Hello? Oh, there we go. Awesome. Hey, everyone. We're gonna get started here. My name is Christopher Campbell from the Jefferies Medical Supplies and Devices team. Happy to be joined here today by Outset Medical. We're hosting a fireside chat with CFO Nabeel Ahmed. Thanks for joining us today. We're gonna do about 20 minutes of questions, and then we can follow up with a 5-minute Q&A from the audience, if that works for you. Yeah, let's kick it off. Yeah. Thanks, Chris. And thanks everyone for being here. It's great to be here. So, I guess let's start with just a high-level overview of your end markets. Maybe if you could size those for us. Talk about the current opportunity and maybe what penetration looks like right now. For sure. Yeah. So, Chris, we are in two of the largest end markets in the United States healthcare system. So dialysis is 85 million treatments annually in the U.S. alone. We have sized the acute market at $2.5 billion and home at just under $9 billion. Now, these are markets where there are high barriers to success: regulatory, technology, and capital. And we have scaled to a point now where with Tablo, our platform, we're able to penetrate these markets. Now, from a penetration perspective, in the acute setting, we're probably low double-digit penetrated. And in the home setting, it's still very much in its infancy, and our value proposition in the home is to help, number one, patients get home, but to help providers stand up revenue and margin-accretive home dialysis programs to ultimately benefit them. Awesome. Yeah, thanks for that. And maybe you could just walk us through the competitive landscape, any, you know, new technology or entrants, and kinda what sets you apart from competitors? Yeah. So nothing has really structurally changed in the competitive environment. In the acute setting and in the home setting, I suppose we compete with large dialysis organizations. These are names that you may have heard of before, and what we've seen from these LDOs is price increases. So a lot of hospitals in the U.S. outsource the provision of dialysis to one of these LDOs, even the dialysis in their four walls, and they are seeing price increases from these LDOs. They are seeing contracts not being renewed in some cases. They're seeing service levels, service levels decrease, so the LDOs are kind of not meeting service expectations. We're also seeing, with respect to the home setting or the chronic setting, we're seeing large dialysis organizations close clinics. One of the large ones talks about closing 100 clinics this year, and, you know, those patients need somewhere to go. They're, they're displaced. So that's kind of on the LDO side. From a technology perspective, again, we're not seeing anything particularly new. You know, we have a new entrant that's coming into the market. They made a design choice to require the customers to buy their box and another machine made by somebody else. Tablo remains the only device that does end-to-end dialysis, meaning you can do dialysis in any part of the hospital, you can do it at home, and you don't need a separate device. The Tablo just needs a tap, a plug, and a drain. You don't need a separate Portable RO or anything else. Gotcha. And then, I guess, moving to a hot topic on GLP-1s. We saw a bit of, like market capitulation a couple of weeks ago with- Mm ... with the FLOW data. Maybe you could just walk us through what you think that, that data means for you and kinda how that'll affect the, the prevalence and incidence of the dialysis population. Yeah, let me maybe talk about both of those populations separately. So from a prevalence perspective, there are about 600,000 people on dialysis. For those people, the leading cause of mortality is cardiovascular issues, and as these GLP-1 drugs reduce the risk of cardiovascular disease, extend life, you know, GLP-1s have the potential to be a tailwind even to the number of people on dialysis and therefore to our TAM. So that's the prevalent. On the incident side, there are about 39 million people in the U.S. with chronic kidney disease, CKD, and they're, you know, going everywhere from CKD 1 down into CKD 5, which is when you need dialysis. Given the modeling we've done, given what we've sort of seen, any reduction in the cardiovascular disease will more than offset any of the benefits, perceived benefits or benefits from reducing the rates of CKD progression. You know, Chris, there are 130,000 people a year, new starts on dialysis, the incident population. Again, that's roughly a third of a% of the 39 million people on CKD, so it takes a lot to move the needle. And again, with the improvement in cardiovascular outcomes, we think that'll be a potential neutral, if not a tailwind to this market. Gotcha. Yep, that makes a lot of sense. I'd certainly take the under on GLPs, and I agree with you there. I guess moving to another hot topic in the capital environment right now. Maybe you could talk a little bit about your split between capital revenues and recurring revenues, and how that will be changing over time, if at all. For sure. So just to orient some folks, we sell our initial device, Tablo, the console. That is our piece of capital equipment. Every console sale then drives recurring consumable revenues, and the consumables is a cartridge plus some fluids that we sell, and then it's service. When you buy Tablo, you get a year of service, and then you renew. The service contracts renew in the high 90% rate. So it's the consumables and the service that are recurring revenues. Today, these recurring revenues are roughly 50% of our total revenues. The console makes up the other 50, and as