Earnings Call Transcript - OM Q1 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Outset Medical's First Quarter 2023 Earnings 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.

Jim Mazzola, Head of Investor Relations

Good afternoon, everyone, and welcome to our first quarter 2023 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer; and Nabeel Ahmed, Chief Financial Officer. During the call, we will discuss our first quarter 2023 operational and financial results, and host a question-and-answer session. 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 pages of outsetmedical.com. This call is being recorded and will be archived in the Investors section of our website. It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. These statements relate to expectations or predictions of future events, are based on our current estimates and various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of Outset's public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. With that, I'll now turn the call over to Leslie.

Leslie Trigg, CEO

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. We had a strong start to 2023 with revenue growing ahead of our original expectations and margins expanding for the eighth consecutive quarter, also ahead of our plan. The momentum we had exiting 2022 carried through the first quarter and positions us well for continued revenue growth and margin expansion through the remainder of the year. Specifically, revenues for the first quarter were $33.5 million, representing approximately 10% growth year-over-year and approximately 5% growth sequentially. While we did see some of the capital equipment purchasing seasonality we had anticipated on our Q4 call, Tablo uptake remains strong, our installed base grew in both the acute care and home markets, and we benefited from strong mix and pricing across the board. On the operational front, our ongoing cost-down and efficiency initiatives continue to pay off, resulting in gross margin that expanded sequentially by another 3 percentage points. We maintain our conviction in the fundamentals of our business, supported by a healthy pipeline and backlog, with interest in and demand for Tablo strong and growing. Our success in the first quarter lays the groundwork for accelerating growth through the balance of 2023, and as a result, we are raising the midpoint of our revenue guidance and also increasing our gross margin guidance today, both of which Nabeel will elaborate on shortly. First, I'd like to begin with a review of our results in the acute market during the first quarter, another consecutive quarter of strong growth. In short, our Q1 results came in better than expected, and we were pleased with our ability to drive upside over our expectations. Our skilled U.S. commercial team continued to deploy our proven land-and-expand strategy during the quarter, closing new sales agreements and expansion sales within existing accounts, and we continue to see customers make the decision to in-source inpatient dialysis with Tablo. We're pleased to see this momentum with a growing number of providers recognizing the cost savings associated with in-sourcing initiatives and eager to move forward bringing Tablo in-house. We had a record number of consoles shipped to large regional integrated delivery networks, including a deployment of more than 50 Tablo consoles to a single network. Additionally, we added more than 30 new hospital sites to our roster during the first quarter, the largest quarterly growth in new sites since 2021. Our acute progress is a direct testament to the strong economic value proposition of Tablo. In any climate, direct measurable cost reduction is valuable to hospitals, but never more so than it is today. Because hospitals are not separately reimbursed for inpatient dialysis in most circumstances, it's a pure-play cost center for them. And because inpatient dialysis ends up being provided as part of hundreds of different diagnostic-related groups, the cost of dialysis can impact the hospital's procedural profitability broadly; because Tablo directly lowers the hospital's dialysis cost by 50% to 75%, with a typically rapid payback period, we continue to see hospital administrators prioritize Tablo in their capital spending plans. Our Bridge program continued to be a strong complementary offering for customers who are considering insourcing their dialysis service lines. As we've discussed before, Bridge provides customers with the confidence to move forward, by serving as a staffing backstop in case their own hiring takes longer than expected. As in Q4, we found in Q1 that most customers we were able to hire in a timely manner and proceed with insourcing without needing to use Bridge. In situations where we have deployed it, we found that customers are able to staff their programs faster than they expected, which also enables us to operate the program cost-efficiently. A good example is Deaconess Hospital in the Midwest. Deaconess operated a large outsourced dialysis program for more than 10 years; as they were forced to bear the rising cost of their outsourced provider and accept lower service levels, their team decided to explore insourcing with Tablo. With the Outset team and the Bridge program, Deaconess was able to hire their own staff and stand up their in-house operation in just 31 days. According to the Program Director, the hospital has observed a 99% clinical success rate during the first five months, dramatically lowering their costs and improving patient outcomes. And these results are not unique to Deaconess; as we continue to expand our footprint in U.S. hospitals, we're finding these results are repeatable and sustainable. Another important element of our commercial strategy is to drive utilization across the installed base, and we were pleased to see positive trends in treatment volume during the quarter, in line with our expectations. We also saw average selling prices rise, both on consoles and consumables, which serves as strong validation of Tablo's clinical and economic value proposition versus our competitors. Our ASPs benefited again from better-than-expected uptake of Tablo add-ons, including good early demand for our TabloCart new product accessory. More broadly, we see an acute care environment that is much more favorable relative to last year. While hospital nursing shortages continue to affect our acute customers, we've observed stabilization in staffing over the past several quarters, and Q1 was no different. Additionally, programs like