Earnings Call Transcript - OM Q1 2022

Operator, Operator

Good day and thank you for joining us. Welcome to the Outset Medical First Quarter 2022 Earnings Conference Call. Currently, all participants are in listen-only mode. After the presentation, we will have a question-and-answer session. If you wish to ask a question during the session, please follow the provided instructions. Please note that today's conference may be recorded. If you need assistance during the call, please use the instructions provided. I would now like to turn the conference over to your host today, Jim Mazzola, Head of Investor Relations.

Jim Mazzola, Head of Investor Relations

Okay. Good afternoon, everyone and welcome to our first quarter 2022 earnings call. Participating from the company today are Leslie Trigg, Chair and Chief Executive Officer and Nabeel Ahmed, Chief Financial Officer. During the call, we will discuss our first quarter operational and financial results, as well as provide an update on our outlook for 2022. After our prepared remarks, we will host a question-and-answer session. We issued a news release after the close of the 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. I'd also like to remind you that 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. Any statements that relate to expectations or predictions of future events, market trends, results, or performance are forward-looking statements. All forward-looking statements are based on our current estimates and various assumptions. These statements 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 report. With that, I will now turn the call over to Leslie.

Leslie Trigg, Chair and CEO

Thanks, Jim. Good afternoon, everyone. And thank you for joining us to review our first quarter 2022 results. Since our last update in February, the Outset team has continued to execute well across our strategic initiatives. We delivered our seventh consecutive quarter of strong top-line growth led by continued momentum in the acute market, as we achieved continued positive performance on gross margin expansion and made substantial progress toward our home inflection objectives for 2022, with the number of home console shifts in the first quarter exceeding our expectations. Total revenues for the first quarter were $30.6 million, representing 33% year-over-year growth and 8.5% growth sequentially. We benefited from strong console demand and strength in treatment utilization, as we continue to capture share across acute care customers, accelerate home expansion, and broaden our install base. Overall, we maintain a high level of visibility into our business, supported by a robust backlog and strong pipeline, grounded in broad interest in Tablo, and we remain confident in our near and longer-term outlook. I want to begin today by discussing our results in home where we made very strong progress against our expansion strategy with Q1 results putting us ahead of schedule relative to our 2022 objectives. There are four metrics we look at as a measure of home growth performance. First, the number of home programs where we are ahead of plan. Second, the number of new patients who went home with Tablo, where again, we are ahead of plan. Third, how quickly patients can train on Tablo, where we have a significant advantage over our competition. And fourth, the number of patients who stay at home on Tablo where we remain meaningfully higher than competitors' retention rates. On our last call, we highlighted that home consoles accounted for a significant portion of our Q4 exit backlog and our expectation that the home business would inflect beginning this year. We're pleased to report that shipments to customers at home exceeded our internal expectations in the first quarter and represented a significant portion of total first-quarter shipments. In addition, we are ahead of schedule in initiating new home programs with providers against our goal to establish 100 programs exiting 2022. Importantly, we continue to deliver a highly differentiated patient and caregiver experience, resulting in an industry-leading retention rate, which we believe is essential to sustainably high long-term growth. This early momentum reinforces our conviction on delivering 2022 home revenue of roughly mid-teens as a percentage of our total revenue. To get there, we plan to continue to expand our footprint with our few customer segments. Progressive dialysis clinic operators focused on substantially growing their home programs and health systems standing up new home dialysis service lines. This past quarter, we launched new programs specifically aimed at the second customer segment, health systems. That proprietary turnkey solution is called destination home, and it provides a roadmap for health systems to send patients home quickly and seamlessly. Through destination home, Outset brings a team of qualified partners that accelerate each step of standing up the service lines, from facility requirements to accreditation and certification, to ongoing patient care management in the home. With one quarter behind us, we're pleased with the level of traction we're seeing. From a clinical and patient experience perspective, the data speaks for itself. In early April, three new datasets related to treatment with Tablo at home were presented at the 2022 National Kidney Foundation spring clinical meeting in Boston. These studies highlighted patient and nephrologist views on home hemodialysis adoption, and the hidden costs of peritoneal dialysis. In the first dataset presented, a national survey of 202 dialysis patients found that 72% viewed the features of Tablo as a significant clinical improvement in home hemo. Additionally, 77% said that Tablo's features would make them more likely to try home hemo. Moreover, a second national survey of 184 nephrologists found that 77% said the features of Tablo were a significant improvement over existing home hemo devices. Importantly, 98% said these features would make them more likely to recommend home hemo to their patients. From prior studies and research, we found that patients identify flexibility in treatment frequency, the availability of dialysis on-demand, automated data and remote monitoring, ease-of-use, and reduction in storage requirements as paramount decision-making considerations when choosing a home hemodialysis device. Tablo provides a compelling answer to these considerations. All of its innovative features also translate into fast training time, which historically has been a barrier to getting patients to adopt home hemo. Across the spectrum of patients who have been trained on Tablo, the average training time remains 10 sessions or less, compared to 4 to 6 weeks with the incumbent machine. The third presentation at NKF was a dataset that