Earnings Call Transcript - OM Q1 2024

James Mazzola, Head of Investor Relations

Good day, and thank you for standing by. Welcome to the Outset Medical Q1 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. And I would like to turn the conference over to your speaker today, Jim Mazzola, Head of Investor Relations. Please go ahead. Okay. Thank you, and good afternoon, everyone. Welcome to our first quarter 2024 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer; and Nabeel Ahmed, Chief Financial Officer. We issued a news release after the close of the market today, which can be found on the investor pages of outsetmedical.com. This call is being recorded and will be archived on the Investors section of our website. It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. These statements relate to expectations or predictions of future events that are based on our current estimates and various assumptions, and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of Outset's public filings with the SEC, including our latest annual and quarterly reports. One quick note before we get started, Nabeel is feeling a bit under the weather today, so I'm going to cover the financial section in our prepared remarks. Nabeel is here with us and will handle Q&A as normal. So with that, let me turn the call over to Leslie.

Leslie Trigg, Chair and CEO

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. With our most challenging recent headwind now behind us with the FDA clearance of TabloCart, demand for Tablo has never been higher: 12 consecutive quarters of gross margin expansion, a strong recurring revenue model that represents more than 50% of our total revenue, tipping point adoption in the acute, strong home growth with an industry-leading patient retention rate, and significant decisive steps now taken towards reaching cash flow breakeven without needing additional capital. Outset's outlook and conviction in its future have never been stronger. Earlier this week, we announced the receipt of FDA clearance for TabloCart with Prefiltration ahead of our guidance for clearance during the second half of the year. I want to thank the incredible cross-functional team here at Outset that accomplished this milestone. TabloCart provides another unique differentiator to Tablo's ecosystem, and we look forward to the impact we expect it will have during the remainder of the year. In terms of quarterly performance, we delivered revenue of $28.2 million in the quarter, which was lighter than we had originally anticipated due primarily to ongoing headwinds from the TabloCart ship hold and some associated orders again being postponed out of the quarter. With the clearance of TabloCart, this factor is now behind us. Additionally, several customers experienced disruption from the Change Healthcare cyberattack, which slowed reimbursement payments and resulted in several of our customers deferring both treatment and console purchases until their cash flow normalized. We believe this factor is now behind us as well, as evidenced by treatment ordering in April, rebounding to expected levels. Taking a step back, over the past quarter, we reflected on the complete alignment between our desire and that of shareholders to reach cash flow breakeven more quickly and with the cash already on hand. As a result, we took action. We undertook a meaningful restructuring of the business, which we anticipate will reduce our cash use through 2027 by over $100 million and reduce our 2024 non-GAAP OpEx by roughly $20 million. As a result, we expect to reach our profitability goals sooner than previously projected and without the need to access the capital markets to get there. Importantly, our cost reductions were carefully planned to protect two key goals: one, continuing to meet or exceed the expectations of patients and customers; and two, achieving our long-term revenue and gross margin expansion guidance. To be very clear, we do not anticipate the restructuring to have an impact on our near-term or long-term ability to grow revenue and expand gross margin. In fact, we believe our ability to exceed our gross margin goals, as we have today, will continue to play an important role in our path to profitability. Headcount reductions, CapEx, and associated program spending in R&D comprised the largest portion of the savings. Prior to making this decision, we were investing heavily in hardware and software engineering projects with long development time horizons. Given Tablo's already deep and wide proprietary technology moat, we are refocusing our dollars and energy on penetrating our $11 billion U.S. market opportunity with the Tablo we enjoy today. We are not sacrificing projects required for longer-term growth but rather pacing those programs