Outset Medical, Inc. Price & Performance (OM)

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 could cause actual results or events to materially differ from those anticipated or implied. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section about the public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports.

With that, I'll turn the call over to Leslie. Thanks, Jim.

Good afternoon, everyone, and thank you for joining us. The fourth quarter again highlighted the commitment of our entire outset team to dialysis patients and providers and showcase the financial, clinical and operational advantages Tableau delivers in the markets we serve. The business performed well in the quarter, driven by our strong recurring revenue business and continued sales transformation progress. We demonstrated another quarter of sequential revenue growth a notable increase in gross margin a decline in operating expenses driven by our cost down measures and a significant strengthening of our balance sheet with the financing we announced on January '6.

Revenue for the fourth quarter was $29,500,000 ahead of our earlier expectations which enabled us to finish 2024 with revenue of $113,700,000 While this was below our original plan for the year, we were pleased to finish with two quarters of progress and ahead of the updated guidance we provided in August. Strong utilization across the now nearly 6,000 Tableaus in our installed base drove another record quarter of recurring revenue.

Recurring revenue grew 13% sequentially and 17% over the fourth quarter of last year. On a console installed base that grew 10% during the year, recurring revenue grew 21% for the full year reaching $83,900,000 At this pace, we expect recurring revenue ex to be on a run rate of more than $100,000,000 annually. We also continue to see strong average selling prices for our consoles and treatments and non GAAP gross margin continue to expand as we sold more treatments and service across a larger installed base. Turning to our end markets. During the quarter, we continued to have success with acute care providers ready to in source their dialysis service line. There are now nearly 4,500 Tableau consoles deployed at eight fifty acute and sub acute sites in The United States. We talked about gaining scale in the acute setting as we began 2024, and we exited the year having objectively solidified that presence. As we expanded the breadth and depth of Tableau's footprint with an existing large health system customers as well as securing contracts with new marquee customers. Looking ahead to the next ten plus months of 2025, we anticipate much of our growth to come again from this end market.

We are pleased with the size and quality of the later stage opportunities in our pipeline and our sales team has made tremendous progress establishing the business case and support for Outset and Tableau within each We recently hosted the Chief Nursing Officer from a three fifty bed regional hospital in the Southeast to talk about results of their insourcing program one year after its implementation. The driver for change was something we hear often. This hospital is paying what it believed to be an exorbitant cost for subpar care and service from its former outsourced provider. CNO told us that extra fees were regularly charged as a result of the outsourced providers for our operations. Our team came in as a partner to help build the business case, support the CNO in establishing a coalition for change and then rolled up its sleeves to assist in the implementation. One year after stand up, the CNO reported that treatments had increased by more than 280% which she attributed to the greater confidence that nephrologists and patients had with the quality and efficiency of the facility's in sourced Their overall treatment completion rate is now greater than ninety five percent. And remarkably, central line bloodstream infections one of the most serious and costly hospital acquired infections were reduced by seventy five percent.

Despite hearing stories like this all the time, their impact never diminishes. The clinical, operational and financial benefits Tableau delivers for dialysis in source compelling reproducible and unique to Eltek, which is why we are so confident in our strategy and our ability to execute against it in 2025 and beyond. Turning to the home end market, we continue to expand tablet use among midsized dialysis providers and within skilled nursing facilities. We again saw industry leading retention rates above 90% at ninety days.

There are now approximately fourteen twenty five Tableau consoles to While change takes longer in this setting, we continue to make steady progress and remain driven by the stories from people who tell us their lives have been changed for the better by having access to Tableau at home, in their post acute setting. From an operational perspective, we were pleased last week that the warning letter from July of twenty twenty three had been officially closed. This milestone followed a comprehensive FDA inspection in the fall which successfully concluded with no 43 observations. Innovation will always be at our core and therefore our quality system and regulatory compliance are are essential at Outset. I am very proud of how our team responded and proud of the commitment to continuous quality improvement that we have embedded across the organization. Addition to the warning letter closure, another recent accomplishment was the recapitalization of the company we announced on January 6. The goal of the financing was to reassure our key constituents investors, customers and employees of our ability to reach cash flow breakeven based on our current projections with ample resources to prosecute our mission. We secured $172,700,000 in equity financing of which $168,800,000 was from a group of March new and existing investors and $3,900,000 that will be invested by members of management and the Board.