evaluated the confluence of clinical and economic outcomes related to PD failure. Market data shows that PD fails 50% of patients within two years, and the data presented at NKF show that PD failure is associated with a nearly 100% risk of hospitalization during the six months preceding discontinuation. The study found that over $72,000 is spent per patient in the three months before and the three months after a patient's transition off PD. Further, after the transition from PD to in-center hemodialysis, hospitalizations remain higher for former PD patients over time. Today, just 3% of patients transitioning off PD will start home hemo, despite the fact that they are already successfully managing kidney disease at home. Collaborating with our provider partners, we see an opportunity in the future to create programs that access this upstream patient population and transition more of them to home hemo with Tablo, driving both cost-savings through hospitalization reduction, and quality of care benefits for patients. In all, we continue to see rapidly growing demand for Tablo as an enabling technology for home programs, fueled by exceptional clinical outcomes, overwhelmingly positive patient experiences in retention, and the increasingly recognized economic benefits for patients and providers. Most importantly, we are proud of the impact Tablo and team Tablo have had on patients and their families. I recently visited several patients dialyzing at home with Tablo. First and foremost, what I observed was confidence, control, and autonomy. I listened to them describe how much more convenient home dialysis was, that it has given them their life back because they now have the freedom to decide when they want to dialyze. They were free from a clinic schedule they didn't choose. They were free to pick up their kids, free to take care of others, free to work again. As one patient put it, 'Clinic with a rush, I was constantly rushed, stressed and had to orient my schedule around it. Being at home, I can take my time. I want to live my life.' Perhaps even most importantly, I heard pride in their voices, pride that they owned their care, that they were independent and self-reliant. This autonomy translates into self-worth and identity in ways that change lives, families, and communities over time. I heard about Tablo being easy to learn and easy-to-use, and I watched people set it up for treatment with confidence. Patients have also reinforced that the patient experience does not begin and end with the device. What I learned was that the experience for patients is tied both to the people and the product. Empathic listening, and patient’s genuine care about the person behind the patient. The art of how we support patients is a big part of our secret sauce — or now, it's not so secret, as well as something we believe creates a protected competitive advantage along with our technology. We're excited for all of you to also get a firsthand view into the patient experience through an educational webinar for investors we have planned for June 1st, from 1 to 2 PM Pacific, 4 to 5 PM Eastern. We have two patients, a caregiver, and a leading nephrologist scheduled to participate in a panel discussion where we will also give you the opportunity to ask questions. We will release additional details in the coming weeks. As we accelerate home adoption, we also continue to see strong growth among our acute care customers. Unlike large, expensive capital equipment, the upfront investment for Tablo is relatively small with a payback period typically measured in months, not years. As a result, console executives have much greater visibility to uncertainty of near-term ROI compared to other types of capital equipment. The combination of Tablo's low capital, high return value proposition has been a key driver of our continued momentum and consistent performance despite the inconsistent capital hospital operating environment. In the first quarter, we made headway with new sales agreements and expansion sales within our existing customer base, as our land and expand strategy continued to progress. A key highlight for the quarter was landing the eighth of the eight largest national health systems. Another area where we continue to see commercial success with new sales agreements is within hospitals with fewer than 100 beds. On our last call, we highlighted how 2021 taught us that Tablo solves important problems not only for the nation's largest health system, but also for smaller hospitals, which in many cases are part of larger health systems, where Tablo is already in use. We also continue to learn about hospitals contending with challenges due to their outsourced dialysis providers struggling with staffing shortages. As we discussed in February, some hospitals are receiving service price increases, some are receiving service level decreases, and some are receiving surprise service contract terminations. In one circumstance, we were contacted by a hospital and asked to install Tablo, and train its nurses within 72 hours. Our service and training team successfully met the challenge and have the hospital's own staff running Tablo treatments later that same day. In short, Tablo has proven to be a valuable solution as it allows hospitals to finally control their own destiny, from cost, to staffing, to compliance. In addition to our commercial success, our team continues to make impressive progress on gross margin expansion, delivering non-GAAP gross margin of 14.8% in Q1. We're very proud of our teams across the business and how they've effectively managed through our continually challenging macro supply chain environment and sector volatility during the quarter. Testament to the team, we have not missed a single day of demand. With no console or cartridge shortages, even as the business has continued its strong growth trajectory. We continue to have healthy inventory positions where it matters, and our backlog is reflective, not as supply chain or production constraints, but as strong demand that is scheduled for delivery on the customers' timeline. In summary, the first quarter of 2022 was marked by a strong start to home inflection, revenue performance, and progress toward our gross margin goals. I'm once again very proud of the entire Outset team and our ability to consistently deliver strong and predictable financial and operational performance. We remain highly confident in our ability to deliver against the 2022 objectives that we laid out on our last call, as we provide a transformative technology to reduce the dialysis burden for patients and all those who support them. With that, I'll now turn the call over to Nabeel to review our financials and provide more granularity on our expectations and key drivers for the remainder of 2022.

