Good day, and thank you for standing by. Welcome to the Outset Medical Q3 2025 Earnings Conference Call. 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, sir.

Good afternoon, everyone, and welcome to our third quarter 2025 earnings call. Here with me today, as always, are Leslie Trigg, Chair and Chief Executive Officer; and Renee Gaeta, 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. This call is being recorded and will be archived on the Investors section of our website. It is our intent that all forward-looking statements made during today's call be protected under the Private Securities Litigation Reform Act of 1995. These statements relate to expectations or predictions of future events are based on our current estimates and various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of Outset's public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. Before we get into the details of the quarter and our revised revenue guidance, I'd like to begin with a few key takeaways. First, while we've made significant progress transforming our sales process and strengthening our team, our third quarter results show that there's still work ahead. Several large opportunities that remain in the final stages of our sales process were forecasted for the third and fourth quarters, and we now expect them to close over the fourth quarter and into 2026. This is a shift in timing. We continue to make good progress on this particular opportunity, which we expect to realize via multiple orders spanning the remainder of the fourth quarter and into next year. Second, hospital demand continues to grow as a result of the clinical, operational and financial benefits that can be achieved by in-sourcing dialysis with Outset's proven technology, expert know-how and exceptional service. We continue to see clear evidence that acute customer demand for in-sourcing with Tablo is growing, and we expect this will support growth for many years to come. Tablo console sales increased 8% in the third quarter. Our pipeline grew meaningfully over last year, and the average size of our sales opportunities increased more than 20%. The markets we serve are large, and we are changing practice within them. Third, our ability to expand gross margin to our next milestone of 50% comes into clear focus with each subsequent quarter of progress, reaching nearly 40% non-GAAP gross margin in the third quarter and remaining disciplined in expense management provides fuel on our path to profitability. Turning to commercial execution. Our third quarter results fell short of our expectations. Last week, I accepted the resignation of our Head of Sales, who has made the decision to retire. We have a strong sales leadership team in place that will now report to me directly as we conduct a search process, which is already underway. This leadership change may result in some internal disruption in the fourth quarter, which is a factor we felt was prudent to take into account as we considered our approach to guidance for the remainder of the year. What I can assure you is that our team has an unwavering commitment to our customers and the patients they serve, and I expect we will demonstrate that commitment as we move through the fourth quarter and into next year. Taking a closer look at the third quarter, revenue was $29.4 million, which represents 3% growth over the third quarter of last year. Treatment utilization was strong, and we remain disciplined in our pricing across consoles and consumables. We believe ASP strength indicates that customers see Tablo appropriately priced for the value delivered and consistent utilization reinforces that once a unit is installed, it's used and provides a long tail of recurring revenue. We also were pleased with our progress executing against a clear path to cash flow breakeven and then profitability. This path begins with top line growth and gross margin expansion. It includes disciplined spend management, and it shows up in significant reduction in cash use we project for 2025 and in the leverage we see to the bottom line. Additionally, our base of clinical, financial and operational evidence supporting the advantages of in-sourcing continues to grow. Last week, there were 3 new data sets presented at the Annual Kidney Week Conference. Among the findings, we presented data from more than 1 million Tablo treatments across approximately 750 facilities that show the clinical effectiveness of in-sourced dialysis in achieving rigorous treatment goals, including up to 24-hour treatments that typically involve the most critically ill patients. One of our customers, AdventHealth, also presented data from the conversion of their Ocala, Florida site to an in-sourced dialysis service line with Tablo. Their results over 5 years showed a 94% reduction in serious cardiac or respiratory events, a sustained reduction in central line bloodstream infections, a very high nurse retention rate with greater than 95% dialysis staff satisfaction and a strong return on investment in the first 2 years of operations. These results support the sentiment we hear from many nurse leaders who believe that in-sourcing with Tablo should be the standard of care at any hospital that provides inpatient dialysis. With that, I'll turn it over to Renee for more detail on the quarter before I provide closing comments.