An important element of the financing was the significant reduction in our outstanding debt from $200,000,000 to $100,000,000 which we refinanced with a new highly supportive credit partner. The new debt agreement pushes Outset maturity to 02/1930 and provides the option to accept an incremental $25,000,000 We now open 2025 with approximately $210,000,000 of cash, which based on our current projections provides the funds expected to capitalize the company through cash flow breakeven and beyond. Related to the recapitalization, we have special meeting of shareholders scheduled for March 5. I encourage all shareholders to carefully review the proxy and vote your shares. Among several proposals under consideration at the meeting, we ask for your support to convert the preferred shares already issued to common shares, and authorize a reverse split of the shares. We believe the reverse split will benefit the company in two ways.

The first is in our ability to attract new investors who may be restricted for purchasing stocks below a certain price threshold. And second, we believe the reverse split may provide commercial benefit by ensuring that how customers perceive the company's financial strength matches the company's actual financial strength. Our rationale for these and all the proposals are outlined in the proxy and we're available to answer questions shareholders may have as they consider these important matters. I said last quarter that we expect the full dividends of our sales transformation to be realized beginning in the first half of twenty twenty five and we remain on track to reach that goal. Three weeks ago, we brought the entire team together at our national sales training meeting with the goal of leading with deeper competency on all aspects of our sales model and go to market During the week, our team learned from one another about best practices and were inspired through the participation of customers eager to share stories of the clinical financial and operational benefits they've realized by deploying Tableau. With the sales training meeting completed, key roles hired and process improvements in place, we look forward to seeing the results of this highly experienced and motivated team over the coming quarters.

Our guidance for 2025, which Shavila outlined, is intentionally conservative. To provide some time to help ensure the benefits of the transformation we've undertaken are [indiscernible] However, foundationally, we are very bullish on the competitive advantages Tableau its established ecosystem can deliver. We've demonstrated time and again that once Tableau is deployed, it is used consistently and this consistent use drives strong, growing and predictable recurring revenue. We've demonstrated that Tableau delivers compelling clinical financial and operational benefits to providers in the acute sub acute and home settings.

And we've demonstrated our ability to expand non GAAP gross margins. In 2024 expanded by nearly 12 percentage points. Finally, we have demonstrated our ability to right size our cost structure by removing approximately $80,000,000 of annualized These actions taken together have enabled us to reduce our cash use projections in 2025 by more than 50%. To less than half of what was used in 2024. With all of these steps behind us, our focus in 2025 with the Transform Commercial team is on reaccelerating revenue growth. And we have a solid foundation on which to build. Despite the challenges of 2024, the Tableau installed base grew by 10% recurring revenue grew by 21%, and we are now on a run rate to perform more than 1,000,000 treatments [indiscernible] With recurring revenue over a seven year useful life, of approximately $15,000 per year for each Tableau console deployed in the home and $20,000 per year for each Tableau console deployed in the acute market we estimate that there is still a $500,000,000 in recurring revenue yet to be realized from the current installment.

As we think about the year ahead, our priorities are clear. We are first and foremost focused on reigniting revenue growth and specifically Our sales transformation has been designed and implemented to help us do just that. During the second half of twenty twenty four, we saw some positive early indicators such as pipeline expansion and deal progression but also recognize that our work here continues. We expect to see the full benefits of these changes reflected in console growth as we move through the year. Next, we are committed to continuing to expand our gross margin. This is been a remarkable success for Outset in an area with significant incremental upside as And finally, with a recapitalized balance sheet we are focused on using every lever at our disposal to accelerate our path to profitability. While 2024 was a year of challenge and transformation for us, What has not changed is the enormity of our market opportunity the proprietary competitive advantages of Tableau, and the power of its economic and clinical value proposition. These bedrock strengths are at the heart of how we've driven a 50% increase in the number of healthcare facilities using Tableau in just the last two years.

How we have increased our installed base by 47% in the same period. And why we continue to see treatment expansion accelerating. For example, it took us four point eight years to reach 1,000,000 cumulative treatments By contrast, it took us an incremental seventeen months to reach 2,000,000. Cumulative treatments.

And we are just getting started. I want to thank our entire team for their commitment to the patients we serve in addition to their commitment to drive growth. Lower expenses and reach our shared goal of profitability. And with that, I will turn it over to Nabil.