Nabeel Ahmed, CFO

Thanks, Leslie. Hello everyone. I am pleased with our great start to 2022. Our first quarter revenue grew 33% year-over-year to $30.6 million, driven primarily by higher consumable shipments, increased console shipments to acute and home customers, and increased services to support our growing installed base. Product revenue grew 41% year-over-year to $25.7 million. Console revenue grew by 22% year-over-year to $18.1 million, driven by higher console placements with ASPs also increasing year-over-year, given the demand for Tablo XT. We continue to see better uptake of our XT upgrade than we had initially projected, which highlights Tablo's clinical versatility and the clinical community's recognition of Tablo's ability to capably treat the very sickest population of patients in the ICU. Consumable revenue was $7.6 million, an increase of 121% versus the prior year. Our Q1 cartridge utilization is strong and in line with our expectations. Service and other revenue of $4.9 million was higher by 4% compared to the prior year. Our core service and other revenue almost doubled with the growth of our installed base but was offset by the planned expiration of the HHS agreement, which we previously described. 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 14.8%, an improvement of approximately 13.2 percentage points versus the prior year period and a sequential improvement of 280 basis points. This improvement compared to the prior year period was primarily the result of the transition of our console manufacturing to our Mexico production facility, our ongoing console costs down programs, and our revenue mix with a higher percentage of our Q1 2022 revenues coming from our consumables compared to the prior year period. Our cartridge manufacturing transition is well underway and our new Mexico-based vendor continues to ramp up their volumes. Operating expenses in the first quarter were $36 million, up $11.8 million versus the prior year period and in line with our guidance. The increase was driven primarily by headcount growth resulting from investments in the commercial organization, investments in R&D, and G&A expenses tied to operating as a public company. Compared to the prior quarter, non-GAAP OpEx decreased $3.4 million primarily because our fourth-quarter OpEx included certain incentive compensation payments, including sales commissions that were tied to our year-end operating performance. We reported a first-quarter GAAP net loss of $36.9 million resulting in a net loss of $0.78 per share compared to a net loss of $30 million or $0.70 per share for the prior year period. Non-GAAP net loss was $31.9 million or $0.67 per share compared to a non-GAAP net loss of $24.2 million or $0.56 per share for the same period in 2021. We ended the quarter with approximately $335.6 million in cash, cash equivalents, restricted cash and investments. Moving on to our 2022 outlook, given our strong performance in the first quarter and the forward visibility afforded by our backlog and our pipeline. We have increased conviction in our ability to execute as we plan to in 2022. As a result, we are updating our expected 2022 revenue targets. We now project revenue for the full year 2022 to range from $144 million to $150 million, a $2 million increase at the lower end of our prior range of $142 million to $150 million. This range represents approximately 40% to 46% growth over fiscal year 2020 revenue. Our performance in the home indicates that we continue to be on track to deliver home revenues of roughly midsingle-teens as a percent of full-year 2022 revenues. Moving to gross margin, our first-quarter results give us increased conviction in the gross margin goals that we laid out for you at the beginning of this year. While we continue to see inflationary pressures in the macro supply chain environment, and on the cost of transportation and the cost of components, our cost leverage is translating as expected. All factors considered, we continue to have confidence in non-GAAP gross margin expansion to the high teens for the full year 2022. With that, I think we're ready for Q&A. Operator, please open the lines.

Operator, Operator

If you'd like to ask a question at this time, please proceed. Our first question comes from Amit Hazan with Goldman Sachs.

Philip Coover, Analyst

Hi. This is Phil on for Amit. Thanks so much for taking my question as always. Thought maybe we'd start with guidance and try to break down the performance in the quarter. So certainly, I heard all of the positive commentary on the home prime which is great to hear. I'm wondering with very little commentary around COVID disruption if 1Q actually came in ahead of your internal expectations, or if the increased confidence and guidance and the raise at the bottom end is more a reflection on the run rate that you are seeing in the exit rates. It's a question on acute and how performance went and whether there was disruption in that space in the quarter?

