Q2 2023 Outset Medical Inc Earnings Call
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Good day and thank you for standing by welcome to the outset Medical Q2 2023 earnings call. At this time, all participants are in listen only mode.
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 one one on your telephone you will then hear an automated message advising your hand is right to withdraw your question. Please press star one again please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, Jim Missoula. Please go ahead.
Jim If you could go ahead and Amit yourself. Please.
Okay. Good afternoon, everyone and welcome to our second quarter 2023 earnings call here with me today are Leslie Trig Chair and Chief Executive Officer, and the BLM, Ed Chief Financial Officer during the call, we will discuss our second quarter 2023.
Operational and financial results and host a question and answer session. 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 of outset medical Dot com.
Call is being recorded and will be archived in the investors section of our website.
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 $19 95. 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.
To materially differ from those anticipated or implied outset 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.
That I will now turn the call over to Leslie.
Thanks, Jim and good afternoon, everyone and thank you for joining US we are pleased to share our second quarter 2023 results, which were marked by accelerating quarter over quarter revenue growth further margin expansion and continued commercial traction across our business.
On the acute side, we've been encouraged to see more customers recognizing catalyze strong economic value proposition and makes a decision to in source inpatient dialysis with tableau. We also continued to see improvement in the broader macro selling environment with both current and perspective customers.
On the home front, we achieved our goal to sign agreements with the majority of large mid sized dialysis providers and initiated the first tableau home program with one of the country's largest health systems with plans to expand to multiple U S sites.
With the first half of 2023 now behind US we retain our strong conviction in the fundamentals of our business with confidence grounded, particularly by a healthy pipeline and backlog with interest in and demand for tableau is strong and growing.
Before I go through the details of the quarter I'd like to begin by providing an update regarding the warning letter we received from FDA in early July as many of you are aware, we previously disclosed that our San Jose facility was inspected for the first time in the Companys history by FDA in late January of this year. We were pleased overall with the inspection process, which can.
Included in February and resulted in for observation that were communicated to us via a form 43.
Each of those observations related to internal process improvements with none related to safety or efficacy concerns. We responded rapidly to FCA with a comprehensive work plan and our team Remediated all four observations internally at the end of the second quarter.
The July warning letter noted two additional observations that were not part of the original inspection findings. The first observation pertaining to content on our website that referenced continuous renal replacement therapy or CRT a modality not currently included in tablets indications for you can.
Can be fully reflective of our most recently cleared indications for years. We've removed. These materials. We believe our action plan is address this finding and expect no impact with customers from this remediation.
FCA second observation related to tableau cart with pre filtration, requiring five 10-K clearance.
Although we had evaluated tableau cart with pre filtration prior to marketing and distributing the product and concluded that no mark marketing authorization was necessary. We've made the decision to solidify its 10-K and posits distribution until a clearance has been granted we've been in dialogue with FDA and we intend to submit the five 10-K by the end of this month.
I want to emphasize that neither of these two additional observations pertain to safety efficacy or quality and importantly, the letter did not place any restrictions on the tablet system itself.
While we were surprised by the warning letter our intent is always to innovate in lock step with an adherence to the highest quality and regulatory standards and that is exactly how we've approached our response to the warning letter. We believe the actions. We have taken are the right steps towards resolving these observations and further strengthening our competitive position.
Turning now to a more detailed review of the quarter. Our performance in Q2, once again demonstrates our ability to consistently deliver strong topline results as well as our commitment to profitability and steady gross margin and presents revenues in the quarter were $36 million, representing approximately 44% growth year over year <unk>.
Currently 8% growth sequentially.
Margin expanded again for the ninth consecutive quarter by a little over two percentage points. Thanks to our continued execution against our consistent gross margin drivers.
In terms of end market performance, beginning with acute care. We were pleased to see strong household growth once again, driven predominantly by momentum with in sourcing initiatives through 2023, we have seen more and more customers are recognizing the cost savings associated with bringing tableau in house and this continues to be a driving factor for health system administrators and.
In the second quarter, we again signed new in sourcing agreements with a large number of hospitals and im encouraged by the pipeline of similar opportunities as we move through the second half of the year.
One such example, during the quarter came from a large IDM with tableau already deployed to multiple facilities in their network. This customer wanted to expand their in source dialysis service line to new network hospitals and ordered nearly 70 additional consoles to fulfill this need and while nationwide. We still remained low double digit penetrated.