to more closely match the longer timeline in which we believe they will be important to our product and technology leads. Additionally, we examined ways to reduce management bands and layers where it did not affect the customer experience and revisited plans to expand over time internationally, determining that our focus over the long-range plan period should remain in the largest dialysis market in the world, the United States. As a result of our restructuring, we expect to reach cash flow breakeven several quarters ahead of our prior estimate without the need to access the capital markets prior to reaching breakeven. At a high level, we continue to see patients and providers benefiting from the differentiated clinical, operational, and financial advantages Tablo can deliver. Our moat is wide and with proprietary in-sourcing know-how, a differentiated technology platform, actionable data, EMR interoperability, service excellence, and regulatory experience through our successful clearance of nine 510(k) during the past nine years. As a result, the universe of providers and patients experiencing the advantages Tablo can provide continues to grow. We also generated additional momentum with skilled nursing and subacute providers and grew an already record pipeline of opportunities in the acute care setting. We believe this momentum sets us up well for a strong year and supports the confidence we have in our financial guidance for 2024. On the operational front, our efforts to replace the silicon tubing and Tablo console with PCBA free material is substantially complete. Looking ahead, we are in the process of completing one additional field action near term to upgrade TabloCart's telehealth capabilities. We are proud of our collaboration with the FDA across the board and look forward to continuing our partnership with them. As we look at progress in our end markets, beginning in the acute care setting, our focus on enterprise selling and dialysis in-sourcing have continued to elevate the financial benefits and strategic importance of Tablo to provide our customers. Even with the first quarter being historically lighter for new console placements, we made good progress expanding within health systems we landed in 2023 and continue to build and advance our pipeline of opportunities nationwide. More than 60% of our acute pipeline consists of deals greater than $1 million each and more than half of our total acute pipeline represents new potential customers. One of our key new customer wins during the quarter was with a hospital in the Southwest associated with a large health system. Like many other customers, this provider was facing increased costs and inadequate service levels from its outsourced dialysis provider and wanted to take charge of their dialysis program. In partnership with the hospital's Chief Financial Officer and Chief Nursing Officer, our team was able to demonstrate the compelling financial, clinical, and operational advantages of an in-source program with Tablo, which resulted in an early termination of their contract with the outsourced provider. Several of these consoles are equipped with our Tablo Pro Plus software for use in the ICU, which continues to have a strong attach rate across consoles shipped in the acute setting and this customer is also taking advantage of our bridge program to assist with their rapid program startup. The summary here is we continue to feel very good about the opportunity and our momentum with acute care customers. We forecasted a softer first half of the year as we manage through an elongated sales cycle and work towards 510(k) clearance of TabloCart with Prefiltration and that's how the quarter played out. And with TabloCart now cleared for sale, we continue to anticipate growing into our guidance range as we move through the year. As we have grown and built scale, particularly in the acute setting, our recurring revenue business model continues to distinguish itself, anchor our guidance for the future and support our drive to profitability. Turning now to the home end market. Our progress in the quarter was highlighted by the multiyear agreement we completed with U.S. Renal Care. We've talked on previous calls about our two-tiered home penetration strategy, which entails partnering with progressive, midsized dialysis organizations and working upstream to create greater channel access for patients by expanding the universe of healthcare providers offering home dialysis. U.S. Renal Care is the largest of the progressive MDOs and committed to accelerating home dialysis with Tablo. Our initial home programs with U.S. Renal Care have been very successful and our early direct-to-consumer marketing has revealed strong interest in many other areas of the country