Leslie Trigg, Chair and CEO

Yes. Sure. Hi, Phil. Thanks for joining. Short answer, no COVID disruption, and really, a continuation of the theme over the last two years. Outset has been an example of a company and a business that's continued to perform consistently well, not because of COVID, and Q1 didn't represent any change to that pattern. So the strength that we saw in the quarter leading to strong performance on the top-line revenue side really came again from the core Tablo value proposition in the acute area around significant cost reduction. Those supplies cost reduction, labor cost reduction, and operating efficiencies for the hospital customers that are choosing to adopt it. So a lot of strength in acute from the core Tablo value proposition and similarly, a lot of strength in home as well as growth in the home revenue number for similar reasons. Tablo is delivering on the promises that we made to our health system and our dialysis provider customers regarding home, rapid training time, and long retention times at home. So these are the drivers of the growth.

Philip Coover, Analyst

Okay. To put a finer point on it, would you say that the raise at the bottom end is attributable to home being ahead of your expectations for the year so far as you characterized on the call?

Nabeel Ahmed, CFO

Yes. Phil, hey, it's Nabeel. Our confidence in our 2022 guidance is really predicated on a couple of things. So one, as Leslie mentioned, we did have a strong start to the year with Q1 performing well on revenue in the acute and the home setting. Number one, and then number two, we continue to have really good backlog and pipeline as we sit here today. As we talked about, we're running this business on the backlog position so we really have good backlog and pipeline at this point. All of that gives us a lot of confidence in our ability to achieve the guidance range that you talked about. That's what drove us to tighten our range to $144 million to $150 million.

Philip Coover, Analyst

That's great. Thanks for the additional color. But if I could sneak just one more in on the capital environment, we've heard from others mixed messages depending on the company in terms of the ability to install and the impact from labor shortages and absenteeism on installations. That sounds like the unique value propositions for Tablo has positioned you all uniquely to supersede that. Can you just talk broadly about any changes that you might have seen from hospitals' willingness to take in capital and their ability to start a new program or take cancellations?

Leslie Trigg, Chair and CEO

Yes. Sure. I'm happy to comment on that. Well, I think there's maybe two parts to that question or cue dynamics that are worth commenting on. One is hospitals' willingness to acquire new capital, so let me comment on that, and I think the second dynamic is around staffing. In short, no, we really have not experienced any change in our business regarding hospitals' interest in acquiring Tablo. I think it's probably worth pointing out. And I mentioned this in my prepared remarks just a moment ago, the capital investment, even for a hospital buying a fleet of Tablo's is really a different ballgame. It's not a couple of million dollars of capital, and so this is a dollar amount that's comparatively small. And number two, an investment where CFOs have a very rapid payback period, as I said a few minutes ago, typically measured in months. I mean, sometimes as soon as three to six months, they're break-even. And that's because they start utilizing Tablo; the cost reduction on the disposables is very, very significant. I think that when our sales team goes in and they're talking to the C-suite, whether it be CFOs, COOs, or CEOs, you're talking about a relatively small amount of investment, again, compared to other forms of capital with a very, very high near-term payback. I think that that continues to serve us well these dynamics. So no changes in the capital acquisition environment as we sit here today as far as Tablo. The second dynamic around staffing, I would say on balance, staffing shortages continue to probably be — well they're not probably, they are a tailwind for Tablo adoption more than they are a headwind. Margin in Q1 did we see a hospital or two change its timing of installation a bit? I mean, maybe, but this was a very, very marginal effect if any. What really had a more meaningful positive effect was this dynamic—again that I mentioned in my prepared remarks around hospitals that had previously been outsourcing dialysis to third-party service providers, and they've been fairly public with this, are really struggling with staffing. So that's resulting in a number of hospitals getting surprised and realizing that they want more control over costs, over compliance and over labor. And so we were called to answer the balance you will have a number of circumstances in Q1 I just talked about one of them in the prepared remarks, but there were many examples of that where it really motivated—lit a fire under the health system to insource dialysis and using Tablo and using their own staff.

Philip Coover, Analyst

That's fantastic. Thanks so much for all the color. Thank you.

Leslie Trigg, Chair and CEO

Sure.

Rick Wise, Analyst

Good afternoon, Leslie. Hi, Nabeel. I hate to start with the generic. Talk to us about supply chain challenges and I feel like I have to ask Leslie or Nabeel. Any concerns at all about electronic component availability, or chips, or anything that is causing you any anxiety as you reflect on the outlook for the rest of the year?

