Good day and thank you for standing by. Welcome to the Outset Medical Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Brian Johnston, from the Gilmartin Group. Please go ahead.

Thanks, operator. Good afternoon, everyone, and welcome to our second quarter 2021 earnings call. Participating from the company today are Leslie Trigg, President and Chief Executive Officer; and Nabeel Ahmed, Chief Financial Officer. During the call, we will offer commentary on our commercial activity and review our second quarter financial results released after the close of the market today, after which we will host a question-and-answer session. The press release can be found in the Investor Relations section of our website at outsetmedical.com. This call is being recorded and will be archived in the Investors section of our website. Before we begin, I'd like to remind you that it is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events, market trends, results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and Outset assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of Outset's public filings with the Securities and Exchange Commission including Outset's latest annual and quarterly reports. With that, I'll now turn the call over to Leslie.

Thanks, Brian. Good afternoon, everyone, and thank you for joining us to review our second quarter 2021 results. Before summarizing our second quarter performance. I'd like to formally welcome Nabeel Ahmed as our new permanent Chief Financial Officer. Nabeel originally joined Outset as our Controller and as a CPA and MBA was directly responsible for building and managing all of the financial operations of the business. He has been a critical component of our success both personally and professionally, and we could not be more thrilled to announce his appointment. It is a true pleasure to describe our team's exceptional performance this quarter together with Nabeel as a partner. And speaking of our results, I am pleased to report that through the second quarter, our team continued to build on our momentum delivering another quarter of significant revenue outperformance, continued gross margin improvement and an outlook for the remainder of 2021, that leads us to raise our fiscal year 2021 revenue guidance. For the second quarter, we reported $25.2 million in total revenue representing 115% growth year-over-year, and 10% growth sequentially. Similar to previous quarters, we continue to add new customers, while also benefiting from existing customers expanding their Tablo fleets to new sites across their networks. New order placements on the acute side continue to be driven by health systems recognizing Tablo's economic value and ease of use, in addition to their interest in insourcing their inpatient dialysis program to take back control over patient quality, compliance and costs, which has never been more important than in today's environment. Earlier this year, we communicated a goal to secure sales agreements with seven of the eight largest national health systems by the end of this year. I'm pleased to report we met this objective earlier than promised in the second…

Thanks, Leslie. Hello, everyone. I've been at Outset for a little over a year now and I am more excited than ever about our mission, our market opportunity and our team. I'm thrilled to be here and to partner with Leslie and our entire team in my new role at this pivotal time in our company's evolution. I'm looking forward to working with all of you, now as Leslie mentioned our second quarter revenue grew 115% year-over-year to $25.2 million, driven primarily by increased onshore shipments to acute customers, higher consumable shipments, our HHS lease agreements and increased services to support a release. Product revenue grew 113% year-over-year to $20.6 million. Console revenue grew by 106% year-over-year to $16.9 million driven by higher console placements and increased ASPs given the availability of capital. Consumable revenue was $3.8 million, an increase of 150% versus prior-year, as higher volume associated with our growing installed base was partially offset by the impact of a large customer with the downward consumables inventory levels following a large Q1 cost. Service and other revenue grew by 124% year-over-year to $4.6 million compared to $2 million from the prior-year. Services for our larger installed base to HHS to the service revenue contributed to the year-over-year growth. As we have previously shared, service and other revenue was down slightly on console basis as strong renewals on service contracts or new console placements were offset by the expected expiry of a portion of our HHS service. Moving to gross margin and operating expenses, I will highlight our non-GAAP results. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's earnings. Our non-GAAP gross margin was 4.4% - an improvement of approximately 45 percentage points versus prior-year period. This improvement is primarily…

[Operator Instructions] Your first question comes from the line of Rick Wise from Stifel. Your line is open.

Good afternoon, and congratulations, it was a marvelous quarter, and congratulations to you, Nabeel. Maybe let's start, I mean we can where to start? Let's start with the home. Just because it's such an exciting topic. And Leslie, I realized you're talking about small numbers up 90% sequentially, obviously superb. But maybe talk about how we should think about this initial year where you are going slow to get it right. We all get that. But how do we think about the progress of the year, maybe just talk about your early experience. I heard you say about the high compliance and the training and the patient experience. But how is this early experience setting you up for maybe going faster next year? Thank you.

