Good day and thank you for standing by. Welcome to the Outset Medical First Quarter 2025 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Jim Mazzola, Head of Investor Relations. Please go ahead.

Okay. Thanks, Victor. Good afternoon everyone and welcome to our first quarter 2025 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 pages of outsetmedical.com. And this call is being recorded and will be archived on the Investors' section of our website. It's 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 SEC including our latest annual and quarterly reports. And with that, I'll turn the call over to Leslie.

Thanks, Jim. Good afternoon everyone and thank you for joining us. Outset's results in the first quarter reflect the strong progress we've made with our commercial transformation, the durable competitive advantage of Tablo in both the acute and home settings, and the meaningful impact our operational execution is having on our path to profitability. Console sales grew meaningfully over last quarter, utilization remains strong, and we demonstrated continued operating leverage. Starting at the top. Revenue for the first quarter of $29.8 million reflected 6% growth from the first quarter of last year. We were very pleased with the composition of revenue, which included 23% sequential growth in console revenue, which is a key metric for us this year as we look to sustainably reignite console growth. We continue to see strong utilization across the Tablo installed base, which resulted in another strong quarter of recurring revenue. Recurring revenue of $22.7 million grew 20% over the first quarter of last year. Once Tablo consoles are placed, they're used. And this utilization frequency keeps us right on track to exit the fourth quarter on a run rate of more than $100 million annually in recurring revenue alone. I mentioned last quarter that it took Outset 4.8 years to reach 1 million cumulative treatments and then an incremental 17 months to reach 2 million cumulative treatments. This quarter we shipped our 3 millionth treatment and it took us not another 17 months, but just over 12 months to get there. We also continue to be pleased with the progress we are making with non-GAAP gross margin, which at 37.6% continued to expand year-over-year as we sold more treatments and services across a larger installed base. Normalizing for the lower absorption of manufacturing overhead, which we've previously discussed, we would have seen non-GAAP gross margin of approximately 40% for the quarter, right on our path to the next milestone of 50%. Turning to our end markets. Our results in the quarter were again driven by continued penetration within acute care providers who have made the decision to reduce costs and improve patient care by insourcing their dialysis service line. The clinical, financial, and operational advantages Tablo can deliver continue to resonate with the full range of acute providers from community and critical access hospitals to regional IDNs and national health systems. For example, one large regional IDN customer deployed their 100th Tablo during the quarter as part of a system-wide insourcing implementation and continues to expand Tablo's use across multiple facilities in several states. At one of the largest health systems in the U.S., we recently expanded our footprint from insourcing dialysis in the acute setting to standing up a new dialysis service line at one of their skilled nursing facilities. We're early in this rollout but excited by the acute to subacute expansion potential within this and other large health systems that are using Tablo inpatient and beginning to evaluate it for use at the subacute facilities in their network. Reflecting on the quarter, we were very pleased to observe continued progress with our sales transformation across both process and people. Our pipeline grew substantially again in the quarter, reflecting contributions from our enhanced capital sales team and sales process and growing market recognition of Tablo's right to win. Our team is becoming increasingly proficient at educating stakeholders at all levels of an enterprise about the benefits Tablo can deliver not only financially, but also clinically and operationally, and our forecast accuracy has improved. During the quarter, we added new customers adopting Tablo for the first time and also saw existing customers buy more Tablo to expand their use to new locations. As we look ahead to the rest of the year in the acute end market, we remain confident in our pipeline and see evidence of continued strong market demand powered by increased Tablo brand awareness and the consistency of the results our technology and our team produces. In-sourcing with Tablo saves hospitals money. It has a relatively low acquisition cost and a short payback period. Clinically, a growing number of acute care customers are sharing reductions in hospital-acquired infections, lower length of ICU stays, and higher nurse satisfaction rates post in-sourcing with Tablo. While federal funding cuts have made the health care environment more dynamic since we provided guidance in February, customers are conveying to us that the financial and clinical case for in-sourcing with Tablo remains compelling as they prioritize their capital expenditures for 2025. This customer feedback fuels our confidence in Outset's plans for the rest of the year, a plan that remains unchanged and on track. Turning now to the home end market. We expanded Tablo's use among mid-sized dialysis providers and successfully contracted with one of the last remaining MDOs that hadn't yet adopted Tablo. Patient demand continues to play a key role in Tablo's home adoption. And to that end, we again drove industry-leading retention rates above 90% at 90 days. As we've said, change in the home setting will take a bit longer than the ramp we're seeing in the acute setting, but 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 Tablo at home or in a post-acute setting. From an operational perspective, the actions we have already taken to remove approximately $80 million of annualized spend delivered leverage in the quarter with our lowest non-GAAP operating loss since our IPO. I want to reiterate that we are aggressively executing against a clear path to profitability that starts with top line growth, includes gross margin expansion, is reinforced through our disciplined spend management and shows up in the significant reduction in cash use we project for 2025 and the leverage we see to the bottom line. Also related to our operational progress, we were pleased with the vote results from our special meeting of stockholders held on March 5, which enabled us to complete the recapitalization of the company that we announced in January. On April 11, we filed our proxy statement for the Annual Meeting of Stockholders scheduled for June 2. In this proxy, we are asking shareholders to approve a one-time increase in our stock pool for employee grants as well as a share pool increase under our employee stock purchase plan. Both of these important programs are necessary to help us ensure we keep our team's interest tightly aligned with investors' interest and to continue to attract and retain top talent at Outset as we reignite growth and build for the long term. One final operational note, we spoke on last quarter's call about a special tariff exemption Outset received in January for medical devices that serve a chronically disabled population. With some of the new tariffs now in place, we can confirm that Tablo, TabloCart and Tablo consumables remain exempt under this special protocol. Additionally, we continue to have a tariff exemption under the USMCA and further contingencies such that we continue to expect no impact from proposed or implemented tariffs at this time. We remain very bullish on the competitive advantages Tablo and its established ecosystem offer customers in the acute and home settings. We've demonstrated time and again that once Tablo is deployed, it's used consistently, and this consistent use drives strong, growing and predictable recurring revenue. We have demonstrated that Tablo delivers compelling clinical, financial and operational benefits to providers in the acute, subacute and home settings. Moreover, the competitive moat around Tablo continues to deepen. Our growing installed base is extending our reach across the country. Our proprietary data analytics ecosystem powered by Tablo's integration with Epic and Cerner and the 3 million data points sent to the cloud after every treatment, every Tablo, every day uniquely enables us to deliver value-added clinical and operational insights and efficiencies to our customers. Our proprietary know-how around insourcing allows us to partner with hospitals as a solution not just a product. Our exceptional at-scale field service team drives a customer satisfaction score consistently above 95% and our portfolio of referenceable customers continues to grow helping to drive market adoption. With the Tablo installed base performing more than one million treatments annually and growing, we estimate that there is still $0.5 billion in recurring revenue yet to be realized from the current installed base alone. I'll close by reiterating our optimism for the year ahead. We entered the year with extraordinary clarity on the vital few priorities for Outset. Our team is determined to deliver on three priorities in 2025. Number one, grow console revenue. Utilization is strong on the consoles we place creating an even more valuable recurring revenue stream as we expand the installed base and gain scale in what remain two of the largest market opportunities in health care. Second, increased gross margin. This is in a bright spot for Outset and we've increased gross margin by nearly 30 percentage points since our first year following the IPO. With product margin nearing 50%, service gross margin increasing with scale, and continued efficiencies in our plan we see a clear path to 50% and beyond. Third, driving to profitability. Our non-GAAP operating loss this quarter was the lowest it's ever been as a public company and our plan calls for it to significantly narrow in 2025 putting us in a strong position to reach cash flow breakeven and profitability within a near-term planning horizon. We fully understand the importance of consistent execution during this pivotal year and intend to remain heads down and focused on doing the work. Accordingly, we don't want to get ahead of ourselves with just one quarter down in the year and intend to maintain our conservative approach to guidance. That said, we are confident about our outlook and believe we are set up very well for the remaining three quarters of the year. Providers including the largest health systems in the country are seeing the enormous clinical financial and operational advantages that insourcing with Tablo can deliver. The market opportunity remains wide open for us and we continue to gain ground, adding new healthcare facilities to our growing customer base and driving treatment expansion. I want to close by thanking our entire team for their commitment to the patients we serve in addition to their commitment to driving growth, managing spend and reaching our shared goal of profitability. And with that I will turn it over to Nabeel.

