Q4 2023 Outset Medical Inc Earnings Call

February 21, 2024

Okay.

Operator: Thank you for standing by, and welcome to the Outset Medical fourth quarter 2023 earnings conference call. At this time, all participants are in listen only mode.

Thank you for standing by and welcome to the outset medical fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone if your question.

Leslie L. Trigg: Before I turn the call over to Nabeel for more detail on the quarter, I want to reiterate what I believe are the most important advances we made. First, we achieved scale in the acute end market by demonstrating that Tableau and insourcing with Tableau are strategic tools to reduce costs and retake control of care for some of the most compromised patients. Second, we expanded our home footprint via partnerships both with new market entrants and existing providers who share our vision for the better patient experience that Tableau can achieve. It is early, but we are laying a strong foundation for growth in one of the largest and most unchanged corners of health.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again.

It has been answered and you'd like to remove yourself from the queue simply press star one again.

Operator: As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Jim Mazzola, Head of Investor Relations. Please go ahead, sir.

As a reminder, today's program is being recorded and now I'd like to introduce your host for today's program, Jim Mozilla head of Investor Relations. Please go ahead Sir.

Jim Mazzola: Good afternoon, everyone, and welcome to our fourth quarter 2023 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer, and Nabeel Ahmed, Chief Financial Officer. We issued a news release after the close of market today, which can be found on the investor relations pages of OutsetMedical.com. This call is being recorded and will be archived in the investor section of our website. It is our intent that all forward-looking statements made during this call will be protected under the Private Securities Litigation Reform Act of 1995. These statements relate to expectations or predictions of future events and 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.

Good afternoon, everyone and welcome to our fourth quarter 2023 earnings call here with me today are Leslie Trig Chair and Chief Executive Officer, and Bill Ahmed Chief Financial Officer, We issued a news release after the close of market today, which can be found on the investor relations pages about set medical Dot Com. This call is being recorded and will be archived in the.

Investors section of our website at.

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 and are based on our current estimates and various assumptions and involve material risks and uncertainties that could cause actual.

Leslie L. Trigg: Third, with recurring revenue exceeding 50% of total revenue in 2023, we have proven the strength of our business model and demonstrated how it can deliver value well in. For example, we continue to expand growth margin, exceeding our guidance and demonstrating that we remain on a clear trajectory to reach 50%. At the same time, we demonstrated strong operating leverage that we expect will persist and expand each year toward reaching our profitability. And finally, we widened Tableau's competitive moat across technology, regulatory, and clinical evidence in ways that deepen connections with providers. Standing by customers and helping them achieve their goals requires much more than a great product, which we certainly have with Tableau, but it also requires an experienced sales and clinical support team, backed by the strength of a mature service organization, which is underpinned by software, analytics, change management know-how, and technology. This is a very difficult to replicate ecosystem.

Or events.

He really differ from those anticipated or implied outfit 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.

Jim Mazzola: For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors section of Outset's 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. Thanks, Jim. Good afternoon, everyone.

I'll now turn the call over to Leslie.

Thanks, Jim Good afternoon, everyone and thank you for joining us.

Leslie Trigg: And thank you for joining us. We exited 2023 having made progress in building a strong foundation from which to serve providers, patients, and investors in 2024 and for the long term. We came away from the year with clarity on areas we need to continue to strengthen and scale. Pride in the difference we are making for providers and patients. Confidence in the lead we have with Tableau from years of innovation and our investments in service and support infrastructure. And conviction around the opportunity based on the vast unmet need for better dialysis outcomes in both the acute and home settings.

We exited 2023, having made progress in building a strong foundation from which to serve providers patients and investors in 2024 and for the long term.

We came away from the year with clarity on areas, we need to continue to strengthen and scale.

And the difference we are making for providers and patient confidence in the lead we have with tableau from years of innovation and our investments in service and support infrastructure and conviction around the opportunity based on the vast unmet need for better dialysis outcomes in both the acute and home settings.

Leslie Trigg: In the fourth quarter, we delivered revenue of $30.5 million, right in line with the revised expectation we set in November to close the year at $130 million, an increase of 13% over. As we have grown and built scale, particularly in the acute setting, our recurring revenue business model continues to distinguish itself, anchor our guidance for the future, and support our drive to profit. As we look at progress in our end markets, beginning in the acute setting, our focus on enterprise selling and dialysis insourcing has continued to elevate the financial benefits and strategic importance of Tableau to providers. During 2023, 25% of our provider customers were newly landed, and 75% were existing customers who chose to expand their Tableau use within their organizations. This distribution highlights the progress we are making within this large market segment and the opportunity for continued long-term care. The percent of new to outset customers increased in 2022 and, demonstrating the network effect we have created. For example,

In the fourth quarter, we delivered revenue of $35 million right in line with the revised expectation we set in November we closed the year at $130 million, an increase of 13% over 2022.

Leslie L. Trigg: And we enter 2024 in a strong competitive position from which to continue our. With that, I'll turn it over. Thanks, Leslie. Hello, everyone.

As we have grown adult scan all particularly in the acute setting our recurring revenue business model continues to distinguish itself anchor our guidance for the future and support our drive to profitability.

As we look at progress in our end markets beginning in the acute setting our focus on enterprise selling in dialysis and sourcing has continue to elevate the financial benefits and strategic importance of tableau cheap provider customers.

Nabeel Ahmed: Revenue for the fourth quarter was thirty point five million dollars, in line with our preannouncement, slightly above the third quarter of twenty twenty three and a decrease of four point seven percent compared to thirty two million dollars in the fourth quarter of twenty. The change from last year was driven by a decrease in console revenue for the reasons we outlined in the third quarter and was partially offset by an increase in consumables. Product revenue was $22.9 million, and this was a decrease of 13% compared to $26.4 million in the fourth quarter of 2020. Service and other revenue was $7.6 million, increasing 11% sequentially from the third quarter and 35% compared to $5.6 million in the fourth quarter of 2020. Consumable revenue was $12.6 million.

During 2023, 25% of our provider customers were newly landed and 75% were existing customers who chose to expand their tableau used within their network.

This distribution highlights the progress we are making within this large market segment and the opportunity for continued long term growth.

Percent of new to outside customers increased in 2022, and 2023, demonstrating the network effects. We have previously discussed for example.

Leslie Trigg: As hospital administrators and clinicians move between facilities and health systems, they are ambassadors for Tableau and the benefits an insourcing program can provide. Additionally, we educated over 400 doctors last year alone, and we've amassed an extensive evidence base demonstrating the power of Tableau clinically, operationally, and, And on top of that, more than 10,000 nurses are now trained on it. In terms of our footprint, we have shipped Tableau consoles to more than 700 sites in all 50 states, including to top national health systems where we have about 20% console penetration and within the top 50 regional IDMs, where we are less than 10%. We estimate the acute total addressable market is roughly 40,000 consoles. And, as we reported in January, we have an installed base of just over 4,000 acute and subacute beds.

That's hospital administrators and clinicians move between facilities and health system. They are ambassadors for tableau and the benefits and insourcing program can provide.

Additionally, we educated over 400 doctors last year alone and we've amassed an extensive evidence data demonstrating the power of tableau clinically operationally and economically and on top of that more than 10000 nurses are now trained on tableau.

In terms of our footprint, we have shipped tableau council to more than 700 sites in all 50 states, including the top National Health system, where we have about 20% console penetration and within the top 50 regional IBM, where we are less than 10% penetrated today.

Nabeel Ahmed: Based on our cloud data, we see console utilization in the hospital setting of around five, and Home Consoles are just about. 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 running. Our fourth quarter gross margin was 26.7%, a more than 100 basis point sequential improvement from the third quarter, and a 9.6 percentage point increase from 17.1% in the fourth quarter of 2020. Gross margin expanded for the 11th consecutive quarter, with our mix of higher-margin recurring consumable revenue and service and other revenue representing 66% of total revenue as compared to roughly 59% in Q's quarter. The year over year increase was driven by a nearly 20 percentage point expansion in product margin that was partially offset by a decline in service and other gross margin as a result of planned investments we made during the fourth quarter that we do not expect to repeat in the first quarter of 2024, including roughly half a million dollars to implement the silicon tubing updates that Leslie talked about.

We estimate the acute total addressable market is roughly 40000 castle and as we reported in January we have an installed base of just over 4000 acute and sub acute console. So we still have a lot of runway ahead of us.

Leslie Trigg: So we still have a lot of runway. As dialysis insourcing with Tableau has grown, it is no surprise to us that we saw in the fourth quarter our Tableau ProPlus software purchased with more than 80% of the console shift in EQ, demonstrating its value in the The results Tableau can deliver in the ICU are clear. When we look at customers like Covenant Health, a regional system with about 20 inpatient units, Prior to Tableau, Covenant patients on dialysis had an average length of stay in the ICU, the most expensive part of the hospital, of over 13 days. When Covenant measured the ICU length of stay of patients on Tableau, it was cut to These results demonstrate what's possible when providers control their own data. In addition to the decrease in length of stay, Covenant also saw total ICU dialysis treatment costs decline substantially from $1.3 million to $240,000, and costs per treatment cut roughly in half.

