Earnings Call Transcript - OM Q3 2023

Jim Mazzola, Head of Investor Relations

Good afternoon, everyone, and welcome to our Third 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 and updated our investor presentation, both of which can be found on the Investor Relations page at 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 will 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 our 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, Chair and Chief Executive Officer

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. A few weeks ago, we provided our preliminary Third Quarter results and shared detailed headwinds that will continue to affect our business through this year and into next. Today, we will review our results for the full quarter, share an update on the actions we have taken to adapt and respond to the current environment, and provide our outlook for 2024 and the longer term. We will also discuss what has not changed. Despite some recent setbacks, all the structural tailwinds remain in place. We are on the front end of growth into two very large end markets anchored by 36 million patients living with chronic kidney disease. Our pipeline continues to expand and our value proposition remains compelling. Tablo's ability to disrupt an $11 billion U.S. market with a better solution in the acute and home environment is firmly intact. To begin, revenues for the third quarter were balanced between our acute and home end markets, with a roughly equal number of consoles shipped to acute and home providers. In the acute end market, our land and expand strategy continues to support a strong pipeline and growing installed base. 30% of placements during the first three quarters of 2023 came from accounts we won during 2022. The other 70% are from expansion sites. Tablo is now used in more than 650 acute and post-acute facilities, including contracts with top national health systems where we have about 20% penetration, and also within the top 50 regional Integrated Delivery Networks, where we are less than 10% penetrated today. Further, we continue to see success with initiatives such as expanded physician education and published cost reduction data, which are all having a positive impact in the acute sector. During 2023, we have reached more than 400 nephrologists and dialysis professionals with our peer-to-peer educational programs. This is in addition to the more than 10,000 nurses already trained on Tablo. Physician and nurse awareness and belief in Tablo continues to be bolstered by published clinical, operational, and economic data. To date, over 70 abstracts and 15 manuscripts on Tablo have been published. Building on this strong foundation, last week's American Society of Nephrology Annual Meeting produced numerous abstracts on Tablo. In the acute setting, these abstracts continue to demonstrate Tablo's differentiated potential to reduce costs and enhance care in both the hospital and at the bedside. One large health system reported achieving more than a 50% reduction in their treatment cost per hour while also reducing length of stay in the ICU. A hospital in Alaska presented data showing that Tablo dramatically reduced the number of patients they had to transfer out of their hospital for care. After adopting Tablo, the hospital only had to transfer one patient out in 12 months, compared to 70 patients transferred out the prior year before using Tablo. Several abstracts related to the use of Tablo in the home, including data from the first 500 patients home on Tablo, which demonstrated a very broad demographic spectrum of adopters, and in a separate abstract showed improvements in physical and mental health scores over 12 months of using Tablo at home, including improvement in sleep, which is among the most frequently cited issues among patients on dialysis. In terms of our home sales in the quarter, orders and shipments were weighted toward mid-sized dialysis organizations and new home market entrants, where we continue to see a strong response to Tablo's economic value proposition, positive patient feedback, faster training time, and higher retention rates. We have made progress this year landing or expanding within several new innovative alternative providers. Evidence of our strategy to broaden access to home hemodialysis, while in the early stages, is working. Overall, for 2023, we expect to place approximately 1,400 new Tablo consoles, led two-thirds in the acute setting and one-third in the home setting. With these new placements, we would exit 2023 with approximately 5,400 units in the installed base, which we project will reach $100 million in recurring annual revenue over time. We thought it was important to provide investors with this annual update on console placements earlier than normal as it is relevant to the financial guidance we will also provide today. In terms of the broader competitive market, our sales team has been working diligently over the past several weeks to address misconceptions created by competitors as a result of the FDA warning letter issued in July. While we expect this competitive response to continue through Q4, our team is better prepared to respond and is doing so accordingly. As noted previously, we believe we have addressed concerns regarding promotion and the Tablo part with pre-filtration. The 510(k) has been submitted, with interactive FDA review underway. We have not factored its clearance into our 2023 outlook. As we look beyond 2023, we would like to take this opportunity to share our perspective on how this business scales over the longer term. Three years post-IPO, we recognized the need to update investors on what we believe the next several years will look like relative to revenue growth, gross margin expansion, and cash flow breakeven. Being in the market now at some level of scale for several years has given us a lot more data and experience from which to project forward with confidence and clarity. While the progress path won't always be linear across all our key goals, we've also heard investors loud and clear on their desire for more metrics, particularly around the installed base and use settings. Therefore, we intend to do that going forward, starting with today's call. Finally, we are acutely aware of shareholders' desire for Outset to reach profitability, and we remain committed and urgent around getting there. Cash consumption is obviously a big part of that equation. To that end, we have already taken prudent steps to reduce spending while continuing investments that drive revenue growth, gross margin expansion, and operating leverage. Nabeel will lay out the specifics in greater detail. With that, I will now turn the call over to him.