previously underserved by viable home hemodialysis options. We also see an opportunity to help patients transition from peritoneal dialysis. PD-related infections are a major cause of dropout for patients who initially chose home dialysis. Creating a seamless transition from PD to HHD enables patients to maintain the control they enjoy at home, where many report a higher quality of life. Advances we are making with home providers are driven by the fundamental differences Tablo can provide for their patients. For example, during the quarter, we continue to see our already strong patient retention rate continue to improve. Patient retention has been the Achilles heel of the incumbent home hemo system and the prior attempts to keep patients dialyzing at home. Our most recent data shows that over 90% of patients who dialyze at home with Tablo remain on treatment at 90 days. This is nearly a 40% improvement over the 90-day retention rate for the legacy home hemo system as cited in the last USRDS report. Additionally, we continue to see controllable attrition of patients on Tablo remaining in the low single digits, which we believe to be well below historical data. For home dialysis to work, patients, caregivers, providers, and payers all need a technology that is easier to set up, maintain, and treat. And this is exactly what Tablo delivers. In terms of our efforts to increase channel access and expand the provider universe, we added a new provider of size in the Midwest, a strategic regional MDO in the Northwest, and several new home-only providers. Our top-of-the-funnel progress in Q1 also included ongoing expansion within one of the largest and fastest-growing subacute providers, serving more than 60 facilities in the U.S. This provider partners with skilled nursing facilities to offer on-site dialysis treatment to residents, which delivers substantial benefits to the SNF operator by reducing the risk and expense associated with transportation to an outsourced dialysis clinic. More importantly, this approach can provide a life-changing benefit to residents who often spend 8 to 10 hours a day being transported to a clinic, waiting to dialyze, treating, and then finally returning home, often missing meals, medications, other therapies, and adequate rest as a consequence. After our initial rollout with this provider early last year, the program has grown significantly and now includes more than 200 Tablo consoles with the potential to continue to grow substantially during the next several years. Importantly, this new model for dialysis reflects a broader trend of providers seeking to enhance patient care by offering in-house and home dialysis services. Our results across home, acute, and subacute continue to highlight the strength of our recurring revenue, which increased 24% over the first quarter of 2023, driven by consumable sales to a larger and growing fleet of Tablo consoles and a very high renewal rate for Tablo service contracts. This recurring revenue stream continues to provide us with visibility into a large portion of our 2024 and longer-term financial guidance. As a reminder, Tablo in the home generates roughly $15,000 per year through their useful life. Tablo in the acute setting generates roughly $20,000 per year as there are more treatments performed on each device in the hospital than with a single patient at home. Before I turn the call over to Jim, I'd like to reiterate a few key points about the quarter. First, we understand the importance of execution this year and remain confident in our plan. The foundation is in place to grow through the year with the return of TabloCart, the continued expansion we see in our pipeline, the success we've had with new home providers, and the strong adoption of Tablo within our large base of acute care customers. Second, our entire team is focused on the drive to profitability. We've demonstrated that commitment through 12 quarters of consecutive gross margin expansion to the 31.1% non-GAAP gross margin we reported today. In addition to the operating leverage we are demonstrating and the actions we took this quarter that we believe will lead us to reach cash flow breakeven several quarters ahead of schedule and without the need for additional capital. And finally, the business model remains strong and our value proposition compelling. We've made the investments in hardware, software, analytics, manufacturing, and a nationwide service infrastructure that all scale well as we grow this business. With recurring revenue now consistently exceeding 50% of total revenue and gross margins continuing to expand, I am more confident than ever of the value we can deliver to providers, patients, and shareholders well into the future. With that, I'll turn it over to Jim.