Nabeel Ahmed, CFO

Hi, Rick, it's Nabeel. So Rick, supply chain continues to be a dynamic environment for us as it has been over the last couple of quarters. Leslie talks about our supply chain team, and let me just say that those guys are working hard, and we have not faced anything so far that we have not been able to overcome. In Q1, we delivered 14.8% gross margin, sequential expansion of 280 basis points up 13.2 percentage points year-on-year in the face of the supply chain challenges. As we look through the rest of this year, the momentum we have, in the first quarter, Rick, combined with sort of the visibility we have into the remainder of the year, we still have confidence in our guidance of getting to high teen gross margin. So long way of saying, we haven't been able to really run into any barriers. We've talked about leveraging our balance sheet to make sure that we have large quantities of some of these longer lead-time or hard to procure items. So the strategies we've employed are the same ones, and they have served us well in the past. And we expect them to serve us well looking forward.

Rick Wise, Analyst

Got you. Thank you, Nabeel. And Leslie, maybe turning to your comments about home shipments exceeding expectations. Maybe you could give us a little more color there. Was it a specific setting or because of a contract or maybe help us understand where the performance came from? And I was hoping you would break down a little more. I'd be curious to reflect more on your comments about the two main opportunities, you know, the clinic operators, and the health systems. Just curious, how can I phrase this? As you think about this year, are you focused on half the revenues are going to come from the clinics and half from the home health systems? Are there any unique challenges or opportunities of getting both going? Where are you? Where are the headwinds that you're facing? Is one harder than the other? Just curious to learn more about this opportunity.

Leslie Trigg, Chair and CEO

Sure. I'm happy to discuss the first part of your question regarding whether our over-performance relative to our internal plan in the home segment was concentrated in one area. The short answer is no. I'm glad you asked, as it highlights that our growth has been evenly distributed across our home customer base. I appreciate seeing consistent growth because it indicates that the device and its value are resonating widely. Moreover, regarding your second question about potential challenges or opportunities between progressive clinic operators and health systems, I don't see any significant headwinds in either segment at this time. We have mentioned the destination home program, which is primarily aimed at health systems, as the progressive clinics generally already have established home programs.

Rick Wise, Analyst

And one last if I could. In terms of the ramp, where are you—in sorry, in the cartridge manufacturing, Nabeel? Where are you in that process? When are you likely to be fully ramped? How should we think about that? Thank you.

Nabeel Ahmed, CFO

Yes, Rick, of course. So we just split for the cartridge. We've got the approval in Q4, and when we last spoke to you, we said that we would be ramping over the first half of this year, and by Q3, Q4, the bulk of our cartridges would be coming from our Mexico vendor. That continues to be the case. The Q2 expectations are on track. We're sticking along to plan and that's one of the things that, as we've talked previously about, gives us the gross margin benefits that allow us to get to our high-teens margin guidance for the year.

Travis Steed, Analyst

Alright. Thanks for taking the questions. I guess I wanted to touch on the home program again. I guess kind of more bigger picture is not quite clear what you mean by inflection, but just love to see what you need to do on the ground beyond the 100 programs in 2022. And the thing that maybe put in place to really get this to grow and you kind of your vision over the next 2 to 3 years.

Leslie Trigg, Chair and CEO

Sure. Thanks for the question, Travis. I think that one key thing that is underappreciated is that really, really significant growth over time is retention. And I know that it is important to be growing the top line, if you will, number of patients at home, but for example, if you're losing 50% off the bottom, you've got to go a 100% to grow 50%. So, I believe in a really significant level of the importance of retention. Building a strong foundation from which to grow will make the growth over time much, much easier. So that's the first part of the answer, Travis is like, what can we do on the ground? We can make sure every patient and every patient's family falls in love with Tablo. And that's going to happen when our team is easy, when Tablo is easy, and when they feel that they could fully appreciate and enjoy the benefits of choosing when, where, and how they want to dialyze. So that's the number one thing that we can do day after day after day to ensure very, very high growth rates for a long time to come.

Travis Steed, Analyst

Right. That's fair. And then—I appreciate the answer. And on gross margins, maybe it's a higher-level question as well, just thinking about the path beyond the high teens that you're talking. Some of the things you could put in place that maybe haven't thought about before, like pricing increases at some point along the future as well to offset some of the inflationary pressures. Just any color there would be great.