Nabeel Ahmed, Chief Financial Officer

Thanks, Leslie. Hello, everyone. I'd like to talk today about three things. First, 2023, including our Q3 performance, guidance for the remainder of the year, and actions we've taken here early in the fourth quarter to reduce our rate of cash consumption. Second, our 2024 guidance, our longer-term view, and our path to cash flow breakeven. And third, our balance sheet and our cash position. With respect now to Q3 and 2023. Our third quarter revenue of $30.4 million is a 9% increase over the third quarter of 2022 and a sequential decline compared to Q2 2023. The sequential decline in revenue was driven by fewer console placements due to the factors that we outlined in October. Consumable revenue was $11 million, up 14% from the prior quarter and 62% versus the prior year. Cartridge utilization continued to perform well and in line with our expectations, highlighting the strength of our recurring revenue model. Based on our cloud data, we see console utilization in the hospital setting of around five treatments per week and home consoles at just about three per week. Service and other revenue of $6.8 million was up 1.8% from the prior quarter and higher by 13.4% compared to the prior year. Excluding service revenue from our HHS agreement that was included in Q3 2022 and did not repeat this Q3, service and other revenue increased by 42.6%, demonstrating the high renewal rates in our recurring service contracts. 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 third quarter gross margin was 25.6%, a sequential improvement of 312 basis points and an improvement of just above 9 percentage points versus the prior year period. Gross margin expanded for the tenth consecutive quarter, with our mix of higher-margin recurring consumable revenue and service and other revenue representing roughly 60% of total revenue as compared to 45% in Q2 of this year. As expected, service and other gross margin increased sequentially to 15.4%, and our expectation remains that it will continue to improve again in the fourth quarter. Operating expenses of $42.3 million in the third quarter were roughly flat sequentially and up 11% versus the prior year period. We reported third-quarter GAAP net loss of $46.2 million, resulting in a net loss of $0.93 per share compared to a net loss of $40.8 million or $0.85 per share for the prior year period. Non-GAAP net loss was $35.3 million or $0.71 per share compared to a non-GAAP net loss of $33.4 million or $0.70 per share for the same period in 2022. We ended the quarter with approximately $197.3 million in cash, cash equivalents, short-term investments, and restricted cash. Moving now to our full-year 2023 outlook. We are reiterating our expectation for revenue to be approximately $130 million, which represents 13% growth over fiscal year 2022 revenue. We continue to expect gross margin to be in the low 20% range and to exit the fourth quarter in the mid-20% range. Further, we continue to expect to consume less cash in 2023 than we did in 2022 and to exit 2023 with approximately $160 million of cash, cash equivalents, short-term investments, and restricted cash on our balance sheet. I want to take a moment now to talk about the cost reductions we implemented in the fourth quarter to better align our operating expenses with our expected rates of revenue growth and with our commitment towards driving towards profitability. We will record a charge of approximately $2.5 million in our statement of operations in the fourth quarter, composed largely of severance and related benefits. These actions combined with other cost-saving initiatives we have put in place mean that our expected OpEx in 2024 will be $20 million to $25 million less than we expected to be in 2023. Now turning to 2024. For the full year 2024, we expect revenue growth in the mid-teens as compared to fiscal year 2023 revenue. This is a conservative expectation based on the following assumptions. One, we place a similar number of consoles in 2024 as we have in 2023. Two, recurring revenues, again, contribute to our growth in the same manner as they have in 2023, and three, that Tablo Card with pre-filtration is approved in the second half of the year. As always, overperformance in any year could be driven by a variety of factors including greater console placements in our large acute and home end markets, higher ASP of our consoles, driven by increased uptake of Tablo Pro software and Tablo Cart, as well as higher volume consumable sales. We expect gross margin for the full year 2024 to be in the low 30% range and to exit the fourth quarter of 2024 in the mid-30% range. The drivers of gross margin improvements are the same as we have discussed for the past three years: cost and programs, the pull-through of higher-margin products and consumables as consoles are placed, and service leverage. With the cost reductions we are undertaking in 2023 and the further actions we're taking to manage our operating expenses, we anticipate OpEx in 2024 of $140 million to $145 million, or $20 million to $25 million below where we expect to exit 2023. This combination of revenue growth, gross margin expansion, and reduced OpEx is expected to drive significant operating leverage and a further reduction in our cash consumption. We expect to use approximately 25% less cash in 2024 than we anticipate using in 2023. Now looking out beyond 2024, we project that our business will grow at a high teens rate annually after 2024 as we gain scale, adjust to the capital spending environment, and achieve Tablo Cart with pre-filtration clearance. For modeling purposes, we expect this ramp to show home revenues increasing from approximately 20% of revenue in 2023 to approximately 25% of revenue in 2027. Beginning in 2024, we will share our installed base twice a year to provide additional visibility to this ramp. Our track record for gross margin expansion gives us ongoing confidence in our ability to get to our 50% gross margin milestone. At our projected revenue growth rates, we now anticipate reaching our 50% gross margin milestone exiting 2027 as full-year revenues reach $250 million. Our conviction in this gross margin ramp is driven by the same factors that have driven 10 consecutive quarters of gross margin expansion. Moving to OpEx. As we have previously shared, we believe that we've already made our key structural investments in talent and infrastructure, and we plan to expand OpEx by a mid-single-digit percent annually beyond 2024. This combination of revenue growth, gross margin expansion, and operating leverage is expected to support the achievement of cash flow breakeven exiting 2027 as we get gross margins to 50%. Now turning to our balance sheet and our cash runway. While there are overperformance scenarios that get us to cash flow breakeven without the need for additional capital, it is reasonable to expect that we may need to top off the balance sheet before 2027, with approximately $160 million of cash exiting 2023 and access to the next $100 million of debt under our SLR agreement. Our cash position provides us with time and levers to operate and grow the business effectively for the next several years.