Thanks, Leslie. Hello everyone. Revenue for the first quarter of $29.8 million grew 6% over the first quarter of 2024 due to higher recurring revenue across a larger installed base. Product revenue of $21.3 million, consisting of console revenue of $7.1 million and consumable revenue of $14.2 million, grew 4% from $20.4 million in the prior year. Importantly, console revenue grew 23% sequentially. Service and other revenue of $8.5 million grew 9% from $7.7 million in the prior year period. Recurring revenue from the sale of Tablo treatments and service was $22.7 million, an increase of 20% over the first quarter of 2024. Now moving to gross margin and operating expenses, which as a reminder reflects our non-GAAP results. Please refer to the reconciliation of GAAP to non-GAAP measures which can be found in today's earnings release. Gross margin of 37.6% for the first quarter continued its nearly five-year upward progression increasing 650 basis points from 31.1% in the prior year period. This growth was underpinned by progress in both product and service and other gross margin. Product gross margin increased 860 basis points year-over-year to 48.4%. Service and other gross margin was 10.3%, increasing 230 basis points from 8% in the prior year period. As I mentioned last quarter when we provided guidance for the year, 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 230 basis points in the quarter, we would have seen non-GAAP gross margin right around 40% and product gross margin above 50% for the first time. Operating expenses of $24.6 million declined by 30% from the prior year period, driven by our ongoing focus on expense management. Non-GAAP operating loss was $13.4 million, 49% below our operating loss in the prior year period and at the lowest level since our IPO. Net loss was $22.8 million or $3.24 per share, 22% lower than the first quarter of 2024. These measures reflect the positive results of our drive to profitability. Moving to our balance sheet. We ended the quarter with $192.3 million in cash, cash equivalents, short-term investments and restricted cash. Based on our current projections, we continue to believe this level of cash gets us through cash flow breakeven. Turning to our guidance for 2025, which we initially provided on the February call. With one positive quarter down, we continue to expect revenue for the full year to be between $115 million to $125 million. Our intent here is to remain conservative as we work through this year of execution. As a reminder, the midpoint of this range implies the installed base and recurring revenue both grow by roughly 10%. Moving down the income statement. We continue to expect gross margin for the full year in the high 30% range. As we discussed on last quarter's call, the rate 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 2025. We plan to continue to quantify this impact to non-GAAP gross margin each quarter to 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, fundamental gross margin expansion is driven by recurring revenue from a larger installed base, service leverage and our console cost-down programs. We continue to anticipate OpEx in 2025 of roughly $90 million. The combination of expected revenue growth, continued gross margin expansion and ongoing OpEx and working capital discipline means that we expect to use under $50 million in cash in 2025, which is less than half the $103 million we used in 2024. To close, we demonstrated in the first quarter how the strong elements of our strategy work together to deliver lasting value for providers, patients, and shareholders. The differentiated value proposition of Tablo, our recurring revenue business model, expanding gross margin and disciplined expense management, all contributed to a strong quarter. With that, I think we're ready for Q&A.