With this new order tableau is now deployed in over 90% of this particular health systems facilities, demonstrating meaningful and continued progress with our land and expand strategy.
For those customers, who are considering in sourcing but are also sensitive to dialysis nursing availability. Our bridge program has remained an attractive offering that provides customers the confidence to move forward, while they complete the process of hiring their own permanent staff as in Q1, we found that in situations, where we sold the bridge program during the quarter customers were.
The staff their program faster than they initially expected, enabling us to operate the program cost efficiently. While those customers proceed without needing to purchase bridge, particularly as we continue to see stability in hospital staffing constraints. It remains an important tool that sets outset, apart and highlights our commitment to service.
Beyond the traditional acute setting we continue to see strong momentum during the quarter with sub acute providers. These providers are an essential British for patients between acute care and ultimately receiving care in the home or in center. We now have master sales and service agreement signed with all of the top 10 sub acute providers one <unk>.
Ample of our success in this market is encompassed which operates nearly 160 hospitals in 40 states with more than 60 of its facilities using tableau today encompass has reported a 50% reduction in a dialysis cost.
Measurable reduction of readmission and reports that patients feel better following dialysis with tableau.
As encompass continues to expand in sourcing with tableau the drivers for them are clear cost reduction and better clinical care.
We saw continued strength during the quarter in asps across both consoles and consumables similar to Q1, our ASP benefited from better than expected uptake of our 24 hour software feature, which we branded tableau pro plus.
From an innovation perspective, we recently improved our integration of tableau with the hospital electronic medical record a key benefit for providers, particularly those managing a growing fleet of tablet system.
This offering is off to a strong start including planned implementations at seven sites of a large regional IBM.
While early it is another example of the type of innovation, we seek to deliver providing new value to customers with new sources of revenue and margin for outset.
Turning for a moment to the macro environment, we've been encouraged to see a consistently improving environment relative to last year with the stabilization in hospital staffing dynamics, we reported in Q1 carrying through the second quarter for those health systems still grappling with staffing issues temporary programs like bridge continue to prove successful in Hell.
<unk>, our commercial team address staffing concerns upfront.
Similarly capital spending, which can sometimes affect the timing of deals also has not been a meaningful headwind for us today due in large part to tableau has economic value proposition and demonstrated ability to lower hospital dialysis cost by 50% to 75%.
Now an update on the home front as we've communicated in the past our strategy for home is twofold and follows the proven land and expand model. We have successfully deployed in the acute setting.
In the short term, we're focused on driving the patient census, and each established home program higher than historical standards by sending more patients home and over the longer term our strategy entails expanding the home dialysis provider universe by working with hospitals and other health care providers to stand up their own home program.
As it relates to this strategy are measurable home goals for 2023 include landing the majority of the largest mid sized dialysis operators known as <unk> and.
And initiating home programs with two of the largest health systems in the country in the second quarter I am pleased to report that we have achieved the first goal led into majority of Mds and made good progress on our second goal by securing a commitment from one of the largest health systems in the country to rollout home program.
Equally important we are gaining traction with individual hospitals setting up their own home program. During the quarter. We closed multiple agreements on this front and I am pleased with the additional opportunities we see for similar agreements in the second half of the year.
Key to success in the home setting is our retention rate, which we believe continues to be a central advantage of tableau and a primary driver for further profitable expansion in the home segment through the first half of this year, our retention rate continued to perform well with tablets patient opt off rate consistently hovering in the 10% range, which.
We believe as roughly half of the historical rate associated with the incumbent home hemodialysis device.
We are proud of data like this and believe it underscores why tableau maintains an edge over competitive devices as we continue to grow the number of patients at home on tableau. It is also our goal to maintain our markedly higher retention rates.
And finally, we are still a few months away, but I want to highlight our plans for the American Society of Nephrology annual meeting coming up in early November multiple abstracts have been submitted that reinforce tableau value across market segments, including the results from our quality improvement effort by an ICU customer.
In this case the provider demonstrated a 43% reduction in mean dialysis treatment hours per patient ICU stay and a more than 50% reduction in dialysis treatment cost per hour, while achieving a roughly mid teens percent reduction and the patients over all ICU like this day with no change in mortality.