James Mazzola, Head of Investor Relations

Thanks, Leslie. Hello, everyone. Revenue for the first quarter was $28.2 million. While below our expectations, revenue was aligned with the quarterly build for 2024 that we guided to during the third and fourth quarter 2023 calls. The decrease was driven by a decline in product revenue, which was $20.4 million in the first quarter, a $2.5 million decrease from the fourth quarter. Service and other revenue increased to $7.7 million, up slightly from the $7.6 million we recorded in the fourth quarter. Console revenue was $9.2 million and consumables revenue was $11.2 million. As Leslie has already discussed, we believe the drivers of this shortfall relative to our expectations—the impact of the TabloCart regulatory hold and the Change Healthcare cyberattack—are now behind us. We were encouraged to see our console average selling price remains strong across all care settings as a result of our disciplined pricing and strong uptake of the Tablo Pro Plus offering with acute customers. Following the end of the quarter, we saw a strong April month for treatment sales and cartridge utilization over time continues to perform in line with our expectations. Before moving to gross margin and operating expenses, I want to highlight the initiative we undertook during the quarter to restructure our 2024 and longer-term spending budgets with the goal of reaching cash flow breakeven without the need for additional capital. Included in our GAAP results is a net charge of $2.5 million that we took in the first quarter associated with the restructuring. This charge is comprised of severance and related benefits offset by the reversal of bonus accruals related to impacted individuals. We have outlined the impact of this charge across our P&L in the tables that accompany our earnings release. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's earnings release. Now moving to our first quarter gross margin and operating expenses, which, as a reminder, reflect our non-GAAP results. Our first quarter gross margin outperformed our expectations at 31.1%, a more than 4 percentage point sequential improvement from the fourth quarter and a more than 10 percentage point increase from the first quarter of 2023. Gross margin expanded for the 12th consecutive quarter, driven by a nearly 350 basis point sequential quarter expansion in product gross margin to 39.8%, and that was partially offset by service and other gross margin of 8%. As expected, service and other gross margin expanded in the first quarter due to investments that we made in the fourth quarter and have previously described. Operating expenses of $35 million declined 4% as compared to the fourth quarter and 16% from the prior year period, driven by the expense reductions we undertook in the fourth quarter. Non-GAAP net loss in the first quarter was $29.3 million, or $0.57 per share, slightly lower than last quarter and $6.1 million, or $0.15 per share, less than the first quarter of 2023. We ended the quarter with approximately $230 million in cash, cash equivalents, short-term investments, and restricted cash, which we expect to fund operations to cash flow breakeven. Turning now to our outlook for the full year 2024. We are reaffirming our revenue and gross margin guidance today. Starting with revenue, we continue to expect a range of $145 million to $153 million. As TabloCart comes back online, we do anticipate some ramp time to reengage on customer opportunities, revise contracts, and schedule installations. As a result, we anticipate Q2 revenue to be in the low $30 million range, with the full benefit of TabloCart's return and the lapping of the elongated sales cycle coming in the third and fourth quarters. Our strong and growing recurring revenue stream provides us a lot of confidence to achieving the second half ramp. With roughly 50% of second half revenue expected to come from recurring revenue, the remainder of second half revenue would require console sales to be roughly in line with quarterly console revenue just prior to the TabloCart ship hold, which we believe is achievable, particularly given the substantial growth in our acute and subacute pipeline during Q1. Turning to gross margin. With our continued gross margin outperformance, we have increased conviction in our guidance for 2024 non-GAAP gross margin. For the full year, we expect gross margin to be in the low 30% range, exiting the year in the mid-30% range for the fourth quarter of 2024. Again, gross margin expansion is driven by console cost-down programs, recurring revenue from a larger installed base, and service leverage. Turning to OpEx for 2024. As a result of the actions we have announced today, we now anticipate that OpEx for 2024 will be $125 million to $130 million. And finally, our long-term guidance. With our strong value proposition across two large end markets, our wide competitive moat, and our broad integrated offering of products and services, we expect annual revenue in the high teens between 2025 and 2027. We continue to expect that our ability to expand gross margin on an annual basis will be linear from our 2024 exit goal of mid-30% to our 2027 exit goal of 50%. We plan to invest in our cost-down programs for both console and cartridge, and we continue to see recurring revenue growth and service leverage. We also expect that the spending cuts we're making in 2024 will add roughly another $10 million in savings in 2025 across COGS, OpEx, and CapEx. As a reminder, our business does not require large amounts of CapEx, which we expect to be in the low single-digit million-dollar range annually through 2027. We have further opportunities for even greater savings if gross margin continues to perform better than expected. As a result of our work to realign our spending and with our anticipated levels of revenue growth and gross margin expansion, we anticipate reaching cash flow breakeven several quarters earlier than previously expected without the need to raise additional capital. The steps we've taken to further adjust our spending are logical and well prioritized, allowing us to continue to deliver an unmatched customer experience as we accelerate our drive to profitability. We remain bullish on the tailwinds in the business and the wide and deep moat we have established with Tablo, all of which gives us confidence in our outlook for 2024 and the longer term. With that, I think we're ready for Q&A. Operator, please open the lines.

Operator, Operator

The first question that we have today will be coming from Rick Wise of Stifel.

Frederick Wise, Analyst

Good afternoon, everybody. Let me start with TabloCart. I have a multipart question that you touched on a bit. Specifically, as Jim mentioned, it’s going to take some time to reengage and there’s work to be done to install. Leslie, can you talk to us about whether there are orders in hand? Are you prepared to manufacture and ship to meet those orders? In the second half, can you quantify the potential upside from having TabloCart in hand, particularly regarding TabloCart sales? Or does it hinder conversations and impact Tablo as well? Sorry for the multipart question.

