Earnings Call Transcript - OM Q4 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Outset Medical Q4 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I will now turn the conference over to Jim Mazzola, Head of Investor Relations. Please go ahead.

James Mazzola, Head of Investor Relations

Good afternoon, everyone, and welcome to our fourth quarter 2025 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer; and Renee Gaeta, Chief Financial Officer. We issued a news release after the close of market today, which can be found on the investor pages of outsetmedical.com. This call is being recorded and will be archived on the Investors section of our website. It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. 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 Outset's public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. Leslie?

Leslie Trigg, CEO

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. 2025 was a year of progress and transformation at Outset Medical, a year where we overcame adversity to emerge with a stronger foundation and even deeper capabilities to help hospitals, health systems, post-acute and home providers improve patient care outcomes at lower cost and with less complexity. During the year, we substantially reduced our cost structure while making significant investments to extend our technology and service leadership. These investments were key to our announcement 2 weeks ago about the FDA clearance of our next-generation Tablo platform. Second, we meaningfully strengthened our team and infused new talent into key leadership roles, in finance, medical affairs and field service. Third, we recapitalized the company with less debt and new capital to fund Outset through cash flow breakeven and beyond. Fourth, we expanded our base of published evidence, demonstrating the significant clinical, operational and financial benefits that can be achieved by in-sourcing with Outset and Tablo. In particular, the clinical value proposition came into clear focus as our customers documented even more evidence of improved clinical outcomes. Fifth, we maintained a very high customer satisfaction or CSAT score, above 95%, for the exceptional customer service we provide. And lastly, we continue to sign new agreements for the in-sourcing of dialysis at new and expansion sites, including at one of the largest national health systems in the country with well over 100 facilities. Tablo is now used at roughly 1,000 acute care sites in the United States. Turning to our financial results for the year, we announced preliminary fourth quarter revenue last month, which came in at the high end of our revised guidance range. At $119.5 million, revenue grew by 5% over 2024 and sets us up for what we anticipate will be an even stronger growth year in 2026. As we have worked toward greater consistency and predictability in our top line results, we continued our steady 5-year expansion of gross margin to finish the year at 39.6% non-GAAP gross margin. Gross margin exiting the year was well above 40%, which keeps us on a trajectory to our next milestone of 50%. Moving to our end markets, I am most proud of the progress we made during 2025 strengthening our partnership and presence with acute and post-acute care providers. We began to see vocal champions emerge throughout our customer base because of the clinical and operational benefits that can be achieved by in-sourcing with Outset. The financial benefits have long been understood and remain a key selling point. In 2025, we saw new momentum from nursing leaders sharing their experiences with improved clinical outcomes as well: lower infection rates, reduced length of stay and higher nurse satisfaction with the dialysis service line that is in-sourced with Outset. Operationally, from gross margin expansion to product innovation, to operating expense performance, we made meaningful progress in 2025 and took strides on our path to profitability. In the past year, we reduced cash usage by $70 million, increased gross margin by more than 500 basis points and continued to narrow our operating loss. Additionally, we made investments in innovation to further extend our technology lead and, just 2 weeks ago, received FDA clearance for the next-generation Tablo platform. This new platform is the first dialysis system cleared under the FDA's 2025 cybersecurity requirements and includes hardware and software enhancements that improve performance and system reliability as well. A 2025 survey of U.S. health care IT and cybersecurity professionals published in The HIPAA Journal found that 93% of health care organizations had experienced at least 1 cyberattack in the past 12 months, with an average of 43 attacks per organization annually. Cyberattacks slow patient care, reduce the hospital capacity and create staffing strain. More than 70% of hospitals experiencing a significant cyberattack report direct patient care disruption, which is why health systems now treat cybersecurity as a critical patient safety issue. A dialysis system that meets FDA's most stringent cybersecurity requirements helps protect hospitals by reducing the risk of compromise, limiting the risk of spread and safeguarding patients. We view Tablo's secure-by-design architecture, multilayer authentication and resilience against unauthorized access, as well as its compliance with FDA's rigorous cybersecurity standards, as a significant new competitive advantage. It provides yet another compelling value proposition, on top of cost savings and on top of clinical outcomes improvement, that we believe will be recognized by health systems amid ever-increasing concerns over cybersecurity, continuity of care and patient safety. This clearance is the 10th 510(k) for Outset, building on our track record of innovation in the dialysis market. The next-generation Tablo is also a new foundation from which we intend to innovate further with future enhancements planned, to widen and deepen the moat we have already established in the acute and home market. We are excited for the planned launch toward the end of the second quarter. Turning to our commercial organization, our team executed well in the fourth quarter against many of the largest opportunities in our pipeline. We closed the deal that had shifted out of the third quarter and made meaningful progress on several others. I am proud of the fourth quarter execution our sales leadership team demonstrated and optimistic about the additional strides we can take in 2026. Our strong pipeline is reflective of the benefits that can be achieved by in-sourcing dialysis with Outset's proven technology, expert know-how and exceptional service. And now together with the next-generation Tablo launching this year and a rich roadmap of additional innovations to follow, we expect to drive growth for many years to come. With that, I'll turn it over to Renee for more detail on the year and our guidance for 2026.