<unk> these economic and clinical benefits are representative of what we now consistently see and what we look forward to presenting more information at ASN, including early insights from our National home Registry. The conference begins on November 2nd and we're planning to host investors at our booth on the morning of November 3rd we look forward to sharing more information as we get <unk>.
Closer to the meeting.
In tandem with solid progress in both end markets. Our team also continues to make strides operationally, which resulted in another quarter of consecutive gross margin expansion, enabling us to deliver a non-GAAP gross margin of 22, 5% in Q2 up over six five percentage points above our Q2.
2022 gross margin as we continue to grow the top line. The principle drivers of margin expansion remain unchanged and our consistent performance over the last nine quarters illustrates our ability to capture this margin expansion opportunity as we look ahead, we remain committed to reaching our next mile marker of 50% gross margin.
I'd also like to provide a brief update on our tableau cartridge in sourcing initiative cartridge production at our Mexico manufacturing facility, which began in the fourth quarter of 2022 has continued to ramp well against our expectations and we're pleased with the throughput and quality. We're seeing we continue to expect the majority of the cartridges, we produce to come from our plant in Mexico.
<unk> by the end of the year.
With that I will now turn the call over to and to be able to review our financials and provide an update on our expectations and key drivers for the back half of 2023.
Thanks, Leslie Hello, everyone. Our second quarter revenue increased seven 7% sequentially and 43, 8% year over year to $36 million.
Year over year change was driven primarily by higher console placements and the associated pull through of consumables used for each tableau treatment.
Product revenue was up five 6% from the prior quarter and increased 49, 5% year over year to $29 $3 million.
Console revenue grew four 4% from the first quarter and increased by 48, 8% year over year to $19 $7 million, we had strong console placements in both our acute and home end markets as well as Lee indicated ASP remained high during the quarter driven by mix.
<unk> disciplined pricing and the substantial majority of acute consoles shipping with our tableau pro plus software.
We believe that these three factors mix pricing and software sales will continue to be the primary drivers for ESP during the second half.
And for the longer term.
Consumable revenue was $9 6 million up.
Up eight 2% from the prior quarter and an increase of 59% versus the prior year as our installed base grows treatment revenue and cartridge utilization performed well and in line with our expectations. We saw invoice treatments in the acute setting between four and five treatments.
Per week, and just above three in the home setting.
Service and other revenue of $6 7 million was up 17, 9% from the prior quarter and higher by 23, 4% compared to the prior year driven by the growth of our installed base and offset by the planned <unk> of the HHS agreements as a reminder, the third quarter of 2022.
So the expiry of the final components of our HHS agreements.
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.
Our second quarter gross margin was 22, 5% a sequential improvement of 221 basis points and an improvement of just above six seven percentage points versus the prior year period.
As expected service margin increased sequentially to 14, 3% and our expectation remains that it will continue to improve throughout the year.
On a year over year basis service margins declined in the quarter due to the HHS agreement that increased service revenue in the second quarter of last year.
As Leslie pointed out this progress marks nine consecutive quarters of consistent and substantial gross margin expansion and once again demonstrates our commitment to reaching our next milestone of 50% gross margin.
Same three key drivers to get us to our 50% gross margin milestone have enabled this track record of margin expansion. They are one our console cost down programs to the pull through of software and consumables and three service leverage.
Operating expenses of $41 5 million in the second quarter were roughly flat sequentially and up 3% versus the prior year period, showing leverage by growing at a lower rate than revenue.
We reported second quarter GAAP net loss of $44 million.
Resulting in a net loss of <unk> 90 per share compared to a net loss of $43 8 million or <unk> 92 per share for the prior year period non-GAAP net loss was $33 9 million or <unk> 69 per share compared to a non-GAAP net loss of $36 $4 million.
Or <unk> 77 per share for the same period in 2022.
We ended the quarter with approximately $226 1 million in cash cash equivalents restricted cash and investments, including $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.
We used $26 $4 million of cash during the second quarter down from approximately $38 million in the first quarter.
This progress demonstrates the strength getting leverage in our model and our continued commitment to delivering on our profitability objectives.
Moving now to our full year 2023 outlook, we are reiterating our 2000 twenty's for your revenue guidance of $144 million to $150 million.
Given the pause in shipments of tableau cart with pre filtration, we now expect to be at the low end of this range. Our guidance assumes that we do not get clearance on our 10-K in 2023.