Bridge have been successful in helping our commercial team address staffing concerns upfront and early, which continues to prove helpful to our sales process. I'll now turn to our progress in the home, which represents another very large market opportunity for Outset. Our strategy entails growing the number of home programs offering Tablo, while simultaneously working to drive the patient census in each program higher than historical standards. Key to both planks of this strategy is maintaining our industry-leading retention rate, which we believe is a central benefit of Tablo and a primary driver for further profitable expansion in this market segment. Specifically, for 2023, our home goals include landing the majority of the largest midsized dialysis operators, known as MDOs and initiating home programs with two of the top national integrated delivery networks. During the quarter, we made good progress against these goals, including establishing a new relationship with another of the top MDOs and first-time shipments to several other regional home providers. As we land relationships with new providers, we remain equally focused on the expand part of our strategy, by deepening our penetration in existing accounts. For example, during the quarter, we increased the number of home programs that have a Tablo Home census of more than 10 patients. While the number of these larger programs is still relatively small, we are encouraged by the early indicators that Tablo can significantly increase the number of home hemodialysis patients per program. During the quarter, I was again able to spend time with patients dialyzing at home on Tablo. One visit struck me in particular for a couple of reasons. First, this individual was in her mid-70s and spoke of how easy and effortless it was for her to master Tablo. Our internal data continues to support that Tablo mastery is not defined by age. The patient I visited began dialyzing in-center, but quickly realized how much more freedom and flexibility home dialysis would afford. However, her dialysis clinic provider didn't offer Tablo. So this patient chose to switch clinics and switch physicians in order to access it. While it's still early, we are beginning to see examples of patients who learn about Tablo and are very willing to switch physicians and clinic providers to be able to dialyze on it. Our recent home progress was validated from a clinical perspective, at last month's National Kidney Foundation's Spring Clinical Meeting, where five new abstracts were presented, that highlighted a range of clinical and financial benefits of home hemodialysis with Tablo. For example, one study estimated that five-year savings for a Medicare Advantage plan generated by prioritizing Tablo's home hemodialysis versus in-center hemodialysis. The study found that a Medicare Advantage plan with 500 dialysis members could drive $4.2 million in estimated savings over five years. Another study modeled the monthly per member costs for a health system assuming risk for a dialysis population from a Medicare Advantage plan, and the five-year savings from establishing a home dialysis program. The study determined that a health system assuming full risk on Medicare Advantage dialysis members could generate $10.7 million in estimated savings over five years. We're proud of data like this and look forward to continuing to build Tablo's clinical evidence base over time. In short, we continue to see growing demand for Tablo at home, fueled by shorter training times, exceptional clinical outcomes, overwhelmingly positive patient experiences, and a differentiated retention rate. Our team also continues to make solid progress operationally, which has resulted in consistent gross margin expansion and enabled us to deliver non-GAAP gross margin of 20.3% in Q1, more than five percentage points over our Q1 2022 gross margin. The first quarter represented our eighth consecutive quarter of increasing gross margins, as we move toward our next mile marker of 50% gross margin. Our drivers of margin expansion remain unchanged, and our performance over the last eight quarters illustrates our ability to capture this margin expansion opportunity. From a product innovation standpoint, we are very pleased with demand for TabloCart, a new product accessory we introduced in Q3 of last year that provides additional maneuverability around the hospital and incremental water prefiltration capabilities. TabloCart is sold separately and is gross margin accretive average selling price and is proving to be a valuable solution to many of our acute care customers. And finally, I'd like to provide an update on our Tablo cartridge in-sourcing initiative that we touched on during our last update in February. To date, cartridge production at our Mexico facility has progressed very well against our initial expectations, and we're very pleased with the throughput and quality we're seeing. Cartridge in-sourcing remains an important lever of gross margin improvement over the longer term, and we look forward to providing future updates in quarters ahead, as production continues to ramp. And speaking of our operations in Mexico, we were very proud this past quarter to hear that our facility was recognized as a Great Place to Work for 2022, scoring an 88 out of 100 points in its first survey. We believe these results reflect the rewarding, inclusive, and merit-based environment our team has worked hard to cultivate. And it's one of the reasons our employee retention rate at this facility is consistently among the highest compared to similar companies in the area. In summary, our momentum and performance through the first quarter reinforces the conviction I have in our mission and the high confidence I have in our ability to meaningfully grow both near term and long term. We have a differentiated technology in Tablo that every quarter gains even wider recognition for the clinical, operational, and financial benefits it can provide, and we are encouraged by our progress across both of our end markets, as well as the continued stability in the macro environment. We're at the front end of penetrating very large and growing end markets. We are confident in our ability to execute through the balance of the year and believe we are very well positioned to capitalize on the many tailwinds supporting our business and fueling Tablo adoption. With that, I will now turn the call over to Nabeel to review our financials and provide more detail on our expectations and key drivers for the remainder of 2023.

