Yes, absolutely.

And you're never greedy Rick, so you never have to worry about that. Yeah, maybe I'll comment on those in sort of reverse order. So what are we seeing in terms of the number of home patients per program? And this is perhaps the one thing I am the most.

kind of encouraged by and bullish about. I think one of the challenges of the past on some of the incumbent home hemo devices is that these home programs would start with, you know, some of the earlier home devices and just kind of linger and never really exceed, you know, one, two, three patients per program. That has been the history.

in the home hemostates for quite some time. That so far has not been our experience. And again, I want to caveat this very clearly. It is early, we're working off of a small base. I acknowledge all of that. But what gives me a lot of confidence about the art of, I'll call it the art of the possible here.

And the reason why I believe we will have lots of programs over time with 10 plus, and I don't even know what the ceiling is yet, which is great. You know, is the ceiling 20? Could it be 30? I mean, we do have programs, Rick, that are well in excess of 10. I'll tell you that. I just don't want to be overly promotional about it in consideration that it is early and it's a small base. But...

But I like what I'm seeing and what we continue to see are faster training times. Regardless of age, regardless of race, regardless of their home status, their education, their income, it's very consistent. Patients finding it accessible and not intimidating and hearing a lot about nurses and physicians, seeing patients choose Tableau when they give them the choice.

So those are my perspectives on that one. And then in terms of, I think the first pretty question was about maybe a little bit more color on new home programs. This was an important metric for us last year, which we did need. And of course, expanding channel access, a different way to say home program.

remains important to us this year as well. We want the maximum number of home programs to be offering Cablo, that's pretty clear. So I think in this past quarter, I was encouraged by seeing growth on all three of the following dimensions. I wanna see growth in the number of new customers. And in our scripture remarks, we talked about new customers. Two, I wanna see growth in the number of expansion sites among current customers.

Thank you, George. Please hold for a moment when we compile the roster. Our next question comes from Travis Steve from BFA Security. Your line is open.

quarter, you're expecting capital to be soft in Q1 with seasonality and then accelerate over the year. So, I'm curious what you saw on the capital side and expectations for the year. And then on the utilization, you'd expect to see utilization come in at the lower end. So, kind of curious with the updates on that as well.

Yeah, hey Travis, it's Naville. So with respect to Q1, you know, we did see some of the expected capital equipment purchasing seasonality that we talked about in our last call. So then Travis, you know, we have always talked from a performance perspective. We really have three things in any quarter. All right.

where we can over-perform on, if you will. One is the number of consoles, second is sort of the treatment volume, and third is ASP. In Q1, we saw strong demand for Tableau, as we expected. We saw strong treatment performance, and I'll talk about utilization in a minute. And then ASP was where we really shone. We saw stronger ASP.

both as a result of the disciplined pricing that we've always been able to maintain. And two, we saw really good mix from the uptake of our accessories, the 24-hour software treatment and our Tableau carts. Right? So that's kind of from a Q1 perspective played as we expected with some nice ASP upside.

And so for the consoles that are more mature, that have been in service, we are seeing utilization, actual treatment utilization, right in line with kind of five treatments per week per console in the acute and three and a half in the home. Now with respect to invoice utilization or what we shipped in the quarter,

We have grown our installed base pretty significantly over the last few quarters. And so we're seeing as these new consoles ramp up, what we're seeing is invoiced utilization of between four and five in the acute and little over three in the home. Again, all right in line.

with our expectations. That's super helpful. And then maybe the bill on margins of that gross margin, not performance, this quarter, you get a little color and prepare to marks, but dig in a little bit more on the upper form of this quarter. And some of the levers that you could pull this year to maybe even get closer to 30% gross margin for the year, you know, if that is even a possible place to get to. You.

And then on OPEX, I heard the comments on low double digits on for this year. Is that the right way to think about it longer term? Is that the kind of leverage we should expect on the operating side? Low double digit OPEX growth in the long term?

Yeah, so Travis, on gross margins, number one, this was our eighth consecutive quarter of gross margin expansion, which we are thrilled with. And sort of for margins, we have long had three primary levers, all of which continue to work for us over the – have worked for us and we expect will continue to work for us.

One is our active console cost and program. Two is the treatment pull through. And again, I talked about having a sort of good strength in our treatments and three is service leverage. Those continue, you know, service. I talked about some of the investments we've made, but sort of those continue. The other thing that gave us benefit in the quarter was the strong ASP that I talked about in response to your last question, right?