Leslie Trigg, Chair and CEO

No worries. Yes, I'm happy to answer all of those questions, and please let me know if I overlook any part of your question. To start, we had to pause all sales, marketing, contracting, and any back office support activities when we decided to implement the ship hold. This means we need to reestablish everything. To provide more clarity, this involves activities such as generating new quotes, reviewing existing sales agreements, and getting new purchase orders generated. While none of this is particularly difficult, it does require some time. Another consideration is customer budgeting; some customers may need to revisit their budgets to reallocate and approve funds that were set aside several quarters ago. Again, this is not complex but will take a bit of time. I'm very confident that we will have all these steps in progress and expect it to carry through the remainder of Q2. The encouraging news is that we are prepared for the second half. We initially anticipated TabloCart approval around the middle of the year, and the early approval gives us more time to prepare ahead of schedule. We can get everything ready during this ramp-up and really leverage this from a sales perspective in the second half, which is a significant factor in our confidence in growth for that period. Regarding your second question about manufacturing—yes, we are ready to ship because we had TabloCart in inventory when the ship hold began. I do not foresee any delays related to supply chain or manufacturing. Finally, you asked about growth and any potential upside in the second half. You're right on target; we anticipate that TabloCart will boost our Tablo console sales, which had previously been deferred across several quarters. We strongly believe that TabloCart will reignite those sales. Additionally, we expect to see orders for standalone cart purchases from our existing customer base, particularly customers who already use Tablo or those who have the TabloCart with the storage drawer and may want to upgrade to the prefiltration version. Thus, we anticipate generating revenue through both of these avenues.

Frederick Wise, Analyst

I appreciate that. There's a lot to discuss. As a follow-up, I think it would be helpful to get more clarity on the first quarter results, which were lighter than expected. Based on your comments and the surrounding context, it seems like this period might have been better than the initial indicators suggest. Can you elaborate on the delayed orders for Tablo and the resolved impacts from the cyberattack? Specifically, would first quarter sales have been $1 million or $5 million higher? Can you help us understand the details and whether those delayed orders will translate into the second quarter?

Nabeel Ahmed, CFO

Yes, Rick, it's Nabeel. The first quarter really played largely as we had guided. We had expected a soft first quarter and then recovery in Q2 and really ramping in the back half of the year. That's kind of the guidance commentary we gave entering this year and back in Q1. So we'd always said the first half of this year will look more like the back half of last year because, again, in both periods, we didn't have Cart. Having—so Q1 performed largely as we expected. Having said that, in Q1, specifically, we did see the continued deferral of console sales and cart sales, which now is behind us with the cart's approval. And we did also experience a little bit from this change healthcare slowdown, which, again, we believe is also behind us. So Rick, Q1 really played largely as we expected, a little bit softer. But again, we believe we haven't lost any deals, and we believe, again, that we're now going to ramp Q2 for a strong second half of the year, again, as we had originally guided.

Leslie Trigg, Chair and CEO

Let me add one more thing to reiterate two important points. First, the treatment revenue and treatment orders in April have come back very strong, and we are optimistic about the direction for Q2 and the rest of the year. Additionally, in response to Rick's question about whether any of these orders came through on the console side, the answer is yes. One of the orders that was deferred out of Q1 due to the change in the healthcare situation was actually placed in April for the record.

Operator, Operator

And our next question will be coming from Shagun Singh of RBC Capital Markets.

Shagun Singh Chadha, Analyst

A quick follow-up here. I was just wondering if there's a way to quantify the backlog of what was outstanding is waiting for TabloCart to get approval on restructuring. Is there any way you can provide the cadence for that $20 million savings in '24 and just what are you saying on the profitability timeline? I know you said a few quarters ahead, but anything more specific. And then, I guess, a big picture question for you, Leslie. Can you just spend some time elaborating on your commercial organization? Like just trying to understand if you have the leadership in place, the feet on the street, if you will, how are you really looking to reengage these customers.

Leslie Trigg, Chair and CEO

Sure. Maybe, Nabeel, you want to start off, and I'll take over in a minute.