We had expected a modest revenue contribution from tableau cart with pre filtration in the low single digit million dollar range.
We now expect to be deferred out of the second half guidance also contemplates the potential impact of some tableau orders being deferred until this five 10-K is cleared.
Based on the visibility we have in our pipeline and backlog, we expect the impact to disproportionately affect the third quarter, which we believe will be roughly flat to the second quarter before growing again on a sequential basis in the fourth quarter.
I want to point out a couple of important themes first we do not expect to lose deals as a result of this pause on tableau card with pre flotation circuit.
Our scale and clear value proposition and diverse end markets gives us the ability to accommodate disruptions such as this and enables us to maintain our guidance range with confidence in our ability to execute through the second half of the year.
I also want to reiterate our 2023 gross margin guidance to be in the roughly low 20% range and that we expect to exit the fourth quarter and the roughly mid 20% range.
And finally on Opex, we continue to expect Opex growth for the full year to be significantly lower than our rates of revenue growth with opex growth in the low double digit percentage. So we are on track and continue to expect that we will burn less cash in 2023 than we did in 2020.
<unk>.
In summary, we are pleased with the strong performance during the first half of 2023 and believe we have the momentum and visibility we need as we work to continue executing through the second half of 2023.
We look forward to providing another update on our third quarter progress during our next earnings call with that I'll turn it back to Leslie for closing remarks. Thanks.
Thanks to Bill, we remain well positioned to execute against our full year strategic goals across both the acute and home segments and look forward to advancing our commercial and regulatory initiatives in locked step in the months ahead recent.
Recent trends combined with our expectation for ongoing stability in the broader macro environment give us greater confidence in our near and longer term growth opportunities, particularly given tableau differentiated value proposition, our large and growing end markets and the positive macro tailwind, which continued to fuel our business.
So with that I think we are ready for Q&A operator, please open the lines.
Thank you we will now conduct a question and answer session.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Our first question.
Is from Travis Steed with Bank of America Securities.
Hi, Thanks for taking the question I guess I just wanted to follow up on the decision to say lower end of the guidance range.
Kevin you guys beat by.
A million this quarter, it's only low single digit millions you have embedded in the guidance.
Just curious why that was.
Isn't that you can't kind of offset that within the guidance range.
And also understand like why would tableau orders actually be deferred here.
When they could probably upgrade to get the cart.
Post the approval.
Yes, maybe I'll just pay Travis I'll start with the second part of your question.
So we originally developed tableau cart for customers that.
Are in areas of the country with with truly bad like anomalously, Badwater, where they found themselves, replacing the filters inside the tableau console more frequently than desired and so we designed tableau card as an optional accessories that they could use to extend the life of the filters inside tableau. So.
As we look at the second half, we're just thinking about hey, if there are any new customers in these really bad water areas they might choose to push back their console purchase until tableau car is available and so for that reason we contemplated that.
And in the guidance that we talked about today.
Hey, Travis, but just a couple of other things on guidance. So first of all when we think about the pause on tableau cart with pre filtration. We did defer the revenue the low single digit million dollar revenue associated with tableau cart with pre filtration itself and then we also contemplated.
The potential deferral of some of these tableau console sales that Leslie you talked about <unk>.
Fortunately based on the visibility we have as we enter the second half we believe that the low end of our guidance range is our floor and we're going to work hard to work our way up from that but again based on the visibility. We have we do believe we'll be at the low end.
Hi, Greg.
Oh, sorry go ahead Trevor No don't go ahead Leslie.
I was just going to say that I will add.
That we I mean, we really did we had a fantastic quarter and in Q2 in a really really strong first half.
I think we all feel very bullish about our ability to execute in the second half and the entire team here is very focused and motivated to kind of work our way up through that range as we move through time here between now and year end.
And just to confirm you're saying that the only thing that's really changed here versus three months ago.
With tableau card and I don't know, if there's a way to kind of parse out how much of it flows.
The actual delays that you're factoring in if that's possible.
On the lower end of the guidance range.
And then bill can you kind of go over the Q3 commentary as well just wanted to turn we got the message on on Q3 modeling.
And I'll jump back in queue. Thanks, a lot.
Yes, Travis so guidance for US is always based on a couple of things one is based on the visibility right and as I mentioned.