Now, our focus for margins Travis are their unchanged. We continue to expect sequential margin expansion. We expect to get margins exiting the year in the mid 20% zone. And that's what we are laser focused on. It's all the same things that we've been doing that we're going to continue to do.

and drive margins to this mid 20% zone. And then Travis that's not obviously, that's only a mile marker on our journey to 50%, right? Good news, the same thing we've done before. Now, on OPEX, the thing I would tell you for OPEX is that we are committed to driving operating leverage. In 2023, OPEX is going to grow low double-digit percent.

Thanks a lot.

Our next question comes from Shigong Xing from RBC Capital Market. Your line is open. Great. Thank you so much for taking the question. I was a little intrigued that you added about 30 new hospitals and you called out that it's the largest quarterly growth in new sites.

point appears to just factor in the Q1 beat and not an improved outlook for the balance of the year. So, you know, just if you can elaborate there, that would be great. And perhaps even touch on staffing. I think some of our checks were suggesting that it continues to be challenging. So just, you know, just what you're seeing there would be great. Thank you.

Yeah, sure. Maybe I'll jump in on that one. I think the, and again in reverse order, I know the thing about pattern here. But so in reverse order, I think that from our vantage point again, this is just what we're seeing here on the ground. The macro environment has absolutely improved. Now, are we back pre-COVID?

shiny, happy people back in 2017, 2018? No. However, we have absolutely not seen staffing get any worse. And what we're hearing from our hospital customers and even reading some of their prints recently, we continue to hear that the availability of nursing labor, particularly let's call it dialysis nursing labor because that's what we're talking about here that's relevant for us.

is improved and that wages are coming down. So I think as we entered the year and thought about our guidance for 2023, we assumed that we would see stabilized staffing because we had started to see it stabilized towards the Q3 and Q4 time period of 2022. So I hope hopefully, so far so good, and it looks like we may have forecasted that correctly to be stable through the year.

that. Cost reduction is an evergreen area of interest for hospitals, but you know, they said in my prepared remarks, perhaps never more so than today. I don't think I've ever talked to a hospital executive who's not interested in improving their operating margins. And again, because dialysis winds up getting delivered as part of hundreds and hundreds of DRT's.

It can have an outside impact on a hospital's P&L if they can save a lot of money there. So I think what we're seeing in the 30 new, and by the way, let me make a side comment, what I also really liked about Q1 was the 30 new, that is a mix of both new customers and existing customers who, because of their results around cost reduction, chose to expand their interest in programs.

That's really helpful.

Sure. Just a quick thing on guidance. Look, we had a really, really strong Q1 performance or business executed really well as we talked about early. And we certainly did what we wanted to do. Now, having said all that, it's still early. We did raise our guidance range to 25 to 30% reflecting the incremental. So.

Got it. And just to follow up on gross margins, you expect to deliver in the low 20s for the full year. Where do you think you might exit 2023? And the magnitude of increase in 23, is that a good proxy of how we should think about 24? Thank you for taking the question. For sure, Shagan. So we expect to exit this year with gross margins in the mid 20% zone. The Q4 gross margin in the mid 20% zone. And if you look at our progress, we have delivered now eight quarters of sequential and steady margin expansion. That trend we would expect to continue to play in the long run, in the medium run.

through at least this 50% gross margin mile marker. You know, the levers of margin expansion for us, it's the same tree, it's console cost down service leverage, consumable pull through all of which lend themselves to linear margin expansion as we've done in the past. Thank you.

50% gross margin mile marker. You know the levers of margin expansion for us it's the same three it's console cost down, service leverage, consumable, pull through, all of which lend themselves to linear margin expansion as we've done in the past. Thank you. Thank you very much.

Good afternoon, Leslie, Nabil, can you hear me all right? Yes. Perfect. Hey, so I'll let either one of you tackle this. Nabil, in your prepared remarks, you mentioned console growth. Consoles were up 2.7% year over year. Just wanted to make sure I got that right. Surage, yes. Console revenue was up 2.7% from the fourth quarter and up 4.5% year over year.

So four and a half, Nabil, can you split that us to the next layer, i.e., what was the impact of pricing within consoles, if at all? And also, how did that split up between home and acute? Yes, Siraj. So a couple of things. One, as you know, we print our installed base annually, which we did entering 2023, and we were exiting this year.