Nabeel Ahmed, CFO

For sure. Shagun, maybe let me sort of lay out how we are thinking about the second half of the year, the full year really from a guidance perspective, right? And so let me go back to sort of we expect the first half of this year to look largely like the back half of last year. Again, because we haven't had cart in any of those periods. So our guidance for Q2 is for revenue in the low $30 million zone, as Leslie pointed out, we'd ramp back on cart with prefiltration. Now Shagun, as we think of the second half of the year, there's really two components I would point you to. So first of all, we will have the recurring revenues on our larger installed base. This is the consumables and the service revenues that will be roughly half of our implied 2H revenue, if you will. If you take that and then sort of the remainder—the remaining console revenue after you sort of take the second half, roughly half is recurring. The remaining console revenue is roughly in line with what we did in the first half of 2023 when we had cart to be able to sell. So that's how we kind of thought about the back half of the year. Moving on, Shagun, your second question with respect to the savings, a little over half of the savings were from R&D and ops groups kind of R&D, more broadly speaking. And again, Leslie talked about the projects that were sort of, again, deferring or that we took a second look at. The rest or half is R&D and ops. The other half is just across the P&L. And again, it's things like spans of control, layers of management programs, and projects that didn't have payback within our LRP horizon. So that's number two. Number three, from a profitability timeline perspective, let me first maybe talk a little bit more about the savings we've generated. So in total, we are saving through the actions we have undertaken over $100 million over our LRP period. Roughly $20 million comes out of $24 million. As we talked about, that annualizes to about $30 million in '25 and a little bit more than $30 million in '26 and '27. So if you propel that math through the model, our initial expectation was that we'd get to breakeven exiting '27, you can see how, again, if you take kind of $30 million, a little bit over $30 million out of the out years, you can see how that will pull profitability forward by a few quarters.

Leslie Trigg, Chair and CEO

Maybe I'll pick up on the commercial org. I think was your last question and do we have adequate coverage out there to rapidly educate customers about TabloCart and other. And the short answer is yes. We are covered actually in all 50 states. Just as a quick reminder, we have a capital sales team. We have a clinical sales team, and we have a national accounts team. All three of those teams cover both acute and sub-acute, of course, and also home. And so we continue to get a lot of operating leverage out of this team. And I think we've talked about that in past calls. That continues to be true, but we do have sales coverage in all 50 states, and I am not worried at all about the speed with which our sales team will be sharing the news with both current customers and our potential new customers.

Operator, Operator

And our next question is coming from Marie Thibault of BTIG.

Marie Thibault, Analyst

Wanted to start here with a pretty high-level one. I know that one headwind you've talked about in the past is a longer selling cycle and environment being a little bit tougher. I wanted to hear how that's changed since you last spoke with us publicly? Has that gotten worse? Has it gotten better? Has it stayed the same? Any detailed commentary you can give on that would be helpful.

Leslie Trigg, Chair and CEO

Yes, sure. I would say on the capital spending environment, it's been really stable, which has been a good thing. So we have not seen any material changes in the capital spending environment. We are also advantaged because Tablo and in-sourcing do have a very rapid payback period, typically inside of a year for a hospital that makes the conversion. And that certainly helps ensure that Tablo rises to the top of those capital budgeting prioritization lists. But setting that aside, in general, we saw a lot of stability in the capital spending environment. No changes to speak of.

Marie Thibault, Analyst

That's great to hear. For my follow-up on gross margins, you continue to exceed expectations, and it's nice to see another increase. Regarding the guidance, you are starting the year in the low 30s, and we anticipate low 30s for the full year, with mid-30s by the end of the year. Should we expect smaller incremental improvements from here? Was this increase a one-time event, or should we anticipate a slight decline? How should we view the cadence for the remainder of the year?

Nabeel Ahmed, CFO

Yes, Marie, it's Nabeel. We are really pleased with our team's ability to deliver our 12th consecutive quarter of gross margin expansion. We believe it will continue to be linear from here to the mid-30% by the end of the year on our way to 50%. It’s a strong performance, and we expect to keep moving forward.

Operator, Operator

Our next question is coming from Kristen Stewart of CL King.

