Outset Medical, Inc. (NASDAQ:OM) Q4 2023 Earnings Call Transcript

Outset Medical, Inc. (NASDAQ:OM) Q4 2023 Earnings Call Transcript February 21, 2024

Outset Medical, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] 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.

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 Investors section of our website. It is our intent that all forward-looking statements made during today’s call will be protected under the Private Securities Litigation Reform Act of 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. 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 will now turn the call over to Leslie.

Leslie Trigg: Thanks, Jim. Good afternoon, everyone, 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 Tablo 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. 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 2022.

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 profitability. 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 Tablo to provider customers. During 2023, 25% of our provider customers were newly landed and 75% were existing customers who chose to expand their Tablo use within their network. This distribution highlights the progress we are making within this large market segment and the opportunity for continued long-term growth. The percent of new to Outset customers increased in 2022 and 2023, demonstrating the network effects we have previously discussed.

For example, as hospital administrators and clinicians move between facilities and health systems, they are ambassadors for Tablo 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 Tablo clinically, operationally and economically. And on top of that, more than 10,000 nurses are now trained on Tablo. In terms of our footprint, we have shipped Tablo 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% penetrated today. 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 consoles. So we still have a lot of runway ahead of us. As dialysis insourcing with Tablo has grown, it is no surprise to us that we saw in the fourth quarter, our Tablo PRO+ software purchased with more than 80% of the console shift in the acute setting, demonstrating its value in the ICU. The results Tablo can deliver in the ICU are clear when we look at customers like Covenant Health, a regional system with about 20 inpatient facilities. Prior to Tablo, 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 Tablo, 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 costs decline substantially from $1.3 million to $240,000 and cost per treatment cut roughly in half. 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 transition. 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 experience. It took us years to build this infrastructure and know-how.

We consider it one of the strongest competitive advantages we have as a 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 and treatment volume has grown, and we did it while maintaining a 97% uptime across the Tablo installed base and reducing our cost to serve by nearly 25%. 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 Tablo consoles to home providers, growing our home base more than 60% to more than 1,300 consoles.

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. We saw our strategies on both fronts payoff in 2023. With the MDOs, which manage dialysis care for about 180,000 patients, which translates to our roughly $9 billion addressable market, we continued to see nice growth in the number and depth of programs offering Tablo. Exiting 2023, our largest home program managed by an MDO averaged 25 patients at home on Tablo. Most home hemodialysis programs historically have had one to five patients home with the incumbent device.

Furthermore, we continue to see unparalleled retention rates. Our longest tenured patients had dialyzed at home now for 3.5 years, demonstrating Tablo’s differentiated patient experience. 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 the provider universe with new entrants, we hit some new milestones in 2023. For the first time, two of our fastest-growing home dialysis providers were not previously in the home dialysis business. As we’ve talked about in the past, the majority of patients actually start their dialysis journey in the hospital. That means hospitals, subacute 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, a long-term care facility or a skilled nursing facility and go directly home without ever entering a dialysis clinic. Like Outset, these new market entrants 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 SNF providers. These partnerships underscore the growing recognition of Tablo’s 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 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 organization, processes and best practices with lessons learned from our experiences and our ongoing focus on continuous improvement. This past quarter, we added our 8th 510(k) clearance to implement new PCB -free silicone tubing in Tablo. As we disclosed in our filings, the FDA initiated an industry-wide review of silicone tubing in 2022. With the 510(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.

Additionally, on the regulatory submission front, we remain in interactive review with FDA on the TabloCart 510(k) submission and continue to forecast sales of TabloCart with prefiltration resuming during the second half of 2024. 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. Every Tablo in the home generates roughly $15,000 per year through its useful life. Every Tablo in the acute setting generates roughly $20,000 per year as there are more treatments performed on each device in the hospital than with a single patient at home. 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 Tablo consoles. 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 our software pipeline. Finally, we congratulate our team member, Steve Williamson, on his appointment to lead 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. Before I turn the call over to Nabeel for more detail in the quarter, I want to reiterate what I believe are the most important advances we made during the year.

First, we achieved scale in the acute end market by demonstrating that Tablo and insourcing with Tablo are strategic implements to reducing costs and retaking 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 Tablo 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 care. Third, with recurring revenue exceeding 50% of total revenue in 2023, we have proven the strength of our business model and demonstrated how we 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 Tablo’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 Tablo. 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 technical support. This is a 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 Nabeel.