As dialysis in sourcing with tableau has grown it is no surprise to us that we saw in the fourth quarter, our tableau pro plus software purchase with more than 80% of the council shift in the acute setting demonstrating its value in the ICU.

The result, tableau can deliver in the ICU are clear when we look at customers like Covenant health original system with about 20 inpatient facilities.

Prior to tableau covenant patients on dialysis had an average length of stay in the ICU. The most expensive part of the hospital of over 13 days when covenant measure the ICU length of stay of patients on tableau. It was cut to eight days.

These results demonstrate what's possible when providers control their own Destiny. In addition to the decrease in length of stay Covenant also saw total ICU dialysis treatment cross declined substantially from one 3 million to 240000 and cost per treatment cut roughly in half.

Leslie Trigg: These results have become very reproducible because our team has developed over the years proprietary expertise in guiding and supporting providers through the outsource-to-insource trend, with the essential investments behind us in creating a world-class field service, customer success, and clinical support organization. We are well-positioned to deliver not just an exceptional product, but an exceptional, highly differentiated change management. It took us years to build this infrastructure and know how we consider it one of the strongest competitive advantages we have. The data back that up as well.

These results have become very reproducible because our team has developed over the years proprietary expertise in guiding and supporting providers, who are the outsourced to endorse transition with essential investments behind us in creating a world class field service customer success and clinical support organization, we are well positioned to do.

Liver not just an exceptional product that an exceptional highly differentiated change management experience.

Nabeel Ahmed: Operating expenses of $36.4 million declined 14% sequentially from the third quarter and 4% from the prior year period, driven in part by the expense reductions we outlined last. From Q4 of last year, the largest decrease in spending came from GNA, which declined 15%. We reported a fourth-quarter non-gap net loss of $29.5 million, or $0.59 per share, compared to a non-gap net loss of $34.1 million, or $0.71 per share, for the same period.

It took us years to build this infrastructure and Knowhow, we consider it one of the strongest competitive advantages we have at the company.

The data back that up as well for example, we continually track customer satisfaction metrics and I am pleased but not surprised that in 2023, our customers reported a 95, 4% satisfaction rate with the performance of our field service organization. This is pretty phenomenal when you consider how rapidly our installed base.

Leslie Trigg: For example, we continually track customer satisfaction metrics. And I am pleased, but not surprised that in 2023, our customers reported a 95.4% satisfaction rate with the performance of our field service organization. This is pretty phenomenal when you consider how rapidly our install dates and treatment volumes.., and we did it while maintaining a 97% uptime across the Tableau installed days and reducing our cost to serve by nearly $25,000. Turning now to the home and market we continue to make progress building the strong foundation we are establishing for long, In 2023, we deployed more than 500 Tableau consoles to home providers, growing our home base more than 60% to more than, We've talked on previous calls about our two-tiered home penetration strategy, which entails partnering with progressive, mid-sized dialysis organizations and working upstream to create greater channel access for patients by expanding the universe of health care providers offering home dialysis.

Treatment volume has grown and we did it while maintaining a 97% uptime across the tableau installed base and reducing our cost to serve by nearly 25%.

Nabeel Ahmed: We ended the quarter with approximately $207 million in cash, cash equivalents, short-term investments, and restricted cash. In January, we added $66.5 million drawn from our term loan agreements, bringing our cash balance early in 2024 to roughly $270 million. As previously reported, revenue for the full year 2023 increased 13% to $130.4 million from $115.4 million in 2020. As a reminder, we lapped the expiry of our pandemic-related contract with HHS. Excluding the impact of the HHS contract in the prior period, revenue grew close. Product revenue was $103.5 million, an increase of 11% from 2022, and service and other revenue was $26.8 million, an increase of 22% from 20. Recurring revenue for the full year was 53%, up from 44%. Gross margin for the year reached 23.6% from 16.1%.

Turning now to the home end market, we continue to make progress building. The strong foundation, we are establishing for long term growth.

In 2023, we deployed more than 500 Tableau council to help providers growing our homebase more than 60% to more than 1300 cancels.

We've talked on previous calls about our two tiered home penetration strategy, which entails partnering with progressive mid sized dialysis organizations and working upstream to create greater channel access for patients by expanding the universe of health care providers offering home dialysis.

Leslie Trigg: We saw our strategies on both fronts pay off. With the MDOs, which manage dialysis care for about 180,000 patients, which translates to our roughly $9 billion adjusted market, we continue to see nice growth in the number and depth of programs offering. By 2023, our largest home program managed by an MDO averaged 25 patients at home on a tablet. Most home hemodialysis programs historically have had one to five patients home with each.

Our strategies on both fronts payoff in 2023 with.

With the Ngos, which manage dialysis care for about 180000 patients, which translates to a roughly 9 billion dollar addressable market. We continue to see nice growth in the number and depth of programs offering Tableau Act.

Exiting 2023, our largest home program managed by an NGL averaged 25 patients at home on tableau.

<unk> home hemodialysis programs historically have had one to five patients home with the incumbent device.

Leslie Trigg: Furthermore, we continue to see unparalleled retention. Our longest tenured patient has dialyzed at home now for three and a half years, demonstrating Tableau's differentiated patient. High retention rates not only benefit patients but also help minimize expensive churn for patients. In terms of our efforts to increase channel access by expanding the provider universe with new entrants, we hit some new milestones in 2020. For the first time, two of our fastest-growing home dialysis providers were not previously in the home dialysis program. As we've talked about in the past, the majority of patients actually start their dialysis journey in the hospital. That means hospitals, sub-acute providers, and others at the top of the funnel have an opportunity to direct patients home first. And many of them are starting to adopt a home-first mindset, where the patient could exit the hospital, a long-term care facility, or skilled nursing facility and go directly home without ever entering a dialysis unit.

Furthermore, we continue to see unparalleled retention rates, our longest tenured patients had dialogues at home now for three and a half years, demonstrating tableau differentiated patient experience hi.

High retention rates not only benefit patients, but also help minimize expensive churn for providers.

In terms of our efforts to increase channel access by expanding to providing universe with new entrants, we hit new milestones in 2023 for the first time two of our fastest growing home dialysis providers were not previously in the home dialysis business.

Nabeel Ahmed: The 750 basis points increase was ahead of our initial expectations and driven by the same factors that we believe will continue to expand gross margin to 50% and beyond. These factors are, number one, console cost and program. Two, the pull-through of higher-margin products and consumables as consoles are placed, and three, the service web. Operating expenses were $161.9 million, including R&D expenses of $46.8 million, sales and marketing expenses of $83.8 million, and G&A expenses of $31.4 million. The net loss was $134.2 million or $2.70 per share compared to a non-gap net loss of $135.8 million or $2.82 per share.

As we've talked about in the past the majority of patients actually start their dialysis journey in the hospital that means hospital sub acute providers others at the top of the funnel have an opportunity to direct patients home first and many of them are starting to adopt a home first mindset, where the patient could exit the hospital or long term care facility our skilled nurse.

Same facility and go directly home without ever entering a dialysis clinic.

Leslie Trigg: Like Outset, these new market entrants see the opportunity to disrupt and improve care delivery for dads. We are pleased to announce that during the fourth quarter, we successfully secured several new sales agreements with skilled nursing facilities, including with one of the nation's largest SNF providers. These partnerships underscore the growing recognition of Tableau's value proposition within the post-acute care setting. Furthermore, our successes throughout the year continue to position us as a trusted partner in delivering dialysis services across care.

These new market entrants and see the opportunity to disrupt and improve care delivery for dialysis patients.

We are pleased to announce that during the fourth quarter, we successfully secured several new sales agreements with skilled nursing facilities, including with one of the nation's largest sniff providers.

These partnerships underscore the growing recognition of tablet value proposition within the post acute sector.

Furthermore, our successes throughout the year continue to position us as a trusted partner in delivering dialysis services across the care continuum. Importantly, these agreements reflect an industry trend a sniff providers seeking to enhance patient care by offering in health and home dialysis services, which matches our commitment to innovation and meeting.

Leslie Trigg: Importantly, these agreements reflect an industry trend of SNF providers seeking to enhance patient care by offering in-house and home dialysis services, which matches our commitment to innovation and meeting the evolving needs of the dialysis community. Operationally, we made progress during Q4 and 2023, strengthening our regulatory and quality organizations, processes, and best practices, with lessons learned from our experiences and our ongoing focus on continuing. This past quarter, we added our eighth 510K clearance to implement new PCB-free silicone tubing in Tableau. As we've disclosed in our filings, the FDA initiated an industry-wide review of silicone tubing in 2022. With the 5 pancake clearance in hand, we are proactively integrating the changes into our manufacturing process and, in the coming weeks, intend to begin implementing the new PCB-free tubing.

Nabeel Ahmed: Turning to our guidance for 2024, we continue to expect revenue of $145 million to $153 million, growing 12% to 18% over 20. As we have previously mentioned, we anticipate the first quarter to be roughly even with the fourth quarter revenue and then building through the year, particularly in the second half as we lap the elongation of our selling cycle. And, as Leslie mentioned, we plan for Tableau Cartwood Pre-Filtration to return. Our guidance for non-GAAP close margin continues to be in the low 30% range for the full year, exiting the year in the mid-30% range.