Kristen Stewart, Analyst

I was wondering if you could just expand a little bit more on the U.S. Renal Care announcement. And just in terms of when we could start to see an impact from that really materializing?

Leslie Trigg, Chair and CEO

Yes, sure. Well, U.S. Renal Care has been a good partner to us and continues to be a good partner to us. And our initial home programs with them were very successful. As I mentioned, it's one of the largest of these midsized dialysis organizations. They manage roughly 36,000 patients across the United States and increasing their home population and growing home is really central to their mission looking forward. I think what they were able to confirm for themselves is a much faster training time with Tablo, which made it easier to convince patients to adopt home. Our training time, our average duration despite a much wider and wider demographic of patients adopting home remains remarkably consistent at under 10 sessions, roughly two weeks or equivalent of peritoneal dialysis. So that's been a real selling point that I think has been recognized by many provider organizations and really this retention rate has been key. It is so much higher than other alternatives out there. And that's really the point. The point isn't to train as many people as you can to go home. The point is to keep as many patients as you can at home. That's really where the economics bloom, and of course, the clinical outcomes manifest themselves. And so we view U.S. Renal Care, like all of our other partnerships within this MDO segment, as really critical to our own home growth, and we're privileged to be able to be a strategic weapon in their hands as well as they try to grow home.

Operator, Operator

And our next question is coming from Suraj Kalia of Oppenheimer.

Suraj Kalia, Analyst

Leslie, Jim, Nabeel. Can you hear me all right?

Leslie Trigg, Chair and CEO

Yes.

Suraj Kalia, Analyst

Perfect. Leslie, a lot of commentary provided. If you could quickly the 90-day 90% retention rate, if I were to extrapolate those curves at the 1-year time point, do you have visibility into what the retention rates are? And also specifically on workforce reduction, Leslie, was there any reduction in the sales and marketing division?

Leslie Trigg, Chair and CEO

Sure. Let me address that. I'll discuss the patient retention rate first and then move on to your second question. We do have data for the one-year retention, and it is significantly higher for Tablo compared to the legacy home hemo system. We are very pleased with the one-year retention rate, which has also been very stable. Not only is it much higher, but it has remained consistent. Suraj, we've mentioned before that at one year, we measure what we call controllable attrition. This differs from uncontrollable attrition, which includes factors like death and transplant, unfortunately. Controllable attrition refers to patients choosing to opt out, perhaps to return to in-center treatment or due to changes in their lives. We strive to influence this rate positively and focus on doing an excellent job in managing it. The controllable attrition rate at 12 months has remained stable at about 10%, even with significant growth in the total number of patients using Tablo at home. Those results have held firm between 90 days and a year. Regarding our workforce reduction, the majority of the cuts impacted the operations and R&D sectors, with the remaining reductions spread throughout the organization. When considering our approach and philosophy for reducing expenses, we had two main priorities: preserving the patient and customer experience, which is crucial for the growth of Tablo, and ensuring we continue to make progress on our gross margin expansion initiatives. We meticulously planned our cost reductions to avoid impacting these key areas.

Operator, Operator

Our next question is coming from Stephanie Piazzola of Bank of America Securities.

Stephanie Piazzola, Analyst

I appreciate the color on the guidance you've given and how we should think about the first half versus the second half of the year. But just wanted to follow up a little bit, I guess, as Q1 coming in a little late and not changing the outlook for the second half. Is there anything getting better maybe in the second half to offset Q1 versus previous expectations and maybe any difference in how we should think about the low versus the high end of the guide now?

Nabeel Ahmed, CFO

With respect to Q1, it came in largely as we expected, though slightly softer. We anticipate Q2 to be a ramping quarter. For various reasons, including reactivating customers with TabloCart and prefiltration, we expect Q2 to increase a bit, reaching the low $30 million range. Looking at the second half, we will have TabloCart with Prefiltration for the entire period as we expect to ramp up in Q2, ensuring we are fully prepared for the second half. Specifically, the second half consists of two main components. First, we will see recurring revenues, which include consumables and services from a larger installed base as we enter this period. If we assume that at least half of our projected revenues for the second half will come from these recurring sources, we expect the other half to come from consoles, with console revenue similar to what we experienced in the first half of 2023 when we had TabloCart with Prefiltration. Does that make sense?

