Good day, and thank you for standing by. Welcome to the Outset Medical Fourth Quarter 2024 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]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jim Mazzola, Head of Investor Relations. Please go ahead.

Okay. Thanks, Kevin and good afternoon, everyone. Welcome to our fourth 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 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 and 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 Securities and Exchange Commission, including our latest annual and quarterly reports. With that, I'll turn the call over to Leslie.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. The fourth quarter again highlighted the commitment of our entire Outset team to dialysis patients and providers and showcase the financial, clinical and operational advantages Tablo delivers in the markets we serve. The business performed well in the quarter driven by our strong recurring revenue business model and continued sales transformation progress. We demonstrated another quarter of sequential revenue growth, a notable increase in gross margin, a decline in operating expenses driven by our cost down measures and a significant strengthening of our balance sheet with the financing we announced on January 6. Revenue for the fourth quarter was $29.5 million ahead of our earlier expectations, which enabled us to finish 2024 with revenue of $113.7 million. While this was below our original plan for the year, we were pleased to finish with two quarters of progress and ahead of the updated guidance we provided in August. Strong utilization across the now nearly 6,000 Tablo's in our installed base drove another record quarter of recurring revenue. Recurring revenue grew 13% sequentially and 17% over the fourth quarter of last year. On a console installed base that grew 10% during the year, recurring revenue grew 21% for the full-year reaching $83.9 million. At this pace, we expect recurring revenue exiting the fourth quarter of 2025 to be on a run rate of more than $100 million annually. We also continue to see strong average selling prices for our consoles and treatments and non-GAAP gross margin continue to expand as we sold more treatments and service across a larger installed base. Turning to our end markets. During the quarter, we continued to have success with acute care providers ready to in source their dialysis service line. There are now nearly 4,500…

Thanks, Leslie. Hello, everyone. Revenue for the fourth quarter of $29.3 million grew 3% sequentially, driven primarily by recurring treatment and service revenue from continued strong Tablo utilization. On a year-over-year basis, revenue declined 3% due to lower console sales for the reasons we previously discussed, partially offset by strong recurring treatment and service revenue. Product revenue of $21 million consisting of console revenue of $5.8 million and treatment revenue of $15.3 million grew 3% from $20.3 million in the third quarter and declined 8% from $22.9 million in the prior year. Service and other revenue of $8.5 million was roughly even with the third quarter and grew 11% year-over-year. Recurring revenue from the sale of Tablo Cartridges and service reached $23.7 million an increase of 13% from the third quarter and 17% year-over-year. We continue to see strong console ASP across all end markets as a result of our disciplined pricing, uptake with acute customers of our Tablo Pro Plus offering and the return of TabloCart with prefiltration also with acute customers. Now moving to gross margin and operating expenses, which as a reminder, reflect our non-GAAP results. Please refer to the reconciliation of GAAP to non-GAAP measures found in today's earnings release. Gross margin for the fourth quarter of 37.6% increased 119 basis points sequentially and by nearly 11 percentage points from last year. This growth was underpinned by progress in both product and service and other gross margin. Product gross margin was roughly flat sequentially and increased nearly 8 percentage points year-over-year to 44.3%. Service and other gross margin was negative 2.5% in the prior year period and reached 20.9% in the fourth quarter of 2024. As I mentioned last quarter, gross margin is adversely affected in the short term due to lower absorption of manufacturing overhead…

Thank you. [Operator Instructions]. Our first question comes from Marie Thibault with BTIG. Your line is open.

Hi, good evening. Thanks for taking the questions. A nice quarter. I wanted to ask quickly here for both the qualitative and quantitative outlook on the console side. I heard Nabeel's comments about a 10% increase in installed base if we take the midpoint of the guide. But if I look at the Q4 console revenues, I think sequentially down from Q3, if I got the math right, I might be wrong. And so I wanted to understand kind of what you're seeing from the sales force that continues to give you guidance -- and I mean confidence in this turnaround. Any updates on large deals and how you would envision kind of the midpoint of the guidance for console sales working throughout the year, cadence throughout the year? Thanks.

Sure. Maybe I'll start and Nabeel, feel free to jump in. Yes, completely fair question on the console front. Look, we had a lot of change and a lot to change in 2024, and we have a nine to 12 months sales cycle. And so as we look forward here, number one, we start to annualize that. Number two, the newly hired capital sales reps from 2024 become fully tenured in the first part of 2025 here. And also we're anchored by what we're seeing in the pipeline. Now understandably, I believe, we want to be conservative as we lay out the year here. But what is true is that all of the sales management, change management steps are behind us, the regulatory changes are behind us, the balance sheet perceptions are behind us. All of which can really increase our conviction on delivering strong console growth this year in 2025. Now it's really a matter of continuing to inspect and ensure that the right disciplines are being practiced consistently across the country. But the changes are firmly in place and there is good evidence of them taking root, which kind of gets to your question about pipeline. So let me go there next. Here's kind of what we're seeing on the pipeline side. First of all, it continues to grow and growing in a high quality, highly inspected way. Just in Q4 alone, we saw more than 10% growth in the 2025 pipeline. Now roughly 70% of our top opportunities forecasted to close this year are already in the latest stages of our sales process. That is an advantage we have never enjoyed in the past as we've entered a new year. So that's new. The size of the pipeline is new. And the diversification is new. We've got really good healthy diversification between existing customers who are now looking to expand their use of Tablo across new hospitals in their network and also new customers, choosing to in source for the first time in 2025 with Tablo. We have good diversification between national contracts and large regional IN contracts and really good distribution across deal sizes, we are continuing to see a high percentage of potential large console opportunities that we do expect to close in 2025. So all in all, again, we've had a lot of change to absorb and for the team to internalize and get good at. But those changes really are behind us and we are now in the kind of what I call the rinse and repeat part of change management under the new model. Hopefully that helps, Marie?