In the evolving needs of the dialysis community.

Operationally, we made progress during Q4, and 2023, strengthening our regulatory and quality organization processes and best practices with lessons learned from our experiences and our ongoing focus on continuous improvement.

This past quarter, we added our eight five 10-K clearance to implement new PCB free silicon tubing and tableau as we disclosed in our filing with the FDA initiated an industry wide review of Silicon shipping in 2022.

With the five 10-K clearance in hand, we are proactively integrating the changes into our manufacturing process and in the coming weeks intend to begin implementing the new PCB free tubing in the field.

Leslie Trigg: Additionally, on the regulatory submission front, we remain in interactive review with FDA on the Tableau CART 510K submission and continue to forecast sales of Tableau CART with pre-filtration resuming during the second half of 2020. Our results continue to highlight the strength and potential of our recurring revenue model, which provides us with visibility into a large portion of our 2024 and longer-term financial. Every tableau in the home generates roughly $15,000 per year through its useful life. Every tableau in the acute setting generates roughly $20,000, as there are more treatments performed on each device in the hospital than with a single. Recurring revenue is driven today by the sales of disposables for every treatment and or service contract. These components will continue to grow as we add new tableaus.

Additionally, on the regulatory submission front, we remain an interactive review with FDA on the tableau of call. It five 10-K submission and continue to forecast sales of tableau cart with pre filtration resuming during the second half of 2024.

Nabeel Ahmed: Again, gross margin expansion is driven by console cost-down programs, recurring revenue from a larger install base, and service levels. With the cost reductions we undertook in 2023, we continue to anticipate OPEX in 2024 of $140 to $145 million. As a reminder, we recorded a charge in the fourth quarter of two and a half million dollars associated with the cost reductions we discussed on the November call.

Our results continue to highlight the strength and potential of our recurring revenue model, which provides us with visibility into a large portion of our 2024 and longer term financial guidance ever.

Every tableau in the home generates roughly $15000 per year through its useful life.

Free cash flow in the acute setting generates roughly $20000 per year.

There are more treatments performed on each device in the hospital, then with a single patient at home.

Operator: We expect to deliver operating leverage and to consume substantially less cash in 2024 than we did in 2023 as a result of revenue growth, gross margin expansion, and reduced operating costs. With the guidance we provided, cash use is expected to move lower each year through our expected break even in 2027, giving us a long-term, We remain bullish on the tailwinds in our business and affirm the longer-term guidance we provided. We continue to expect revenue growth in the high teens annually beginning in 2025 and gross margin continuing to expand reaching our 50% milestone exiting 2020. With that, I think we're ready for Q&A. Operator, please.

Recurring revenue is driven today by the sales of disposables for every treatment and our service contracts. These components will continue to grow as we place new tableau counsel as we announced last month, we exited 2023 with over 50% of our total revenue coming from recurring revenue and see even greater potential over the longer term through August.

Leslie Trigg: As we announced last month, we exited 2023 with over 50% of our total revenue coming from recurring revenue, and we see even greater potential over the longer term through our software. Finally, we congratulate our team member Steve Williamson on his appointment to lead another public medical service. Steve joined us at a key time when we were building our national sales and service team. Thanks to him building a team of incredibly capable and talented commercial leaders who run our sales, service, and marketing organizations today, we do not currently intend to backfill.

Software pipeline.

Finally, we congratulate our team members, Steve Lamson on his appointment to wait another public medical device company.

Steve joined Us at a key time, when we were building our national sales and service organization.

Thanks to him building a team of incredibly capable and talented commercial leaders, who run our sales service and marketing organizations today, we do not currently intend to backfill his position.

Leslie Trigg: Before I turn the call over to Nabeel for more detail on the quarter, I want to reiterate what I believe are the most important advances we made during First, we achieved scale in the acute end market by demonstrating that Tableau and insourcing with Tableau are strategic tools to reduce costs and retake control of care for some of the most compromised patients. Second, we expanded our home footprint via partnerships both with new market entrants and existing providers who share our vision for the better patient experience that Tableau can enable. It is early, but we are laying a strong foundation for growth in one of the largest and most unchanged corners of health.

Before I turn the call over to bill for more detail on the quarter I want to reiterate what I believe are the most important advances we made during the year.

Operator: Certainly, one moment for our first question, and our first question comes from the line of Rick Wise from Stiefel. Your question, please. Hi everybody.

First we achieved scale in the acute end market by demonstrating that tableau and insourcing with tableau, our strategic implemented to reducing costs and retaking control a cure for some of the lost compromised patient.

Leslie L. Trigg: Maybe, Leslie, you laid out very clearly all the progress, and it feels like, in the end, the studies you go into are making progress in a kind of period, and it feels like the setup for this year is a positive one. Talk about some of the most important incremental drivers then. I hate to ask, you know, where might there be some upsides.

Second we expanded our home footprint via partnerships, both with new market entrants and existing providers, who share our vision for the better patient experience at tableau can enable it is early but we are laying a strong foundation for growth and one of the largest and most unchanged corners of health care.

Leslie L. Trigg: I imagine Tableau Card coming earlier, but things like the skilled, for example, the skilled new contracts that skilled nursing accounts help us think about the implications of that and any new product launches. What's not in the guidance, the measured, tempered guidance you're giving us now? Hi Rick, good to hear from you. Yeah, we do feel that we're really well set up for 2024. We know this is the year of execution for us.

Leslie Trigg: Third, with recurring revenue exceeding 50% of total revenue in 2023, we have proven the strength of our business model and demonstrated how it can deliver value well into the future. For We continue to expand growth margin, exceeding our guidance and demonstrating that we remain on a clear trajectory to reach our 50%. At the same time, we demonstrated strong operating leverage that we expect will persist and expand each year toward reaching our profitability goals. And finally, we widened Tableau's competitive moat across technology, regulatory, and clinical evidence in ways that deepen connections with providers and patients. Standing by customers and helping them achieve their goals requires much more than a great product, which we certainly have with Tableau, but it also requires an experienced sales and clinical support team backed by the strength of a mature service organization, which is underpinned by software, analytics, change management know-how, and technology. This is a very difficult to replicate ecosystem, and we enter 2024 in a strong competitive position from which to continue our. With that, I'll turn it over to Nabeel. Thanks, Leslie. Hello everyone,

<unk> with recurring revenue exceeding 50% of total revenue in 2023, we have proven the strength of our business model and demonstrated how it can deliver value well into the future.

Fourth we continue to expand gross margin exceeding our guidance and demonstrating that we remain on a clear trajectory to reach our 50% milestone at the same time, we demonstrated strong operating leverage that we expect will persist and expand in each year toward reaching our profitability goals.

And finally, we widened tableau competitive mode across technology regulatory and clinical evidence in ways that deepen connections with providers and patients.

Leslie L. Trigg: And accordingly, we are focused on delivering against the goals we've set out for the year and feel that we're very, very well positioned to do exactly that. I think to answer your question, certainly the return of Tableau CART post FDA clearance is expected to be a positive catalyst, 0.1, 0.2. We are experiencing early wins in this new segment of the post-acute space. As a reminder, when we entered the post-acute space, we decided to focus first on long-term acute care facilities and rehab facilities and had a lot of success there. We've mentioned in the past that we are contracted with, and Tableau is being used by all 10 of the largest 10 post-acute providers in the LTCH and the rehab space. And so we have the opportunity to start to turn our attention to kind of the third leg of that growth tool, which is skilled nursing facilities. The nice part about that is that we can penetrate that market with our exact same sales force and our exact same field service team.

Going by customers in helping them achieve their goals requires much more than a great product, which we certainly have with tableau, but it also requires an experienced sales and clinical support team backed by the strength of a mature service organization, which is underpinned by software analytics changed management know, how and technical support this.

Very difficult to replicate ecosystem and we enter 2024 in a strong competitive position from which to continue our growth with that I'll turn it over to mobile.

Thanks, Leslie Hello, everyone revenue for the fourth quarter was $30 5 million.

Nabeel Ahmed: Revenue for the fourth quarter was 30.5 million dollars, in line with our pre-announcement, slightly above the third quarter of 2023 and a decrease of 4.7 percent compared to 32 million dollars in the fourth quarter of 2021. The change from last year was driven by a decrease in console revenue for the reasons we outlined in the third quarter and was partially offset by an increase in consumables. Product revenue was $22.9 million, a decrease of 13% compared to $26.4 million in the fourth quarter of 2020. Service and other revenue was $7.6 million, increasing 11% sequentially from the third quarter and 35% compared to $5.6 million in the fourth quarter of 2020. Consumable revenue was $12.6 million.

In line with our pre announcement slightly above the third quarter of 2023, and a decrease of four 7% compared to $32 million in the fourth quarter of 2022.

The change from last year was driven by a decrease in console revenue for the reasons, we outlined in the third quarter and was partially offset by an increase in consumables revenue.

Product revenue was $22 9 million.

A decrease of 13% compared to the $26 4 million in the fourth quarter of 2022.