Nabeel Ahmed, CFO

Yeah, so Travis, let me just say a couple of things there. So first of all, we continue to have conviction in our ability to get to roughly 50% gross margins in 2025. That's the next milestone, if you will, that we're looking forward to. The drivers of that are well known and are drivers that we are actually on now. We've talked about our console costs down programs; that's in place now, it's given us benefit since you've had consoles and we will give us benefit in the future. Secondly, we've talked about our cartridge, so as that transition to Mexico completes here this year, that will give us benefits that will continue into the future. We've talked about our service margin expansion, which will come as we have more consoles deployed and as we get leverage from that team. And then finally, as we move to a larger install base, that will drive margin expansion rates. Those are the margin expansion drivers that can get us to roughly 50% target. In terms of the second part of your question on pricing, we have customers where we have committed pricing, but for the majority of our customers, we do have the ability to raise prices if and when we choose. We're not going to comment on specific pricing programs or actions we may take. But all of what I described here is baked into our path to get to roughly 50% margins in 2025.

Travis Steed, Analyst

Great, thanks for taking the questions.

Suraj Kalia, Analyst

Good afternoon, Leslie. Nabeel, can you hear all right?

Nabeel Ahmed, CFO

Yeah.

Leslie Trigg, Chair and CEO

Yes. It's fine, thank you.

Suraj Kalia, Analyst

Perfect. Hope everyone to stay healthy. Say—so—Leslie, thanks for providing a lot of information. Unless I'm over-reading this, please forgive me if I am. I think there should be a distinct shift in your commentary about targeting PD patients. And the reason I — it caught my attention is peak patients. It's a hit or miss of having a partner on-site, right? Because that's—it's—I was curious if this was going to serve as a more shifted focus. And also if I could piggyback on that question. The 100 home programs you look to target by the end of FY 2022, the criteria used to identify and target these, is peritoneal dialysis really the driving factor here?

Leslie Trigg, Chair and CEO

Yes, Suraj, thanks for the question. Short answer is no, PD is not at all a driving factor, so let me back up and maybe give a little bit more color. No shift in the types of patients we're targeting. I mean, as you know, unfortunately, the entire dialysis patient population in the United States, only 1.5% to 2% of patients are on HHC to begin with, so there is just a massive opportunity ahead of us amongst patients who are currently just sitting in dialysis clinics. So that's maybe where we start. The thing though is, I do think PD patients over many, many years have been underserved. I think these are individuals that many of them are already really successful at home. They're already independent. They already manage a chronic disease very well, independently or with a care partner. I do think that on a human level, it's a shame and unnecessary to see the vast majority of them when they end PD and go straight back into the clinic. I just think that's wrong. And so we do see an opportunity in the future. Is it a targeted program or something new or shift? Not at all, but I thought it was worth starting to talk about and have it be a part of the conversation because I think that PD patients deserve much better and greater channel through which to stay at home. It's perhaps more of a clinical and humanitarian comment more than anything else, Suraj, but over time, yes, we probably do anticipate working on upstream patient communication over the next couple of years just to ensure that more PD patients who are coming off that therapy are aware of and offered opportunities to stay at home on HHD.

Suraj Kalia, Analyst

Got it. The math or the deals, the math suggests approximately 600 Tablo consoles were shipped in the quarter, and forgive me, I must have missed it. Did you provide a backlog number exceeding 1Q? Because I remember 1250 or so exceeding Q4 2021. I'm just trying to connect the dots, just make some assumptions in terms of these unit shifts possibly going to home and just kind of connecting the dots here. Any help would be great.

Nabeel Ahmed, CFO

Yes, Suraj. So with respect to backlog disclosure, our practice has been and continues to be to provide that number annually, so we printed it exceeding Q4. The next time will print it will be exceeding Q4 of 2022. With respect to your console shipment count, I don't want to add again, we're not in the practice of providing installed base numbers in any given period, but like that feels a bit high to me. I'll let you know next time if that changes.

Suraj Kalia, Analyst

Fair enough. Hey, Leslie, I'll just throw it one more and I'll hop back in queue, I promise. In a hypothetical scenario, Leslie, you guys have done very well in terms of on-demand dialysate production. Can this approach be morphed into a real-time on-demand PD approach and take it through the NDA trial and everything? Is that something that potentially could be on the radar for Outset? Thank you for taking my questions.

Leslie Trigg, Chair and CEO

Sure. Of course. The question around PD and generally, where—what are we thinking about next and what might be on the future item is a very fair one and an understandable one. First and foremost, with 1.5% of the population on HHD and maybe just a mere 12% on home period, our primary focus remains on the U.S. market number one, and giving patients more access in general due to HHD. I will say this is an organization. I think we have imaginative inventors who are probably going to continue to desire to imagine and invent. The directions in which we take that DNA inside of Outset, I think are still to be revealed. We’re going to remain a very ambitious group of people in ways that continue to drive differentiated growth and really meaningful quality of life and clinical improvements for patients and providers that I can assure you.