Thank you, Leslie, and good afternoon, everyone. Revenue for the third quarter of $29.4 million consisted of $20.6 million in product revenue, which was slightly ahead of $20.3 million in the prior year period. Product revenue included console sales of $8.3 million and consumable sales of $12.2 million. Service and other revenue of $8.9 million grew 6% from $8.4 million in the prior year period. Recurring revenue from the sale of Tablo consumables and services was $21.1 million, slightly ahead of the third quarter of 2024. Third quarter recurring revenue was dampened by ordering patterns for treatments across our large-volume acute care customers that don't always perfectly mirror underlying utilization. For example, during the quarter, data from connected Tablo consoles showed that several of our large acute care customers performed twice as many treatments as they ordered. Thus far, in the fourth quarter, we have seen treatment orders accelerate to better match actual utilization. We expect treatment revenue to normalize next year as we lap the comparison to an unusually strong fourth quarter in 2024, and we see orders from our larger acute care customers catch up with our usage data. We also believe there are steps we can take to help the ordering patterns of our customers more closely align with actual utilization to assist us with better visibility and forecasting. We will be working to make these improvements during 2026. Next, I will walk through our gross margin and operating expenses for the quarter. Please refer to the table in today's earnings release for a reconciliation of GAAP to non-GAAP measures. Non-GAAP gross margin expanded another 350 basis points from last year, reaching 39.9% for the quarter, even with a 130 basis point headwind from the under-absorption of manufacturing overhead. Excluding the manufacturing headwind, we would have seen non-GAAP gross margin above 41% for the first time. Product gross margin increased 250 basis points year-over-year to 45.7% from 43.2% in the third quarter of 2024. Service and other gross margin was 24.8%, more than doubling from the 12.5% we reported in the third quarter of 2024. This progress keeps us right on our path to the next milestone of 50%. We are making progress against our plan to optimize inventory levels and gradually increase production, which further mitigates the gross margin impact of the manufacturing under absorption we have discussed all year. For the full year, I continue to expect a headwind of approximately 150 basis points, which will have a diminishing effect in 2026. Moving to operating expenses. We continue to see the positive impact of actions taken primarily during the second half of 2024 to remove $80 million of annualized spend. For the quarter, non-GAAP operating expenses declined 17% to $22.1 million compared to $26.5 million in the third quarter of 2024. Non-GAAP operating loss was $10.4 million, over 35% below the operating loss of $16.1 million in the prior year period. Non-GAAP net loss was $12.4 million, which was 39% lower than $20.2 million in the third quarter of 2024. These measures reflect the positive results of our drive to profitability. Moving to our balance sheet. We ended the quarter with $182 million in cash, cash equivalents, short-term investments and restricted cash. We used approximately $6 million in cash during the quarter, driven by expanding gross margin, lower operating expenses and the optimization of inventory levels. Turning to our guidance for 2025. Considering the factors Leslie and I have covered, we revised our 2025 revenue guidance to a range of $115 million to $120 million from our prior guidance of $122 million to $126 million. We continue to expect gross margin for the full year to be in the high 30% range. With regards to operating expenses, we remain on track in the low $90 million range for 2025. The combination of revenue growth, gross margin expansion and expense discipline means that we continue to expect to use less than $50 million of cash in 2025. As a reminder, we used more than $100 million in 2024. So we are trending towards more than a 50% reduction in operating cash use. We continue to believe our cash balances are sufficient through cash flow breakeven and beyond. With that, I'll turn the call back over to Leslie for closing comments.

Thanks, Renee. I want to close by saying that we operate in two large end markets where we remain the clear technology leader. We are now approaching 1,000 acute sites using Tablo on a run rate of 1 million treatments per year, and we expect to close the year having performed more than 3 million cumulative treatments on Tablo systems. We are gaining scale with significant growth runway ahead as our installed base matures. With hundreds of customer master sales and service agreements already in place, our expansion opportunity within our current customer base alone is significant. And on top of that, we continue to convert new customers in this multibillion-dollar acute care market. Gross margin has reached a new high. Our operating expenses have been rightsized, and we are well-capitalized with cash that puts us in a strong position to deliver on our long-term mission. And importantly, our technology, in-sourcing expertise and customer experience moat is getting wider and deeper. All of this progress sets a powerful foundation for value creation over the long term. Customer demand for what only Outset can offer continues to grow. Providers, including some of the largest health systems in the country, are realizing the enormous clinical, financial and operational advantages that in-sourcing with Tablo can deliver. The market opportunity remains wide open for us as we continue to improve our execution, which I believe will enable us to make significant progress in 2026 and beyond. And with that, I think we are ready for Q&A. Operator, please open the lines.

Our first question is from Rick Wise with Stifel.

There are many questions. I believe you make a strong argument regarding the factors influencing the quarterly performance, the change in guidance, and the positive outlook. Let's approach this from a few perspectives. Tim, regarding the guidance of $6 million or $7 million at each end of the range, is that based on one order or three orders? Is that figure reflective of everything, or is there some additional insurance included? This situation must be incredibly frustrating. How cautious are you being in this regard, especially since you mentioned having one headquarters approval and just obtaining signatures from the other 12 hospitals? Could you elaborate on that for us to start?