It's in other revenue was $7 6 million, increasing 11% sequentially from the third quarter and 35% compared to $5 6 million in the fourth quarter of 2022 <unk>.

Consumable revenue was $12 6 million.

Up 15% from the prior quarter and 58% versus the prior year cartridge utilization continued to perform well highlighting the strength of our recurring revenue model based on our cloud data, we see console utilization in the hospital setting of around five treatments per week and home consoles at just about three per week.

Nabeel Ahmed: Next slide. Cartridge utilization continued to perform well, highlighting the strength of our recurring revenue model. Based on our cloud data, we see console utilization in the hospital setting of around five treatments, and Home Consoles at just above $3. 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 reading. Our fourth-quarter gross margin was 26.7%, a more than 100 basis point sequential improvement from the third quarter, and a 9.6 percentage point increase from 17.1% in the fourth quarter of 2020. Gross margin expanded for the 11th consecutive quarter, with our mix of higher-margin recurring consumable revenue and service and other revenue representing 66% of total revenue as compared to roughly 59% in Q3.

Leslie L. Trigg: So we can do so with a lot of operating leverage behind it. And I would say that, you know, the early wins in skilled nursing facilities are expected to be an additional catalyst for growth in 2024. Third, I would cite continued growth margin expansion. We obviously had strong growth margin gains in 2023. We expect another year of very consistent expansion. You know, our team has made 800 or 900 basis points improvements look easy. It's not.

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 fourth quarter gross margin was 26, 7% and more than 100 basis point sequential improvement from the third quarter and the nine six percentage points increase from $17, 1% in the fourth quarter of 2022.

Gross margin expanded for the 11th consecutive quarter with our mix of higher margin recurring consumable revenue and service and other revenue representing 66% of total revenue as compared to roughly 59% in Q3 of this year.

The year over year increase was driven by a nearly 20 percentage points expansion in product margin that was partially offset by a decline in service and other gross margin as a result of planned investments we made during the fourth quarter that we do not expect to repeat in the first quarter of 2024.

Leslie L. Trigg: And so I want to call attention to that and compliment our teams across the organization for making that happen. But we do have very high confidence in our ability to meet and exceed expectations on the gross margin front. And maybe lastly, I think a fourth key takeaway is that with recurring revenue now over 50% of our total revenue, it gives us a very strong basis off of which to grow with a lot of visibility. So those are probably the four growth factors and catalysts that we look forward to this calendar year. Okay, great. And just on the TableauCard progress, and I apologize, you're probably sick of answering the question, but any incremental updates on your engagement with the agency? Are they asking questions? And again, the second half sounds like a reasonable projection to me, but could it happen earlier?

Nabeel Ahmed: The year over year increase was driven by a nearly 20 percentage point expansion in product margin that was partially offset by a decline in service and other gross margin as a result of planned investments we made during the fourth quarter that we do not expect to repeat in the first quarter of 2024, including roughly half a million dollars to implement the silicon tubing updates that Leslie mentioned. Operating expenses of $36.4 million declined 14% sequentially from the third quarter and 4% from the prior year period, driven in part by the expense reductions we outlined last quarter. From Q4 of last year, the largest decrease in spending came from G&A, which declined 15%.

Including roughly half a million dollars to implement the silicon tubing updates that Leslie mentioned.

Operating expenses of $36 4 million declined 14% sequentially from the third quarter and 4% from the prior year period, driven in part by the expense reductions we outlined last quarter from Q4 of last year. The largest decrease in spending came from G&A, which declined 15%.

We reported a fourth quarter non-GAAP net loss of $29 5 million or <unk> 59 per share compared to a non-GAAP net loss of $34 1 million or <unk> 71 per share for the same period in 2022.

Nabeel Ahmed: We reported a fourth-quarter non-gap net loss of $29.5 million, or $0.59 per share, compared to a non-gap net loss of $34.1 million, or $0.71 per share, for the same period in 2020. We ended the quarter with approximately $207 million in cash, cash equivalents, short-term investments, and restricted capital. In January, we added $66.5 million drawn from our term loan agreements, bringing our cash balance early in 2024 to roughly $279 million. As previously reported, revenue for the full year 2023 increased 13% to $130.4 million from $115.4 million in 2020. As a reminder, we lapped the expiry of our pandemic-related contract with HHS this year; excluding the impact of the HHS contract in the prior period, revenue grew close. Product revenue was $103.5 million, an increase of 11% from 2022, and service and other revenue was $26.8 million, an increase of 22% from 20. Recurring revenue for the full year was 53%, up from 44%. Gross margin for the year reached 23.6% from 16.1%. The 750 basis points increase was ahead of our initial expectations and driven by the same factors that we believe will continue to expand gross margin to 50% and beyond. These factors are, number one, console cost and program.

We ended the quarter with approximately $207 million in cash cash equivalents short term investments and restricted cash in January we added $66 $5 million drawn from our term loan agreements, bringing our cash balance early in 2024 to roughly $270 million.

As previously reported revenue for the full year 2023 increased 13% to $134 million.

From a $115 $4 million in 2022 as a reminder, we lapsed the expiry of our pandemic related contract with HHS This year.

Excluding the impact of the HHS contracts in the prior period revenue grew close to 20%.

Product revenue was $103 5 million, an increase of 11% from 2022 and service and other revenue was $26 8 million an increase of 22% from 2022.

Leslie L. Trigg: Any additional perspective there? Thank you. Of course, sure. No, I'm not sick of answering questions at all.

Recurring revenue for the full year was 53% up from 44% in 2022.

Gross margin for the year reached 23, 6% from 16, 1% in 2022, the 750 basis points increase was ahead of our initial expectations and driven by the same factors that we believe will continue to expand gross margin to 50% and beyond these factories are number one console cluster.

Leslie L. Trigg: It's a very reasonable and expected question. The engagement to answer it continues to be very collaborative and very constructive. We are an interactive review. So to answer that part of your question, we are in the process of questions and answers and more questions and more answers. It is following the path that all of our other eight submissions and clearances have followed over the last number of years.

Programs to the pull through of higher margin products and consumables as consoles replaced and three service leverage.

Operating expenses were $161 $9 million, including R&D expenses of $46 8 million sales and marketing expenses of $83 8 million.

G&A expenses of $31 4 million.

Net loss was $134 2 million or $2 70 per share compared to a non-GAAP net loss of $135 8 million.

$2 82 per share for 2022.

Turning to our guidance for 2024, we continue to expect revenue of $145 million to $153 million growing 12% to 18% over 2023.

Nabeel Ahmed: 2. The pull-through of higher-margin products and consumables as consoles are placed, and 3. Service level. Operating expenses were $161.9 million, including R&D expenses of $46.8 million, sales and marketing expenses of $83.8 million, and G&A expenses of $31.4 million. The net loss was $134.2 million or $2.70 per share compared to a non-gap net loss of $135.8 million or $2.82 per share.

As we have previously mentioned, we anticipate the first quarter to be roughly even with the fourth quarter revenue and then building through the year, particularly in the second half as we lap the elongation of our selling cycle and as Leslie mentioned, we plan for tableau cleared with pre filtration to return to the market.

Leslie L. Trigg: And so, net net, it's progressing exactly as we had expected it to. There is always the chance that the review finishes earlier than expected, but I think we still feel confident in the guidance that we've given around a second half return to Tableau. Thank you so much. Of course. Thank you.

Our guidance for non-GAAP gross margin continues to be in the low 30% range for the full year exiting the year in the mid 30% range for the fourth quarter again gross margin expansion is driven by console cluster programs recurring revenue from a larger installed base and service leverage.

Nabeel Ahmed: Turning to our guidance for 2024, we continue to expect revenue of $145 million to $153 million, growing 12% to 18% over 2020. As we have previously mentioned, we anticipate the first quarter to be roughly even with the fourth quarter revenue and then building through the year, particularly in the second half as we lap the elongation of our selling cycle. And as Leslie mentioned, we plan for Tableau Cartwood pre-filtration to return. Our guidance for non-GAAP gross margin continues to be in the low 30% range for the full year, exiting the year in the mid-30% range for the full year.

With the cost reductions we undertook in 2023, we continue to anticipate Opex in 2020 for about $140 million to $145 million.

Operator: One moment for our next question. And our next question comes from the line of Shagun Singh from RBC Capital Markets. Your question, please. Hi, this is Avian speaking on behalf of Shagun.

As a reminder, we recorded a charge in the fourth quarter of $2 5 million associated with the cost reductions we discussed on the November call.

Finally.

We expect to deliver operating leverage and to consume substantially less cash in 2024 than we did in 2023 as a result of revenue growth gross margin expansion and reduced opex with the guidance. We provided cash usage is expected to move lower each year through our expected breakeven in 2027, giving us a long cash runway.

Leslie L. Trigg: Thanks for taking my question. So, Leslie, what trends are you seeing for Tableau Console uptake pending Tableau Cartwright pre-filtration approval? Is there something that the company can do to meaningfully drive more sales in the interim, including on the marketing front? And then I have a follow-up. Yeah, sure.

Yes.

We remain bullish on the tailwind in our business and affirmed the longer term guidance. We provided in November we continue to expect revenue growth in the high teens annually beginning in 2025 and gross margin continuing to expand reaching our 50% milestone exiting 2027.