Josh Jennings, Analyst

Hi, good afternoon thanks for taking in the questions and resolution to strong stretch of the year. Leslie, you were talking about hospitals calling in the caliber year or Outset to help them with their staffing challenges and retake control over their dialysis service line. I was hoping to ask about actually outsourced service providers, third-party like DaVita's, because some agile checks suggested that they bought some Tablo systems for their servicing of some hospitals, dialysis units or service clients. Are you seeing that channel pick up from third-party providers purchasing Tablo consoles for one? And then just to follow up, is just on DaVita's specifically with all these staffing shortages, not just for their in-hospital dialysis business, but also on the home, I mean, is there a channel in 2022 where DaVita could be starting to purchase more Tablo systems? Thanks for taking the questions.

Leslie Trigg, Chair and CEO

Sure. I'm—yeah, I'm just jotting down the order of your question here. The—so the activity that we've seen here today, I'm going to address the acute first, Josh, but the activities that we've seen here today—on the acute side is almost entirely health systems. And that's our focus, right? Let's go back to the commercial strategy. All of our team, clinical and capital is pointed at selling, servicing, and supporting the health systems to control their own destiny when it comes to the cost and complexity of dialysis, whether it's in the ICU or bedside dialysis on the floor. So that's what we trained our Psychs on and that's where we think we deliver the greatest value, right to the end customer. So that addresses the first part of your question. The second part of your question, the last thing I would ever do is try to see for another provider, another entity. We are again similarly focused on the home in two segments, and seeing a lot of benefit reward for that. I think as humans, we tend to continue to do things that are working and where we're seeing success. And we're seeing a lot of success with a number of more conventional dialysis providers, again in the mid-year segment of the market, and they are really progressive and nimble and agile, moving as many patients home as they can possibly support as quickly as they can do so, so that's where we want to be.

Josh Jennings, Analyst

Great, thanks so much.

Danielle Antalffy, Analyst

Good afternoon, guys. Thanks for taking the question. Leslie, I was quick to ask a question on home, so I'm going to keep the home conversations going. And just curious, as you were opening up these new home centers, what the process is like? So one of the things I remember from days covering NextStage when it was a standalone company was it was really important to get the right patients on, etc., to make sure to your point, the retention was high. And it feels like Tablo is in such an advanced position from a technology perspective. Does patient selection matter and what you're working with these centers on to ensure that they're starting off on the right path building a successful home program? And that's it for me. Thanks.

Leslie Trigg, Chair and CEO

Okay, sure. I think that the notion of the right patients is very old-fashioned thinking, and perhaps patient selection in the quote-unquote, right patients was needed when the technology options that were available were less accessible, perhaps took longer to train on, and were more difficult to successfully maintain at home. Our goal—our design goal from the very beginning with Tablo was to ensure that we designed a technology that all patients, almost all patients, could be successful on whether they had a third-grade education or a graduate degree. When I look at our patient population and we've had the ability now, we’re running a registry where we can look at patient demographics, it is extremely diverse. It is diverse in terms of age, gender, race, socioeconomic characteristics, and I'm really proud of that, because I think as part of the moral mission of Outset, a big part of that is erasing inequities and access to home health, and one way we're doing that is through the simpler technology that doesn't require a PhD to use. Another way that we're going to do that is by continuing to influence the physician mindset. And this will happen over time as they do send more and more patients home, but influencing the physician mindset that perhaps once was more selective, and convincing physicians that there's no need to be selective anymore. That showed up even in our home trial, our IDE, where 70% of our IDE was non-white. We published on that. The results were exactly the same. We have seen again a very similar data in terms of the diversity of our patient population here in the experience with equivalent retention rates and equivalent training time upfront. So that's point one, so no, we do not anticipate that this very narrow, overly narrow, constrictive patient selection process will matter at all in the future moving forward which I think again is a great thing on many levels. How do we build a successful program? Part two of your question, yes, it's not really about patient selection. It is about though, making sure that we can support the home program in as many ways as we can. So we are growing our customer experience team, they effectively serve as the Tablo concierge for each and every patient but also for the home team staff. We are always about asking what are your obstacles? What are your challenges? Let us take that off your hands and let us make this work for you. So I think a lot of the programs' success points, Danielle, are in a good news way, things that are well within our control and pretty tactical, actually, there's nothing structural, there's nothing strategic. It's probably just doing more of a full-service approach that we found gives these teams the confidence to grow home programs as quickly as they need to be grown.