Stephanie Piazzola, Analyst

Yes. Thank you.

Nabeel Ahmed, CFO

And then as you think about moving through the guidance range, we've always had the same performance levers, right? So we can place more consoles in both our large home or acute end markets. We have ASP. We have Tablo Pro Plus penetration or sales. And of course, we have TabloCart sales both to our existing installed base and to new customers. So those are kind of how we think about guidance.

Leslie Trigg, Chair and CEO

I would like to add a few points based on your comments. Besides TabloCart, which is a significant factor as we head into the second half, I want to highlight that we observed substantial pipeline expansion in the first quarter. Previously, we mentioned that our sales cycle typically spans 9 to 12 months, with some deals closing sooner and others taking a bit longer. Generally, it remains within this timeframe. With this notable pipeline expansion, a larger percentage of our deals in the pipeline are now exceeding $1 million, and over half are from potential new customers. This shift in our pipeline is promising in a positive way, providing additional support for the second half of the year. Furthermore, we are also anticipating the impact of the sales cycle from the third and fourth quarters of 2023, which will influence our performance in the latter half of 2024. This combination of three supportive factors is what drives our confidence in our growth trajectory for the remainder of this year.

James Mazzola, Head of Investor Relations

Okay. Thanks, Stephanie. Next question, operator.

Operator, Operator

And the next question is coming from Joshua Jennings of TD Cowen.

Joshua Jennings, Analyst

I was hoping to just get an update on the Tablo enhancements that have been brought forward over the past 12 to 18 months. It sounds like the CTO departed as part of the restructuring. I imagine there's a deep bench there, but any plans to replace that head of that group? And then anything we should be looking for in terms of technology enhancements on the Tablo system as we move through this year.

Leslie Trigg, Chair and CEO

Yes. Sure, Josh. Happy to answer that. One of our, if not our CTO's greatest gift and legacy to Outset is the team that he put in place here, and he's leaving us with. We have an absolutely stellar Vice President of Software, very, very deep bench strength on cyber and data analytics and EMR operability. As we noted in the script, we have spent the last many number of years making very significant enhancements and investments in all dimensions of software, data, data transmission, cyber and EMR interoperability. And now is our moment to harvest those investments. And as I said, we do have an advantage in this market, which is we are light years ahead. We have a very, very meaningful technology advantage, both hardware and software. And I know this has been pointed out to us by investors and shareholders that, hey, you guys have an incredible, incredible lead; should you just be maybe taking a pause and really selling and marketing what you have? And I think that there's a lot of merit to that, and we reflected on that a lot. We will never stop being sort of the imaginative ambitious people that we are; I can't change the personality of the organization. However, we do have an advantage and the lead that we already have, both software and hardware, will be our focus for the over the course of this LRP period to make the best use of that. But no, we are not going to stop dreaming. And as I mentioned, we are just going to probably more pace investments in the future, better aligned to the timeline at which they might pay off, which is probably maybe towards the end of the LRP period or beyond. Hopefully, that helped.

Joshua Jennings, Analyst

Definitely. And then just thinking about the evolution of the Tablo system and as we think about the LRP, what are the pricing assumptions both on the capital and on some of the disposables? Should we be thinking about price increases year-over-year, or is stable pricing the name of the game within that LRP guidance?

Nabeel Ahmed, CFO

Yes, Josh. We've always discussed Tablo and our capability to maintain our pricing at the lower end while providing value-added accessories, such as Tablo Pro Plus and now TabloCart with Prefiltration. This is how we approach pricing generally now and throughout the LRP period.

James Mazzola, Head of Investor Relations

Okay. Thanks, Josh. Operator, any further questions for us?

Operator, Operator

At this time, there are no more questions in the queue. I'd like to go ahead and turn the call back over to Leslie for closing remarks.

Leslie Trigg, Chair and CEO

Great. Well, I would like to thank everybody again for joining us this afternoon and wish everybody a very good evening. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for joining. You may all disconnect.