We took the low single digit million associated with cards and sort of deferred that out of 2023, and then we took an estimate for tableau deferrals again for the reasons that Leslie you talked about that is the only thing as we were entering the quarter Leslie you talked about the strong performance.
<unk>, we saw console placements do exactly what we want we saw treatments behave the way we expect right in line with our expectations service renewals remain high. So we had all of the ingredients. If you will drive us to have a really strong print and get really really good commentary with respect to the bag.
Half of the year pause not withstanding.
So hopefully that helps again, we do we are guiding to the low end of our range as the floor now with respect to the quarters given the recency of this event, we believe that the third quarter will be more disproportionately impacted we have to now go out and work with our customers on alternate.
Plans for those customers and Badwater jurisdictions, we have to go work on ultimate plans and help them with how we can work with them. So we believe the third quarter will be more impacted and that it'll be roughly flat to the second to the second quarter and then that we will grow in <unk> as again, we get some of the momentum.
<unk> I missed some of the deals from <unk> that may be deferred.
Land and <unk> I'll, just I'll, just punctuate, what what Nobel set at the beginning of your question Travis that nothing else has changed and nothing extra I think importantly, nothing structural has changed here.
This is <unk>.
<unk> curve ball, we will be able to manage it within the current guidance guidance range, but all of the other leading indicators in acute at home are performing exactly as I hope they would so I think with regard to the performance of the business at large both near term and long term our bullishness has remained unchanged.
Change.
Very helpful color. Thanks, a lot.
Sure.
One moment for our next question.
And our next question comes from Rick Wise with Stifel.
Good afternoon everybody.
Monthly.
Dwell on tableau and it's clear the business.
Excellent shape and you're making.
A lot of positive progress, but just to make sure I'm understanding everything.
It didn't seem like.
And maybe I'm wrong, and remembering but it didn't seem like you were going to or you felt the necessity to.
File 10-K, how is the decision made.
Injunction with FDA was this your initiatives.
And.
Maybe just help us think about a potential timeline to resolution I know, there's no perfect answer, but can you just add too.
Some some more clarity around that point.
Of course, absolutely happy to so first and foremost.
We are doing this are our own volition as we talked about I think in early July the warning letter did not require or request that we stopped selling or distributing.
Tableau card or are at the tableau system.
Our goal at <unk>.
Job number one is to fully remediate the warning letter as quickly and as soon as late as possible and so as we had more more time on the clock I mean, we've received a warning letter July six I think and we disclosed on July seven so with the benefit of more assessment and analysis time.
We determined that the fastest path towards kind of a smooth an expeditious resolution.
The file and parse it should I just think it's the right thing to do again in the spirit of job number. One is is resolve the warning letter as quickly and smoothly as possible.
Related to the five 10-K itself.
Taking a step back that the decision making around tableau carve its regulatory approach obviously occurred some time ago.
While this recent action may not reflect it externally.
We really have substantially deepened our expertise and capabilities in this area and I do feel we are well positioned moving forward to scale.
<unk> and regulatory at the pace that our high growth rate is requiring.
We have have taken a lot of time, both internally and also with external experts to develop and implement a multitude of initiatives to continue to scale and bolster quality regulatory from people to our senior leadership to processes procedures.
We have upgraded and expanded the breadth and depth of our talented at this point, we have examined every facet of our quality and regulatory management systems strengthening along the way.
So I feel that moving forward and let me add one more point, while we were surprised by this warning letter, we actually really have had a quite a strong track record of successful 500, 10-K submissions and clearances.
And the fact that we have received at least one five 10-K clearance every year for the last five years and more prior to that.
I do think as a result of all of this cumulative regulatory experience and also as a byproduct of our intent to continue to innovate we are amassing very valuable expertise.
How to meet the expectations of regulators and in ways that I believe we believe are creating competitive advantages that will be quite durable and valuable over time.
Lastly, let me touch on the you're a part of your question related forward timing.
Our immediate focus is on producing the clearest and most comprehensive submission that we can that's critical to enabling a timely FDA review and so our entire team is focused on doing that by the end of August .
Obviously as you know 500 case typically do follow a faster path at least compared to PMA, but theres always a lot of factors at play and so we're assuming that FDA review will take us through the end of the year, which again is also factored into our guidance.
But our focus and our strategy at this point is to provide an incredibly thorough an incredibly robust.
Robust submission into the agency for review.