Nabeel Ahmed, CFO

Thanks, Leslie. Hello, everyone. Our first quarter revenue increased approximately 4.6% sequentially and 9.5% year-over-year to $33.5 million, exceeding our expectations. The year-over-year change was driven by both higher product revenue and higher service and other revenue. The ongoing increase in recurring consumables and service revenues is one of the benefits of our expanded installed base and continues to be one of the key drivers of gross margin expansion. Product revenue was up 5.4% from the prior quarter, despite some expected capital equipment purchasing seasonality and increased 8.2% year-over-year to $27.8 million. Console revenue grew 2.7% from the fourth quarter and increased by 4.5% year-over-year to $18.9 million. We saw console average selling price increase year-over-year, driven primarily by our disciplined approach to pricing and ongoing demand for Tablo accessories. Consumable revenue was $8.9 million, up 11.4% from the prior quarter and an increase of 17.1% versus the prior year, as our installed base grows. Treatment revenue in cartridge utilization performed well and in line with our expectations. We saw invoice treatments in the acute setting between 4 and 5 treatments per week and just above 3 in the home setting, reflecting the mix of mature consoles and newly shipped consoles that are ramping up. Service and other revenue of $5.7 million was up 0.8% from the prior quarter and higher by 16.4% compared to the prior year. Our core service and other revenue increased approximately 65% year-over-year, with the growth of our installed base and was offset by the planned expiry of the Health and Human Services agreements. As a reminder, the third quarter of 2022 saw the expiry of the final components of our HHS agreements. 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 first quarter gross margin was 20.3%, a sequential improvement of 315 basis points and an improvement of just above 5 percentage points versus the prior year period. Service margin declined in the quarter due to investments we made in people and programs designed to drive service efficiency. With these investments made, we expect service margins to improve sequentially through the rest of the year. As Leslie pointed out, this progress marks eight consecutive quarters of consistent and substantial gross margin expansion, and once again demonstrates our commitment to reaching our next milestone of 50% gross margin. Primary drivers of margin expansion in the quarter were higher average selling prices and lower freight costs. Additionally, margins have and we expect will continue to benefit from our ongoing console cost-down program and our initiative to in-source cartridge production at our facility in Mexico. Our internally manufactured cartridges have now started to reach customers, and we anticipate that by the end of the year, most of the cartridges produced will come from our factory. Operating expenses in the first quarter were $41.7 million, up $5.7 million versus the prior year period. The drivers of OpEx were in our commercial organization, in support of our higher revenue and gross margin and in R&D, in support of our innovation-driven roadmap. General and Administrative also increased year-over-year, as we have the full year impact of investments we made in 2022. We reported first quarter GAAP net loss of $44 million, resulting in a net loss of $0.90 per share compared to a net loss of $36.9 million or $0.78 per share for the prior year period. Non-GAAP net loss was $35.4 million or $0.72 per share compared to a non-GAAP net loss of $31.9 million or $0.67 per share for the same period in 2022. We ended the quarter with approximately $252.5 million in cash, cash equivalents, restricted cash, and investments, which includes $100 million of borrowings under our term loan. We continue to have access to up to an additional $200 million of capital under our SLR debt facilities. We burned $38 million during Q1, which we expect to be the highest cash use quarter this year. Moving now to our full year 2023 outlook, starting with revenue. Given our strong performance in the first quarter and the visibility afforded by our backlog and pipeline, we have increased confidence in our ability to execute in 2023. As a result, we are raising our expected 2023 revenue guidance. We now project revenue for the full year to range from $144 million to $150 million, a $4 million increase at the lower end of our prior range of $140 million to $150 million. This updated range represents approximately 25% to 30% growth over fiscal year 2022 revenue. Moving to gross margin. Our strong first quarter results give us increased conviction in the gross margin goals we outlined at the beginning of the year. We are raising our gross margin guidance, which we now expect to be in the low 20% range for the full year 2023, up from the approximately 20% that we shared with you on our last call. And we have even greater confidence in our expectation that we will exit the fourth quarter in the mid-20% range. And finally, on operating expenses, we continue to expect OpEx growth for the full year to be significantly lower than our rate of revenue growth, with OpEx growth in the low double-digit percentage zone. This combination of operating leverage and our commitment to manage working capital efficiently means that we continue to expect that we will burn less cash in 2023 than we did in 2022. In summary, we are very pleased with our momentum starting this year. Tablo continues to demonstrate its economic, clinical, and operational value across both acute and home end markets, and our focus on gross margin continues to pay dividends. So, we're looking forward to executing through the rest of the year. With that, I think we're ready for Q&A. Operator, please open the lines.