Yes, that's a lot of great detail. Thank you for that, Leslie. I guess on the flip side, treatments continue to be very, very strong with your consumables revenue. And I'm curious what drove it. I mean, was it higher rates of utilization and turnover? Was there some ASP lift that came along with some of these consumables? What was kind of behind some of the beat, which was a good $1 million or $2 million higher than we had forecasted?

Yes. Hey, Marie. We too were really pleased with our recurring revenue performance and specifically treatment sales. We did see very strong console utilization on our larger installed base. And as we have seen in previous fourth quarters, we did see a little bit of stocking, but again nothing that I would call out.

Okay, very helpful. Thank you.

One moment for our next question. Our next question comes from Shagun Singh with RBC Capital Markets. Your line is open.

Great. Thank you so much. I was hoping maybe we could start on the P&L and gross margins. If you can walk us through the cadence for the year in 2025 on gross margins as well as OpEx. And then given gross margins -- sorry, given R&D was about 500 basis points below expectations in Q4. I'm just wondering if you can also walk us through some of the areas of OpEx cuts on R&D as well as SG&A. You're also investing given the commercial focus. So just walk us through some of the building blocks for 2025. That would be helpful.

For sure. Yes, Shagun, so please just keep me on track here. With respect to gross margin, we printed 35.6% here for the full-year and we expect that to expand to the high 30% zone. Now remember, gross margin will continue to be adversely affected by this under absorption of manufacturing overhead. Absent that, it's been roughly 300 basis points in the last couple of quarters. So we could think about it in a similar zip code for next year. With respect to the quarters, we tend to generally expect linear gross margin expansion, but that can be affected by our product mix, whether it's home versus acute consoles or treatment sales versus console. So that might put a little bit of what I'll call noise in the quarterly progression on gross margin. With respect then to OpEx, so again, we printed just under 120 million of OpEx in 2024. And based on the annualization of the cuts that we made of the restructuring actions we've taken, we expect OpEx in 2025 to be in the $90 million zone. And again, OpEx for us tends to be relatively linear. We do see a little bit more in the fourth quarter as we true up annual incentive comp that sort of thing, but otherwise it tends to be pretty linear. And then Shravan, with respect to kind of where the cuts came from, our cuts have been focused on making sure that we do not touch our commercial ability to execute and expand consoles. So we've kind of cut everywhere around that, but remain convinced that we have the right commercial organization to execute against our objectives for '25. Let me pause, hopefully that makes sense.

Yes, I can -- I'll add just a little bit more color on the R&D specific question that you had, Shagun. Let me give you a couple of examples. It starts with discipline prioritization. And so we are very, very, very clear and have extreme focus around what we need to get done in '25. And at the risk of repeating ourselves, it's reignite revenue growth continue to expand gross margins and execute against our very clear path to profitability, that's it. And you put that on a bumper sticker. That's what we're going to do. So as we looked at R&D, we took a very disciplined approach to prioritizing kind of only the projects that directly benefited those three goals in the very near term. So said differently, that meant we had to take a much closer look at R&D projects that were longer data things that had a payoff period that fell outside of our LRP or towards the end of our LRP. That's an example of things that projects that we're not undertaking in the near term. We also on the SG&A side, we're just seeing good old fashioned operating leverage. We are getting more done with fewer people, which is exactly what you want to see in the business scale. So those are hopefully a few additional details to provide you with the context.

Thank you so much.

Yep.

One moment for our next question. Our next question comes from Suraj Kalia with Oppenheimer. Your line is open.

Hey, Nabeel, can you hear me all right?

Hi, Suraj. Yes.

Perfect. And so one question from my side, Nabeel. Obviously, a lot of positive commentary in you guys' prepared remarks. The greater than 50% reduction in cash outlay for 2025, Nabeel, outlay for 2025. Nabeel, the industry is very capital intensive. And I think so in somewhere in your remarks also, your commentary, you said like you're not touching the commercial organization. Can you help tie both of those together in terms of cutting back so much, and the capital intensity required for growth in this business? Any additional color would be great. Thank you for taking my question.

Hey, Suraj. Yes, so first of all, with respect to our cash guidance. So number one, we are expecting revenue to grow as we articulated in our call. Number two, we're expecting gross margin to expand as we talked about. And we have taken OpEx down from again $120 million to roughly $90 million that's $30 million of changed right there. On top of that, Suraj, we've previously talked about our efforts to reduce inventory levels and reduce our console build plan to accommodate that. And then finally, we have taken out a material amount of interest -- cash interest expense given our reduction from $200 million of debt to a 100 million of debt. So that's kind of the bridge on cash burden.

Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Leslie Trigg for any further comments.

Okay. Great. Well, thanks to all of you for joining today. I'd like to close by thanking our entire team again for the incredible difference they're making every day, in the lives of dialysis patients, their families, and the providers who care for them. Have a have a great evening. Thanks again.

Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.