Good day, and thank you for standing by. Welcome to the Outset Medical Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jim Mazzola, Head of Investor Relations.

Good afternoon, everyone, and welcome to our second 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. These statements relate to expectations or predictions of future events 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 full 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.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. I would like to begin by extending a warm welcome to Renee, who joined us in early June. She has very quickly rolled up her sleeves, immersed herself in the business, and has already become a valuable strategic and operational partner. Turning to the second quarter results. We are pleased to report another strong quarter today and to raise our guidance range for the year. With the progress we made during the second half of 2024 and now through the first half of 2025, we have momentum that reflects the growing demand for the clinical, financial and operational benefits that Tablo can deliver as well as the internal work we have done to improve our commercial execution. Revenue in the second quarter of $31.4 million grew 15% over last year, driven by another quarter of strong Tablo console sales and consistent utilization. A key goal for this year was to sustainably reignite console growth. And with 2 quarters down, our team is executing very well. Console sales again increased sequentially and also grew over the second quarter of last year. We also continued to see consistent utilization across the Tablo installed base, which contributed to recurring revenue of $22.5 million in the quarter, 11% over the second quarter of last year. This included a 17% increase in consumable revenue. Once Tablo consoles are placed, they're used, and this utilization keeps us right on track to exit the fourth quarter on a run rate of more than $100 million annually in recurring revenue. Gross margin expansion remains a cornerstone of our path to profitability and an area where we again executed well during the quarter. Non-GAAP gross margin reached 38.4%, expanding more than 1 percentage point from last year, even…

Thank you, Leslie, and good afternoon, everyone. I have enjoyed digging into the business during the 2 months since I joined Outset in early June, and I'm very happy to walk you through our financial results today. I look forward to meeting more of you in the coming weeks. Revenue for the second quarter of $31.4 million grew 15% over the second quarter of 2024. The increase was driven largely by console volume and mix, including sales to acute customers, which carry a higher average selling price due to the additional features attached to each unit. Product revenue of $23.1 million, consisting of console revenue of $8.9 million and consumable revenue of $14.2 million grew 20% from $19.2 million in the prior year. Importantly, console revenue grew sequentially and year-over-year. Service and other revenue of $8.3 million grew 2% from $8.2 million in the prior year period. Recurring revenue from the sale of Tablo consumables and service was $22.5 million, an increase of 11% over the second quarter of 2024. Next, I'll walk through our gross margin and operating expenses for the quarter. Please refer to the table in today's earnings release for a reconciliation of GAAP to non-GAAP measures. Non-GAAP gross margin expanded another 110 basis points from last year, reaching 38.4% for the quarter even with a 100 basis point headwind from the under-absorption of manufacturing overhead. Product gross margin increased nearly 400 basis points year-over-year to 48.9%. Service and other gross margin was 6.9% compared to 13.6% we reported in the second quarter of 2024 due to the short-term investments we made in parts supply. We are making progress against our plan to optimize inventory levels and gradually increase production, which further mitigates the gross margin impact of the manufacturing under absorption we have discussed all year.…

[Operator Instructions] Our first question comes from Rick Wise at Stifel.

Great to see another, I think, maybe the fourth quarter in a row of steady progress on all your key business priorities. It's great to see that. If I could start off just, Leslie, on your guidance, and not to use your words to against you, but you said -- I think I'm quoting you, you said we're set up very well for the second half of '25. And if I'm doing the back of the envelope math correctly, maybe I'm not, but it seems like at the midpoint of the guide that looking -- forget the differences between third and fourth quarter, it sounds like the midpoint would be sort of make the second half roughly -- very roughly equivalent to the first half sales level. But it feels like momentum is growing. Am I thinking about this correctly? And maybe help us understand what's maybe keeping you, I'll say, thoughtfully conservative?

Sure. Rick, happy to do that. First and foremost, we really are happy with the way the year has shaped up to date. Taking a quick step back, we kicked off the 2025 year by conveying that we did intend to remain conservative throughout '25 from a guidance standpoint as we stay focused on what we know is a really important year of execution for the company. But having said that, it was great to see very strong console and recurring revenue performance in the first half of this year, combining that with -- and you did hear me correctly, what we believe is a very good setup for the second half of the year, we were pleased to raise the range, both on the top and the bottom by a full $7 million, which effectively raises the low end above what was the midpoint of our guidance at the beginning of the year. So, I think that's all very, very good news. Let me say a little bit more about another part of your question, kind of why we believe the setup for 2H, and I'd say beyond 2H is good. I'll try to keep it short, but 3 short points. One, this commercial transformation is absolutely taking root. The changes and the improvements we made to the team and the tools and the processes is really paying off from pipeline management to forecasting to our ability to convert opportunities to contracting. It's -- in short, it's all better. I think the second short point is that demand is growing. Our pipeline did grow again, both sequentially and year-over-year. And also, equally as important, the deals are progressing. We have more deals in the pipeline that are in the later stages versus the earlier stages. And we have good…