Leslie Trigg, Chair and Chief Executive Officer

Thanks, Nabeel. I'd like to close by going back to the fundamentals of this market, the business model, and our product. We are penetrating one of the largest healthcare markets in the world with over 85 million dialysis treatments performed each year in the United States alone. We have two growth platforms within it: acute dialysis and home dialysis. Our acute Total Addressable Market in the U.S. is $2.5 billion. That's nearly 40,000 consoles. By year-end, we expect to have sold just over 4,000 acute consoles. So, a very, very long growth runway still lies ahead of us. The home Total Addressable Market in the U.S. is nearly $9 billion, and that's assuming only 30% of dialysis patients can or ever want to go home. From what we've seen across the country with Tablo, this is an incredibly conservative estimate. We have barely scratched the surface. With so many tailwinds pointing toward more care in the home, and more dialysis care in the home specifically, we are on the right side of healthcare with the right technology at the right time. Just four years into commercialization, roughly half of our revenues already come from recurring revenue. When Tablo consoles are sold and installed, their use generates between $15,000 and $20,000 per year, depending on a few settings. This is a business that produces operating leverage. For example, we have grown revenue more than 70% on a compounded annual basis over the last four years with the same size capital sales team. This is a business that will generate gross margin of 50% and beyond. We have 10 consecutive quarters of gross margin expansion behind us, and a clear itemized execution plan that gives us confidence. This is a business that can be profitable and will be profitable due to inherent operating leverage, gross margin profile, and an ever-thickening foundation of predictable, sticky recurring revenue. Our product is not just the device but also change management and customer success expertise that is proprietary and very hard to replicate. There are high barriers to success, and we are actively elevating those barriers by expanding both our technology and our regulatory moat. Our economic, clinical, and operational value proposition is evergreen, saves healthcare providers money, simplifies their operations, and improves the quality of life for patients. These fundamental benefits are unlikely to go out of style, and Tablo brings a highly differentiated, difficult-to-copy product market fit to them. For all these reasons, this is a market, a business model, and a product that supports double-digit growth rates for many years to come. With that, I think we are ready for Q&A. Operator, please open the line.

Operator, Operator

At this time, we will conduct a question-and-answer session. Our first question comes from the line of Rick Wise of Stifel. Your line is now open.