Renee Gaeta, CFO

Thank you, Leslie, and good afternoon, everyone. Revenue in the fourth quarter of $28.9 million consisted of $19.9 million in product revenue, which, as expected, was below $21 million in the fourth quarter of last year. The components of product revenue include console sales, which grew 11% to $6.4 million, and consumable sales of $13.5 million. As we indicated last quarter, consumable sales were lower in the quarter compared to the fourth quarter of last year due to order timing. Consumable revenue did rebound sequentially, just as we had anticipated on last quarter's call based on our Tablo utilization data, growing nearly 11% over the third quarter. We were very active during the quarter to tighten up our forecasting methodology for treatments, which now includes closer collaboration with our largest customers on their ordering patterns. I believe we have made improvements to better predict treatment demand, and we will continue to monitor Tablo utilization and ordering data as we hone our approach. Service and other revenue of $9 million grew 6% from $8.5 million in the prior year period. Recurring revenue from the sale of Tablo consumables and service was $22.5 million, again growing sequentially, as we anticipated on last quarter's call, but down from the fourth quarter of 2024 due to customer ordering patterns that resulted in a strong fourth quarter in the prior year. Next, I will walk through our gross margin and operating expenses for the quarter. Please refer to the tables in today's earnings release for a reconciliation of GAAP to non-GAAP measures. Non-GAAP gross margin expanded more than 500 basis points from last year, reaching 42.9% for the quarter, even with another 130 basis-point headwind from the under-absorption of manufacturing overhead. Excluding the manufacturing headwind, we would have seen non-GAAP gross margin closer to the mid-40% range. Product gross margin increased 640 basis points year-over-year to 50.7%, from 44.3% in the fourth quarter of 2024. This marks the first time product gross margin has exceeded 50%. Service and other gross margin was 25.6%, growing 470 basis points from 20.9% in the fourth quarter of 2024. This progress keeps us right on our path to the next milestone of 50%. Moving to operating expenses. Non-GAAP operating expenses declined nearly 4% to $25.7 million, compared to $26.6 million in the fourth quarter of 2024. Non-GAAP operating loss was $13.3 million, 14% below the operating loss of $15.5 million in the prior year period. Non-GAAP net loss of $15 million was 22% lower than $19.3 million in the fourth quarter of 2024. These positive results reflect our drive to profitability. Moving to our balance sheet, we ended the quarter with $173 million in cash, cash equivalents, short-term investments and restricted cash. We used approximately $9 million in cash during the quarter. To close out the full year of 2025, we reported revenue of $119.5 million, a 5% increase over 2024. Product revenue was $84.8 million, a 5% increase over $81 million in 2024. Service and other revenue was $34.7 million, a 6% increase over $32.7 million in 2024. And recurring revenue was $88.7 million, also a 6% increase over $83.9 million in 2024. Non-GAAP gross margin for the year increased 400 basis points to 39.6%, or 41.1% excluding the impact of manufacturing under-absorption. For the full year, the under-absorption headwind was 150 basis points, right on our forecast, and will have a diminishing effect in 2026. Non-GAAP operating expenses in 2025 were $97.8 million, a 19% reduction from $120.7 million in 2024. Non-GAAP net loss was $65.4 million, a 31% decline compared to $94.8 million in 2024. Turning to our guidance for 2026, we expect revenue to be in the range of $125 million to $130 million, a 5% to 9% increase over 2025. In terms of revenue timing, we expect the first quarter to be roughly flat to the fourth quarter of 2025, and then stepping up through the rest of the year. For non-GAAP gross margin, we expect to be in the low to mid-40% range. A higher console mix would move gross margin lower in the range, just as a higher mix of consumables would move gross margin to the higher end of the range. We expect the manufacturing under-absorption that was a headwind in 2025 to attenuate as we move through 2026. Finally, we anticipate continued operating leverage this year with operating expense growth at roughly half the rate of expected sales growth. In terms of cash use, we expect Q1 to be our highest cash use quarter for the year due to planned investments in inventory and manufacturing. On a full year basis, the combination of revenue growth, gross margin expansion and expense discipline will enable us to use less cash in 2026 than the $46 million we used in 2025. With that, I will turn the call back to Leslie for closing comments.