Yes, sure. Happy too, Rick and thank you. So first and foremost, we do still plan to share our installed base figures at the end of every calendar year, and that hasn't changed. So we'll certainly be able to give you that visibility at the end of fiscal year 2021 about home and together with Tablo console used in Transitional Care Unit. And we do still absolutely expect patients at home to grow sequentially throughout 2021 and beyond. And we expect console bookings on the home side to continue to grow sequentially quarter-over-quarter. So I think all that's good news. I still I guess reflecting on all of my experience across my medical device career launching new technologies, I still believe what matters most at such an early stage of rollout especially with a technology that is so fundamentally disruptive. It really is doing it right at the beginning. So let me talk more about what does that mean? That means operationally, are we delivering a great experience on distribution and logistics? Are patients receiving the supplies they need on time every time? Is the console arriving in their home and being installed every time, on time, at the time, it's been requested? Those details seem mundane, but I think we can all related consumers. There's a big value to promises made, promises kept. And we want to be a promises made, promises kept company to all of our customers, providers, patients and families alike. So Rick, that's one way that we're measuring ourselves operationally. So many other leading indicators that I talked about, let's talk about training time and how that would set us up for success for growth next year, which is really the question you're asking, if we know that patients across the spectrum, regardless of age,…

Thanks. And Nabeel, let's pick on you a little bit, two aspects of your guidance, if you just give us a little more color. Your comment that sales, as we think about the second half or back half concentrated, how do you make them understanding, what you're saying, sort of I mean obviously, we had a nice step-up here 2Q versus 1Q. Are we thinking, are you sort of implying and maybe I'm miss - totally misreading it, that the third quarter is more for some reason, sequentially flattish with the second quarter? And with wherever point in your sales guidance, we land we could potentially have a very large fourth quarter. How should I understand your comment?

Yes, Rick, absolutely. And so the comment was that our back half growth will be concentrated more in Q4. And so let me just sort of back up a little bit, when we do our guidance, it's informed by the backlog we have coming into the quarter, and then the pipeline that we have, as we sit here today and look forward through the back half of the year. And our pipeline, and our backlog are really informed by when our customers need us to deploy our consoles, right and so the advantage to having this backlog in this pipeline is that we have great visibility into the back half. And it also tells us that we will see sort of moderate sequential growth here in Q3, but really that the bulk of the back half growth will come in Q4.

And so you're basically saying, just with orders in hand and the shipping dates, that's just the way it's going to break out this year or is that [indiscernible] as well, go ahead, Leslie.

Yes, Rick, it's exactly that with orders that we have in hand. Remember, our backlog is committed orders that we have non-cancel orders. And then it's also our pipeline which is deals that we are working that we expect to close.

Got you. And may I ask one last if I could. Gross margin, you commented Nabeel that you expect to be at a low double-digit rate as you exit the year. And clearly, you are telling us in most of ways, all the setup for that meaningful gross margin improvement. But back to sort of this cadence in question, so you're not going to be at that double-digit level in the third quarter. Will the full fourth quarter get to a low double-digit rate or how should we think about that cadence and magnitude and direction? Thank you so much.

Yes, Rick. Of course, so we're looking for sequential improvements in gross margin here in Q3. And then you are right, it is Q4 that we expect to be in the low double-digits from a gross margin perspective again, driven by our Mexico facility that is now producing 100% of our consoles, but our ongoing cost down program and then, as Leslie mentioned, by our expectation that our cartridge production in Mexico gets approved here in the fourth quarter.

Got it. Thanks again.

Thank you.

Your next question comes from the line of Amit Hazan from Goldman Sachs, your line is open.

Hey, this is Phil on for Amit. Thanks so much for taking the question. I just may be starting with guidance. Going back to Rick's question, I'm interested in any anecdotes that you can give over what you've seen in the last few weeks, particularly on the acute side with what's going on in Delta, how that's kind of informed your visibility for the backlog and your expectations for 3Q and 4Q?