Nabeel Ahmed: Thanks, Leslie. Hello, everyone. Revenue for the fourth quarter was $30.5 million, in line with our pre-announcement, slightly above the third quarter of 2023 and a decrease of 4.7% 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 and a decrease of 13% compared to the $26.4 million in the fourth quarter of 2022. 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 2022. 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 above three per week. 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%, 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 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 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 $0.5 million 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 $0.59 per share compared to a non-GAAP net loss of $34.1 million or $0.71 per share for the same period in 2022.

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 2022. 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 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. 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. This 750 basis point 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-down programs; two, the pull-through of higher margin products and consumables as consoles are placed; 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 and 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 or $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.

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 TabloCart with prefiltration to return to the market. 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 cost-down programs, recurring revenue from our larger installed base and service leverage. With the cost reductions we undertook in 2023, we continue to anticipate OpEx in 2024 of $140 million 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.

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 use is expected to move lower each year through our expected breakeven in 2027, giving us a long cash runway. We remain bullish on the tailwinds in our business and affirm 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. With that, I think we’re ready for Q&A. Operator, please open the lines.

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Q&A Session

Operator: Certainly, one moment for our first question. And our first question comes from the line of Rick Wise from Stifel. Your question, please.

Rick Wise: Hi, everybody. Maybe — I mean, Leslie, you laid out very clearly all the progress, and it feels like in the end, steady she goes, making progress 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 where might there be some upside? I imagine TabloCart coming earlier. But things like the skilled — for example, the skilled new contracts set 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?

Leslie Trigg: Sure. Hi, Rick. Good to hear from you. Yeah. 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 and feel that we’re very, very well positioned to do exactly that. I think to answer your question, certainly, the return of TabloCart post FDA clearance is expected to be a positive catalyst, point one. Point two, 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 — and Tablo is being used by all 10 of the largest 10 post-acute providers in the LTAC and the rehab space.

And so we have the opportunity to start to turn our attention to kind of the third leg of the growth stool, which is the 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, so we can do so with a lot of operating leverage behind it. So I would say that the early wins in the skilled nursing facilities are expected to be an additional catalyst for growth in 2024. 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 800 basis points or 900 basis points improvements look easy, it’s not. And so I want to 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.

And maybe lastly, I think a fourth key takeaway is 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 vectors and catalysts that we look forward to through calendar year ’24.

Rick Wise: Okay. Great. And just on the TabloCart 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, second half sounds like a reasonable projection to me. But could it happen earlier? Any additional perspective there? Thank you.

Leslie Trigg: Of course. Sure. No, I’m not sick of answering the question at all. 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 in 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. And so net-net, it’s progressing exactly as we had expected it to. There’s always a chance that the 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 TabloCart.

Rick Wise: Thank you so much.

Leslie Trigg: Of course.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Shagun Singh from RBC Capital Markets. Your question, please.

Unidentified Participant: Hi. This is Avi (ph) on for Shagun. Thanks for taking my question. So Leslie, what trends are you seeing for Tablo console uptake pending TabloCart with prefiltration approval? Is there something that the company can do to drive more sales more meaningfully in the interim, including on the marketing front? And then I have a follow-up.

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 always for us remains new customer wins, and we had a nice number of those in 2024, new customers that decided to in-source with Tablo for the first time. At the same time, we always have our eye on expansion. Why? Because a hospital or a health system would not perpetuate its use of Tablo within other new hospitals inside of its network if the technology and the experience around it were not delivering on its promises to lower costs and deliver operational and clinical benefits. And I think the expansion numbers that we saw in ’23 and then we expect in ’24 proved that it is.

And so I guess I would say how does it get accelerated. 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 the 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 in 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 Tablo 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 Tablo provides them.

Unidentified Participant: Thanks for that color. And Nabeel, what are the factors that could potentially get you to deliver at or above the top end of your guidance in ’24?

Nabeel Ahmed: 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 1,400 console round numbers as we placed in 2023 and 2022. We’re also assuming, again, within guidance here at the midpoint that our — 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 TabloCart earlier or it could just be a 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.

Unidentified Participant: Thanks.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Kristen Stewart from CL King. Your question, please.

Kristen Stewart: Hi. Thanks for taking my question. Can you hear me okay?

Leslie Trigg: Yes. Perfect.

Kristen Stewart: Okay. Perfect. I was just wondering if you could just provide [indiscernible] 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 burn down in 2024?