Leslie Trigg, CEO

Thanks, Renee. I want to close by reiterating that we operate in 2 large end markets where we remain the clear technology leader. Tablo consoles have performed more than 3 million cumulative treatments. And what is even more astounding is the depth and the breadth of our data repository. There are now more than 8 trillion data points in our cloud platform, which helps fuel our analytics and innovation engines, improves the customer experience and ultimately enhances patient care. We're gaining scale with significant growth runway ahead through hundreds of master sales and service agreements already in place and a pipeline of new customer opportunities. All of this progress sets a powerful foundation for value creation over the long term. Providers, including many of the largest health systems in the country, are realizing the advantages that in-sourcing with Tablo can deliver. Our team is differentiated by its expertise and an unwavering commitment to our customers and the patients they serve. I expect we will demonstrate that commitment again in 2026 as we drive growth and move ever closer to profitability. With that, I think we are ready for Q&A. Operator, please open the lines.

Operator, Operator

One moment for the first question today, which will be coming from the line of Marie Thibault of BTIG.

Marie Thibault, Analyst

I wanted to start here with next-gen Tablo. Thanks for the background on the advantages that system will offer. Can you tell us a little bit about how that might change the markets that you can go after, the types of hospitals you can go after, whether it might change your sales cycle timelines? And any ASP lift that we might see as well from that launch?

Leslie Trigg, CEO

I'm glad to talk about that. Thank you for the question. This is a topic we are very passionate about because we are proud of the efforts that have gone into it and the value we aim to provide to hospitals. I've spoken with numerous hospital leaders regarding cyber issues, especially those who see vendor devices as a significant risk. They are concerned not only about their own network's security but also about the numerous devices connected to it. It's clear that health system executives are placing a heightened emphasis on the cybersecurity of the medical devices in their facilities. With our first dialysis system now meeting FDA's stringent cybersecurity standards, I believe this will attract attention and interest from potential customers, regardless of hospital size. It’s worth noting that I haven't observed a significant difference in cybersecurity concerns across small, medium, or large hospitals; they all share this concern as it relates to fundamental patient safety. Therefore, I see this as a possible advantage for us in 2026 and beyond. While it's still early since we just received approval a couple of weeks ago, I expect to see increased interest. I believe our capability to provide advanced cybersecurity measures will be well received by hospitals. Regarding the ASP lift, I look forward to sharing more details as we approach the launch later this year. We have always followed a pricing philosophy that focuses on value, and we believe this upgrade offers considerable value. I encourage you to stay tuned for more specifics as the year progresses.

Marie Thibault, Analyst

Okay. Very helpful, Leslie. And then a quick follow-up on the sales force and the deal pipeline. It certainly sounds like you've tightened up the process so that you have cleaner visibility into timing and the deals. But can you tell us anything about the stability of the sales force? Was there any attrition post the leadership leaving? And are there any updates on the search for the leader? And anything sort of on how you're viewing the deal pipeline now given the guidance of sequentially flat for first quarter?