Drew Ranieri, Analyst

Hi Leslie and Nabeel, thanks for taking the questions. Sorry to break the home trend, but to go to acute for a moment. Leslie, you highlighted—you added your ACE of the eighth-largest national healthcare systems and also highlighted that you continue to capture share in the acute setting. I was just wondering if you might be able to give us an update there on where Tablo is in terms of penetration at the larger healthcare systems, and are you seeing still conversions or some of the accounts sticking with some incumbent technologies, but also augmenting with Tablo.

Leslie Trigg, Chair and CEO

Yes, sure. I'm happy to talk about that. The—so first part of your question, what's sort of what's the runway and what are the next steps? I mean, I think we've landed on the shores of the eight national health systems and obviously landing on the shore is not the same as conquering. I think we've got a lot of continents to explore, not to overdue my Columbus analogy, but so I think the next aspiration is to make our way across the selected continents and to grow penetration. There is a significant console team just within the largest eight that we now have access to and we intend to go after. We are still, relatively under-penetrated in most all of those national customers. High single, low double-digits across working toward this $2.5 billion TAM more broadly in the acute area. I think tremendous runways in the largest eight are still ahead of us, which I'm excited about. Of course, with the eighth, we've got hundreds of hospitals across the country and parts of big regional health systems still ahead of us. So I think, Drew, at the risk of sounding boring and repetitive, the land and expand is really working. In this past quarter, we did land new customers, we also saw expansion within our existing customers, and that's frankly what I care about the most having participated in the ramps of many other medical device products over time. If your current customers are having a great experience, they will buy more. I always excessively keep my eye on expansions within the current customer base. That is my personal leading indicator and its greatness is absolutely fun to land new customers. But where I take, I think the greatest pride is that the devices are delivering on their promises leading to a lot of same-store sales, not only within specific hospitals but across the health networks regionally and nationally. And I think about your question was, are we still seeing full conversion or is it ad hoc? And I would say, I didn't notice any new trends to be honest, in Q1. I think we do have many customers that when they in-source, that typically is a bulk convergence. We have many customers who are using Tablo to in-source. We also do have some customers that maybe are already home with their own dialysis service line and patients, and are using Tablo in concert with other devices that maybe are earlier in their experience and we expect them to grow into full conversion over time.

Drew Ranieri, Analyst

Maybe for Nabeel. But it looks like our OpEx declined or maybe it was about flat sequentially versus the fourth quarter. But maybe how are you thinking about OpEx throughout the year? And maybe this is more for Leslie, but can you remind us of anything on the new product side coming in 2022, whether it's hardware or more on the software side, any updates on international? Thank you.

Nabeel Ahmed, CFO

So with respect to OpEx Drew, so you might remember when we last spoke in February, we talked about OpEx declining sequentially from Q4 to Q1. That's just because we have commissions and those incentive compensation payments that go out in Q4 that don't recur in Q1. So that's the decline. All OpEx itself is trending late in line with what we've shared from a guidance perspective on our last call, we said OpEx was roughly the Q4 2021 times four, and we continue to track essentially that for the full year.

Leslie Trigg, Chair and CEO

I'll maybe cover the new products and international. So, Drew, on the new product side—and maybe we don’t talk about this enough. We have a continuous updating and upgrading process on the software and data analytics side every year in the last two years and this year will be no different. We are super excited about it, and we will never, ever, ever continue or discontinue trying to improve the provider in the patient experience and offering them things with new functionalities and maybe new surprising, delightful moments alongside that. Internationally, we are focused, obviously, in the near term on the U.S. market, which is still an asset and barely penetrated for Tablo. Our march toward world domination—I'm kidding. But we do recognize that the U.S. is about 30% of the worldwide market for dialysis. There is a lot of opportunity there, but we don't want to—and I don't think we ever have—sort of do anything other than measure five times and cut once. Same thing with the U.S. market because we do take our commitments on the margin side seriously and the cash spend side seriously. Our calculus around where in the world and when and why and how is a pretty detailed thought exercise for us. We want to do it with careful deliberations. So I would still say don’t expect anything to report near-term. A lot, a lot of work is going on behind the scenes internally, and I would still forecast that yes, I think you will find Tablo outside the United States. More details to be revealed, and we're very, very confident about the where, when, why, and how.

Drew Ranieri, Analyst

Thank you.

Leslie Trigg, Chair and CEO

Yes.

Operator, Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Leslie Trigg for closing remarks.

Leslie Trigg, Chair and CEO

Great. Thank you! I want to thank everybody on the call for joining us this afternoon, and I hope you all have a really great evening. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.