Operator, Operator

Our first question comes from the line of Rick Wise from Stifel.

Rick Wise, Analyst

Let me begin with the guidance. It's encouraging to see a strong start to the year, and we always strive for more. I appreciate the thoughtful guidance you provide. However, could you help us understand how the quarterly flow is likely to unfold? Last year, we experienced a decline in the second quarter, but there was consistent improvement in each subsequent quarter. I initially expected steady sequential increases this year as well, but given the outperformance and the way you adjusted the low end without changing the high end, it suggests that we may see flat sequential growth leading into the second quarter, followed by a potential increase of $1 million or $2 million in each quarter after that. I apologize for the lengthy statement, but how should we think about this to accurately approach the midpoint guidance?

Leslie Trigg, CEO

Yes, it's great to hear from you, Rick. I'll share some thoughts and then pass it over to Nabeel for any additional comments. To start, we're very pleased with the strong growth and performance we experienced in Q1, which has allowed us to raise the midpoint of our growth range to reflect a 25% to 30% increase. While we are confident in our ability to meet our 2023 plan due to this strong Q1, it's worth noting that we are just 90 days into the year. As always, we will focus on executing against a robust pipeline and leveraging the momentum we generated during these first 90 days. Overall, I feel optimistic about how we began the year and am excited about our growth opportunities both in the near term and long term. Regarding your question on the growth trajectory, I believe you are correct that we expect steady sequential improvement each quarter. We do not anticipate any flatness, and as we mentioned at the beginning of the year, we expect this consistent growth rate to continue throughout the year, and that perspective hasn’t changed.

Rick Wise, Analyst

I appreciate the additional details you're providing this quarter. Regarding the home program, could you share some more specifics? I'm looking for greater insight into the progress you're making. Can you give us information on how many new programs have been launched and the level of increased patient utilization in your more established home programs? I'm trying to understand the momentum, as it seems to be building, and I'm curious about how to frame that inquiry.