Great. That's very appreciate the thorough answer.
Two last questions on the answer from a brother together I was.
Thank them.
Correct in saying that.
I was intrigued to see that.
Despite moving to the lower end of your sales.
Our sales range guidance unchanged, but the low end.
And thinking about losing revenue profitable revenue from tableau.
Current accessory sales, which I imagine.
Must be a higher margin highly accretive margins to the overall company.
I mean, how does guidance how does the gross margin stay intact. When you move to the low end.
Second question.
There is.
Talking about.
As always these.
Significant progress in lending the mid size.
Accounts.
You hinted at.
One very large account and another one to come.
How do we imagine.
That starts to get factored into.
The sales.
Sort of.
Thinking on sales.
Is it.
It's going to potentially benefit fourth quarter or no. It's going to take three to six months for some reason I'd just like to know how that all plays out. Thanks, so much for both.
Sure maybe I'll you want to hit the margin question first yes for sure. So Rick Tableau card with pre filtration was and is.
When it gets back to expect it to be margin accretive to us having said that we only launched the product late last year and again Rick. This is a product that is really only serving customers in jurisdictions, where the water is really bad so we never expected it to be in all of our consoles.
Sales or even in the majority of console sales the drivers for us of margin expansion really are unchanged. It's continued cost down on the console. It's continued pull through of our consumables. It service leverage and then just to double click on ASP.
<unk> tableau cart with pre filtration certainly wasn't component the other drivers of ASP strength have been number one our disciplined pricing, which really hasnt changed since we've been commercial and number two it's been our sale of tableau Pro plus the 24, our software which in the second quarter was in the substantial majority.
<unk> of our acute consoles and so we have a lot of other margin drivers rigs that continue to give us conviction in our gross margin objectives. Both through the back half of this year and then to our ramp up to that 50% milestone.
I'll pick up on the home piece, Rick So when we started the year I'm hearing in January or planning for the year last December .
We had those two goals in mind as we thought about our forecast and our expectations for where we wanted to land the plane on home by the end of 2023.
So we assumed we are prone to assuming victory and reaching it.
No matter what obstacles in our way.
We had assumed victory on Hey, we are going to get contracts with the majority of these midsized <unk> by the end of the year end and we will have two of the largest health systems.
<unk> contracted to set up home program, so I, while it would be difficult to say, hey, we're going to start to see impact in this quarter versus that quarter.
We certainly planned for some benefit in 2023, which were already starting to see.
Thank you so much.
Of course.
One moment for our next question.
And our next question comes from Sugar, and saying with RBC capital markets.
Great. Thank you for taking the question I was just wondering that with Q2 Q3 sequential growth flat what is driving your confidence in the significant step up that you're modeling for Q4.
Sugar and it's really just the visibility that we have into the business remember we've always run a high visibility business just under half of our revenues are recurring revenues. These are from consumables and service and then with our strong pipeline and backlog we have a good.
Good forward visibility into console placements. So again, it's really just visibility which is what we always anchored guidance on that tells us both that we will achieve the low end at least the low end of our guidance range and that we believe <unk> will be roughly flat to <unk>.
I would echo everything.
I would only add from my vantage point, and probably more editorial than anything I mean, we have never had a bigger pipeline than we have today.
And I think we've really been aided with the benefit of some time as more and more and more health systems have adopted tableau for insourcing and seen the cost reduction benefits and the clinical care benefits in the operating benefits.
There is a network effect that starts to emerge.
And so I've been present myself for a number of conversations between health system executives sort of sharing and swapping.
Success stories, and so I think that I can I can sincerely say that the flywheel.
Particularly in acute is firmly underway and so those are some of the factors that give me the confidence more editorially about the back half of this year.
Got it and just.
As my second question in the acute setting you called you called out strong demand from hospitals due to cost savings I think you also referred to some data out there.
That seems pretty positive just in that setting I guess two part question are there any.
Economic or outcomes analysis.
That youre focused on.
Presenting data from and then in the acute care setting how are you thinking about utilization versus continuing to expand so.
Over the new land and expanse strategy. Thank you.
Yes, maybe I'll start and if you can.
On utilization I'll, just touch on that it's not an or it's an and.
And we have a.
Our commercial team that is very focused.
Both on expanding the number of customers expanding the number of facilities inside the customer networks. Your console sales and then we have a large percentage of our team in the commercial organization focused on expanding utilization.