Thanks, Leslie. Hello, everyone.

Revenue for the fourth quarter of $29,500,000 grew 3% sequentially driven primarily by recurring treatment and service revenue from continued strong Tableau utilization. On a year over year basis, revenue declined 3% due to lower sales for the reasons we previously discussed partially offset by strong recurring treatment and service revenue. Revenue of $21,000,000 consisting of console revenue of $5,800,000 and treatment revenue of $15,300,000 grew 3% from $20,300,000 in the third quarter and declined 8% from $22,900,000 in the prior year.

Service and other revenue of $8,500,000 was roughly even with the third and grew 11% year over year.

Recurring revenue from the sale of Tableau cartridges and service reached CAD23.7 million an increase of 13% from the third quarter and 17% year over year.

We continue to see strong console ASP across all end markets as a result of our disciplined pricing uptake with acute customers of our Tableau Pro Plus offering and the return of Tableau Kart with prefiltration. Also with acute customers. Now moving to gross margin and operating expenses, which as a reminder reflect our non GAAP results. Please refer to the reconciliation of GAAP to non GAAP measures found in today's earnings release. And by nearly 11 percentage points from last year. This growth was underpinned by progress in both product and service and other gross margin. Product gross margin was roughly flat sequentially and increased nearly eight percentage points year over year to 44.3%.

Service and other gross margin was negative 2.5% in the prior year period and reached 20.9% in the fourth quarter of twenty twenty four. As I mentioned last quarter, gross margin is adversely affected in the short term due to lower absorption of manufacturing overhead as a result of our reduced console build plan. And efforts to reduce inventory levels.

Absent the impact of under absorption of manufacturing overhead, which dampened gross margin by approximately 300 basis points in the quarter, we would have seen non GAAP gross margin of just over 40%. Operating expenses of $26,600,000 declined by 27% from the prior year period driven by our ongoing focus on expense management and the restructuring actions we've taken.

Net loss was $19,300,000 or $0.37 per share roughly 35% lower than the fourth quarter of twenty twenty three, reflecting the positive results of our drive to profitability. Moving to our balance sheet. We ended the fourth quarter with $162,000,000 in cash cash equivalents, short term investments and restricted cash. As Leslie mentioned, following our financing in January, we had approximately $210,000,000 on the balance sheet and have reduced our outstanding debt from $200,000,000 to $100,000,000 maturing in 02/1930.

Based on our current projections, we believe this level of cash gets us through cash flow breakeven. Close out the full year 2024, we reported revenue today of $113,700,000 was ahead of our pre announced in January and the revised guidance we had provided in August of last year. A decrease of 22% due to lower console sales for the reasons we have previously Service and other revenue was $32,700,000 an increase 22% from 2023 driven by high service renewal rates across a larger installed base. Recurring revenue for the full year was $83,900,000 representing growth of 21% compared to our recurring revenue in 2023. Gross margin for the year increased nearly 12 percentage points to 35.6% or roughly 37% excluding the impact of manufacturing, under absorption. Operating expenses in 2024 were $119,300,000 declining 26% from 2023, due to the focused efforts to restructure and streamline our operations and accelerate our path to profitability. Operating expenses included R and D expenses of $29,100,000 sales and marketing expenses of $61,900,000 and G and A expenses of $28,300,000 Net loss was $93,400,000 or $1.79 per share, a 29% decline compared to $131,600,000 or $2.65 per share for 2023. Turning to our guidance for 2025.

As Leslie mentioned, our approach is to be conservative. We expect revenue for the full year 2025 to be between $150,000,000 to $125,000,000 The midpoint of this range would imply that the installed base and recurring revenue both grow by roughly 10%. For modeling purposes, we anticipate revenue to be the lowest in the first quarter and then build as we move through the year. Moving down the income statement. We expect another year of gross margin expansion in 2025 with gross margin for the full year in the high 30% range. As we discussed on last quarter's call, the rates of expansion will be affected as we burn down our inventory levels and under absorb manufacturing overhead. Excluding the impact of under absorption, we would anticipate company gross margin exiting the year above 40% in the fourth quarter of twenty twenty five. We plan to continue to quantify this impact to non GAAP gross margin help you model the trajectory. Although gross margin may fluctuate on a quarter to quarter basis, as a result of our product mix, we remain right on track to meet our next gross margin milestone of 50%. Again, gross margin expansion is driven by recurring revenue from a larger installed base service leverage and our console cost down programs.