Rick Wise, Analyst

Thank you for that very clear perspectives and numbers, the incremental guidance. There's a lot to focus on. But maybe for starters, Leslie, we attended the ASM meeting in Philadelphia this past week. I'd just be curious from your perspective, your high-level takeaways and any updates on reactions to the opportunities that emerged at ASM. And maybe just as part of that, we've heard from one of your larger acute customers about the cost savings they're seeing. How are you driving that awareness? Clearly, there's a major customer that high volume that's seeing significant economic benefits. How are you sort of powering that message forward as well?

Leslie Trigg, Chair and Chief Executive Officer

Yes, sure. Thanks for the question, Rick. We're creating awareness of what I would call now the proven and reproducible cost reduction benefits in a couple of ways. I mentioned in the descriptive remarks that we have actually reached many people through these peer-to-peer educational sessions. We're doing them now amongst nephrologists, nurses, and health system executives, having reached over 400 professionals just in the last 9 months. That's been a big new focus for us this year, and I think that's really paying off. So that's one venue. The second venue is by continuing to add to the published evidence base. I mentioned over 70 abstracts and 15 manuscripts. Many of those reference and document the cost reduction benefits, as well as the operational and clinical benefits. I think that continues to pay off. Lastly, in large national and regional medical meetings like the one you just referenced, we have the opportunity to not only speak directly with customers but also connect customers with their peer group. I will say that I think we are starting to see a bit of a network effect, and that is certainly turning the flywheel in the acute market and continues to create momentum for us in that segment.

Rick Wise, Analyst

Great. That's excellent. And just specifically, you highlighted innovation. I was curious if there are other products we should be aware of or if you want to talk about anything else. But specifically, can you update us on the status of Tablo's Card?

Leslie Trigg, Chair and Chief Executive Officer

With Tablo Card, sure. There are no updates on the regulatory path. It is under review, and we feel that it was a very strong submission that we are really proud of. We aren't factoring its clearance into 2023. For modeling purposes, assume that Tablo Card is cleared in the second half of 2024. But that's not driven by anything specific or new with regard to our interactions with the FDA. We just think it's a prudent assumption to make. We expect to face, in Q4, some of the competitive activity around Tablo Card not being available by our choice and some competitive noise around the other aspects of the warning letter concerning some case studies that were previously on our website. We believe that we have fully satisfied the FDA's concerns around our website. We've filed the 510(k) for Tablo Card, and our team is absolutely better prepared this quarter. There are many customer conversations to be had to ensure that there are no misconceptions or misinformation out there. I would expect that communication process, those conversations will certainly take us through Q4, which again, were factored into the guidance we've provided around year-end 2023.

Rick Wise, Analyst

Great. And just one last one from me. Maybe an update on your home efforts, some key milestones from your perspective this quarter and the setup for the home outlook for 2024.

Leslie Trigg, Chair and Chief Executive Officer

Sure, I appreciate the question. Yes, home continues to grow. We still expect it to be a very significant contributor to revenue over the long term. What we're really focused on strategically is, number one, expanding the provider universe, whether those are new market entrants. We've seen the emergence of several new market entrants; these are adjacent healthcare providers that have not previously been in the home dialysis market but are using Tablo exclusively to drive more patient adoption in the home. That is part one, extending the provider universe. We have a lot of strong proof points out of 2023 heading into 2024. The second focus is to drive the depth of the home programs we have. Historically, these home programs with the incumbent device typically tended to peter out at low single-digit numbers of patients in the home. That has not been our experience. With the home programs offering Tablo, these are well into double digits. I don't know yet where the ceiling is for how big a home program can be. Tablo was designed to accelerate training, simplify operations and therefore, expand the number of patients who feel that home is accessible to them, and we see it doing just that. A couple of our abstracts demonstrate that as well. That is point two, driving depth in each home program. The third point is always retention rate because the longer that capital patients stay at home on Tablo, the thicker the foundation for future growth. We have continued through Q3, and as we sit here today even in Q4, to see a very steady and stable retention rate that is markedly higher than the retention rate seen with other home devices in the past.

Operator, Operator

Our next question comes from the line of Shagun Singh of RBC Capital Markets. Your line is now open.

Unidentified Analyst, Analyst

This is Avi on for Shagun. Thank you again for the detailed longer-term outlook. I had a couple of questions. First, how should we think about the cadence of revenue growth and margin expansion from 2024 to 2027? Do you expect it to be linear or more back-end loaded, especially as we get closer to the EPC deadline in 2027?