our installed base grows, the recurring revenues will increase naturally. If you look at our 2024 guidance, just as a framework here, Chris, if we place the same number of consoles in 2024 as we expect to place in 2023, roughly 1,400 consoles, we can drive a mid-teens revenue growth based on that, and then that same theme of the roughly mid-teens revenue growth on a flat console placement can continue forward. And so that gives us a base level of growth. The recurring revenues give us a base level of growth that allows for more predictable, visible forward growth. Now, you touched on the margins. As our install base grows, as we place more consumables, that's a lever for margin expansion for us. Consumables today are roughly 50% gross margin for us, and again, as we sell more, as the install base grows, we'll see margin lift over time. Gotcha. You guys recently called out some pressures on CapEx spend. Can you talk about what you've seen from the capital market to this point, and kinda what your expectations are through the rest of the year and into 2024? Yeah. What we started to observe in Q3 was more discipline exerted by hospitals around capital purchasing decisions. We'd been tracking hospital CapEx and sort of how they were thinking about capital deployment for about a year now, and we have seen increasing levels of discipline exerted. You know, and this discipline comes in the form of needing more approvals internally, or maybe they're looking at more leasing options or a second leasing partner, that sort of thing. So that's what we've seen here, and we expect that to continue into 4Q. Indeed, it's elongated our sales cycles, which is we expect to continue into 4Q, and which we expect to continue into next year, and we bake that into our guidance of mid-teens growth here. Gotcha. I guess moving to your guidance for mid-teens top line in 2024, I guess what are some of the other things you have baked into there? Maybe some factors that could lead to possible over or under achievement, and kinda what are the puts and takes for margin guidance as well? Yeah. So for the top line, our guidance really is based on the power of recurring revenues, right? So again, I talked about, roughly 50% of our revenue is coming from consumables and service, and we talked next year, if we place the same number of consoles, 1,400, roughly, that we expect to place this year, we get that roughly mid-teens revenue growth. So that's kinda baked in. As we think beyond 2024, we accelerate to high teens, and that's for two reasons. Number one, we are expecting approval on, one of our products, TabloCart with Prefiltration. We're expecting that approval for a guidance in the H2 of next year, and so again, in 2025, we'll have it for the full year. And we're also expecting that by the middle of next year, we have lapped this elongation of sales cycles from the capital spending that I alluded to, and so again, that accelerates as we move forward. Now, in terms of overperformance, Chris - sorry. In terms of overperformance, you know, we've got a bunch of levers at our disposal. We can place more consoles, which we've done in previous quarters. We can command a higher ASP, either because of the ability that we have to protect pricing or because we sell more TabloCarts, or we sell more of our Tablo Pro+ software, or because we sell more consumables. Those all remain in play. Understood. And then maybe you could just talk a little bit about your margin guidance for the year. I think you called for roughly 1,000 basis points of GM expansion in 2024. Kinda what are some of the levers there, and how do you plan to achieve that? Yeah. So the good news from a margin expansion perspective, it's the same things next year and the year after that we're doing today. Margin expansion for us is console cost down, where we have R&D and supply chain strategies to pull cost out of our console, kind of the box that we sell. It's more consumables as the install base grows, and it's service leverage. And some of the service leverage is natural. It's just as we scale, you know, there's absorption of the service folks. But we've also made investments in remote diagnostics and remote repair capabilities of Tablo, which again, will mature over time. So those are, broadly speaking, the three big things, and ASP also is a contributor of margin expansion. I talked about the Tablo Pro Plus software. This is software that we deploy over the air. It allows Tablo to run 24 hours. It's used in the ICU, and it's because it's software, it's very, very high margin product. And so as we think about the 10 percentage points we have to add next year, same things we've done before. And remember, Chris, we've now expanded gross margins for 10 consecutive quarters in a linear fashion, and so basically, it's the same thing that'll happen next year. We'll just continue to play the tape forward. Yep. I guess sticking to financial guidance, for the first time, you guys recently provided an LRP, calling for high teens growth annually through 25 and 27. What are some of the assumptions here for accelerating that growth rate from kind of the mid-teens you're looking for today? Yeah, yeah. So, as I mentioned, Chris, the mid-teens calls for a couple of things. One, it is that we place the similar number of consoles in 2024 as we expect to place in 2023, and that we only get approval of TabloCart with Prefiltration for the H2 of the year, or meaning we get revenue from that product in the H2 of the year. It also assumes that we lap the sales cycle elongation for the capital spending discipline next year. So as you move beyond 2024, we'll have the cart with Prefiltration