Leslie Trigg, CEO

Yes, absolutely. And you're never greedy, Rick, so you never have to worry about that. I'll comment on those in reverse order. Regarding the number of home patients per program, this is perhaps one of the aspects I am most encouraged and optimistic about. One of the challenges in the past with some existing home hemo devices has been that these home programs would start with early home devices and often stay stagnant, never exceeding 1, 2, or 3 patients per program. This has been the trend in the home hemo space for quite some time. However, that hasn't been our experience so far. I want to clarify that it is still early, and we're working off a small base, and I acknowledge that. But what gives me confidence is the potential for growth here. I believe we will eventually have many programs with over 10 patients, and I'm not sure where the upper limit is, which is great. Is it 20? Maybe 30? I can tell you we have programs that exceed 10 patients, but I want to be cautious in my enthusiasm considering the early stage and small base. What I'm observing is encouraging, especially regarding training times being quick regardless of age, race, home status, education, or income. Patients find the process accessible and not intimidating, and I've heard from nurses and physicians that patients choose Tablo when given the option, along with a longer retention rate. So again, it's early with a small base, but I’ve launched many medical devices in my career, and I see strong signs of potential adoption here over time, which is significantly higher than what we’ve seen per program with existing devices. Those are my thoughts on that. As for the first part of your question about new home programs, this was an important metric for us last year, which we didn't achieve, and expanding channel access or home programs remains a priority for us this year. We want as many home programs as possible to offer Tablo, that’s clear. In the past quarter, I was encouraged by the growth in all three following areas. First, I want to see growth in the number of new customers; we mentioned new customers in our scripted remarks. Second, I want to see growth in the number of expansion sites among current customers, meaning whether current home providers are opening new locations to offer Tablo. Yes, we saw good growth there. Lastly, I want to see growth in the number of patients per program. As I just mentioned, we saw good growth in that area as well. Overall, I feel very encouraged across all three dimensions.

Operator, Operator

Our next question comes from Travis Steed from BofA Securities.

Travis Steed, Analyst

Congrats on the quarter. Maybe digging a little deeper on Q1 and expectations for the full year. I know coming into the quarter, you're expecting capital to be soft in Q1 with seasonality and then accelerate over the year. So curious what you saw on the capital side and expectations for the year? And then on the utilization, you'd expect to see utilization come in at the lower end. And so kind of curious with the updates on that as well.

Nabeel Ahmed, CFO

Yes, it's Nabeel. Regarding Q1, we observed the anticipated seasonality in capital equipment purchases that we mentioned during our last call. We've always indicated that there are three key performance areas in any quarter where we can exceed expectations: the number of consoles, treatment volume, and average selling price (ASP). In Q1, we experienced strong demand for Tablo, which aligned with our expectations, and our treatment performance was robust. I'll discuss utilization shortly. Our ASP particularly stood out due to our consistent disciplined pricing and the favorable mix from increased sales of accessories, the 24-hour software treatment, and our TabloCarts. Overall, from a Q1 perspective, we achieved the outcomes we anticipated, including a positive ASP increase. Now, regarding utilization, we assess it in two ways. First, most of our consoles are connected to the cloud. For the more established consoles in service, we are currently achieving an actual treatment utilization of approximately five treatments per week per console in an acute setting and 3.5 in a home setting. In terms of invoice utilization for what we shipped during the quarter, our installed base has expanded considerably over the last few quarters. As these new consoles are activated, we're seeing invoice utilization between four and five in an acute setting and just over three in the home setting, all of which is consistent with our expectations.

Travis Steed, Analyst

That's super helpful. And then maybe Nabil on margins a bit, good gross margin outperformance this quarter. You gave a little color in the prepared remarks, but digging a little bit more on the outperformance this quarter and some of the levers that you could pull this year to maybe even get closer to 30% gross margin for the year, if that is even a possible place to get to? And then on OpEx, I heard the comments on low double digits for this year. Is that the right way to think about it longer term? Is that the kind of leverage we should expect on the operating side, low double-digit OpEx growth kind of long term?

Nabeel Ahmed, CFO

Yes. So, Travis, we are very pleased to report our eighth consecutive quarter of gross margin expansion. We have three main strategies that continue to benefit our margins: our active console cost-reduction program, strong treatment pull-through, and service leverage, which includes the investments we've made. We also saw a positive impact from a strong average selling price. Our goal for margins remains the same, as we anticipate sequential margin expansion and expect to finish the year in the mid-20% range. This is part of our ongoing efforts to reach a target of 50%. Regarding operating expenses, we are committed to improving operating leverage. This year, OpEx is projected to grow at a low double-digit percentage on revenue growth of 25% to 30%, and we will maintain our focus on operating leverage and managing cash burn as we move forward. I cannot provide guidance on OpEx growth beyond 2023, but our priority is clear.