Nabeel Ahmed, Chief Financial Officer

Yes, this is Nabeel. So, regarding the annual growth, we expect roughly mid-teens for 2024, then into high teens for 2025 and beyond. For the quarters, we've historically observed capital purchasing cyclicality where Q1 tends to be the slowest growth period and we see accelerating growth as we move through the year. That trend applies this year and will apply in any year in 2024, particularly as we expect Tablo Card to be cleared in the second half. This first half and second half effects will be more pronounced, and you'll see more growth in the back half of the year. But after 2025, it will just be the capital purchasing cyclicality impacting a slower Q1 and accelerating through.

Leslie Trigg, Chair and Chief Executive Officer

Yes, let me add to that because I heard also something regarding home and the ECD model. As I think about home, I would expect this home growth to remain relatively linear. We will have quarter-to-quarter variability; that's to be expected. But over a period from 2024 to 2027, I expect the growth rate to be relatively linear. I also want to comment on the ECD model; those incentives and disincentives are getting richer as we get closer to 2027. By 2026, 2027, it will get up to either plus 8% over the Medicare base rate or minus 10% under the base rate if providers are not growing their home and transplant programs to the threshold that CMS has established. That remains a powerful tailwind. It's not the only tailwind; we recently saw clinic closures become a tailwind. Both of the biggest service providers in the nation announced clinic consolidation and closures due to staffing challenges. That is encouraging nephrologists and health systems to expand their home care options, viewing home as a near-term and long-term solution to that problem. Generally, I believe Medicare Advantage will continue to play a significant role as this is now available to all dialysis patients, reportedly up to 40% of the dialysis population. These payers have become increasingly motivated to send more patients home on dialysis, affording them the benefits both clinically and economically.

Operator, Operator

Our next question comes from the line of Josh Jennings of T.D. Cowen. Your line is now open.

Josh Jennings, Analyst

I wanted to ask about the strategy to launch into international markets. With the updated outlook, does that include any international expansion plans? Any updates on that international strategy would help in understanding our prospects.

Leslie Trigg, Chair and Chief Executive Officer

Yes, thanks for the question, Josh. The forward-looking guidance that we provided today is U.S.-only over the near term and the long term through 2027. We have filed for regulatory clearance in a small number of largely English-speaking countries outside the United States and have had efforts underway to evaluate those markets. This is a potential growth sector in the future, but I would call it a longer-term growth vector. Our team and management remain very focused today on the largest dialysis market in the world, which is here in the United States.

Josh Jennings, Analyst

Understood. I wanted to follow up on the event at ASN. The nursing executive from HCA commented that about 145 hospitals adopted Tablo. I was wondering if that IDN has incorporated Tablo as the best practices technology for patient dialysis. Can you share your view on the opportunity at HCA to more deeply penetrate their hospital network in the acute setting but also catalyze development in HCA's home programs?

Leslie Trigg, Chair and Chief Executive Officer

Sure. Yes. I appreciate it. We talked about roughly the 650 different facilities in both the acute and sub-acute spaces, as I mentioned in October, being a significant growth opportunity for us. This includes very large national hospitals and health systems like HCA and others, as well as top regional IDNs. HCA has been a phenomenal partner for us. They were and remain innovators, being very forward-thinking on both the acute side and also on the home side regarding the future of dialysis care. With national health systems, we are just 20% penetrated there. We're proud of achieving 20%, but that still leaves over 80% ahead of us. We are excited about replicating the success we have had with many of our customers across both acute and sub-acute sectors throughout the remainder of the national and the larger regional providers.

Operator, Operator

Our next question comes from the line of Travis Steed of BofA Securities. Your line is now open.

Unidentified Analyst, Analyst

This is Stephanie on the line for Travis. Thanks for taking my question and providing the longer-term guidance. That’s really helpful. Just wanted to ask about, first, on the pre-announcement call; you talked about a few headwinds that are leading to a longer sales cycle. I know that was only a few weeks ago, but is there any update on those from a competitive noise or capital spending standpoint and what is factored into the 2024 guidance for those?

Leslie Trigg, Chair and Chief Executive Officer

Yes, sure. Thanks, Stephanie. There is a lot of momentum in both segments, which I believe is due to the large evidence base around Tablo, the growing network effect, and the proven reproducibility of the cost reduction benefit. Those factors give us a lot of confidence in the guidance that we provided. At the same time, we need to be mindful of changes we're noting in the capital purchasing environment. In the past month, we are observing more stakeholders involved in decision-making at all levels. That's understandable and prudent on their part; we're seeing more steps in their financial analysis and processes and more detail to their decision making. However, we're not seeing customers back away from expansion or backing out of deals. We are experiencing what I would call additional deliberation that is elongating our sales cycle to around 12-plus months. We've included that consideration in our guidance for 2024, believing it to be a reasonable and cautious assessment.