approved, we'll have lapped the sales cycle elongation. And now, flat consoles, again, roughly 1,400, gets you to mid-teens, and there's incremental consoles to get from mid-teens to high teens, incremental console sales. But we are so early in these two large end markets, in home and acutes, that we've got the conviction that we can go achieve those incremental console sales. Yep. Nice. And then, I guess, shifting gears a little bit, kind of the change in site of care is a pretty big trend in healthcare we've seen over recent years, kind of coming out of COVID. What are some of your goals for home expansion in 2023? And what does the ramp look like in 2024 and beyond? Yeah. So let me maybe touch on our home strategy a little bit. So our strategy is to expand the provider universe, to expand channel access for patients, in the chronic setting, and we do that three ways. Number one, we go where the patients are, which is the mid-size dialysis organizations. So this is anybody but the big two, and they control roughly 30% of the dialysis patients today. Now, one of our objectives this year was to make sure that we were signed up with a majority of the mid-size dialysis organizations, which we announced in our Q2 call that we were. The second leg of our home expansion strategy is getting large health systems, getting health systems to stand up home dialysis programs and bypass the chronic dialysis clinics completely. One of our goals was to stand up a couple of national providers to have home programs, and we announced our first national provider standing up a home program, again, earlier this year. Then the third leg of this stool is what we call alternative providers. These are folks who they're not dialysis providers, but they serve dialysis patients in other ways. You can think about vascular access clinics, home care providers who may be working with dialysis patients in other ways, and we've done well there. Now, in terms of specific goals, we talked about home being roughly 20% of our expected revenues this year, growing within our guidance range to about 25% of revenues in 2027, and that's not a ceiling. We expect growth beyond that as we, again, expand the provider universe here and improve channel access. I guess, could you talk a little bit about what differentiates Tablo specifically in the home end market, and kinda what you're seeing from some competitors in that space as well? Yeah. The big thing that we've been laser focused on in the home end market is retention on therapy. You know, we have heard about the prior competitor in this space having an attrition rate of roughly 50%. You know, 50% means one in every second patient who goes home on that previous device is dropping off therapy. Now, some of that is death and transplant, which, you know, death happens, transplant we want to have happen. But what we have observed with Tablo is the patient opt-off rate is 10%, markedly lower than that for the previous device, and that's because, number one, Tablo is easier to learn on. It takes 2 weeks to learn Tablo versus 6-8 weeks on the old competitive device, and even 5 weeks to learn on the new competitive device based on their IDE. Secondly, Tablo does not have a lot of supplies. Because Tablo makes dialysate on demand, you don't have to have boxes and boxes of fluids that you have to store in your house, which you had to with the old competitive device. And then thirdly, Tablo is touchscreen simple, where the old competitive device wasn't. So again, all of this contributes to much better retention on therapy, and this retention on therapy means providers can make money because people are doing the treatments longer, and patients are happy to do the treatments longer because they simply—it's just simpler to use. Yep. And sticking to Tablo, I guess moving OUS, can you talk a little bit about how the OUS market, you know, differs from the US market, and kinda what your guys' commercialization strategy is there? Yeah, the international markets are definitely an upside driver for us. We have filed for regulatory approval in a handful of English-speaking markets outside the United States. But again, given the size of the U.S. market, the $11 billion TAM I mentioned earlier, we're in no rush to go international. Our focus right now really is on this large U.S. market, where there's a lot of penetration for us still to go. Yep. I guess, shifting to profitability, kind of top of mind right now for a lot of midcap investors, can you talk a little bit about what your path to profitability looks like, and how you get there and maybe timelines? Yeah. So profitability remains one of the pillars for us, so revenue growth, getting patients home, getting profitable are simple, in simple terms, some of our pillars. We get profitability when we get gross margins into that 50% zone. We've talked about, given our guidance, getting to our gross margins to 50%, exiting 2027, which is the year in which we get revenues to roughly $250 million, again, within our guidance construct. If you peel that back, what gets us profitable is revenue growth, it's gross margin expansion, and then OpEx leverage. We believe that we can grow OpEx at a roughly mid-single-digit% rate after 2025 and beyond... and so that's what gets us there. Yep. Can you maybe walk us through some of the levers there on OpEx, and kinda where you think you can drive that leverage? Yeah. So one of the things we did early in Q4 was to take a look and rationalize our OpEx. So we had two pillars, really. One was commercially, we wanted to make sure that we preserve our commercial engine to grow into and beyond our guidance range. And number