Great. I appreciate all the detail there. And maybe just sort of one factor of many underpinning all those comments is the commercial strategy transition. I was hoping you could give us some additional color on where are we? I think previously, if I remember correctly, you said that, you thought the sales force transition would be sort of fully productive after the quarter you just reported. I mean, are we past the sort of standup phase, if you will? Help us understand that or if there's more to go, what would get you to, yes, we're past that. And maybe help us -- maybe I'd be curious to hear your thoughts about how a now more fully trained on a productive sales force factors into your rest of '25 outlook and maybe how that sets you up even for next year from that perspective?

Sure. Yes, happy to comment on that more. In a nutshell, the commercial organization looks and feels and operates very differently today in all of the best ways, as a result of the changes and the improvements that we've made here over the last couple of quarters. And that showed up for us in a really nice way, both in the first quarter and again in the second quarter as these new tools and the new sales process, really, again, aimed at success at the enterprise sales level did contribute to -- these are some of the things we look at, Rick, improved forecast accuracy, more demonstrated visibility, predictability and control over how deals -- where are deals exactly in the sales process and how are those deals progressing. The ability of the team to convert those opportunities to contracts and ultimately to revenue has also improved. We're obviously going to stay extremely vigilant in monitoring how everything is going. But the headline value here, I think, is so far so good, and we're really happy with the progress and the evidence that we have seen to date and have confidence in how it's going to continue to translate here through the remainder of the year.

Our next question comes from Marie Thibault at BTIG.

Congrats on a very nice quarter. I wanted to ask here a little bit more on some of the deal strength that you saw in the quarter. Absolutely understand that your deal pipeline is diversified, a lot coming from kind of enterprise sales. But just trying to understand how sustainable some of it is. And also, there was some commentary about strong ASPs on consoles. Of these new deals, is there a lot of uptake of some of your newer products or newer upgrades where you're able to get some of those higher ASPs, things like TabloCart and others?

Yes. Thanks for the question, Marie. And yes is the answer. But let me give you a little bit more color behind it. We did have ASP strength due to a really nice attach rate both on or said differently, uptake for TabloCart and the Tablo PRO+ software, which did help fuel the ASP strength. Also, I would be remiss, if I didn't mention that our team continues to do a great job on ASP discipline. And I think the ASP strength is reflective of the results that the technology and sort of the proprietary ecosystem around it is driving for customers. Customers, particularly in the acute and the post-acute setting, I think, is the nature of the question, really are experiencing and continuing to share actually more and more with their peers very, very tangible cost reduction, operational efficiencies. And I'll say, what is continuing to emerge are these clinical outcomes. More and more hospitals are reporting significantly lower CLABSI rates, lower rates of hospital-acquired infections when they have moved from an outsourced model to an insource model. And so between, I think, that the way that we think about the pricing structure around Tablo, the team's discipline in executing around it, and the accessories and some of the software options, all of those were key contributors to ASP strength. Now, going to the beginning part of your question on sort of how durable, I think -- and guide me, if I'm not getting the first part of your question right, but yes, kind of the durability and the sustainability of the pipeline and sort of forward-looking console sales. The console revenue that we saw this quarter and that we expect to see in 2H is driven not only by strong ASP, but let me be clear, by very strong console placements and strong console uptake. So that's a really important point one. Point two, when we look forward into the pipeline, and I'll touch on this very large enterprise agreement that we signed this quarter, as I mentioned in the prepared remarks, that's dozens of facilities potentially and hundreds of consoles over time potentially. And so with several of our existing customers and new customers at the enterprise level, we do take a view that this could provide a pretty interesting growth rate for us for many quarters to come in the future.

That's really encouraging, Leslie. Great to hear. And then I guess I'd like to ask a little bit about your hiring of a Chief Nursing Officer during the quarter. Great to see someone who believes in the Tablo story so much that they want to join the company. What will be her focus? Is it increasing home utilization? Is it increasing utilization in the acute care setting? Is it helping inside sales? What's kind of the focus of that role?