So Rick, this is Renee. I'll begin with the numbers commentary, and then I'll let Leslie share our overall perspective. The shortfall is primarily due to a significant console opportunity that has moved from the third quarter to the fourth quarter. When evaluating our guidance for the rest of the year, we are considering all the deals expected to close in the second half of the year that didn’t finalize in Q3 but are anticipated to close in Q4. There are a few larger enterprise deals where we aim to change the standard of care, and we are realistically assessing their status. Additionally, with the departure of our Head of Sales, we recognize that this could create some disruption, and we are taking that into account when forecasting our guidance for the year.

Got you. No, that's clear. I don't know whether you wanted to say something, Leslie, or shall I go ahead?

Yes, please go ahead, Rick, that was well said by Renee.

Yes, very clear. And I'm going to ask a couple of questions, if I could. But console revenues were better than we were thinking this quarter. Again, I'm not sure how to balance the third quarter performance with the order timing commentary. I mean that was encouraging as was the service. Can you talk more about what you're seeing and just help us better understand the individual moving numbers and what we're looking at and how that fits into this larger narrative you're sharing today.

We experienced an increase in console revenue compared to the third quarter of last year, which was very encouraging. However, we are frustrated with our execution regarding the timing of deal closures, and we recognize that we need to improve in this area. It's important to highlight that the size of individual deals in our pipeline has increased significantly, with an average deal size up by about 20%. While this indicates strong demand from major health systems, it also presents challenges in accurately predicting when these deals will close. Over the past year, we've made foundational progress by implementing a new sales process, new tools, and hiring for a different sales profile, all of which have contributed to transforming the organization. Nonetheless, our work is not finished. We need to refine and enhance our ability to control deal timing and better predict closing times, which is our next focus.

Got you. In looking for a new sales leader, Leslie, what kind of individual are you seeking? What kind of experience do you need them to have? Also, how quickly do you think you can make this hire? What are the implications of this sales leader transition for '26? Should we be more concerned about the outlook for '26, its magnitude, or how the year might unfold due to this issue?

Of course. Sure. I'm happy to address all of that. Maybe I'll take it from the top. In terms of the criteria for our search, and I'll emphasize that the search is already underway, and I'll address your question there in a second, Rick, around timing. But the search is underway. I don't think any of the criteria will surprise you, but I'll take you through it. First and foremost is a background in capital equipment. Number two, a background and strong track record in enterprise sales, total conversion of health systems, total standardization of health systems, the ability to convert many hospitals inside a health system to standardization around one technology and one care delivery model. And someone, I would say, maybe three who has the capacity to act very strategically, but at the same time, is extremely immersed in the details, sort of obsessed with the details and involved with the customer and with our sales team every step of the way. And last, I'll say somebody who is an exceptional coach, someone who is an exceptional leader developer and will ensure that we continue to preserve what's great about Outset and our sales team right now, which is who they are as individuals and in the collective from a culture standpoint. So that's what we're going to have our eye on there, Rick, as we move forward in our search. I will say in terms of impact, let me start by several of our sales VPs were hired prior to Laura joining. So I think it's important to note that we have really good tenure and importantly, experience, both in acute and home in these top roles. So I want to emphasize that. At the same time, we have many other very valuable team members who are serving in important roles and making meaningful contributions that remain very committed to Outset and our mission and the opportunity here. I am very much looking forward to, as I know Renee is as well, is getting even more directly engaged with the team with the sales team now reporting to me and sales operations reporting to Renee and getting even deeper engagement with our customers. That said, as Renee noted, whenever you make a change in sales leadership, you do see the potential for some distraction. What does that all mean at a practical level? It can mean fewer selling hours as everybody sort of digests the change and gets ready for new leadership. So we did feel it was prudent to account for this in our revised guidance. But I am very confident that hiring a new sales leader will take us to the next level and help us get to the state of predictability and consistency around deal close timing that we're looking for.

Leslie, I just wanted to kind of touch on the visibility and the growth outlook for your business here. In '25, you're delivering about 3% growth off of pretty easy comps last year. You're exiting the year with a 9% year-over-year decline. So firstly, what does that imply for '26? I think consensus is at 10.5% year-over-year growth. And then also, how do you think about the long-term growth of this business? Is this mid-single digit, high single-digit, low double-digit growth business? How should we think about it? It's definitely a large market opportunity, but how do you give investors conviction in the execution?