Leslie Trigg, CEO

Absolutely. As I reflect on Q4, I believe we have a skilled sales leadership team that kept the organization focused on the quarter. The results of Q4 demonstrate that, even with a revised guidance range, we executed at the top of it. We saw treatments return to normal levels, and the deal from Q3 that had slipped closed in Q4. Console sales bookings met our expectations for Q4, which was encouraging. Looking ahead, Renee and I remain actively involved in reviewing the pipeline and forecasted deals, and we will continue to monitor things closely. Regarding the stability and focus of the sales organization, so far, so good. We are still conducting a search for a new leader with the help of a top executive search firm. Having a strong sales leadership team currently allows us the time to find the right candidate. We are being very thoughtful to ensure the new leader aligns culturally and operationally with our business.

Marie Thibault, Analyst

Sorry. I was just saying thank you.

Leslie Trigg, CEO

Thank you. But I was going to address the third part of your question, which I think was pipeline in Q4 and kind of across 2025. So looking back on the year in full, yes, the pipeline did grow across all the key metrics that we measure, which are the overall size of the pipeline, the average deal size, in particular, deals over $1 million in console value. And then we also look at: does the pipeline look healthy in terms of diversification? And we look at diversification a couple of different ways. One is diversification between new customers, who are coming into the pipeline interested in moving from outsourcing to in-sourcing with Outset, and then existing customers who are already in-sourced with Tablo and looking at expansion to new facilities based on the clinical or operational and financial benefits that they've already seen and proven after themselves. So yes, we do see good diversification between new and existing. We also look at the diversification in terms of hospital size. We see good diversification between kind of the big, brand-name, beachhead health systems that have entered our pipeline, but also medium-sized hospitals and small hospitals. And I'll maybe take an opportunity just to touch on a point that's adjacent to your question, Marie. When I talk about small hospitals, we're really proud of the impact, albeit early; it's nascent, but the impact that we have had in '25, and we expect to have in '26, with critical access hospitals. These are hospitals that are increasingly looking at standing up new dialysis service lines because dialysis clinics in their local, rural communities have closed. And the patients, therefore, in these rural areas do not always have access to any sort of dialysis care, which obviously is problematic because it is a life-sustaining therapy. And so we are proud of the partnership that we're starting to effectuate with critical access hospitals, to ensure that these rural communities have consistent access to dialysis. So very long-winded answer, I apologize for that. But in terms of pipeline diversification, across the size and type of the hospitals, I think we are very well balanced, again, across large enterprise solution level deals, again, all the way down to critical access hospitals and sort of everything in between.

Operator, Operator

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

Joshua Jennings, Analyst

I wanted to follow up on Marie's question you answered, Leslie, regarding pipeline diversification. Can you quantify the pipeline growth entering 2025 versus entering 2026? Additionally, as we consider the potential to expand your current customer base and the associated sales cycle, is there a prioritization for the sales team to reduce the sales cycle? Or do you believe the current mix is appropriate? What strategic plan do you have in terms of the different segments within the pipeline, particularly regarding shortening the sales cycle over the next 12 to 24 months?

Leslie Trigg, CEO

Yes. Thanks, Josh. Those are all great questions. I'm going to answer them with a little bit of sensitivity from a competitive standpoint, but let me see if I can at least provide some helpful color. So you really hit the nail on the head when you talked about the sales cycle. And that's exactly why diversification in the pipeline around deal size is important and why the diversification between sort of new customers and expansion customers is important. The larger the deal, the longer the sales cycle. And that's not unique to Outset. That's, I think, universal to any capital equipment business. When customers are new to Outset, obviously, you've got a few extra steps around master sales and service agreements and OAs, et cetera, long before you get to a PO. And that always adds some time. When you're dealing with enterprise solution opportunities, you are talking about 10 hospital conversions, 15, 20 or more hospital conversions, sometimes all at the same time. And those are big decisions. We recognize that those are big, important decisions. And so understandably, those types of deals are going to involve more stakeholders at the health system level. You not only are working with a system CNO. As for example, if it's a 15 or 20-hospital system, you also need to make sure that all other 15 or 20 local level CNOs are on board and enthusiastic. And so that takes a bit more time. So when we look at the larger enterprise opportunities, our sales cycle, and we've shared this before, it remains, I would say, in that 9 to 12-month plus-plus range that it can be as long as 1.5 years. At the same time, when we look at deals that are much smaller, that is closed, that can be as little as 3 to 6 months. And so as we think about the design of our pipeline, the management of the pipeline, that's exactly how we're thinking about it, Josh, is really about a balance between sales cycle time. You also asked me about the sales force focus, and here I'll be a little bit more artful. But I would say that we are focused on serving any and all hospitals and post-acute facilities that want to kind of control their own destiny when it comes to the clinical, operational and financial benefits of in-sourcing versus outsourcing. With that being said, yes, you're right that if you're thinking about customers who already have a footprint with in-sourcing in Tablo, in the theoretical, that often can have a shorter sales cycle with lower barriers to adoption. But again, I want to stress, we're focused on serving everyone who wants to control their own destiny moving forward for better patient care. Hopefully, that provides a little bit of helpful color.