Nabeel Ahmed: Again, gross margin expansion is driven by console cost-down programs, recurring revenue from a larger install base, and service levels. With the cost reductions we undertook in 2023, we continue to anticipate OPEX in 2024 of $140 to $145 million. As a reminder, we recorded a charge in the fourth quarter of $2.5 million associated with the cost reductions we discussed on the November call.

Leslie L. Trigg: Well, I really like the distribution of our growth in 2023, and I would expect it to follow a similar pattern in 2024. And what I mean by that is, a catalyst for us always remains new customer wins, and we had a nice number of those in 2024.

With that I think we're ready for Q&A operator, please open the lines.

Certainly one moment for our first question.

And our first question comes from the line of Rick Wise from Stifel. Your question. Please.

Okay.

Hi, everybody.

Maybe.

Luckily you laid out very clearly.

Progress in.

Operator: We expect to deliver operating leverage and to consume substantially less cash in 2024 than we did in 2023 as a result of revenue growth, gross margin expansion, and reduced operating costs. With the guidance we provided, cash use is expected to move lower each year through our expected break-even in 2027, giving us a long cash runway. We remain bullish on the tailwinds in our business and affirm the longer-term guidance we provide. We continue to expect revenue growth in the high teams annually beginning in 2025, and gross margin to continue to expand, reaching our 50% milestone by exiting 2025. With that, I think we're ready for Q&A. Operator, please.

It feels like.

In the end.

The steady as she goes making progress.

Leslie L. Trigg: New customers that have decided to insource with Tableau for the first time. At the same time, we always have our eye on expansion. Why?

Period, it feels like the setup for this year is a positive one.

That's some of the most important incremental driver has been I hate.

Yes.

Where might there be some upside.

Leslie L. Trigg: Because a hospital or a health system would not perpetuate its use of Tableau within other new hospitals inside of its network if the technology and the experience around it are not delivering on its promises to, you know, lower costs and deliver operational and clinical benefits. And I think the expansion numbers that we saw in 23 that we expected 24 proved that it is. And so I guess I would say, you know, how does it get accelerated?

I imagine tableau card coming earlier.

But things like.

For example, the skilled new.

Contracts that skilled nursing head count help us think about the implications of that.

And.

Any new product launches.

What's not in the guidance the measured tempered guidance youre, giving us no.

Sure Hi, Iraq, Okay to good to hear from you.

Yes, we do feel that we're really well set up for 2024. We know this is a year of execution for us and accordingly, we are focused on delivering against the goals. We set out for the year end and feel that we're very very well positioned to do exactly that.

Operator: Certainly, one moment for our first question, and our first question comes from the line of Rick Wise from Stiefel. Your question, please. Hi everybody.

Leslie Trigg: Maybe, Leslie, you laid out very clearly all the progress, and it feels like, in the end, the studies you go into are making progress in a kind of period, and it feels like the setup for this year is a positive one. Talk about some of the most important incremental drivers, and I hate to ask, you know, where might there be some upside. I imagine TableauCard coming earlier, but things like the skilled, for example, the skilled new contracts that will affect nursing accounts help us think about the implications of that and any new product launches. What's not in the guidance, the measured, tempered guidance you're giving us now. Hi, hi, Rick.

I think to answer your question certainly the return of Tableau cart post FDA clearance is expected to be a positive catalyst.

Leslie L. Trigg: I'll talk maybe a little bit more about the network effect, or maybe a better word for it is kind of this flywheel. We have demonstrated that these cost reduction and clinical benefits are reproducible as more and more hospitals have published their experience, shared their experiences publicly, and their data. We talked about Covenant Health and the script here just a minute ago as an example of that. And what we do see now, as our reference base continues to grow. And as health system executives move around and clinicians move around, the word and the ambassadorship around Tableau is continuing to grow quite substantially. Plus, now that we've trained, as I mentioned, over 10,000 nurses, we're seeing sort of a flywheel effect developing within the nursing community as well, with a lot of support for the benefits that Tableau provides. Thanks for that color!

0.1, 0.2, we are experiencing early wins in this new segment of the post acute space as a reminder, when we entered the post acute space, we decided to focus first on long term acute care facilities and rehab facilities and had a lot of success. There we've mentioned in the past that.

We're contracted now with.

Leslie Trigg: Good to hear from you. Yeah, we do feel that we're really well set up for 2024. We know this is the year of execution for us.

And tableau is being used by all 10 of the largest pan post acute provider in El <unk> in the rehab space.

Leslie Trigg: And accordingly, we are focused on delivering against the goals we've set out for the year and feel that we're very, very well positioned to do exactly that. I think I've answered your question. Certainly, the return of Tableau CART post FDA clearance is expected to be a positive catalyst. 0.1, 0.2.

And so we have the opportunity to start to turn our attention to it's kind of a third leg of that growth tool, which it needs to skilled nursing facilities. The nice part about that is that we can penetrate that market with our exact same sales force and our exacting field service team. So we can do so with a lot of operating leverage behind it so I would say that.

Leslie Trigg: We are experiencing early wins in this new segment of the post-acute space. As a reminder, when we entered the post-acute space, we decided to focus first on long-term acute care facilities and rehab facilities and had a lot of success there. We've mentioned in the past that we are contracted with, and Tableau is being used by all 10 of the largest 10 post-acute providers in the LPAC and the rehab space. And so we have the opportunity to start to turn our attention to kind of the third leg of that growth tool, which is skilled nursing facilities. The nice part about that is that we can penetrate that market with our exact same sales force and our exact same field service team.

The early win and.

Skilled nursing facilities.

Are expected to be an additional catalyst for growth in 2024.

Nabeel Ahmed: And Nabeel, what are the factors that could potentially get you to deliver at or above the top end of your guidance in 24? Yeah, I mean, so guidance, as you may remember, from the last time from our November call, we've assumed at the midpoint of guidance that we are placing roughly the same 1400 consoles round numbers as we placed in 2023 and 2022. We're also assuming again, within guidance here at the midpoint, that our say that capital spending doesn't change, meaning its impact on our sales cycle doesn't change. And so as we think about moving anywhere through our guidance range, it really depends number one on the number of consoles we place. And that could be either as a result of getting Tableau carts earlier, or it could just be latent underlying demand in both our large end markets. We've also seen in the past overperformance come from ASP, and also from more treatment sales than we have modeled. So we can see the upside in a variety.

Third I would say continued gross margin expansion, we've obviously had.

Strong gross margin gains in 2023.

We expect another year of very consistent expansion.

Our team has made eight or 900 basis points improvement look easy it's not.

So I wanted to.

I'll just call attention to that and complement our teams across the organization for making that happen, but we do have very high confidence in our ability to meet and exceed expectations on the gross margin front.

Leslie Trigg: So we can do so with a lot of operating leverage behind it. And I would say that, you know, the early wins in skilled nursing facilities are expected to be an additional catalyst for growth in 2024. Third, I would cite continued growth margin expansion. We obviously had strong growth margin gains in 2023. We expect another year of very consistent expansion. You know, our team has made 800 or 900 basis points improvements look easy. It's not.

And maybe lastly, I think are four key takeaways with recurring revenue now over 50% of our total revenue. It gives us a very strong basis off of which to grow with a lot of visibility. So those are probably the four.

Growth factors and catalysts that we look forward to through calendar year 'twenty four.

Okay great.

Leslie Trigg: And so I want to call attention to that and compliment our teams across the organization for making that happen. But we do have very high confidence in our ability to meet and exceed expectations on the gross margin front. And maybe lastly, I think a fourth key takeaway is that with recurring revenue now over 50% of our total revenue, it gives us a very strong basis off of which to grow with a lot of visibility. So those are probably the four growth factors and catalysts that we look forward to through the calendar year. Okay, great. And just on the TableauCard progress, and I apologize, you're probably sick of answering the question, but any incremental updates on your engagement with the agency? Are they asking questions? And again, the second half sounds like a reasonable projection to me, but could it happen earlier?

Just on the.

Yes.

Tableau card progress.

I apologize, you're probably sick of answering the question but.

Any incremental updates on your engagement with the agency are they asking questions.

Sure.

Again second half sounds like a reasonable projections for me, but could it happen earlier.

Nabeel Ahmed: [inaudible] Thank you. One moment for our next question, and our next question comes from the line of Kristen Stewart from CL King.

Any additional perspective there. Thank you.

Of course sure no I'm not sick of answering the question at all it's a very reasonable at a second question.

Operator: Your question, please. Hi, thanks for taking my question. Can you hear me OK?

Engagement to answer it the engagement continues to be very collaborative and very constructive we are an interactive review setting answer that part of your question.

Leslie Trigg: Any additional perspective there? Thank you. Of course, sure. No, I'm not sick of answering questions at all.

Operator: Yes, perfect. Okay, perfect. Um, I was just wondering if you could just provide some cost reductions that you guys are taking, the initiatives across the company, and what gives you confidence that you can get cash burned down in 2024. Yeah, hey, Kristen.

We are in the process of.