Unidentified Analyst, Analyst

That's helpful. And then, just one more on the long-range plan. If you could provide a bit more detail on the overall thought process behind how you put this together, what's assumed in the high teens annual growth rate from a macro or micro perspective? I know you mentioned some reimbursement factors.

Leslie Trigg, Chair and Chief Executive Officer

Sure. Well, I will ask Nabeel to weigh in here too. The last four years have given us a lot more data and experience than we had at the time of the IPO. Our first full launch year was 2019. We've learned a lot since then. Today, we have much more scale from which to build—this very predictable, sticky recurring revenue provides greater visibility than we've ever had before. Our evidence base, the thousands of nurses and physicians, the hundreds of facilities, this network effect all contribute to our confidence moving forward. We also have better knowledge of the challenges and the timelines associated with true disruption. We've now seen this play out in a real way on both the home and acute sides. Nabeel, do you have any other comments?

Nabeel Ahmed, Chief Financial Officer

Yes, Stephanie, I would just add some color here. If you think about placing roughly 1,400 consoles in 2023 and project that same amount over time, the recurring revenues generated from this growing installed base alone will get you to a roughly mid-teens CAGR between now and 2027. To achieve high teens in any year, you'll be looking for console growth. For the reasons Leslie talked about, we believe we can drive higher console placements. To clarify, we will have placed around 400 consoles last year and expect to place this year. Given that we have faced two exogenous events that have impacted us, I think this is a reasonable assumption.

Operator, Operator

Our next question comes from the line of Kristen Stewart of CL King. Your line is now open.

Kristen Stewart, Analyst

I was wondering if you could add some comments on the competitive landscape and comment on the launch of Quanta's product at ASN, as well as your thoughts on the competitive landscape going forward.

Leslie Trigg, Chair and Chief Executive Officer

Sure, happy to. We believe we have a better product with deep expertise supporting our customers. Moreover, I have learned that the importance of product plus the programs surrounding it cannot be overstated. When we walk into an acute site, we're not selling just a dialysis machine. We are creating strategic cost-reduction opportunities for that hospital. Once we show the financial analysis indicating the cost-benefits involved in labor and supplies reduction, the next step involves teaching hospitals and health systems how to insource inpatient dialysis, which they have not done before. We have developed that in a proprietary way over the past several years. I think that creates a compelling and protectable offering. We have succeeded in reaching a significant commercial footprint around Tablo, and our technology is now fully integrated with Epic and Cerner, which is no trivial task. Our regulatory moves continue to set new and higher bars, which solidifies our market leadership.

Operator, Operator

Our next question comes from the line of Suraj Kalia of Oppenheimer & Company. Your line is now open.

Suraj Kalia, Analyst

I appreciate you guys laying out the roadmap from FY '24 through '27. Can you help us understand the rationale for this timeline? You mentioned structural tailwinds for Tablo; given the upcoming competition, what are your insights regarding this?

Leslie Trigg, Chair and Chief Executive Officer

Yes, sure. Thank you for the question. To simply put it, we've heard investors loud and clear about what they care about concerning Outset's future. They want to know how and when Outset gets to profitability, how and when Tablo and Outset will reach a gross margin of 50%, and when we will start the next leg of our journey beyond that threshold. We felt it necessary to provide transparency and clarity on how we project to scale over the next few years. Additionally, having three years post-IPO and four years in the marketplace has given us a wealth of data, insights, and the scale needed to make informed projections. We now have more clarity about both upside drivers and potential challenges and their timelines. Nabeel, do you have anything to add?

Nabeel Ahmed, Chief Financial Officer

Yes, I would reiterate. If you analyze placing roughly 1,400 consoles this year, if we project similarly in the coming years, the recurring revenues from this expanding installed base will enable us to achieve around a mid-teens CAGR to 2027. To reach high teens requires console growth driven by the factors Leslie outlined, making our projections fairly conservative.

Operator, Operator

This concludes the question-and-answer session. I would now like to turn it back to Leslie Trigg for closing remarks.

Leslie Trigg, Chair and Chief Executive Officer

Great. Thank you. Thanks to all of you for joining today. We look forward to our next update on our fourth quarter call. Have a great evening.

Operator, Operator

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