Hi, yes. This is Leslie obviously, I'm happy to answer that. It's an interesting question. Obviously, a timely one based short answer is based on what we know we see today, we don't expect any direct impact on our business. And look I think the advantage we have today is some history, right. When we look back at 2020, our business was very resilient. And that's probably for at least two reasons. I think one as a reminder, we operate and serve therapeutic space that requires patients to receive this treatment at least three times a week, rain shine pandemic, no pandemic and almost regardless of all these factors. So that's probably one reason for our stability. And two, I think that the Tablo value proposition is evergreen, right, we're talking about an enterprise solution that reduces the cost and complexity of dialysis and helps hospitals expand their margin. That's in fashion can take whether you're in a pandemic or not. And that's the value proposition that we saw up through 2020, both the highs and the lows of the pandemic, to be just as resonant with health system executives. So we don't have any reason to believe today if we sit here today that those dynamics and more would be any different in the back half of the year. And that's far COVID is not affecting our strong confidence about our second half of the year performance or our outlook on 2021.

Okay, great, thanks Leslie. Secondarily, maybe a new versus an existing customers kind of a question, line of questioning. In the past, you've given a little bit of color around, how many Tablo systems, various size hospitals could support? Maybe not to that extent, but I'm just wondering with the existing customers that you have today, sort of how penetrated give us an idea for what that opportunity looks like? And then maybe posit sort of the mix of growth from existing versus new customers today, and how you see that evolving in the next quarters?

Sure, yes. That's a great question. Maybe I'll work that one in reverse chronological order. I think, what I was thinking about this quarter, preparing for the call, I think they were to me like three really interesting aspects about it. One, we had a really healthy blend, which we hopefully characterize for you in the script, but a really healthy blend between new customers and existing customers that was really balanced. And I think we all understand the benefit of new customers. But for me, I really assign a tremendous amount of value to existing customers, we do talk about our commercial strategy as land and expand, right. And I think for any medical device company, eventually you run out of land. And so my philosophy has always been commercially that, you should really focus on doing an exceptional job at the expand part as early as you can. And so what I liked about Q2, I like the whole first half of '21 with I think that we were showing that expand is working as well. And that only happens if you're creating a consistently good experience for customers and patients again, along the lines of promises, made promises kept. So that was one interesting aspect of the quarter was very balanced blend of new customers, and then expansion within existing customers who decided to deploy Tablo to new hospitals within their networks. I think that the other interesting part to me, of course was the significant increase in home console bookings. And that continues to give us confidence that home demand will continue to grow for Tablo. And lastly, of course, we were very, very pleased to see seven of the eight National Health Systems now having signed agreements with Tablo again a quarter two earlier than we had communicated. So this is the thing that really stuck out to me in terms of customer mix and contract signed, if that's helpful.

That's great. Thanks so much. I'll jump back in queue.

Your next question comes from the line of Drew Ranieri from Morgan Stanley. Your line is open.

Hi, Leslie, and congrats Nabeel. Thanks for taking the questions. Just to go back on gross margins for a second. Just hearing more and more Medtech companies talk about inflationary costs and freight being a burden. I appreciate that you gave guidance, talking about sequential increases and low double-digits by the fourth quarter, which is can you give us a better sense for your confidence in gross margin expansion for the back half, if you kind of look at the upper end of your revenue range, should we kind of be thinking that would be the higher end of low double-digits for gross margins, trying to get a better sense there. And also, if you're seeing any supply constraints, or semiconductor shortages as you're building out the installed base here?

Yes, happy to. So with respect to our gross margin sort of guidance here, and the sequential increase that I alluded to, we have a high degree of confidence in that trajectory. And it's really for the three reasons I mentioned with Rick, it's really the fact that now our plant in Mexico is up and running. And obviously as we built more consoles and get better absorption sort of out of that facility, we will see improvements in margin, it's our cost down strategy that our supply chain team is pursuing. And then finally, it's the treatment, so we have a high level of confidence. Now with respect to your supply chain question, we're definitely on top of and not immune to sort of what we were seeing in the market in terms of supply chain challenges. Now we have a great supply chain team who is laser focused on this issue, and we have not seen disruptions in our supply chain at all. And sort of our strategies here to mitigate have been placing purchase orders with suppliers for long lead time items, making sure we have committed supply. It's making sure that we have inventory of raw materials components, particularly long lead time items. And then it's also making sure that our balance sheet we're carrying finished Tablos, having a buffer stock of finished Tablos with which we can sort of service near-term demand, if there is, if something happens. But to be clear, high confidence in our ability to deliver these double-digit gross margins in Q4, low double-digit gross margins in Q4. And it's sort of just a rocking supply chain team that's keeping us in good shape.

