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

Good afternoon, everyone, and welcome to our fourth quarter 2025 earnings call. Here with me today are Leslie Trigg, Chair and Chief Executive Officer; and Renee Gaeta, Chief Financial Officer. We issued a news release after the close of market today, which can be found on the investor pages of outsetmedical.com. This call is being recorded and will be archived on the Investors section of our website. It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Outset assumes no obligation to update these statements. For a list and description of the risks and uncertainties associated with our business, please refer to Outset's public filings with the Securities and Exchange Commission, including our latest annual and quarterly reports. Leslie?

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. 2025 was a year of progress and transformation at Outset Medical, a year where we overcame adversity to emerge with a stronger foundation and even deeper capabilities to help hospitals, health systems, post-acute and home providers improve patient care outcomes at lower cost and with less complexity. During the year, we substantially reduced our cost structure while making significant investments to extend our technology and service leadership. These investments were key to our announcement 2 weeks ago about the FDA clearance of our next-generation Tablo platform. Second, we meaningfully strengthened our team and infused new talent into key leadership roles, in finance, medical affairs and field service. Third, we recapitalized the company with less debt and new capital to fund Outset through cash flow breakeven and beyond. Fourth, we expanded our base of published evidence, demonstrating the significant clinical, operational and financial benefits that can be achieved by in-sourcing with Outset and Tablo. In particular, the clinical value proposition came into clear focus as our customers documented even more evidence of improved clinical outcomes. Fifth, we maintained a very high customer satisfaction or CSAT score, above 95%, for the exceptional customer service we provide. And lastly, we continue to sign new agreements for the in-sourcing of dialysis at new and expansion sites, including at one of the largest national health systems in the country with well over 100 facilities. Tablo is now used at roughly 1,000 acute care sites in the United States. Turning to our financial results for the year, we announced preliminary fourth quarter revenue last month, which came in at the high end of our revised guidance range. At $119.5 million, revenue grew by 5% over 2024 and sets us up for what we anticipate will…

Thank you, Leslie, and good afternoon, everyone. Revenue in the fourth quarter of $28.9 million consisted of $19.9 million in product revenue, which, as expected, was below $21 million in the fourth quarter of last year. The components of product revenue include console sales, which grew 11% to $6.4 million, and consumable sales of $13.5 million. As we indicated last quarter, consumable sales were lower in the quarter compared to the fourth quarter of last year due to order timing. Consumable revenue did rebound sequentially, just as we had anticipated on last quarter's call based on our Tablo utilization data, growing nearly 11% over the third quarter. We were very active during the quarter to tighten up our forecasting methodology for treatments, which now includes closer collaboration with our largest customers on their ordering patterns. I believe we have made improvements to better predict treatment demand, and we will continue to monitor Tablo utilization and ordering data as we hone our approach. Service and other revenue of $9 million grew 6% from $8.5 million in the prior year period. Recurring revenue from the sale of Tablo consumables and service was $22.5 million, again growing sequentially, as we anticipated on last quarter's call, but down from the fourth quarter of 2024 due to customer ordering patterns that resulted in a strong fourth quarter in the prior year. Next, I will walk through our gross margin and operating expenses for the quarter. Please refer to the tables in today's earnings release for a reconciliation of GAAP to non-GAAP measures. Non-GAAP gross margin expanded more than 500 basis points from last year, reaching 42.9% for the quarter, even with another 130 basis-point headwind from the under-absorption of manufacturing overhead. Excluding the manufacturing headwind, we would have seen non-GAAP gross margin closer to the…

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

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

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

Sure. I'm happy to address that. Thanks for the question and hello. Yes. So let me talk a little bit more about that. It's one of my favorite topics right now because we are really proud of the work that went into this and what we believe will be the value that we deliver to hospitals. I myself have talked with so many hospital leaders around cyber, and particularly those that view vendor devices as their biggest vulnerability. They not only have to worry about the security of their own network, but of course, increasingly, all of the different devices that are connected to it. So I think it's more than fair to say that health system executives have an extremely heightened focus on the cyber safety of the medical devices being used in their environment. So given the fact that we now have the first dialysis system harmonized with FDA's very rigorous cybersecurity standards, I do believe it will help us generate incremental attention and interest among potential customers, I'd say, regardless of size, maybe to hit on one part of your question. I haven't seen a big difference in the level of cybersecurity attention between small, medium or large hospitals. They're all concerned about it, because it's something that they increasingly view through the lens of like fundamental patient safety. So yes, I do think that this will be a potential tailwind, a potential catalyst for us in 2026 and obviously beyond. I do think that it could -- again, very early, we just got the approval a couple of weeks ago, so too early to speculate. But minimally, I think that we will see incremental attention and interest. And I do think that our ability to offer hospitals sort of advanced cyber safeguards will be very positively received. In terms of the ASP lift, look forward to giving you more specifics on that as we get a little closer to the launch a little bit deeper in the year. We do, I think, philosophically, we have always followed a philosophy around pricing for value. And we believe that value to this upgrade is quite significant. But I'll close by saying stay tuned as we get a little deeper into the year on specifics.