Both of our businesses performed exactly as we would expect. They're both very well set up for us to execute on our goals for this full year and will help us grow into our 25 to 30 percent guidance range for the year. Thanks. Next question, please. Thank you. Our next question comes from Josh Jennings with TD Cohen. Your line is open. Hi. Good afternoon. Thanks for taking the questions.

I was hoping to just follow up on a discussion we had with a hospital executive that had adopted Tableau and in-sourced their inpatient dialysis service line. It seems as if the competition of Davida and Fresenius mostly are having a tough time with increased expenses and...

and offering their hospital customers just a kind of no bargaining power, but jacking up the cost for them to run the inpatient dialysis service line. Is that still ongoing, that dynamic where there are many hospitals that are being held ransom to

take up their expenses and how big of an opportunity do you think that is or what ending of that opportunity in terms of the competitors having some issues do you think you're in right now? Hi Josh, yeah let me think about that a little bit.

I want to give a clever answer on the inning, but it's not coming to me right now. So it feels like an opportunity for a witty retort, but I don't have it. Because I don't know, obviously, not being inside those organizations and knowing what their strategic plans look like. But what I can tell you is we did, of course, we did see some of the moves and the behavior that we didn't party around because we felt like they're halved. This is because we're notstrumental. This is because there's a big homogenization coming from people's bodies, people's bodies, people's includes, people who could live a life and

to experience either elevated pricing or a reduction in service level or both or in some cases the hospitals have had their outsource agreements terminated on them unexpectedly. I would not say that those any of those actions are driving the uptake of Tableau. It does occur the hospital that you're speaking about.

is one of them. But by and large, the in-sourcing of dialysis with Tableau is really considered by the majority of the hospitals to be a strategic cost reduction initiative, regardless of what's going on with their outsource provider. Hospitals, I think, are ready to control their own destiny.

Not only from a cost perspective, but as a reminder, some of these other benefits are very real and very valuable. When you own your own dialysis, you control your destiny with regard to compliance. The Joint Commission very, very frequently, I've had health systems tell me it's one of their top three citations from Joint Commission is where are all the maintenance records on your dialysis machine? So you take control of your destiny around compliance, you take control of your destiny around

the insourcing solution, regardless of whatever behavior they might be experiencing with their outsource vendor.

Thanks for that. That was a very eloquent answer to an eloquent question, but that's very helpful to understand those dynamics. I wanted to also ask about just hospitals and hospital systems that are adopting Tableau retaking control of their inpatient dialysis.

one of the better understand I guess the revenue opportunity and I guess the the return for these hospitals and hospital systems for bringing that kind of home patients.

under the roof or recouping them. I'm sure there's many elements including a halo effect and potentially capturing those patients for all of their care, not just their home dialysis. But I wanted to just better understand that dynamic and how attractive it is for hospitals' hospital systems to kind of tack on this home service line as well. Thank you.

Of course, yeah, sure, I'd love to talk about that. And I would say a little bit of what's changed in terms of the motivation of a health system to start a home program, actually, it has been enhanced because early on the motivation was a top line revenue, a new chronic revenue stream, very predictable, very stable, very complimentary, you know, frankly, to maybe a less predictable.

procedural revenue stream inpatient, that still remains true and is attractive. What has changed though and been added is, now it's a solution for a problem. And the problem that I've been hearing a growing number of health system executives talk about is, we don't have anywhere to discharge our inpatients out into the community, because of these dialysis clinic closures.

that have been talked about publicly by many of the clinic operators. These hospitals increasingly are seeing extended length of stay, needing to keep patients in the hospital just to dialyze them for longer and longer because there literally are no chairs available in the community. And so clinics are closing and clinics that are not closing, some of them are just reducing their service.

days or times, which is exacerbating the challenge. So I think the reason why we're hearing more and more health system executives talking about standing up home programs, being very, very interested in engaging in the discussion is because it is actually solving an acute, no pun intended, but an acute problem, and it's offering a long-term revenue upside.