With the cost reductions we have undertaken, we now anticipate OpEx in 2025 of roughly $90,000,000 below the $100,000,000 run rate we projected on our third quarter call.

This combination of expected revenue growth, continued gross margin expansion and ongoing OpEx and working capital discipline means that we expect to use under $50,000,000 of cash in '20 which is less than half the $103,000,000 we used in 2024. Lastly, as it relates to our 2025 outlook, want to address the potential impact of tariffs that have been proposed on goods imported from Mexico As you know, we have a state of the art manufacturing facility in Mexico where Tableau, Tableau Cart, And Tableau Cartridges Are Produced. We Do Not Believe We Will Have Exposure To Potential Tariffs As Our Products Are Covered Under A Special Exemption. In Addition, We Previously Said That We Are Carrying Adequate Console Inventory We Believe Will Satisfy Most Of Our We Also Have Treatment Inventory Staged In The United States to meet near term demand and we are able to shift a portion of our future production to Thailand should it be necessary.

To close, we operate in large end markets where our strong value proposition continues to resonate with two quarters of good progress under our belts, we look forward to returning to growth in 2025 and continuing on our path to gross margin and to profitability. With that, I think we're ready for Q and A. Operator, please open the lines.

Our first question comes from Marifai Baut with BTIG. Your line is open.

Hi, good evening. Thanks for taking the questions and nice quarter. Wanted to ask quickly here for both the qualitative and quantitative outlook on the console side. I heard Nabil's comments about a 10% increase in installed base if we take the midpoint of the guide. But if I look at the Q4 console revenues, I think sequentially down from Q3, if I got the math right, I might be wrong. And so I wanted to understand kind of what you're seeing from the sales force that continues to give you guidance and I mean confidence in this turnaround Any updates on large deals and how you would envision kind of the midpoint of the guidance for console sales working throughout the year cadence throughout the year?

Thanks.

Sure. Maybe I'll start and if you feel free to jump in. Yes, completely fair question on the console front. Look, we had a lot of change and a lot to change. In 2024. And we have a nine to twelve month sales cycle. And so as we look forward here, number one, we start to annualize that. Number two, the newly hired capital sales reps from 2024 become fully tenured in the first part of twenty twenty five here. And also we're anchored by what we're seeing in the pipeline. Now understandably, I believe, we want to be conservative as we lay out the year here. But what is true is that all of the sales management, change management steps are Hi, Doug. The regulatory changes are behind us. The balance sheet perceptions are behind us, all of which can really increase our conviction. On delivering strong console growth this year in 2025. Now it's really a matter of continuing to inspect and ensure that the right disciplines are being practice consistently across the country, but the changes are firmly in place. And And there is good evidence of them taking root, which kind of gets your question about pipeline.

So let me go there next. Here's kind of what we're seeing on the pipeline side. First of all, it continues to grow and growing in a high quality, highly inspected way. Just in Q4 alone, we saw more than 10% growth. In the 2025 pipeline.

Now roughly 70% of our top opportunities forecasted to close this year are already in the latest stages of our sales process. That is an advantage we have never enjoyed in the past. As we've entered a new year. So that's new. The size of the pipeline is new.

And the diversification is new. We've got really good healthy diversification [indiscernible] between existing customers who are now looking to expand their use of Tableau across new hospitals and their networks and also new customers. Choosing to in source for the first time in 2025 with Tableau. We have good diversification between national contracts and large regional IDN contracts. And really good distribution across deal sizes. We are continuing to see a high percentage of potential large console opportunities we do expect to close in 2025. So all in all, again, we've had a lot of change to absorb and for the team to internalize and get good at. But those changes really are behind us and we are now in the what I call the rinse and repeat part of change management under the new model. Hopefully that helps for me. Yes, that's a lot of great detail. Thank you for that Leslie. I guess on the flip side, treatments continue to be very, very strong with your consumables revenue. And I'm curious what drove it? I Was it higher rates of utilization and turnover? Was there some ASP lift that came along with some of these consumables? What was kind of behind some of the Beat, which was a good $1,000,000 or $2,000,000 higher than we had forecasted.