And just want to follow-up there, with the cartridge approval expected in the fourth quarter, is that actually contemplated in your sequential increase commentary for gross margins?

It is, but remember that the real benefit from the cartridge cost down will be in 2022. So there's a little bit of benefit here in 4Q. But honestly, the real benefits is going to be in '22 for us.

Okay, and Leslie, maybe this one's for you, but with ETC for a moment, can you just maybe talk about the - if you're seeing kind of that being a direct impact, as you're approaching customers and building out the market? Is it still very early days, are you seeing an impact is more yet to come, just any help there would be appreciated? Thank you.

Yes, sure. I would say with respect to the ETC, that it is in our experience right, which is all we can comment on, I think it is very much top of mind for all the providers that we work with and talk to. I would characterize it very broadly as still in their preparatory and planning phases. I still think I think you probably communicated in the past that we're really excited about the ETC, we project that having a bigger impact on home dialysis market expansion, probably more like 2023, '24, '25 than we would expect certainly not in '21, or even in '22 because I think in all fairness, providers need time, right to understand how they want to increase their home dialysis numbers, what programs, what new technologies they want to start using, to try to reach these targets and benefits from the advantages of ETC. So I continue to be very, very optimistic that the ETC will have an impact. I would just guess that its impact will be probably, as I said more in the '23 and beyond period rather than nearer term.

Great, thanks for taking the questions.

Yes.

Your next question comes from the line of Danielle Antalffy with SVB Leerink. Your line is open.

Hey, good afternoon, everyone. Thanks for taking the question. Nabeel, congrats on the CFO position. Leslie, I have a question for you. We've done a lot of work on the renal space, and specifically the potential for home dialysis adoption within that home hemoadoption over the last six weeks. And the feedback we're getting is incredibly positive. I've been following the space for a long time. And it really does feel like the barriers have fallen from a technology perspective, regulatory perspective. And I guess my question for you is, why aren't we today in an adoption inflection already because based on the data points I got it felt like we were and I guess if we are, is it really just you Outset sort of - you guys are the gating factor as far as what you are willing to or can supply the market. Are you pacing the inflection or am I missing something? Thanks so much.

Yes, no, thanks for sharing that feedback from your own research. Look, a couple of thoughts, I guess. I think that we're not at the inflection point yet. However, I would say that if you look at the incumbent device and the incumbent services provider who owns that device, they've reported, I would say frankly amazing growth in the home dialysis market, within their own network of dialysis centers. I think they're doing a terrific job already at expanding the utilization of home dialysis within their own facilities. So I think it's starting to happen. What we're seeing is the rest of the providers really starting to activate and set goals and targets and objectives about where they want to be with home over the next couple of years and that alone is major progress, Danielle, I got to tell you, just to even hear a provider, say, hey, we want 30%, 35%, 40% of our patients at home over the next three, four or five years, that's a big deal. Now, that being said, everybody wants to do it well, everybody wants to do a good job. And it's hardly going to help just to start to kind of push as many patients home as you can as quickly as you can, and not really have it stick. And so we're obsessed with the stickiness of it, the stickiness comes from the experience that you have, both with the provider and the technology. And so in my view, I think providers are ready for it. And probably taking some really smart steps more on the how we've moved away from the weather and that. I think we're past that. I think it's all about how, which is really exciting. So I think we're just coming up on the inflection point.

Okay, that's helpful. And then just as a follow-up to that, then as we think about embarking upon this adoption inflection, where are the key sticking points? So to that, how sort of what still needs to be done to get the market ready to absorb or be able to absorb this adoption inflection for home? Is it infrastructure? Is it just awareness like what needs to happen still for the help to be answered? Thanks so much.