Yes, I'm really glad you asked about that. The -- what we've learned, and I think we've talked about this a little bit in prior calls. One of the things that we learned as a team really over the last 12 to 18 months was just how critically important the role of the Chief Nursing Officer is in moving from outsourcing to insourcing of dialysis. We were finding over time that more and more of our sales processes were involving a CNO audience. They are the folks at the executive level that do ultimately own the implementation of the move from outsourcing to insourcing. And so it was really critically important that our team focused on the Chief Nursing Officer at any given hospital and that we become really good at explaining how the move really serves them and their nursing teams. And so now looking forward in this new hire of a Chief Nursing Officer, she will be really focused, first and foremost, on working with our sales organization and sharing her own experience in successfully moving from outsourcing to insourcing with many of the customers, the potential new customers in our pipeline and partnering with those CNOs to really explain and help them with the change management around that, and helping them understand kind of the key steps along the way from outsource to insource and what her keys to success were that did allow her hospital to materially lower their cost of dialysis, their complexity of dialysis and also drive some pretty meaningful clinical improvements for patient care.

Our next question comes from Josh Jennings at TD Cowen.

Great to see the strong quarter and the updated guidance. Leslie and Renee, would love to just touch on the enterprise channel or IDN opportunity. And I know you've had some big wins over the years, and those wins seem to continue in the first half of '25 and the pipeline is filling up with opportunities, the sales pipeline up with opportunity as well. Maybe just talk about the penetration in this IDN or enterprise channel and the go-forward opportunity a little bit more. I think you've touched on it already in some of your answers, Leslie, but I'd love to hear your build and just how big of an opportunity from here you see that enterprise channel. Clearly, it's a large one.

Yes, sure. Thanks for the question, Josh. I'm happy to. So, despite the successes that we've had here for the last couple of quarters in pipeline expansion and in closing new deals, we are still -- I would still call it an early innings in terms of the runway. If we look at the total addressable market in the acute and subacute and just to recap on terms, in subacute, we include LTAC rehabs principally in that TAM number. We would consider ourselves to be kind of in the low double digits in terms of market penetration. So that is what really excites me the most is we've come a long way. And with 900 sites now using Tablo, both acute and post-acute, it is kind of amazing that we're only low double-digit penetrated, which tells me we have a lot of exciting opportunity ahead with a team now that is really ready and capable to go after it. I think that another thing I think about in terms of the TAM is there's a lot of interconnectivity to think about, too. Many health systems own LTACs. Many health systems own rehabs. Many of these health systems have or are getting into the skilled nursing facility area. Nephrologists that round in hospitals also round in the outpatient setting of home and have patients at home. And so, we really benefit greatly from the interconnectivity, both at the clinician level and also at the IDN level, which I think is helping to kind of fuel this flywheel. Another, I'll give you one last observation that I found pretty interesting, Josh, is we have for the last 12 to 18 months seen a fair amount of executive leadership migration, executive leaders moving from one hospital to another, one health system to another. And that has really started to pay dividends for us as well, not that we had anything to do with that. But you can imagine, as the CNO moves from hospital A to hospital B and hospital A has successfully outsourced with Tablo and seen the benefits at their first hospital, they're kind of bringing that experience, that confidence and conviction to their next hospital executive leadership role. So, we have actually experienced some tailwinds and some benefits that I think is only going to continue as this footprint for us grows in the acute and post-acute space and insourcing with Tablo becomes an interesting idea to the standard of care, which we fully intend to deliver on here in the coming future.

Excellent. And sorry for another relatively high-level question. But you mentioned partnering up with the #3, third largest dialysis provider for patient access to Tablo. I was hoping you could just provide a roadmap or help us think through the tailwinds for home hemo in second half '25 and into 2026. Clearly, that's a nice tailwind for Outset, but maybe the market and then any other tailwinds for the home hemo opportunity, how that's opening up, how you see it opening up and any tailwinds for Outset's home franchise specifically?

Yes. Sure. I'm happy to. I always love talking about home. We have continued to make good progress in the home end market, both with the -- we call it, midsized dialysis organization, or MDOs, and then the skilled nursing facilities or SNFs. And that continues to contribute about 15% to 20% of our revenue, which is exactly in line with the expectations that we shared in the beginning of the year. Our overarching goals for home growth as we set up 2025 were, first and foremost, and at the risk of beating a dead horse, I'm really passionate about this topic around retention. I've always believed that sustainable longer-term growth has to start with an industry- leading retention rate, so that you're always growing from a strong foundation. We have maintained a 90% or greater retention during the first 90 days, which all of the data suggests is sort of the leading indicator of longer-term retention at home, and we have maintained very, very differentiatedly high retention rates at 12 months as well. So, the backbone of our growth is retention, regardless of the channel through which it comes. Our second goal was to achieve partnerships, with all of the largest MDOs in the country. And as of Q2, we now can check that box. We continue to see more location growth depth. Job #1 is to contract with the largest MDOs. And then job #2 over time is to deepen the utilization and offer Tablo in more and more and more of their locations. And that's the next phase that we're focused on now that we have achieved the contracts that we were hoping to achieve. And then the third thing is to begin our entry into SNFs. That was the third goal for '25. That does remain a very large, but also obviously very new to us market. The trappings are all there in the sense that the value proposition, it actually is quite similar to acute, lower and less complicated dialysis, which delivers a dramatically higher quality of life and treatment benefit for patients. And so, we've gotten a good start to capitalizing on that here in 2025. As I mentioned, we're seeing some good kind of tailwind even through our acute partnerships into SNFs in addition to SNFs that want to directly manage dialysis in-house and through service providers that are specifically focused on coming in-house into the SNFs and providing dialysis there. So that was a long answer, Josh. I apologize for that, but I'll just say that, those were our 3 key goals to continue to develop this market and penetrate into it with Tablo over the longer-term. But here in the near term, I think the team is executing very well across all 3 of these vectors.