Our first question will come from Marie Thibault from BTIG. Your line is open.

Hi, good afternoon. Thanks for taking the questions and congrats to the team on a very nice quarter here. Would love to get a little more detail on the turnaround in the console selling process. I think in the past, Leslie, you've talked about the new sales force reaching tenure here in the first half of this year. So I'd love to understand if you think all of the potential disruption to the commercial team is sort of behind us at this point. And then any more details on kind of the increase in the console installed base? Was the console revenue beat largely volume? Or was pricing ASPs a significant help too?

Hi Marie, thanks for the question and thanks for the acknowledgment. On the sales transformation, I mean first and foremost I'll say that the team here has made a remarkable amount of progress in a relatively short period of time. And second, I'll say that it's really paying off. Our commercial organization looks different, feels different, operates very differently today as a result. And yes, you stated it correctly, the tenure within our team continues to grow. We cited that on our last earnings call as a tailwind for 2025. And that's helped. That has helped. I think as a result, we saw consistent performance in Q1 across the country and also pretty consistent and significant contributions to pipeline growth across the country as well, which was really great to see. In addition to the sales team changes and improvements, I'd also cite a number of different new proprietary sales tools that we're using. Of course, our new sales process, kind of the depth and breadth and inspection-centric approach we're taking to forecast accuracy as I just said did contribute to improvements in forecast accuracy and also a lot more visibility into how deals are progressing through the sales process. I think the last part of your question was about are we on track? Or when do we think this will be kind of firmly behind us? In the past, we've communicated our expectation or my expectation at least that this transformation will be fully complete in the first half of 2025. And based on what we're seeing that projection is very much intact. I mean, obviously, it'll be really important to continue to see additional quarters of similarly positive execution. But from where we sit today, all indicators are green. And maybe I'll just make one other comment and turn it over to Nabeel on the console question. But in terms of the indicators that we continue to watch, first and foremost is customer demand. And customer demand remains strong. I think a couple of reasons. One, our existing customers really are seeing the benefits and the payback of insourcing with Tablo and actually an increasing number are sharing that with others. We are seeing some momentum drivers as a greater and greater number of facilities adopt Tablo. It's many, many hundreds of healthcare facilities across the country. And those results in a cumulative fashion are really starting to bubble up. Two, I mentioned increased Tablo brand awareness. So we're finding that when we enter into new conversations with potential new customers, they actually already know what Tablo is. They know who Outset is. And that's actually a little different for us in a positive way compared to past years. We're also continuing to closely monitor not only the pipeline of opportunities, of course, the overall size and the quality but also the mix. And we are seeing a really cool mix of new, I would call it marquee brand-named health systems, as well as existing customers that are looking to further expand based on the results they have seen with Tablo. And lastly, we are continuing to monitor where are these deals in the sales process and are they progressing? As we look at our top forecasted deals for 2025, the majority of them are already in the last couple of stages of our sales process, which again gives us a lot of confidence as we look forward.