Yes. Hey, Marie. We too were really pleased with our recurring revenue performance and specifically treatment sales. We did see very strong console utilization on our larger installed base. And as we have seen in previous fourth quarters, we did see a little bit of stocking Okay, very helpful. Thank you. One moment for our next question. Our next question comes from Shagun Singh with RBC. Capital Markets. Your line is open.

Good. Thank you so much. I was hoping maybe we could start on the P and L and gross margins. If you can walk us through the cadence for the year in 2025 on gross margins as well as OpEx? And then given gross margins sorry, given R and D was about 500 basis points below expectations in Q4. I'm just wondering if you can also walk us through some of the areas of OpEx cuts on R and D as well as SG and A, you're also [indiscernible] for 2025, that would be helpful.

For sure. Yes, Shugan. So please just keep me on track here. With respect to gross margin, we printed 35.6% here for the full year and we expect that to expand to the high 30% zone. Now remember gross margin will [indiscernible] this under absorption of manufacturing overhead Absent that, it's been roughly 300 basis points in the last couple of quarters. So we could think about it in a similar zip code for next year. With respect to the quarters, we tend to generally expect linear gross margin expansion but that can be affected by our product mix, whether it's home versus acute consoles or treatment sales versus consoles. So that might put a little bit of what I'll call noise in the quarterly progression on gross margin. With respect then to OpEx, so again, we printed just under $120,000,000 of OpEx in 2020 and based on the annualization of the of the cuts that we made at the restructuring actions we've taken, we expect OpEx in 2025 to be in the $90,000,000 zone And again, OpEx for us tends to be relatively linear. We do see a little bit more in the fourth quarter as we true up annual incentive comp that sort of thing.

But otherwise it tends to be pretty linear. And then, Shevlin, with respect to kind of where the cuts came from, our cuts have been focused on making sure that we do not touch our commercial ability to execute and expand consoles. So we've kind of cut everywhere around that, but remain convinced that we have the right commercial organization to execute against our objectives for 2025. Let me pause. Hopefully that made sense.

Yes. I can I'll add just a little bit more color on the R and D specific question that you had, Shigun. Let me give you a couple of examples. It starts with disciplined prioritization. And so we we are very, very, very clear and have extreme focus around what we need to get done in 2025. And at the risk of repeating Outset, it's reignite revenue growth, continue to expand gross margins and execute against Our very clear path to profitability That's it. And you put that on a bumper sticker. That's what we're going to do. So as we looked at R and D, we took a very disciplined approach to prioritizing kind of only the projects that directly benefited those three goals in the very near So said differently, that meant we had to take a much closer look at R and D projects that were longer dated.

Things that had a payoff period that fell out LRP. That's an example of things that projects that we're not undertaking in the near term. Also on the SG and A side, we're just seeing good old fashioned operating leverage. We are getting more done with fewer people.

Which is exactly what you want to see as a business scale.

So those are hopefully a few additional details to provide you with the context.

Thank you so much.

Yes. One moment for our next question. Our next question comes from Shirazh Kalia with Oppenheimer. Your line is open.

Hey, Nabil, can you hear me all right?

Hi, Suraj. Yes. Perfect. And so one question from my side, Nabil. Obviously a lot of positive commentary in your in you guys' prepared remarks.

The greater than 50% reduction in cash outlay for 2025, Nabil, the industry is very capital intensive. And I think so in somewhere in your remarks, also your commentary, you said like you're not touching the commercial organization. You help tie both of those together in terms of cutting back so much and the capital intensity required for growth in this business, any additional color would be great. Thank you for taking my question. Hey Suraj, So first of all, with respect to our cash guidance, so number one, we are expecting revenue to grow as we articulated in our call. Number two, we're expecting gross margin to expand as we talked about and we have taken OpEx down from again $120,000,000 to roughly $90,000,000 that's $30,000,000 have changed right there. On top of that Suraj, we previously talked about our efforts to reduce inventory levels and reduce our console build plan to accommodate that. And then finally, we have taken out a material amount of interest, cash interest expense given our reduction from $200,000,000 of debt to $100,000,000 of debt, So that's kind of the bridge on cash burn.

Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Leslie Trigg for any further comments.

Okay, great. Well, thanks to all of you for joining today. I I'd like to close by thanking our entire team again. For the incredible difference they're making every day in the lives of dialysis patients Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.