As the tenure of the tableau is in those accounts mature so it will never be in work for us It will always be an end.
In terms of the economic analyses.
Some of that actually will be presented in greater length at V or in more detail I should say at the ASN annual meeting here in early November and in addition to that we.
We continue to see.
Customers publishing white papers sharing their own experiences are there are a number of other conferences et cetera that will take place in early 2024, and it will be it is my expectation I think that will continue to see more of this economic data are being shared in those venues as well over time as as more and more of it is.
Is recognized and accumulated.
Thank you.
Your next question one moment for our next question.
Our next question comes from Suraj Kalia.
With Oppenheimer and company.
Hi, Leslie can you help me alright, yes.
Yes.
Perfect.
So lastly, I remember last year.
In your comments.
There was this notion of home being approximately 15% contribution in FY2023.
You start vaguely recall that number and it was triangulating to like $20 million in contribution.
I appreciate the qualitative commentary maybe can you give us some.
Guideposts on where home hemo is currently relative to your expectations relative to patients.
Yeah, Hey, Suraj you can view our comments were with respect to 2022, we had expected for the full year 'twenty two to drive home revenue to roughly 15% of our total revenue and we surpassed that we actually got.
Out of home revenues to be roughly 20% of our 2022 revenues for the full year for the full year last year.
Yeah.
Yes, Thanks, Sheila and we gave we will update you with our installed base annually, we give console placements annually that breakout home in acute and we'll update that when we print our <unk> results.
One moment for our next question.
And our next question comes from Josh Jennings with TD color.
Hi, great. Thanks for taking the questions.
I was hoping you could just help us think about drivers for 2024.
Drivers of either sustaining the revenue growth, you're delivering in 2023 or accelerating.
Softest comp.
Recovery earlier in the year from the ship hold and then dialysis.
Tableau card in just a very very minor I guess.
Disruption here in the second half of 'twenty three.
But outside of the tough comps it.
Sounds like the pipeline is there any other drivers you would you would have us think through.
We are forecasting post.
<unk> results.
Yeah.
Josh Hi, it's bill so look for 2024 as Leslie pointed out earlier structurally nothing has changed for us tableau demand for both our acute and whom end markets remains and we entered the second half with a lot of momentum in both of those end markets.
And we're really setting up for what had a good print and we're setting up for a strong back half of the year now none of sort of the hiccup that where we're facing here none of that demand goes away as we've talked about our expectation is that sales of both tableau card with preferred.
Patients will resume once we get our clearance and that any tableau orders that may differ will also come back once we get.
Our five 10-K clearance. So as we think about 2024 nothing has structurally changed now we're in the middle of 2023 here and it's it's you know in any year. It would be early for us to give any specific commentary on 2024, our focus is now really executing.
To get to the low end of our guidance range for 2023, and then to work hard to get above that and we'll come back and update you on 24, as we get more visibility as we normally would.
I agree with all that I'd only add.
Maybe at a at a more qualitative level.
The drivers of demand, which will underpin obviously our performance in 'twenty for the drivers of demand on the acute side.
Our strong and only getting stronger.
Hospitals need to want to must reduce costs hospitals want to need to provide the best possible clinical care that they can for their patient community.
And increasingly hospitals are facing challenges with discharge their inability to find a dialysis chair in the outpatient dialysis clinic community is causing some really significant.
Headaches and cost pinpoint with latest deck.
If hospitals cannot find a chair in that community to discharge a patient who they must continue dialogues that patient in the inpatient setting for which they are not reimbursed and so we are seeing a pretty material uptick in traction interest activation amongst both smaller hospitals and large health system.
In standing up their own home programs and I do anticipate that to be a major driver in 'twenty four as well.
Great. Thanks, Thanks for that detailed answer and I also wanted to just ask about.
I mean, I guess a potential headwind.
Could be.
Channel just kind of the competitors are having.
Having a stronger response, but our anecdotal checks suggest that some of the dialysis providers provide that or outsourced inpatient dialysis are rolling over and just giving up business is.
Have you seen anything on that.
Amit.
The marketplace.
With a stronger competitive response from those dialysis providers or do you expect one going forward. Thanks.
Yeah sure Josh short answer no, we havent really seen a significant change.
What has been happening and continues to happen and this is just giving us some color on what we hear from health system executives.