The long-term revenue upside, which is what you originally asked me about, is in a couple of different components. Of course, you've got per treatment revenue. You also have training revenue. Physicians have billing revenue that they take advantage of. The real advantage for the health system is in the long-term revenue.

is their lack of overhead. If a hospital is going to start their own home program, it takes very little facility space. It does not take a village. It does not take very many staff members to stand this up. And there are variable expenses, but they're variable. And so I think that the margin contribution, which you also asked me about.

Our next question comes from Drew Rainier from Morgan Stanley . Your line is open.

Hi Leslie and Nabil, thanks for taking the questions. Just maybe to piggyback off Josh's question that he last asked, but as we've talked to nephrologists over since covering the company, there's been kind of an increasing sense of urgency in the specialty that the care paradigm just needs to change and there's been kind of elevated staffing shortage issues I think compounding that issue.

Leslie was just you're seeing early green shoots of patients really starting to push the decision. So how is that going to kind of factor into the next couple of years for the company as there's more of a push from patients versus nephrologist just love to hear your thoughts on that.

was just you're seeing early green shoots of patients really starting to push the decision. So how is that going to kind of stack her into the next couple years for the company as there's more of a push from patients versus nephrologists? Just love to hear your thoughts on that. Sure, absolutely.

So, yes, I think that the feedback that you've received from nephrologists about maybe an increasing urgency to change the care paradigm is very, very true. In fact, I was talking to a nephrologist yesterday who made the exact same remark to me out of frustration that he was lacking optionality at this point.

change, big change, occurs over time. But I do think it's coming, and this is just another pressure point pushing us to that moment around the staffing shortages, which I don't anticipate will abate in the dialysis clinics anytime soon. In terms of the health system perspective,

And do I think that they are more front-footed? I not only think it, I see it. Just in terms of the cumulative number of conversations that our team is now having with health systems that want to look at a full enterprise solution, as we call it, using Tableau from the ICU all the way to home.

We are having many, many, many more conversations than we had, let's say, this time last year about deploying a home program in tandem with an acute program. And that, again, is being driven, yes, the upside revenue opportunity is great and appreciative, but it's really about kind of solving a near-term problem around length of stay and discharge. So yeah, I think

it is causing health systems to be much more open-minded minimally. And I do think they're trying to be a little bit more front-footed, as you put it. Lastly, on the patients and the early green shoots there, and that's the right way to characterize it. Again, I don't want to overpromote. I don't want to overstate. We have evidence that there are an increasing number, while small, and it's a small base, there are an increasing number of patients. That's also influenced by COVID. We talked about this in the past.

drew over the next couple of years. And I'm interested in this phenomenon because our DTC spend right now is de minimus. We've done a little bit of, I'll call it experimentation slash piloting with very, very low cost geo-targeted social media, which has produced some good results, but we're not even spending money and we're seeing this movement, so.

I feel pretty bullish over the next couple years as patients take matters into their own hands. Really helpful, thank you. Maybe just a last question on innovation. Yeah. You've launched Tableau Cart. Just maybe talk to us about what's next on the innovation.

with customers. Just any thoughts there on how you're thinking about future development? Thank you so much. Yeah, sure, of course. Well, and the answer may be all the above, right? So, I think I'll tell you what I think we feel really particularly interested and excited about. And we've made some, again, some baby steps to kind of prove to ourselves and our sales team.

of these add-ons for which we will assign very margin friendly margin of creative ASPs to all of them, you will likely see coming out of the software side both in terms of new features functions. You may see us also offering premium versions of the Tableau ecosystem because you know the Tableau ecosystem is not just the Tableau console that's only where it starts.

Once somebody buys into the ecosystem, they're also buying access to all of the data that flows to and out of Tableau. They're buying access to data analytics and dashboards. They're buying access to EMR integration. There might be basic versions of that, premium versions of that.

And I am very confident that we have a commercial team that can be exceptional in really selling value around not only the console, but the ecosystem over time. So that's generally the direction of PSGAL. Thanks for taking the questions.

confident that we have a commercial team that can be exceptional in really selling value around not only the console but the ecosystem over time. So that's generally the direction of CSGO. Thanks for taking the questions. Of course.

Thank you for your questions. And now we'd like to turn it back to Leslie Trey for closing remarks. Thanks, and thank you all for joining the call today. I really want to thank the entire outset team for creating such a strong start to the year. As I see it, the depth of talent and commitment and urgency and intensity that you all display every day is to me second to none in this industry, and I could not be prouder of what we continue to achieve together. GLAP Convrology