Sure, absolutely. Two things come to mind, kind of off the top of my head, I would say one is training. And I think that we're going to see a lot of invention in training, both through technologies like Tablo simply because they are easier to learn, right, there is just fewer steps with Tablo, there's nothing to memorize, there's no mental math, the instructions are always there on the screen for the patients every time. And so one of our big, big design objectives with Tablo was to get Tablo down to sort of a PD like training experience, which everybody I think sort of hold is the goal standard for short patient training time. And we've achieved that, I think that there's more we can do though, to probably make training even more convenient for the patient, and maybe changing a little bit of the setting of the training model that I think will further accelerate the patient frankly, the patient backlog of people who do want to go home. So I think training is an area that you'll continue to see providers and Outset innovate on to loosen up that that pipeline, the second thing that comes to mind is physician education. And that's probably no different than any other area of medical devices, right? When you've got something new, whether it's a new device or a new way to treat patients, that takes time. We haven't had in this country a tremendous history in the physician education on home modalities. But again, you have now I think a whole community of providers, and health systems that have a lot of motivation to educate the physicians that they work with about home and better outcomes and lower costs. So I think that the faster we can get out there and as a community and educate physicians and find continually, newer, faster, better ways to train patients, I think that's going to make a big difference.

Thanks for that.

Your next question comes from the line of Shagun Singh from Wells Fargo, your line is open.

Thank you so much for taking the questions. I have a three part question. And I'll just ask it upfront. First is a clarification, I just wanted to make sure you said model sequential growth in Q3 with respect to sales, that would probably put you at the upper end of guidance. The second one is just with respect to the home setting. Can you help us understand, how far do you have visibility into these orders? And how are you thinking about the competitive response? And then, just lastly, you talked about data science and AI on the call. Could you just elaborate on some of your specific R&D initiatives and any timelines there? Thank you for taking the questions.

Sure. Let's see Nabeel, do you want to handle the first one on sequential growth?

Yes, so yes, Shagun yes I did say it's modest sequential growth here in the third quarter and more sequential growth here in the fourth quarter. And that's precipitated or driven rather by the backlog that we have in entering the quarter and in the pipeline that we've got sort of as we look forward here.

Okay, great. Okay, so maybe I'll take the last two. Well, it's kind of two in two A, your two was about, how much visibility do we have into the forward home pipeline? And I would say quite a bit. We've talked and that's not differentiated, by the way from the acute setting. I think we've always talked about our backlog, generally giving us let's say, one to three quarters of visibility. And I don't think that that's going to be any difference so far as we can tell today, I don't think that that's going to be any different from home, I think we're going to be similarly advantaged in having a lot of visibility on what homes going to look like over the coming couple of quarters. So I think that's all very positive and underscored by a significant increase, the 90% increase in fact, home bookings for this past quarter compared to the prior-quarter. On data science and AI, yes, I'm happy to give you a couple of examples, there's a lot I mean, this could be like a whole hour long conversation. But, for example big buckets, I mean, one big bucket for us is operational, we now have the - Tablo has the unique capability, we're the only system in the market to be able to do remote patient monitoring. That feature is enabled in the acute setting, which became incredibly important during some of the heights of COVID. So that nurses and physicians could monitor multiple patients with COVID, on Tablo in multiple rooms at the same time without having to go in and out and consume PPE. We have the ability to enable remote monitoring for patients in the home, which I think has both the clinician and it's a very unique and…

That's really helpful color. And just with respect to the home setting, how are you thinking about the competitive response? Thank you.

Yes, I'm sorry, I forgot about that one. Well, I think first and foremost, with an $11 billion TAM, you got to expect some new entrants. I'd be surprised if we didn't see anybody else show up. Second thing, I'd say is with such a large TAM and we certainly talked about this before, I mean, it could very, very easily support many, many different technologies, especially excuse me, given the early innings on home, I mean at this point, it's still to me, like the more voices the better. The more companies, industries, organizations, physicians, patients, all kind of unified around better choice, more choice, and flexibility, the better. All that being said, of course from a technology perspective, we remain really confident. We're the only and we believe into the future, we will be the only enterprise solution that can be used anywhere from the hospital to the home and have great confidence in our current feature set, which is differentiated today. And I think to our mindset is just not one of standing still. We're ambitious and we're impatient, and we are not done.

Got it, thank you so much.

This concludes today's Q&A portion of the call. I will now turn the call back over to Leslie Trigg for the closing remarks.

Thank you so much. Thanks to the operator and thanks to all of you for joining us today. I really hope everybody has a great evening. Thanks again.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.