Joshua Jennings, Analyst

No, definitely. And maybe a little bit too granular, but just any color on or quantification of, I guess, the pipeline ending '26 versus '25?

Leslie Trigg, CEO

Yes, we experienced similar growth in the pipeline as we did between 2024 and 2025. The growth rate from the end of 2024 to the end of 2025 was about the same as in the previous year. I am very encouraged by the demand we are generating. Recently, some of the pipeline expansion has resulted from a new clinical value proposition that our customers have been increasingly publishing, showcasing reductions in length of stay, lower CLABSI rates, and fewer code blues during dialysis treatment. I have heard from potential customers that this has sparked an additional wave of interest, beyond the established financial ROI benefits of in-sourcing with Tablo over the past couple of years.

Joshua Jennings, Analyst

Great. Just sneaking one more, sorry. Multipart question on that last one. But just thinking on the guide and 5% to 9% revenue growth, any help just thinking about, as we're forecasting, updating our models, console growth versus consumable growth within that range?

Renee Gaeta, CFO

Sure, I'm happy to help. When we considered our guidance range, we looked at the three main components of revenue and the various factors affecting each. Our projected growth of 5% to 9% represents what we believe is a balanced and prudent approach for the full year. I suggest you consider forecasting growth for recurring revenue to align closely with that overall growth. As we've seen from our performance in 2025 compared to 2024, we experienced steady revenue growth across consoles, consumables, and services.

Operator, Operator

Our next question will be coming from the line of Kendall Au of RBC.

Kendall Au, Analyst

I have a couple of modeling questions. I understand that you are consistently exceeding expectations on gross margins. Is there an update on the timeline for reaching the 50% mark? Can you achieve that before the end of 2027? Additionally, does your current cash suffice for you to reach profitability, or will you need to raise more cash before that happens?

Renee Gaeta, CFO

Sure. Those are great questions. As you can see, we continue to improve our gross margins year after year, with a 500 basis point increase just last year. We're making progress toward our goal of 50%. In Q4, we observed product gross margins that support this aspiration. For the upcoming year, we're guiding low to mid-40% range, but we believe that reaching 50% is certainly within our future plans. While I can't specify a year for when we'll achieve that, we are eager to share it with everyone when the time comes. Regarding our balance sheet, we currently have $173 million in cash, cash equivalents, and investments. Over the past year, we have reduced our operating cash burn from $116 million in 2024 to $46 million in 2025. We aim to further improve this in 2026. We are confident that our cash reserves are sufficient to take us to profitability and beyond.

Kendall Au, Analyst

I appreciate the insight. I have a quick question regarding the hospital capital budget. What are you observing in that environment right now? Do you think it's increasing compared to last year? Additionally, what is the current state of it? Also, could you provide some commentary on the backlog you mentioned? I'm interested in the size and scale of that for Tablo at the moment.

Leslie Trigg, CEO

Sure. Yes. Well, on the capital spending front, we are not seeing any material changes, at least in the customers that we're calling on or the customers that are in our pipeline, we have not really observed any material changes in their planning or how they're thinking about capital spending for 2026. So nothing systematic or widespread that changes our outlook either near term or long term. Backlog, yes. That has been an important lever for us in the past. It remains an important lever for us as we move forward over the planning horizon. And I would say we feel very good about where we're entering 2026. And that will continue to be one of the KPIs that we measure ourselves against as we move through the year and into '27.