Sure. I want to emphasize that we haven't provided guidance for any period beyond 2025, but we look forward to doing so in the future. It's important to note that demand is still growing, even with the challenges we faced this quarter related to deal timing. The deals in our pipeline are advancing, and their sizes are increasing. Our competitive edge, along with our insourcing ecosystem, is strengthening. Console utilization remains high and consistent, which we believe is crucial as it directly reflects customer experience. We're proud of this aspect, and it supports our recurring revenue model. We acknowledge that we have work to do on the final piece of our commercial transformation, but we are optimistic that we can expedite this with new leadership. While we are not satisfied with this quarter's results and recognize it was a timing issue rather than a fundamental problem, we are committed to improving our capital sales execution to better navigate the dynamics of these larger deals. However, our market opportunity and technological advantages remain intact, and the ongoing demand from larger health systems gives us confidence in our ability to grow revenue at differentiated rates in the future.

Yes, sure. I think as you think about just reflecting on the update that we've provided with our 2025 guidance and the trim on that number, it's a good starting point for how we should be thinking about 2026. Of course, highlighting all of the factors that we talked about today. So a change in sales leadership is something that you should probably also factor in, in the near term. And I would just sort of reiterate around we aspire to be a higher growth company that has a higher growth than 5% or 10%, and we believe that we've got the marketplace to do that. We just need to have some execution here on deal timing. Yes, it really depends on the specific revenue stream. For the console segment, it's clear that closing deals and transitioning to shipment are crucial, and we need to continue refining that process. This is likely our biggest challenge ahead. On the treatment side, we gather a lot of data from our connected Tablo devices and monitor it frequently, noticing that utilization remains strong. The issue has been the timing of orders from a few large customers that did not occur in Q3. However, we are seeing that Q4 orders are starting to align more closely with utilization. We definitely need to refine our approach in that area, getting closer to our customers to gain better visibility. We believe that by understanding their ordering patterns and supply chain management, we can improve our forecasting for the treatment segment.

I'll just maybe chime in one other thought on the console side because you had asked about, hey, is there sort of more new kind of more foundational changes that are needed in this commercial transformation journey. And I would say no. I mean, we have work to do to further cement the impact of all the changes. But look, I mean, a lot of really great foundational work has taken place and taken root from sales process to enterprise selling, the sales rep profile, the sales rep structure. I mean, we would not have been able to get this far over the last year without all of it. And now we need to kind of fine-tune focus on predictability and the ability to better forecast the timing of deal close.

Just wanted to follow up to understand the consumables sales order timing issue a little bit more closely. Is that just an issue of the hospitals maybe overordered, weren't as good on their own forecasting? I don't recall really hearing of this sort of difference between the treatment patterns and the order pattern happening in the recent past. So I just want to understand that, what's being done to prevent it? And then sort of the timing of that coming back, right? Should we think of Q4 being order and revenue very similar to what we're used to seeing on utilization? Is there some pull forward or making up for some of the missed revenue in Q3? Does that extend into 2026? Just a little more clarity on that.

Sure, Marie, I'm happy to provide additional insights. This situation involves a specific group of high-volume customers we observed in Q3. We anticipated an additional order during the third month of that quarter, but it didn't materialize. Each customer has unique supply chain policies and financial management practices, so we're committed to gathering more information and collaborating closely with them to enhance our forecasting abilities. We need to focus on this defined set of customers and are dedicated to addressing this in 2026. For the latter half of this year, we expect performance to align more closely with what we experienced in Q1 and Q2. Up until now in this quarter, we haven't seen any significant orders affecting what occurred in Q3. Instead, we've noted consistent ordering throughout Q4 that reflects how customers view their fiscal management and policies.

Okay. Understood. And a follow-up here on the console side and the Head of Sales resignation. When exactly in the quarter did that happen? And is there a way to sort of size up some of the guidance cut? How much of that is coming from sort of the timing issues around console orders closing versus some uncertainty about sales force disruption? Is there a way to kind of parse out what you're assuming in that $6 million guidance cut?

Of course, yes. Why don't I start by addressing your first question? The change in our sales leader occurred after the close of the quarter recently here. It was actually last week. So it was very recent. And I think look, I'm only reflecting back historically as I've seen these sorts of changes and evolutions in the past that there can be some time in the follow-on quarter where members of the commercial team naturally need time to digest and absorb and that can, not always, but can lead to some distraction and less time available for selling forward. And so we were just trying to be cognizant of that and consider it as a potential factor for the remainder of this year. I don't know if you want to pick up on anything further on the guidance.

I would say, Marie, specific to the console activity for the third quarter, you might not be surprised in that console activity because it's a capital sale is generally in the third month of the quarter, where we start to see visibility in what orders are going to be coming in. So late in September was where that activity fell through, similarly on the consumables treatment ordering as well, sort of all late in the third month of the quarter. And as we then look towards what should we update guidance for, for the year, we took that into consideration as well as, as I mentioned, our full set of deal review for what was anticipated now for Q4, where are those current conversations, getting really close to the sales organization as to the timing of that event. And that plus the resignation of our sales leader, we factored all of those in, and that's how we've come up with the guidance range of $115 million to $120 million.