Excellent. Maybe if I could just sneak one in and maybe too granular with it. I mean, how should investors think about the growth trajectory from here second half of '25 into '26 for the home unit versus acute channel for Outset? Should that be kind of on par or would home or acute outpace the other?

Sure. No problem. Yes, broadly the same. I would think about it in the same way that we've always talked about acute and subacute as kind of our first wave of growth, and we are still very, very much in that first wave, as I mentioned, just only low double digits penetrated here. So, I would continue to expect acute, post-acute to be in that 80%, 85% of our revenue range with home as the remainder. So, we don't expect any changes in that mix as we look forward here.

Our next question comes from Shagun Singh at RBC.

This is [ Mo ] on for Shagun Singh. Congrats on the quarter. I was wondering if you could touch a little bit deeper on some of the internal work that has been done to transform the commercial organization. You talked about the restructuring a little bit. Can you maybe just tell us where you stand on those efforts and maybe try to quantify that a little bit? And I'll have one follow-up.

Of course, yes, I'm happy to. Sort of -- to top line it for you, the commercial organization itself is, I would almost say, dramatically different than it was just a relatively short time ago. And again, credit to our commercial leader and her regional leadership team for implementing any number of changes and improvements. We looked at, Mo, to answer your question a little bit more specifically, we restructured the team. We looked at a new enterprise skill set. I've talked in the past about how our kind of original sales team was, I think, less able to capitalize on these enterprise-level opportunities that we had earned the right to get in front of. And just had a little bit of a different skill set, probably a little bit more start-up mode, as I would describe it. And so, we needed capital sales professionals who had to put it shortly seen the movie before, and had success and a track record of end-to-end management of deals that were many dozens of Tablo and dozens of facilities that would all be making the move from outsourcing to insourcing. And so, I would say all of the work around infusing our team with those new skill sets is behind us, that work can be called complete. In addition to that, we introduced many new sales tools, data-driven sales tools that under a new Vice President of Sales Enablement, who's done an absolutely terrific job at enabling our team to be more focused, more targeted, and more efficient through the pipeline management, the sales process management, and also given the commercial and the finance organization, data-driven tools that have led to better forecasting and timing of close. And lastly, we talked about introducing a new sales process. Again, this was aimed at a new segment of our audience, sort of more of our mainstream adopters versus the early adopters. And when the mainstream adopters are looking at moving from outsourcing to insourcing over, as I said, dozens and dozens of their hospital facilities, that's a different sales process. It's a really different sales process than the work that we needed to do, let's say, in 2021, 2022 earlier in our commercial penetration. And so, we introduced an entirely new sales process with a very, very high level of inspection rigor and again, data-driven tools to ensure that we were moving across the country in every territory through an enterprise-level sales process in the same way. So, I'll stop there. This is a passion topic for me. I could go on and on. But I will stop there and hope that, that gives you the color that you're looking for.

Totally, really appreciate it. And just a quick follow-up. You touched earlier on your goal to use less than $50 million of cash this year. Are you able to maybe talk a little bit more about what the outlook would be into 2026 for cash burn, just directionally? Any comments on that?

Yes. Mo, this is Renee. Happy to take this one. At this stage, we're -- we've given, I think, as much guidance as we're going to give at this stage. We've been really pleased with the performance, as you can see just in Q2, how much step down from Q1. And then we've given some sort of insight around what we expect for the back half of the year. I wanted to give some comfort into 2026 and some high-level view that it might not be just $5 million a quarter going forward. We're going to have a little bit of elevation as we, again, ramp production to continue to move towards sales growth, and we get back to sort of a normalized state on inventory production as well as one-off items that happen generally in Q1. give additional guidance for 2026.

That's extremely helpful. I really appreciate it, and congrats again.

I'm showing no further questions at this time. I would now like to turn it back to Leslie Trigg for closing remarks.

Thanks, and thanks again to all of you for joining today. I'd really like to close by thanking our entire team for the meaningful difference that they're making every single day in the lives of dialysis patients and the providers who care for them. I hope you all have a great evening. Thanks again.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.