Leslie Trigg: It's a very reasonable and expected question. The engagement, to answer it, the engagement continues to be very collaborative and very constructive. We are an interactive review, so to answer that part of your question, we are in the process of questions and answers and more questions and more answers. It is following the path that all of our other eight submissions and clearances have followed over the last number of years.

Questions and answers and and more questions and more answers. It is following the path that all up our other eight submissions and clearances that followed over the last number of years and so net net it's progressing exactly as we had expected it to.

Nabeel Ahmed: So the expense reduction initiatives are the ones we announced in our last call as well. And what we did is we really took a look at all of our spending and anchored it around two pillars. So one thing we wanted to protect was our commercial ability to execute into our guidance range and beyond, as we think about, you know, our long-range horizon here, so meaning out to 2027 and beyond. So we wanted to preserve our ability to sort of perform on the top line.

There is there is always the chance that their review finishes earlier than expected, but I think we still feel confident in the guidance that we've given around the second half return to catch a tableau part.

Leslie Trigg: And so, net net, it's progressing exactly as we had expected it to. There is always the chance that the review finishes earlier than expected, but I think we still feel confident in the guidance that we've given around a second half return to Tableau. Thank you so much.

Thank you so much.

Of course.

Thank you one moment for our next question.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Shagwan Singh from RBC Capital Markets. Your question, please. Hi, this is Avi on behalf of Shagun.

And our next question comes from the line of.

<unk> <unk> from RBC capital markets. Your question. Please.

Alright. This is avi on for Simeon Thanks for taking my question.

Leslie Trigg: Thanks for taking my question. So, Leslie, what trends are you seeing for Tableau console uptake pending Tableau Cartwright pre-filtration approval? Is there something that the company can do to meaningfully drive more sales in the interim, including on the marketing front? And then I have a follow-up.

So luckily what what trends are you seeing for tableau console uptake pending tableau cart with pre filtration approval is there something that the company can do to drive more sales and more meaningfully in the interim including on the marketing front and then I have a follow up.

Nabeel Ahmed: And then we wanted to make sure that we preserved R&D capability, both to continue to drive costs down on our console and to fund software, which we've long talked about as kind of where we think the future is going to be. So once we had these two pillars, we sort of went through everything else in our P&L and just made sure that we were spending at an appropriate level given our expected rate of growth. That resulted in taking out roughly $25 million worth of OPEX in round numbers and allows us to, you know, last year in 2023, we just printed about $162 million of OPEX non-GAP, and our guidance for 2024 is about $140 to $145 million. So that's kind of the exercise we went through. Now, from a cash perspective, we burned just under $120 million in 2023, and our expectation is to burn significantly less than that, about $100 million in 2024, and then to burn incrementally less each year moving forward as we have revenue growth, gross margin expansion, and OPEX leverage off this new lower base.

Leslie Trigg: Yeah, sure. Well, I really like the distribution of our growth in 2023, and I would expect it to follow a similar pattern in 2024. And what I mean by that is, a catalyst for us always remains new customer wins, and we had a nice number of those in 2024.

Yes sure.

Well.

I really like the distribution of our growth in 2023, and I would expect it to follow a similar pattern in 2024, and what I mean by that is.

Our catalyst always for us.

New customer wins, and we had a nice number of those in 2024.

Leslie Trigg: New customers that have decided to insource with Tableau for the first time. At the same time, we always have our eye on expansion. Why?

New customers that decided to in source with tableau for the first time at the same time, we always have our eye on expansion why because.

Leslie Trigg: Because a hospital or a health system would not perpetuate its use of Tableau within other new hospitals inside of its network if the technology and the experience around it are not delivering on its promises to, you know, lower costs and deliver operational and clinical benefits. And I think the expansion numbers that we saw in 23 that we expected 24 prove that it is. And so I guess I would say, you know, how does it get accelerated?

Hospital or health system would not perpetuated use of tableau within other new hospitals inside of its network.

Technology and the experience around it we're not delivering on its promises to.

Lower cost and.

And deliver operational and clinical benefit then I think the expansion numbers that we saw in 'twenty three and we expect that 'twenty four proved that it is and so.

I guess I would say how does it get accelerated.

Leslie Trigg: I'll talk maybe a little bit more about the network effect, or maybe a better word for it is kind of this flywheel. We have demonstrated that these cost reduction and clinical benefits are reproducible as more and more hospitals have published their experience, shared their experiences publicly, and their data. We talked about Covenant Health and the script here just a minute ago as an example of that. And what we do see now, as our reference base continues to grow, and as health system executives move around, and clinicians move around, the word and the ambassadorship around Tableau are continuing to grow quite substantially. Plus, now that we've trained, as I mentioned, over 10,000 nurses, we're seeing sort of a flywheel effect developing within the nursing community as well, with a lot of support for the benefits that Tableau provides. Thanks for that color.

I'll talk maybe a little bit more about the network a factor or maybe a better word part is kind of the flywheel.

We have demonstrated that these cost reduction and clinical benefits are reproducible as more and more hospitals have published their experienced shared their experiences publicly in their data we talked about covenant health in the script here just a minute ago as an example of that and.

And what we do see now as our reference base continues to grow.

Thats health system executives move around and clinicians around.

Nabeel Ahmed: Thank you so much for taking my call. Great. Thanks, Kristen.

The word ambassadorship around tableau is is continuing to grow quite substantially plus now that we've trained as I mentioned over 10000 nurses, we're seeing sort of a flywheel effect and all the bank within the nursing community as well with a lot of support for the benefits of tableau provides them.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Drew Ranieri from Morgan Stanley. Your question, please. Hi, Leslie. Hi, Nabeel.

Okay. Thanks for that color.

Leslie L. Trigg: Thanks for taking the question. Maybe for Leslie, just your comments about the home market, you mentioned one of the MDOs is averaging about 25 patients at home with Tableau. And you mentioned the historical reference of like, 1 to 5 patients on in common devices, just maybe help us understand what the characteristics are of that MDO.

Nabeel Ahmed: And Nabil, what are the factors that could potentially get you to deliver at or above the top end of your guidance in 24? Yeah, hey Avi. So guidance, as you may remember from the last time from our November call, we've assumed at the midpoint of guidance that we are placing roughly the same 1400 console round numbers as we placed in 2023 and 2022. We're also assuming again within guidance here at the midpoint that our say that capital spending doesn't change, meaning its impacts on our sales cycle doesn't change. And so as we think about moving anywhere through our guidance range, it really depends, number one, on the number of consoles we place. And that could be either as a result of getting Tableau cards earlier, or it could just be latent underlying demand in both our large end markets. We've also seen in the past overperformance come from ASP and also from more treatment sales than we have modeled. So we can see upside in a variety of ways.

Bill what are the factors that could potentially get you to deliver.

At or above the top end of your guidance in 2004.

Yes, yes.

So guidance as you as you may remember from the last time from our November call. We've assumed at the midpoint of guidance that we are placing roughly the same 1400 consoles round numbers as we placed in 2023 and 2022. We're also assuming again within guidance here at the midpoint at that or said that cap.

<unk> spending doesn't change, meaning its impacts on our sales cycle doesn't change and so as we think about moving anywhere through our guidance range. It really depends number one on the number of consoles, we place and that could be either as a result of getting tableau culturally or it could just be leasing underlying demand in both our large end markets.

Leslie L. Trigg: It's now up to like, 25 patients, and there's such a significant population of home patients still out there. What's really going to get the market to make more progress in getting patients from the center to the home over the next 12, 24 months? Kind of how are you thinking about that?

We've also seen in the past over performance come from ESP and also from more treatment sales than we had modeled so we can see upside in a variety of ways.

Thanks.

Nabeel Ahmed: Thanks. Thank you. One moment for our next question. And our next question comes from the line of... Christian Stewart from CLK. Your question, please. Hi, thanks for taking my question. Can you hear me OK?

Okay.

Thank you one moment for our next question.

Yes.

Okay.

And our next question comes from the line of.

Kristen Stewart from C. L. King your question please.

Okay.

Hi, Thanks for taking my question can you hear me okay.

Nabeel Ahmed: Yeah, perfect. Okay, perfect. I'm just wondering if you could provide a little bit more on the cost reductions that you guys are taking, the initiatives across the company, and what gives you confidence that you can get cash burned down in 2024? Yeah, hey, Kristen.

Yes perfect.

Okay perfect.

Just wondering if you could just provide.

Color on the cost reductions that you guys are taking the initiatives across the company and what gives you confidence that you can get the cash burned down and 2024.

Leslie L. Trigg: And thanks for taking the question. Sure. Yeah, good to hear from you, Drew.

Leslie L. Trigg: So I guess one comment, first and foremost, we really were excited by the examples that we have amongst the home programs of getting into, I'll call it, elevations of a home patient census that have never been seen before. We do have, as I said, our highest home program has been averaging 25 patients. That's not a ceiling, and one of the things that I'm most excited about and sort of curious about is how much higher above 25 we can go. And I think it's quite a bit higher.

Yeah, Hey, Kristen so.

Expense reduction initiatives are the ones, we announced in our last call as well and what we did is we really took a look at all of our spending and anchored around two pillars. So one thing we wanted to protect was our commercial ability to execute into our guidance range and beyond as we think about our long range horizon.