Operator, Operator

Our next question comes from Shagun Singh from RBC Capital Markets.

Shagun Singh, Analyst

Great. I was a little intrigued that you added about 30 new hospitals, and you called out that it's the largest quarterly growth in new sites since 2021. Can you just elaborate on what drove that? And more importantly, do you expect that momentum to continue, and as customers get more familiar with Tablo and they realize the cost savings, or is it more one-off this quarter? Your guidance increase at the midpoint appears to just factor in the Q1 beat and not an improved outlook for the balance of the year. So just if you can elaborate there, that would be great. And perhaps even touch on staffing. I think some of our checks were suggesting that it continues to be challenging. So just what you're seeing there would be great?

Leslie Trigg, CEO

Sure. From our perspective, the macro environment has definitely improved. While we aren't back to the pre-COVID levels of 2017 or 2018, we haven’t observed a decline in staffing. Feedback from our hospital clients and recent data indicate that the availability of nursing labor, especially in dialysis, has improved, and wages are decreasing. As we planned for 2023, we anticipated that staffing would stabilize, and indications towards the end of 2022 suggested we were on the right track. Regarding the 30 new hospitals, I believe this is a sign of sustained trends rather than a one-off occurrence. Hospitals are increasingly focused on cost reduction, and I’ve yet to meet a hospital executive uninterested in enhancing their operating margins. Since dialysis is offered as part of many Diagnosis-Related Groups, it can significantly impact a hospital’s financial performance if they can reduce expenses in that area. Importantly, the 30 new hospitals include both new and existing clients who, due to positive cost reduction results, have decided to expand their insourcing programs. This ties back to Tablo's role in lowering operational costs and increasing efficiency, which addresses a persistent challenge facing the healthcare system.

Nabeel Ahmed, CFO

Shagun, just a quick thing on guidance. I mean, look, we had a really, really strong Q1 performance. Our business executed really well as we talked about early, and we certainly did what we wanted to do. Now having said all that, it's still early. We did raise our guidance range to 25% to 30%, reflecting the incremental visibility we have through the rest of the year, but we still have three quarters of execution ahead of us. We're very excited about this execution. We have the backlog and the pipeline. We need to go and get through this guidance range, but it is only Q1, and we wanted to sort of be thoughtful in our guidance strategy.

Shagun Singh, Analyst

Got it. And just a follow-up on gross margin. You expect to deliver in the low 20s for the full year. Where do you think you might exit 2023 and the magnitude of increase in '23, is that a good proxy of how we should think about '24?

Nabeel Ahmed, CFO

For sure, Shagun. So we expect to exit this year with gross margins in the mid-20% zone. So Q4 gross margin in the mid-20% zone. And if you look at our progress, we have delivered now eight quarters of sequential and steady margin expansion. That trend we would expect to continue to play in the long run, in the medium run through at least this 50% gross margin mile marker. The levers of margin expansion for us, it's the same three; it's console cost down, service leverage, consumable pull-through, all of which lend themselves to a linear margin expansion, as we've done in the past.

Operator, Operator

Our next question comes from Suraj Kalia with Oppenheimer.

Suraj Kalia, Analyst

Perfect. So I'll let either one of you tackle this. Nabeel, in your prepared remarks, you mentioned console growth, with consoles up 2.7% year-over-year. I just wanted to confirm that I heard that correctly.

Nabeel Ahmed, CFO

Suraj, yes. Console revenue was up 2.7% from the fourth quarter and up 4.5% year-over-year.

Suraj Kalia, Analyst

So 4.5%, Nabeel, can you split that up to the next layer? i.e., what was the impact of pricing within consoles, if at all? And also, how did that split off between home and acute?

Nabeel Ahmed, CFO

Yes, Suraj. So a couple of things. One, as you know, we print our installed base annually, which we did entering 2023, and we were exiting this year. Now what I'll tell you is that the number of consoles we placed was right in line with our expectation, in line with kind of our commentary around capital equipment purchasing seasonality, and we did see higher average selling price as we talked about on the call, which kind of helped us from a margin perspective as well. With respect to acute and home Suraj, both of our businesses performed exactly as we would expect. They're both very well set up for us to execute on our goals for this full year and will help us grow into our 25% to 30% guidance range for the year.