Is that they are continuing to receive higher pricing.
And lower service level on those outsourced contract and so.
Yes, yes, I mean that activity does continue to be a tailwind for us is that obviously provides additional ammunition and motivation to in source.
And sort of take back control of that service line.
It kind of controlling their own destiny, both on cost and also clinical care. So that that does continue to be.
Tailwind for us.
Understood. Thank you.
You bet.
As a reminder to ask a question. Please press star one one on your handset to be entered into the queue.
For next question.
Our next question comes from drew Ranieri with Morgan Stanley .
Hi.
Thanks for taking the questions.
Maybe just to piggyback off of Josh is.
Last question there.
First question Budd.
I know that we previously talked about being more of a gradual.
Types of adoption curve.
<unk> point, but maybe just to build on your answer to Josh but is there anything in the environment at home from a provider or maybe even a patient standpoint.
Getting easier in terms of your ability to drive tableau home adoption.
Or just even shifting care to the home from the clinic I mean, you were just talking about.
The discharge issues, but is there a point, where you think you just kind of hit critical mass where.
Adoption, just because it becomes much more easier and maybe it doesn't flip.
Yeah happy to talk about that that is telling me, it's my favorite topic.
As everybody it out that notice.
I do think that the what the what's new.
Again in the last couple of quarters. The what's new are these discharge issues, what what remains small.
<unk> tailwind on the financial side or the one the availability of Medicare advantage for dialysis patients, which is new since 2021 and the estimates that we've heard from providers is that already at least 40% if not a bit more of their dialysis patient census.
<unk> is already on Medicare advantage.
The tailwind because that does have a and associated higher reimbursement rate than pure Medicare.
That's helping a lot and then the second thing is DTC program and that it has got a long runway running through 2027, those carrots and those steps are starting to get steeper as we move into 2024 through 27.
So we do continue to see that as a motivator.
Probably more so with sort of the mid size operators and the health system kits to health systems, just have a completely different cost structure.
So I think all of those financial headwinds or excuse me tailwind remain if.
If there's anything new I think the tableau economic value proposition has become more and more clear to to providers.
As they understand that whether it's a medicare patient or Medicare advantage or commercial patient the economics of tableau on a per treatment basis.
Make a lot of sense and so I think we've had greater success through and sort of what's new I think we've been more successful in our ability to show people that through financial Rois and and walk people through that story and I think as the providers gain more and more experience and supporting patients at home.
The last piece I think that that continues to change in a positive way as they say seeing is believing and every time, a new customers start seeing patients preferentially choose tableau start seeing patients actually really train inside of 10 days, regardless of their age education or skill level in <unk>.
As they see their own patient stay on home for a much longer period of time than their experience that led them to believe with other devices in the past that that word is getting out and yes. It will not be overnight and yet we still anticipate a gradual climb.
But in those respects.
Again, I'll use the flywheel analogy of the flywheel is beginning to turn here.
Got it. Thanks I appreciate the color there and maybe one for an appeal.
Just as we look at your gross margins.
First the prior year period.
Significant step up in product revenue margins stepped down on service and others can you just talk about maybe some of the factors. There for service was it just the leasing agreement coming off but anything that we should be focusing on as we think about a build up in our gross margin lines.
Yeah, Hey drew on the service margin line you are spot on it's really just the the expiry of the HHS agreement. So Q3 of 22 was the last quarter of that deal and it'll be behind us here in a quarter even from a comp perspective now if you look at our progress.
Q1 of this year to Q2 of this year, you will see kind of a linear step up and that linear step up in service margins will continue into the future every once in a while we'll have to make investments in people and programs, but again over time, you will absolutely see a linear step up in service margins and product margin is real.
Really our cost down efforts as well as again more consumables shift more consumables revenue as the mix shifts from growth in the installed base.
Thanks for taking my questions.
Mhm. Thank you.
Okay.
I am showing no further questions at this time I would now like to turn the conference back to Leslie for closing remarks.
Great. Thank you well I just like to thank everybody for attending and wish everybody a very good evening I do want to close by thanking the entire outset team I see every day, a relentless determination and a really deep beliefs, and restoring agency and autonomy to patients and providers.
And for that I, I and others here are deeply grateful. So thanks. Thank you again to the team and thank you all for joining today and have a great evening.
Yeah.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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