Yeah. Marie, it's Nabeel. With respect to console, the sequential improvement came largely from volume. Now in terms of ASP, we're still pleased with ASP in the quarter. Our team does a great job, has done a great job on pricing discipline. We haven't historically discounted a lot of it in the quarter and that continues to be the case in the first quarter. And obviously mix is important for us. And ASP on acute, as you know, is higher because those frequently ship with PRO+ and Cart. But again really pleased with ASP and thanks to the team on both ASP and strong volumes.

All right. Very encouraging all of that. Thank you for the detail. I guess, I'd like to understand a little bit more about the selling process as you move into the subacute space. What are some of the, I guess, proof points or evidence that they look for? Is it very similar to selling into acute? How would you characterize both the process what they look for and maybe some of the timelines that are required for decision-making? Thanks for taking the question.

Yeah, of course, that's a great question. The headline is very, very similar to acute and that has allowed us to drive a lot of sales force productivity. It's also very similar on the back end. It's one sales team. It's one clinical support team. It's one field service team. And so I think that's really important to note. But to get a little bit more specific for you in the ways in which it is similar: the sales process, first and foremost, most of these post-acute/subacute facilities have traditionally been outsourcing their dialysis to a third-party provider. So that's similar in the acute, which leads to the second similarity: the value proposition is the same. They are looking for number one cost reduction; and number two improved clinical care. Those subacute facilities in the past also have struggled and been frustrated by the heavy cost of outsourcing it and experiences where their patients oftentimes had to wait many hours for a third-party provider nurse to show up on site and be able to deliver the treatment that they want their patients to be able to receive immediately when that care is needed. And that's exactly what insourcing and sort of taking control of their own destiny through Tablo enables them to accomplish. In terms of the sales process cycle time, I would say also pretty similar to acute. Of course, it depends on the size of the deployment. We have been very successful so far with LTACs and rehabs, who have gone for enterprise-level standardization of Tablo and insourcing across their networks. And so that's also been a real bright spot for us and has tracked similarly to the way that these larger acute regional and national health systems are thinking about standardizing with Tablo insourcing across their enterprise in the same fashion.

Thank you so much.

Thank you. And one moment for our next question. Our next question will come from the line of Josh Jennings from TD Cowen. Your line is open.

Hi. Good afternoon. It's a nice start to the year. I was wondering about the risk of macro headwinds that hospitals might encounter in the upcoming quarters. When hospitals were facing pressure after the pandemic, the clinical and economic advantages of Tablo in the acute setting became particularly significant. Could you remind us of the success you experienced then and explain why Tablo is the right device at the right time, even in a recessionary environment? Also, does your competition in outsourced third-party services for in-service dialysis lines face rising costs that could lead to much higher expenses if hospitals continue to outsource? Sorry for the lengthy question, but I wanted to touch on that.

I believe you articulated that much better than I could, so I’ll just echo your sentiments. Let me break that down a bit. To date, we haven't noticed any changes in the hospital capital spending environment. Nothing has impacted us so far. As we look at roughly one month into Q2 and reflecting back on Q1, we're closely monitoring any developments that might influence that, whether regarding Medicaid or tariff effects on pricing, but nothing has impacted our results thus far or our outlook going forward. One reason for this is the economic value proposition that Tablo offers. We not only help hospitals save money, but we do so in a very concrete manner. This is not about hypothetical savings in nursing hours down the line; it's about real, immediate dollar savings with a quick payback. Most of our clients report a return on their capital investment within 12 months, and some have exceeded their internal ROI expectations within three to four months. While cost reduction remains a significant interest for health systems, especially in uncertain times, projects that are tangible and immediate naturally gain priority. We experienced this during COVID, and we have a track record of it. I won’t speculate on how competitor costs might increase, but logically, if their supply or labor costs rise due to tariffs, it could lead to higher prices for hospitals that are outsourcing. In contrast, we maintain control over our entire supply chain and are currently shielded from any tariff impacts. This enables us to assure our customers that we can sustain our pricing. We manage both the patient experience and the customer experience, which allows us to deliver financial, clinical, and operational benefits effectively. Therefore, I believe we are well-positioned for the remainder of the year, regardless of the market conditions.