Nabeel Ahmed: Yeah. Hey, Kristen. So the expense reduction initiatives are the ones we announced on 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 here, 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 preserved 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 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 — 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 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.

Kristen Stewart: [Technical Difficulty]

Jim Mazzola: 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.

Andrew Ranieri: Hi, Leslie. Hi, Nabeel. 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 on the home with Tablo. And you mentioned the historical reference of like one to five patients on incumbent devices. 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? Kind of how are you thinking about that and thanks for taking the question.

Leslie Trigg: Sure. Yes. Good to hear from me, Drew. The — 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 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 Tablo really irrespective of patient demographics is materially faster than 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. So second part of your question was how do we reach for even, again, higher 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 per home program. We’re really focused on going deep with the programs that we have, which we’re starting to see. Part two, 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? Where do they — how and where are they trained? How are they supported? 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, a transformation in the market this big is not — certainly not going to happen overnight.

We’ve always expected it to grow in a steadily linear fashion. But I do think all the right work is being done now, which we expect to feed a high double-digit growth rate far, far into the future for us on the home and the acute side for that matter.

Operator: Does that answer your questions.

Nabeel Ahmed: Operator, I think we can go to the next question. Thank you.

Operator: Okay. Thank you. [Operator Instructions] Our next question is a follow-up from the line of Shagun Singh from RBC Capital Markets. Your question, please.

Shagun Singh: Hey, Leslie. 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 at, is there any change in strategy or anything you’re looking to do differently? Thank you for taking the follow-up.

Leslie Trigg: Sure. Happy to. Well, I think that as I look — 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, 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 sort of services and products that health systems and patients are increasingly frustrated by and which are driving them to actively seek new solutions.

I 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 Tablo that I spoke to in the prepared remarks. We have become in a proprietary way, exceptional at guiding hospital and health system customers through the change management process. 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 underappreciated, 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 road map now both to this next milestone to 50% gross margins and a very clear road map to a profitable business in addition to a high growth one.

Shagun Singh: Just any change in strategy or is it business as usual?

Leslie Trigg: 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 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 in-sourcing with Tablo and delivering a product and team experience that motivates existing customers to expand within their network continues to pay dividends. And then on the home front, I think the strategy remains resonant at the mid-sized dialysis organizations continuing to deepen the patient census and volume in our existing programs and sort of similarly landing new market entrants at the top of the funnel who are very motivated to enter this business and provide patients with additional channels of access through which to go home.

So I think when we look at our growth, if I 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 2024.

Shagun Singh: Thank you so much.

Leslie Trigg: Of course.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Joshua Jennings from TD Cowen. Your question, please.

Joshua Jennings: Hi. Good afternoon. Thanks for taking the question. I was hoping to just ask about the competitive counter marketing that was ongoing in 2023 and where that stands today. I believe it’s most impactful in some ICU settings and competitors inferring that Tablo XT is not appropriate for all care settings or just the dynamic between CRRT versus some of the on-label treatment types for Tablo. Has that died down or has your team been able to counteract that effectively? Where does that stand, Leslie?

Leslie Trigg: Yeah. Sure. Nice to hear from you, Josh. Well, in short, our team has done a really, really good job in responding to that. We were caught a little flat-footed as we’ve noted in Q3, Q4, but not so anymore. And I would also add that we have not necessarily seen any new competitive activity since then. 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 we’re fortified by is the technology itself. Tablo is the only device in the market that can deliver dialysis therapy anywhere between 0 and 24 hours.

I think it’s utility and its value in the ICU is further supported by a statistic that Nabeel gave, which is that 80% of our console sales last quarter had the Tablo PRO+ 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 Tablo delivers in the ICU. And none of that is changed as a result of the warring letter, the competitive activity around it, which is the good news.

Joshua Jennings: Excellent. And then just one follow-up on the home opportunity. I think you’ve called out just the stat about 40% of the U.S. dialysis population having Medicare Advantage and then 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 economic beneficial home is for these payers. Thanks a lot.

Leslie Trigg: Yeah. Of course. I’m happy to. Well, and maybe I’ll take a half step back and say, I think all of the structural tailwinds and kind of the more foundational growth drivers for home 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 towards home as a result of COVID. I think patients are more confident sort of forward leaning to our homes 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. 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 supporting their dialysis members 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 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. So the conviction and the belief and the motivation is certainly already present.

Joshua Jennings: Great. Thanks so much.

Operator: 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.

Leslie Trigg: Thank you, 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.

Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.