So meaning out through 2027 and beyond so we wanted to preserve our ability to sort of.

To perform on the top line and then we wanted to make sure that we preserve R&D capability, both to continue to drive cost down on our console and to fund software, which we've long talked about as kind of where we think the future is going to be so once we have these two pillars, we sort of went through everything.

Leslie L. Trigg: That is because our training time on Tableau, really irrespective of patient demographic, is materially faster than the incumbent devices, so we're just enabling patients to get home more quickly. And, again, our retention rate is absolutely critical. We have had a markedly higher retention rate both short term within 90 days and longer term at 12 months, and that helps tremendously.

In our P&L and just made sure that we were spending at an appropriate level given our expected rate of growth that resulted in taking out roughly $25 million worth of Opex in round numbers and allows us to last in 2023, we just printed about $162 million of.

Opex non-GAAP and our guidance for 2024 is about $140 million to $145 million. So that's kind of the exercise. We went through now from a cash perspective, we burn to just under $120 million in 2023, and our expectation is to burn significantly less than that about 100 million.

Nabeel Ahmed: And our guidance for 2024 is about $140 to $145 million. So that's kind of the exercise we went through. Now, from a cash perspective, we burned just under $120 million in 2023, and our expectation is to burn significantly less than that, about $100 million in 2024, and then to burn incrementally less each year moving forward as we have revenue growth, gross margin expansion, and OPEX leverage off this new lower base.

Leslie L. Trigg: Our goal is to get patients home and enable them to stay home, and I think our team and our technology has done a really good job of doing that. So the second part of your question was, how do we reach for even higher shelves, if you will, in terms of the number of patients home? I think it's twofold. With the existing dialysis providers, it is growing the number of patients per home program.

In 2024, and then to burn incrementally less each year moving forward as we have revenue growth gross margin expansion and opex leverage of this new lower base.

Nabeel Ahmed: Thank you very much. Great. Thanks, Kristen.

Okay.

We're taking that.

Great. Thanks Kristen.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Drew Ranieri from Morgan Stanley. Your question, please. Hi, Leslie. Hi, Nabeel.

Thank you one moment for our next question.

And our next question comes from the line of drew Ranieri from Morgan Stanley. Your question. Please.

Hi, Leslie on the Bill Thanks for taking the question maybe.

Leslie Trigg: Thanks for taking the question. Maybe for Leslie, just your comments about the home market. You mentioned one of the MDOs is averaging about 25 patients at home with Tableau, and you mentioned the historical reference of like one to five patients on incumbent devices.

Maybe for <unk>.

Leslie just your comments about.

The whole market you mentioned one of the <unk>.

Averaging about 25 patients with tableau.

Leslie L. Trigg: We're really focused on going deep with the programs that we have, which we're starting to see part two of, keeping that retention rate high, and then adding more patients at the top of the funnel. As we talked about in the prepared remarks, by creating more new market entrants that are sending patients home, we are seeing movement there. We're seeing new market entrants get into the business of home dialysis who are kind of motivated by and attracted to the economics of home. And also, they're starting to think about the journey to home. How do we get patients into the home? How and where are they trained? How are they supported?

And you mentioned the historical reference of like 1% to five patients on carbon devices.

Leslie Trigg: Just maybe help us bridge what the characteristics are of that MDO that's now up to like 25 patients. And there's such a significant population of home patients still out there. What's really going to get the market to make more progress in getting patients from in-center to the home over the next 12, 24 months? How are you thinking about that?

Maybe help US bridge, what the characteristics are of that that's now up to like 2025 patients.

And there's such a significant population.

Patients still out there, what's really going to get.

The market to make more progress.

And getting patient front and center to the home over the next 12 to 24 months kind of how are you thinking about that thanks for taking the question.

Leslie Trigg: And thanks for taking the question. Sure. Yeah, good to hear from you, Drew.

Sure, Yes, good to hear from me Andrew.

So I guess, one comment first and foremost we.

Really we're excited by the examples that we have amongst the home programs of getting into I'll call. It elevations of other home patient census that had never been seen before.

Leslie L. Trigg: They're thinking about all those questions in really sort of different and creative ways, all of which I think will contribute to a greater patient flow direct to the home with a home first mindset. So, as with all things that are transformative, transformation in a market this big is certainly not going to happen overnight. We've always expected it to grow in a steadily linear fashion.

We do have we are as I said, our highest home program has.

<unk> been averaging 25 patients that's not a ceiling and one of the things that I'm. The most excited about and sort of curious about is how much higher above 25 can we go and I think it's quite a bit higher that is because our training time on tableau really irrespective of patient demographic is mature.

Really faster.

Leslie L. Trigg: But I do think all the right work is being done now, which will feed a high double double digit growth rate far, far into the future for us on the home and the. Does that answer your question? Operator, I think we can go to the next question. Thank you. Okay, thank you.

Then the incumbent devices. So we're just enabling patients to get home more quickly and again, our retention rates the retention rate is absolutely critical here.

We have had a markedly higher retention rate.

Both short term within 90 days and longer term at 12 months and that helps tremendously.

What our goal is to get patients home and enable them to stay home and I think our team is that our technology has done a really good job of doing that.

Operator: And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one one moment for our next question. Our next question is a follow-up from the line of Shagun Singh from RBC Capital Markets. Your question, please. Hey Leslie, thank you for squeezing me in.

The second part of your question was how do we reach for even again.

Shelves, if you will of the number of patients home I think it's twofold with the existing dialysis providers. It is growing the number of patients for whom program. We're really focused on going deep with the programs that we have which we're starting to see.

Park Hill, keeping that retention rate high and then adding more patients at the top of the funnel as we talked about in the prepared remarks by creating more new market entrants that are sending patients home. We are seeing movement, there, where we're seeing new market entrants get into the business of home dialysis, who are kind of motivated by <unk>.

Leslie L. Trigg: I was just wondering if you could talk a little bit about what the street is missing about the Outset Medical story, and given where this talk is at, is there any change in strategy or anything you're looking to do differently? Thank you for taking the follow-up. Sure, happy to.

Traffic to the economics of home and also they're starting to think about the journey to home how do we get patients into the home where do they how how and where are they trained how are they support it. They are thinking about all those questions and really sort of different in creative ways, all of which I think will contribute.

Leslie L. Trigg: Well, I think that as I take a step back and look at the outset story, I see a couple of things. Number one, I see a market with very high barriers to success. We have now scaled to a point where we have scaled the high barrier and raised it for others, those who are already in the market and those who might be attempting to enter it. Two, I see a business that is predicated on a very high percentage of recurring revenue, which provides visibility, and durability, and that percentage of recurring revenue will only continue to get greater in the future. I also see a market with incumbent competitors that are providing services and products that health systems and patients are increasingly frustrated with and which are driving them to actively seek new solutions. I think that the last point I'll make is that, you know, this is about much more than technology. It is about the ecosystem that we built around Tableau that I spoke about in my prepared remarks. We have become, in a proprietary way, exceptional at guiding hospital and health system customers through the change management process.

To a greater patient flow direct to the home with a with a home first mindset. So.

As with all things that are transformative transformation a market. This big it is not certainly not going to happen overnight, we've always expected it to grow and have steadily linear fashion, but I do think all the right work is being done now.

We expect to feed a high double digit growth rate.

Far far into the future for us on the on the home and and the acute side for that matter.

Okay.

Does that answer your questions.

Operator, I think we can go to the next question. Thank you okay. Thank you.

And as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star 111 moment for our next question.

Hmm.

Our next question is a follow up from the line of <unk> from RBC capital markets. Your question. Please.

Lastly, thank you for squeezing me in I was just wondering if you can talk a little bit about what the street is missing about the outset medical story and given where the stock is that is there any change in strategy or anything you're looking to do differently.

For taking the follow up.

Sure happy to.

Well.

I think that as I love to take a step back and look at the outset story I see a couple of things number one I see a market with very high barriers to success. We have now scaled to a point, where we have scaled the high barrier.

Leslie L. Trigg: We've become exceptional in moving and supporting patients in the home. We've become exceptional in our field service organization, our clinical support organization, and our ability to educate and train physicians and nurses. And so perhaps if anything, being under appreciated, maybe it is the recurring revenue element of the story, the unprecedented retention rate in the home, and the strong gross margin gains that we've already made with a very, very clear roadmap now, both to this next milestone of 50% gross margins and a very clear roadmap to a profitable business in addition to a high, just in case any change in strategy or the business as usual. Our strategy remains exactly the same

<unk> raised it for others.

Those who are already in the market and those who might be attempting to enter it.

Two I see a business that is predicated on a very high percentage of recurring revenue, which provides visibility durability and that percentage of recurring revenue will only continue to get greater in the future.

I also see.

Our market with incumbent prevent competitors that are providing services and products that health systems and patients are increasingly frustrated by and which are driving them to actively seek new solutions.

Think that.

The last point I'll make is that this is about much more than a technology. It is about the ecosystem that we've built around tableau that I spoke to you in the prepared remarks.

We have become in a proprietary way exceptional at guiding hospital health system customers through the change management process, we become exceptional and moving and supporting patients in the home we become exceptional in our field service organization, our clinical support organization and our ability to educate and train physicians.