Operator, Operator

Our next question comes from Josh Jennings with TD Cowen.

Josh Jennings, Analyst

I was hoping to just follow up on a discussion we had with a hospital executive that had adopted Tablo and in-sourced their inpatient dialysis service line. It seems as if the competition, that DaVita-Fresenius mostly are having a tough time with increased expenses and offering their hospital customers, just kind of no bargaining power, but jack up the cost for them to run the inpatient dialysis service line. Is that still ongoing, that dynamic where there are many hospitals that are kind of being held ransom to take up their expenses, and how big of an opportunity do you think that is or what inning of that opportunity in terms of the competitors having some issues do you think you're in right now?

Leslie Trigg, CEO

Let me think about that for a moment. I want to provide a thoughtful response, but I'm not coming up with one at the moment. It seems like there could be a clever answer, but I just don’t have it. Since I'm not part of those organizations and don’t know their strategic plans, it’s hard to say. However, I can share that we observed certain behaviors and actions from hospital systems and their outsourced providers in 2022, which have continued into this year. We certainly took that into account when setting our guidance for the remainder of the year. Our guidance for 2023 did consider that some hospitals and health systems would experience either higher costs or reduced service levels, or in some cases, unexpected terminations of their outsourced agreements. I wouldn’t say that any of those actions are driving the adoption of Tablo. The hospitals you mentioned are examples of this, but generally, the insourcing of dialysis via Tablo is viewed by most hospitals as a strategic cost-reduction measure, independent of their issues with outsourced providers. Hospitals are keen on controlling their own outcomes, not just from a cost standpoint, but also for the significant operational benefits. Owning their dialysis services allows them to maintain compliance effectively, as many health systems have cited compliance issues related to maintenance records on dialysis machines. By managing their own dialysis with their own staff, patients won’t have to wait for hours for an outsourced vendor. Therefore, numerous operational advantages, alongside cost reductions, are motivating hospitals to pursue insourcing, regardless of the challenges they might face with their outsourced providers.

Josh Jennings, Analyst

Thanks for that. That was a very open answer to an ineloquent question, but that's very helpful to understand this dynamic. And wanted to also ask about just hospitals and hospital systems that are adopting Tablo, retaking control of their inpatient dialysis service line or just bringing Tablo in to swap out their dialysis systems and already controlling their inpatient dialysis service line. But then considering developing a home program, and I just wanted to better understand, I guess, the revenue opportunity and I guess, the return for these hospitals and hospital systems for bringing that kind of home patients under the roof or recouping them. I'm sure there are many elements, including a halo effect on potentially capturing those patients for all of their care, not just their home dialysis. But wanted to just better understand that dynamic and how attractive it is for a hospital and hospital systems to kind of tackle on this home service line as well?

Leslie Trigg, CEO

Of course, I'd be happy to discuss that. The motivation for health systems to initiate a home program has actually strengthened. Initially, their motivation was focused on generating top-line revenue from a new, predictable, and stable chronic revenue stream, which complemented a more unpredictable procedural revenue stream for patients. While that remains appealing, the dynamic has evolved. Now, it also serves as a solution to a pressing issue. More health system executives are expressing concern about the limited options for discharging inpatients into the community, especially due to the closures of dialysis clinics. As a result, hospitals are experiencing longer patient stays because they have to keep patients hospitalized just to provide dialysis, as there are not enough available chairs in the community. Some clinics that remain open are reducing their service days or hours, compounding the problem. This increasing dialogue among health system executives about establishing home programs stems from the fact that it addresses this urgent issue and offers a potential for long-term revenue growth. The revenue upside consists of several components, including revenue per treatment, training revenue, and billing revenue for physicians. The real advantage for health systems lies in the minimal overhead required to start a home program. Setting up such a program needs very little facility space and does not require a large staff. Though there are variable expenses, they are manageable. Therefore, the contribution to margins for hospitals is quite attractive and significant, as they are not burdened by heavy overhead costs. For these reasons, health systems are currently gaining substantial interest in this area.