Excellent. Just a follow-up regarding the sales transformation, which is nearly complete, and the strategy is starting to show positive results. I wanted to understand what you're observing in terms of attrition, which seems to be very low. Additionally, can you share your plans for expanding the commercial foundation and infrastructure? Are you considering adding more resources, and do you believe the sales force and its structure are where they need to be to meet your guidance this year and support growth in 2026? Thank you.

Yes, our attrition in the sales force is very low, reaching a record low as we progressed through Q1. We're proud of our team and our culture, and our voluntary retention rate reflects that. Regarding the size of our sales team, it is currently well-aligned with our needs. Our team consists of two components: the capital sales team, which includes regional capital sales and national accounts, and the clinical sales team. Both teams are appropriately sized to fulfill our commitments to investors for 2025 and beyond. We are also witnessing increases in sales rep productivity across the board, with significant gains in both clinical and capital sales revenue per person, and there is still room for growth in that area. We plan to continue investing in our field service team, which consistently receives customer satisfaction scores above 95%. We track this metric rigorously every quarter with a large sample size. We take great pride in the experiences we deliver to patients and providers, and our field service team plays a critical role in that. These are the team members our customers interact with daily, whom they trust. Therefore, we will make incremental investments as needed to support our growing volume and installed base through 2025 and into 2026.

Okay. Thanks, again.

Thanks, Josh.

Our next question will come from Shagun Singh from RBC. Your line is open.

Thank you so much and congratulations on the beat. I was just wondering given the beat, why you didn't decide to adjust the guidance here? Also it has a pretty wide range. So where are you tracking the low end? Or is there greater confidence at the midpoint or the higher end? And then anything you can share on the cadence? Do you still expect to grow sequentially as you move through the year?

Thank you for the question and for acknowledging our strong start to the year. We're very pleased with it. Looking back, we focused on three key objectives in the first quarter, and the team successfully delivered on all of them. These objectives were growing console revenue, expanding gross margin, and keeping Outset on track for profitability. As we look to the rest of the year, we plan to maintain our focus on these same three priorities, which we committed to our shareholders. I am very confident in our ability to achieve this, driven by the continued growth in our pipeline that we observed in Q1, and the strong demand from both new and existing customers. Additionally, we've seen steady performance from our capital sales team across all regions, reflecting the progress from our sales transformation. That said, I believe it's important to keep perspective. One strong quarter is just a part of the overall picture, and we have three more quarters ahead of us. We want to ensure we don't get ahead of ourselves. While our outlook remains optimistic and our excitement is high, we will take a conservative approach to our guidance. Nabeel, please feel free to add any specifics.

Yes, Shagun. So look, we were really pleased with Q1. And as Leslie said, we are confident in our outlook. But we're one quarter down with three quarters of execution to go. We're simply being conservative here. And from a modeling perspective, we'd recommend you remain conservative as well. Now from a cadence for the rest of the year, we do continue to expect that revenue will build through the year. And again, look, we had planned to be conservative here, I'll say that again, and we will remain so. And we'd recommend again, that you're also conservative as you build your models.

Absolutely. I'll start off, Nabeel can add to the installed base growth. Shagun, to keep it brief, yes, I believe it has helped us. Our performance in Q1 was primarily driven by the efforts of our team, including the sales team, sales process, and new tools, and that remains the same. It has been beneficial to eliminate some customer questions as well. It was great to move past that and also to resolve some regulatory challenges. As mentioned in February, I felt that our February call had a theme of being clear for takeoff, and I think the theme for Q2 is that we are making progress.

Shagun, with respect to console placements, we disclosed that annually. What I can tell you today is that console revenue went up 23% from Q4. We're pleased with the number of consoles we shipped. And again, on treatments, we had another strong quarter here.

Thank you. And I'm not showing any further questions in the queue. I would now like to turn the call back over to Leslie Trigg for any closing remarks.

Great. Thanks to everyone for joining today. I'd like to close again by thanking our entire team for the meaningful difference they're making every day in the lives of dialysis patients. Have a great evening, everyone. Thanks, again.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.