two, we wanted to protect our R&D organization to drive cost down, because a lot of our console cost down is engineering work, and we wanted to make sure that we preserve software because we wanted to continue to invest in remote diagnostics, remote repair capabilities. And also, you know, we're the only provider, dialysis provider, who is integrated with hospital EMR systems, and we wanted to make sure that that remains a robust offering. Once we had those two pillars, commercial and R&D, we went line by line and rationalized OpEx to make sure we were supporting, you know, supporting those two pillars. And we took $20 million-$25 million of OpEx out of, of, of our cost structure. That's part one. Now, part two, why we believe we can grow OpEx in kind of that mid-single digit% zone, is because we have a lot of leverage inherent in our commercial model. We talked on our last call about not having to add a single capital sales rep for the last few years, and that's largely because of our land and expand strategy. We've signed a lot of the big names we've had to. Now, the work is on expansion, and expansion is done by what we call clinical sales reps, who are less expensive than the capital sales reps, right? So as you imagine moving forward, we've basically got the infrastructure and the baseline set. We don't have to add the expensive capital sales reps. We now need to add the relatively less expensive clinical sales reps, and obviously, we expect leverage from those folks, right? We're not gonna add them at the same rate going forward as we did in the past. R&D is basically staffed out, and G&A, you know, is relatively simple, and you'll have to add a few here and there, but that's what gives us the conviction that we can keep OpEx pretty contained. Moving to cash, you guys exited 3Q with almost $200 million on the balance sheet. Mm-hmm. Can you talk a little bit about your expectations for consumption in 2023 and beyond, and maybe a little bit about your capital allocation strategy and kinda how you're balancing, you know, growth with also savings? Yeah. So we expect—So we had $197 million of cash in Q3. We expect to exit Q4 with $160 million of cash on the balance sheet, and we expect to burn less than $100 million next year based on the guidance we provided. And every year thereafter, we expect our burn to be less than the year before, right? On top of that, we have access to $100 million in just the next tranche of an existing debt facility that we have. We signed this debt facility in November 2022. The next tranche is $100 million. If you just take that with our balance sheet, you get to $260 million of liquidity. And so that, plus the burn construct I just mentioned, means we have a lot of time, Chris. On top of that, we have levers at our disposal. OpEx, like for any company, remains a lever at our disposal. We can also do better on revenue or do better from a gross margin perspective. Again, what I'd leave you with there is we have a lot of time. We have a few minutes left. I guess at this point, we can move to the field. If anyone out there has any questions, raise your hand and give it a go. All right. Oh, go for it. Maybe you speak up. I can speak up. Yeah. What is the current level of penetration of home dialysis in the US that you can get? Yeah, so home dialysis. So today, home dialysis is roughly 15%, and within that, there are two modalities. There's peritoneal dialysis, which is the lion's share of that 15, and hemodialysis, which is then the minority of that 15. Now, peritoneal dialysis is a transitory treatment. It. People can stay on it for roughly two years. Most people can stay on it for roughly two years, and then they transition to hemodialysis, which there is no, there's no. You can be on hemo for as long as you need to be, until you get a transplant or pass. And so home is, you know, a large LDO has talked about getting home to 25% or more. There are incentives in the U.S., so there's this piece of legislation called the ESRD Treatment Choices Mode l. It was a reimbursement framework passed in 2020, if memory serves, and it talked about rewarding providers for getting 80% of the incident dialysis patients home or transplanted. So all of that to say, we expect that 15% to grow. 25% is a benchmark set out by one of the other LDO providers, and there are economic incentives to drive patients home at a differentiated rate. So it, it'll be a lot higher. I don't know if that helped. Anybody else? I guess I can close this out with one more. You walked us a little bit through the balance sheet and cash. Can you talk about possible capital needs, and if you think you'll need to top off the balance sheet in the coming years? So hospital capital needs, we talked a little bit about earlier. What we have seen is hospitals being more disciplined as they deploy capital, and just number 1, they might have more approvals internally. And number 2, they might look at leasing options where they hadn't before. So, that's the, that's sort of the headwind that we saw in 3Q, that we again expect to lap as we, as we round out next year and get back into high teens growth, right? With respect to our balance sheet, again, as I mentioned, Chris, we have $260 million just with the next $100 million drawing, and that gives us a lot of time, and we again retain a lot of levers to either manage OpEx further if we need to, or, you know, we can always beat on the gross margin or on the revenue lines. Awesome. I think that finishes off on time. Thank you very much for joining us. So we got Outset Medical here, CFO Nabeel Ahmed. Look forward to following the story. Thanks, Chris. Thank you, everyone.