Operator, Operator

And our next question is coming from the line of Rick Wise of Stifel.

Frederick Wise, Analyst

I have a few follow-up questions related to the impressive inquiries we've already addressed. Regarding the next-gen Tablo system, I'm curious if there's an upgrade option available. Can existing customers upgrade for a small fee, or would they need to purchase a completely new Tablo? Is there a chance for the entire existing user base to upgrade at the full price of a new Tablo, depending on what the average selling price would be? Please clarify that for us. Additionally, while the cyber security aspect is certainly intriguing on its own, could you elaborate on some of the new features and capabilities that may enhance Tablo's appeal, usability, and clinical value? I have a related follow-up question on this topic as well.

Leslie Trigg, CEO

Certainly. I will address your first question and then move on to your second. Regarding the next generation and upgrade opportunity, our current customer base will have complete access to this upgrade. They will be able to upgrade their systems. Additionally, new customers will have the chance to purchase new Tablos that come equipped with the latest software, hardware, and cybersecurity upgrades that I will highlight shortly. This upgrade is fully accessible to both existing users and new customers. You also inquired about the specifics of the cybersecurity improvements. This has been a substantial undertaking for our team and required extensive technical effort over several months. For instance, we have enhanced our physical network cloud connections and implemented new software and hardware changes. We have also introduced numerous new security measures and now provide continuous cyber monitoring. As for device performance and reliability improvements, we have introduced new software, a new operating system, and updated hardware. The benefits to customers include increased uptime, which enhances the user experience. Improved device performance and reliability result in higher availability, which directly translates to better patient care. The user experience for nurses and biomedical technicians in hospitals is also enhanced due to these improvements. Looking ahead, we are committed to customer-centric innovation, focusing on developing solutions based on user feedback. The advancements in this next generation reflect our dedication to incorporating suggestions and ideas from our nursing staff and others in acute and post-acute care settings.

Frederick Wise, Analyst

Great. To simplify, you haven't shared the average selling price or whether it compares to the current generation of Tablo. If I assume there are more features and added value from cybersecurity, what does this mean for your gross margins once fully launched? Will it enhance margins at that time? Is there a learning curve in manufacturing that could initially lower margins as you start? Additionally, could you clarify your guidance, whether it's for the first or second half? Considering the gross margin question, how should we view the new Tablo's impact on margins? Thank you for addressing all these points.

Renee Gaeta, CFO

No problem, Rick. This is Renee. I'll address some of the gross margin questions, particularly our perspective on this. As Leslie mentioned, we are developing the commercial launch strategy, with a focus on the Q2 timeframe, during which we hope to provide more clarity on average selling prices. We believe that product innovation carries value, and this product is part of our ongoing innovation efforts, which customers will appreciate. Regarding gross margin, this could positively impact revenue throughout the year and potentially gross margins as well. We've strategically considered this product launch, including the opportunity for current customers to upgrade their devices, future manufacturing prospects, and the finished goods inventory we currently have. The functionality aspects were carefully planned for this next generation, allowing for upgrades, additional components, and software enhancements. In terms of our gross margin projections, we've incorporated these factors, and we don't foresee significant negative impact currently. Typically, there can be challenges when transitioning between device generations, but we anticipate only a mild effect this time. Selling more consoles could lessen our gross margin, as we've experienced historically. Ideally, we want to benefit from this scenario by driving more console sales and achieving higher top-line revenue growth, even if it dampens gross margins in the short term. Our commercial launch is set for late Q2, which will be part of our backend assessment. We'll observe how that launch unfolds and how it performs over the summer.

Operator, Operator

That does conclude today's Q&A session. I would like to turn the call back over to Leslie now for closing remarks. Please go ahead.

Leslie Trigg, CEO

Thank you all for joining today. I want to express my gratitude to our customers and our team for the significant impact they make every day in the lives of dialysis patients. I hope you have a wonderful evening.

Operator, Operator

Thank you so much for joining today's conference call. This does conclude today's meeting. You may now disconnect.