Leslie L. Trigg: I think, you know, we're in the early innings of both acute and home. We're very proud of the roughly 10 or 11% penetration we have on the acute side, but that leaves 90% to go. And so I think our strategy of focusing on what we call kind of land and expand, both landing new customers, adopting insourcing with Tableau, and delivering a product and team experience that motivates existing customers to expand within their networks continues to pay dividends. And then on the home front, I think the strategy remains resonant with mid-size dialysis organizations continuing to deepen the patient census and volume in our existing programs, and sort of similarly landing So I think when we look at our growth, if they look, for example, at 60% growth just on the home console front in 2023, we feel very confident in the components and the commercial strategy at large moving through 2020. Thank you so much, and of course.

<unk> and nurses.

And so perhaps if anything being underappreciated, maybe it is see the recurring revenue element of the story.

The unprecedented retention rate in the home and and the strong gross margin gains that we've already made with a very very clear roadmap now both to this next milestone to 50% gross margins and a very clear roadmap to a profitable business. In addition to our high growth one.

Just any change in strategy or the business as usual.

Our strategy remains exactly the same I think we are in the early innings of both acute and home.

We're very proud of the of the roughly 10 or 11% penetration we have on the acute side, but that leaves 90% to go hand, So I think our strategy of focusing on what we call kind of land and expand both landing new customers adopting and sourcing with tableau and deliver.

During a product and Andrew and team experienced that motivates existing customers to expand within their networks continues to pay dividends.

And then on the home front I think the strategy remains resident.

At the at the mid sized dialysis organizations, continuing kind of deepen the patient census, and volume in our existing programs and sort of similarly landing at new market entrants at the top of the funnel who are very motivated to enter this business and provide patients with additional channels are back that.

Operator: One moment for our next question. And our next question comes from the lab, from Joshua Jennings from TD Cowan. Your question, please. Hi, good afternoon.

Through which to go home. So I think when we look at our growth as I look for example at 60% growth just on the on the home console front in 2023, and we feel very confident and the components and and the commercial strategy at large moving through 2024.

Leslie L. Trigg: Thanks for taking the questions. I was hoping to just ask about the competitive countermarking that was ongoing in 2023 and where that stands today. I believe it was most impactful in some ISU settings and with competitors inferring that Tableau XT is not appropriate for all care settings or just the dynamic between CRRT versus some of the on-label treatment types for Tableau. Has that died down, or has your team been able to counteract that effectively?

Thank you so much.

Of course.

One moment for our next question.

And our next question.

Comes from the line.

Of Joshua Jennings from TD Cowen Your question. Please.

Hi, good afternoon, thanks for taking the questions.

I'll just ask about the competitive counter marking that was ongoing in 2023.

And where that stands today and I believe is most impactful.

And some ICU settings.

There are some firming.

Tableau XT, it's not appropriate for all care settings, or just the dynamic between CRT versus somebody all enabled treatment types for tableau has that died down or has your team been able to counteract that effectively where does that stand.

Leslie L. Trigg: Where does that stand? Yeah, sure. Nice to hear from you, Josh.

Leslie L. Trigg: Well, in short, our team has done a really, really good job. And in responding to that, we were caught a little flat-footed, as we've noted in Q3, Q4, but not so anymore. And, and I would also add that we have not necessarily seen any new competitive activities since then.

Yeah sure nice to hear from you, Josh well and ensure our team has done a really really good job and in responding to that we were caught a little flat footed as we've noted and in Q3 Q4, but not sell anymore.

And and I would also add that we have not necessarily seen any new competitive.

Activity since then.

Leslie L. Trigg: We exist now in a competitive market. It's not a surprise that we have taken as much market share and grown as fast as we have. So I would expect to see competitive activity, and we're more ready for today than we ever have been in the past. I would say that, you know, the other thing that we're fortified by is the technology itself.

We exist now in a competitive market, it's not a surprise when we have taken as much market share and grown as fast as we have so I would expect to see competitive activity.

And we're more ready for it today than we ever have been in the past.

I would say that the other thing that where were.

Fortified by is the technology itself on tableau is the only device in the market that can deliver dialysis therapy anywhere between zero and 24 hours.

Leslie L. Trigg: Tableau is the only device in the market that can deliver dialysis therapy anywhere between zero and 24 hours. I think its utility and its value in the ICU are further supported by a statistic that Nabeel gave, which is that 80% of our console sales last quarter had the Tableau Pro Plus software attached to it, which is a feature, the 24-hour feature that you would only use in the ICU. And so I think that speaks to the value, clinical value that Tableau delivers in the ICU. And none of that is changed as a result of the warning letter or the competitive activity around it, which is good news. Excellent. And just one follow-up on the home opportunity. I think you've called out just this stat about 40 percent of the U.S. dialysis population having Medicare Advantage, and that payers ultimately may drive more patients to the home to secure an economic benefit. Can you just, have there been any actions by payers to date, or do you expect any in 2024? Or how can that evolve? Maybe just remind us of how economically beneficial home is for these payers? Thanks a lot.

I think its utility and its value in the ICU is further supported by a statistic that no bill gave which is that 80% of our console sales last quarter had the tableau pro plus software attached to it.

<unk> is a feature of the 24 hour feature that you would only use in the ICU and so I think that speaks to the value clinical value that tableau delivers in the ICU and none of that is changed as a result of the the warning letter or the competitive activity around it which is which is the good news.

Excellent and then just one follow up on the home opportunity. Thank you called out.

About 40% of the U S dialysis population.

I think Medicare advantage.

Payers ultimately Mei Mei.

May drive more patients to the home to secure an economic benefit can.

Can you just has there been any actions by payers to date or do you expect any in 2024.

Paul maybe just remind us of how economically beneficial home is for for these payers. Thanks a lot.

Leslie L. Trigg: Yeah, of course, I'm happy to. Well, maybe I'll take a half step back and say, I think, you know, all of the structural tailwinds and kind of the more foundational growth drivers for housing are all still firmly intact. As a reminder, the ETC model from CMS is in place and providing increasing benefits, or increasing incentives, I should say, between now and 2027. So that model, we believe, will continue to incent providers of all types to send more patients home quickly. We do still see patient preferences being influenced in a positive way toward home as a result of COVID. I think patients are more confident and sort of forward leaning toward home than ever. And that's also aided by, I think, kind of the normalization of the hospital to home environment and movement. And then the third big structural tailwind is one that you cited.

Of course I'm happy to.

And maybe I'll take a half step back and say I think all of the structural tailwind in kind of the more foundational growth drivers for home are all still firmly intact.

As a reminder, the EPC model from CMS.

Is in place and providing increasing benefits are increasing incentives I should say.

We know in 2027, so that that model. We believe we will continue to incent providers of all types to send more patients home quickly.

We do still see patient preferences being influenced in a positive way toward home as a result of Covid I think patients are more confident in sort of forward leaning toward home than ever and that's also aided by I think kind of the normalization of of the hospital to home environment and movement and then the third day.

Structural tailwind just wondering you cited yes, we have we do continue to see data that roughly 40% of the dialysis population is already signed up for Medicare advantage. These.

Leslie L. Trigg: Yes, we do continue to see data that roughly 40% of the dialysis population is already signed up for Medicare Advantage. These payers, prior to Medicare Advantage eligibility for dialysis patients, used to be able to transition their commercial patients over to Medicare at month 30, and now that's no longer the case. So they will be effectively supporting their dialysis members effectively in perpetuity. And so we do expect to see increasing involvement amongst Medicare Advantage providers to urge their partners to move more patients into the home. I'll say, as I said a couple of minutes ago, I think transformation at this level in any market rarely happens overnight. And so I would not necessarily expect to have results to report back to you on that next quarter per se, but in almost every conversation we have with payers, it involves a discussion around how do we move more patients home. We believe that the cost of care is lower and that the quality of care is higher in the home.

These payers prior to Medicare advantage eligibility for dialysis patients used to be able to transition their commercial patients over to Medicare at <unk> 30, and now that's no longer the case, so they will be supporting other dialysis numbers.

Effectively in perpetuity and so we do expect to see increasing involvement amongst the Medicare advantage providers to urge their partners to move more patients into the home I'll say as I said, a couple of minutes ago, I think transformation at this level in any market.

Rarely happens overnight and so I would not necessarily expect to have results to report back to you on that next quarter per se, but in almost every conversation we are having with payers. It involved a discussion around how do we move more patients home, we believe that the cost of care is lower.

And that the quality of care is higher than the home so the conviction and belief and the motivation is certainly already pregnant.

Leslie L. Trigg: So the conviction and the belief and the motivation are certainly already there. Great, thanks so much. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Leslie Trigg for any further remarks. Thank you, and thanks to all of you for joining us today. We look forward to our next update on our first quarterly call and hope you all have a great evening. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. [inaudible]

Great. Thanks, so much.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Leslie trick for any further remarks.

Thank you Ann and thanks to all of you for joining today, we look forward to our next update on our first quarter call and hope you all have a great evening.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Okay.

[music].

Q4 2023 Outset Medical Inc Earnings Call

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