I was hoping to just follow up on the update on the guidance and just make sure that you're not seeing any orders fall out of the pipeline, not seeing any order cancellations. I believe you may have commented on that, but just to circle back on that if you haven't. And then also just on the sales force, have you seen much transition through the quarter? Or is it really just the head of the sales organization that's departed? Is there any other transitions that you guys are considering in the guidance? Sorry that's 2 questions in one, but I have one more.

You're efficient, Josh. Thank you for asking about the deal flow and progress. To keep it short, none of the deals projected to close in Q3 and Q4 have dropped out. The deal we mentioned has just seen a timing shift from Q3 but is still in the final stages of our sales process. We provided some context to that earlier. As we engage in these enterprise-wide deals involving numerous hospitals, the number of stakeholders and necessary approvals increases significantly. It's a substantial decision for the health system to select one technology and bring it in-house. We're diligently working through these steps, and I believe our sales team is taking the right actions to close these opportunities. None have fallen out of the pipeline, which is encouraging for us. And then in terms of the change in sales leadership, this is our primary change. As I mentioned, we have several of our sales vice presidents who were hired prior to Laura joining. And so we do have really good tenure experience and commitment at that level. We don't have any other significant changes at this time at the VP level. And we know we have a very, very committed team who believes in the change that this is hard work. We are changing a space that hasn't changed in 40 years, and that's never easy to do. But this is a resilient team, and this is a team who has never been more motivated to kind of make a permanent and profound change in this industry, both acute and home for the ultimate benefit of patients. So we have a team that is ready to execute and ultimately to deliver on our long-term mission and achieve the differentiated growth rates we know are capable in such a large market with a technology leader. Yes. Sure. Yes. Thanks for the question. On the home side, we always start by talking about the retention rate, which is foundational to growth. And we have seen, again, this past quarter, very stable and high retention rates in the home population even as that home population continues to grow, which is great to see. We have continued to see growth in the home programs of our largest MDO customers, which, again, we see as a direct reflection of their experience and the experience of their patients. We continue to hear from the MDOs that their patients talk about a materially easier training time, materially easier use, day-to-day use, and this feeling better effect, which we don't talk about quarter-over-quarter on earnings calls. But this feeling better effect has stayed with us really literally from patient 1, talking about feeling physiologically better on Tablo at home and in the acute setting. And so we feel really good actually about the progress across the home and across these MDO customers and into the SNF opportunity, which we continue to look at as a whole future vector of additional growth in the home channel.

Just a quick follow-up on '26. I think you said 2025 is a good proxy for '26 as of now. I just wanted to make sure I heard that correctly. And then also just anything you can share on Q1? Would you expect some of the orders that didn't come in 2025 or Q4 to come in Q1 '26, so we should expect a stronger Q1 versus the balance of the year? And then I know that this year in '25, you started with a pretty broad range of 1% to 10%. Should we expect a wide range in 2026? Just any directional color on guidance philosophy would be helpful.

Sure. I think to clarify on my statement specific to 2025 and the good place to start is I specifically said we reduced 2025 guidance by, let's just calculate it, roughly $7 million. And so that's a good place for you to start when you're thinking about 2026 forward. And I would say, at this point, as we updated, the orders from Q3 and Q4 have now slipped into Q4 and into 2026. At this point, sort of forecasting forward into Q1 and specifically what our guidance range is going to be at that point, I'm just going to reserve the right to talk about that when we've got a full update on 2026 guidance.

Sorry to put you on the spot, but listening to Shagun's question, I'm wondering if it is impossible or highly improbable that the $7 million, or whatever the number is, could fall into the fourth quarter. I mean, does it seem highly likely that it won’t? You see where I’m getting at. Sorry to put you on the spot.

No, that's fine, Rick. As we were thinking about how to guide for the remainder of the year and for '25, our philosophy took into account, again, the fact that we are changing the sales leadership and that some of these deals will close in Q4 and some will close in Q1. And so that new range of $115 million to $120 million does not assume that all of the deals, again, if you think about a $7 million reduction, it does not assume that all those come into Q4. It's not to say that it's impossible or it could never happen. But again, given all the factors at play here for the remainder of the year, we felt it was prudent to take this approach. Okay. Thank you, and thank you again for your patience and bearing with our top technical start there. I do appreciate everybody joining today. And I'd like to close by thanking our customers and our team for the meaningful difference they make every day in the lives of dialysis patients. Thank you all, and have a great evening.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great evening.