Operator, Operator

Our next question comes from Drew Ranieri from Morgan Stanley.

Drew Ranieri, Analyst

To build on Josh's previous question, as we've engaged with nephrologists over time, there is an increasing urgency in the specialty for a change in the care paradigm, which is intensified by staffing shortages. Setting the mortality issue in dialysis aside for now, are you noticing that customers are becoming more proactive in preparing for the influx of dialysis patients returning to the system? Additionally, you mentioned earlier, Leslie, that there are early signs of patients beginning to influence decisions more strongly. How do you see this development affecting the company over the next few years, particularly with the growing push from patients compared to nephrologists? I would appreciate your insights on this.

Leslie Trigg, CEO

Sure. I completely agree that the feedback from nephrologists regarding the urgent need to change care practices is very accurate. I recently spoke with a nephrologist who expressed his frustration at having limited options for available chairs in the clinic. This situation is indeed a positive factor, encouraging hospitals to consider home programs and also prompting nephrologists to adapt. I believe a significant change is on the horizon. While major changes take time, this current pressure point from staffing shortages, which I expect will persist in dialysis clinics for the foreseeable future, is pushing us toward that change. From the perspective of health systems, I don’t just think they are becoming more proactive; I see it happening. Our team is engaging in a growing number of discussions with health systems interested in a comprehensive solution that includes using Tablo from inpatient to home. We're having many more conversations about implementing a home program alongside an acute program compared to this time last year. This shift is driven not only by the considerable revenue potential but also by the need to address immediate challenges related to length of stay and discharges. Health systems are definitely becoming more open-minded and trying to be more proactive. Regarding patients and the early signs of change, I don’t want to exaggerate, but we are seeing a small but notable increase in patients who, perhaps influenced by COVID, are recognizing home as a safer option. More individuals are taking the initiative to research and advocate for their own needs, even if it means switching clinics and physicians to access services. I think this trend will play a significant role for us in the coming years. I find this phenomenon intriguing, especially since our direct-to-consumer spending is currently very low. We've experimented with minimal-cost targeted social media campaigns that have yielded positive results, and we are witnessing this shift without significant investment. Therefore, I feel optimistic about the next couple of years as patients take charge of their care.

Drew Ranieri, Analyst

Really helpful. And maybe just a last question on innovation. You've launched TabloCart. Just maybe talk to us about, what's next on the innovation side? Is it hardware? Is it software? And as you're thinking about developing products, commercializing them, is there more of an emphasis on monetizing these like TabloCart? Or is it more going to be about maintaining a higher retention rate or stickiness with customers? Just any thoughts there on how you're thinking about future development.

Leslie Trigg, CEO

Yes, certainly. The answer might encompass all aspects. What really excites us is the progress we've made, demonstrating to ourselves and our sales team that we can effectively sell core Tablo and associated add-ons. Our commercial team has shown significant potential in this area. One example of these add-ons is TabloCart, which is hardware. I anticipate that the majority of future add-ons will come with attractive margins and selling prices. We are also likely to introduce new software features and functions. This might include premium versions of the Tablo ecosystem, which extends beyond just the Tablo console. Once a customer engages with the ecosystem, they gain access to all the data that interacts with Tablo, including data analytics and dashboards as well as EMR integration. There will likely be both basic and premium versions available. I am confident that our commercial team is skilled in effectively promoting the value of not just the console, but the entire ecosystem in the long run. That is the general direction we are heading.

Operator, Operator

Thank you for your questions. And now we'd like to turn it back to Leslie Trigg for closing remarks.

Leslie Trigg, CEO

Thanks, and thank you all for joining the call today. I really want to thank the entire Outset team for creating such a strong start to the year. As I see it, the depth of talent and commitment and urgency and intensity that you all display every day is to me, second to none in this industry, and I could not be prouder of what we continue to achieve, together with, very forward-leaning innovation-centered provider partners and clinicians and most importantly, patients. And lastly, to our shareholders, thank you for your continued support. I really look forward to capitalizing on our early momentum and delivering on our promises through the remainder of the year. Have a great evening, and thanks again.

Operator, Operator

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