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

Absolutely. Yes. Well, I think as I reflect on Q4, and I'll say, current state, today, we do have an experienced sales leadership team. They did an excellent job at keeping the organization focused on the quarter. I think the results of Q4 reflect that, albeit on a revised guidance range. We did execute at the top of that revised guidance range. We did see the treatments renormalize. We did see the deal from Q3, that slipped, close in Q4. We did see console sales bookings land exactly where we expected them to land in Q4. So all of that was encouraging. Now as we kind of look forward, Renee and I remain very hands-on inspecting the pipeline and forecasted deals. And we're still operating at a very detailed level. We'll obviously continue vigilant monitoring. But in terms of the stability and focus of the sales organization, I'd say, so far, so good. We do still have a search underway, which is being done for us by a leading executive search firm. Because we do have a very strong and capable sales leadership team in place today, it is affording us the time to find the best of the best. So we're being very deliberative and to ensure that we have the best cultural and operational fit for the business. Maybe lastly, I think -- what?

Sorry. I was just saying thank you.

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

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

I wanted to follow up on Marie's question you answered, Leslie, just on the pipeline diversification. Is there any way to -- or 2 questions within one. One, can you quantify the pipeline growth entering '25 versus entering '26 or vice versa? And then just as we think about the potential to expand your current customer base and just the sales cycle associated with those deals, is there any -- is there a prioritization for the sales force to reduce the sales cycle? Or is the mix appropriate, I think, as you stated? Any strategic attack plan just in terms of the different buckets within the pipeline, thinking about contracting the sales cycle over the next 12 to 24 months?

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

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

Yes. We saw about the same amount of growth in the pipeline as we did between '24 and '25. We saw, again, about the same rate of growth between '25 heading into -- year-end '25 heading into the beginning of -- sorry, year-end '24 and the year-end '25, about the same rate of growth as we did the prior 12 months. So I continue to be very encouraged about the demand that we're generating. And I think that some of the pipeline -- I know that some of the pipeline expansion more recently has been because of this new clinical value proposition that's been emerging and then published increasingly by our own customers, seeing a reduction in length of stay, a reduction in CLABSI rates, even a reduction in code blues during dialysis treatment. And I have understood from potential customers that that has driven, I would say, an incremental wave of interest beyond the financial ROI benefits that have been long understood with in-sourcing with Tablo for a couple of years now.

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

Sure, Josh. Happy to step in here. I think as we sat back and thought about the guidance range, we absolutely looked at it across the 3 primary components of revenue and the different puts and takes to each of those. So you're right in that our 5% to 9% growth is our -- what we believe is our balanced, best approach for right now for the full year. And I would believe that -- my position is that you should think about forecasting growth for recurring revenue to be roughly in line with that top line growth. And as you can even see from what we just performed on for 2025 against 2024, we saw very consistent revenue growth in console, consumables and service.

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

I just had like 2 modeling questions. I know you guys continue to track ahead of expectations on gross margins. Is there any update on the time line to get into that 50% mark? Can you achieve that prior to exiting 2027? And then also, I have a quick question, does your current cash -- is that enough right now for you to reach profitability? Or do you need to raise any more cash before reaching that point?

Sure. Yes, great questions. I think as you can see -- on gross margins alone, you can see that year after year we continue to execute against our gross margin and, just last year, had a 500 basis point improvement. So we are continuing to march towards that pathway. And as you've indicated, our goal is 50%. And we just saw that even with just product gross margin for Q4. We're going to guide for the current year to, as I mentioned, sort of the low to mid-40% range. But we do feel as though that that 50% absolutely is within our planning horizon. I'm just not going to give a formal year to when we're going to achieve that, but we absolutely look forward to doing that and sharing that with everyone at that time. Specific to cash on the balance sheet, I think as you think about we've got $173 million in cash, cash equivalents and investments, as you've seen just from our performance in this past year, we brought operating cash burn down from $116 million in 2024 down to $46 million in 2025. And as stated on our call, we will look to better improve against that in 2026 as well. And we absolutely believe that we've got sufficient cash on the balance sheet to get us to profitability and beyond.

I really appreciate the color there. And then I have just quick question on capital budget. I was wondering what you're seeing on the hospital capital budget environment right now. Do you feel like it's up year-over-year? And also, what's the state right now? And then also, can you give me a little commentary, I know you talked about having a backlog, is that still -- like, can you talk about the size and maybe the scale of that right now for Tablo?

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

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

Just I want to have some follow-up questions sort of building on a lot of the excellent questions already discussed. On the next-gen Tablo system, it's great to see it, a couple of follow-ups. One, is there an upgrade opportunity here? Like, does your existing installed base upgrade for a nominal fee? Is it a whole new Tablo they would buy? Is there an opportunity to upgrade your entire existing base at a full cost of a new Tablo, whatever that ASP would be? Maybe just help us understand that. Could you talk a little bit more -- the cyber security topic is obviously compelling alone, but help us understand some of the additional, some of the other new features and capabilities and how that might add to Tablo's luster and ease of use and clinical utility? And then I have a related follow-up question to that.

Okay. Great. Yes. Perfect. Why don't I -- I'll try to address the first part and then we can go to your part two. So on the next gen and the upgrade opportunity, short story long, yes. Our existing installed base customers will have full access to this upgrade. They will be able to upgrade. At the same time, new customers will also have an opportunity to buy new Tablos that already contain, because they've been manufactured in, already contain all of the software, hardware and cyber upgrades that I'm about to elaborate on in 1 second. So yes, this is a full access upgrade both for -- that will be available to the current installed base and also new customers moving forward. You also talked about or asked about what are some of the details around -- on the cyber front, what does that really mean? Gosh, this could be like an hour-long conference call that I -- a podcast, that I'm sure you all would really enjoy, but I will try to keep my answer brief. This was a massive amount of work for our team and took us many, many, many months of technical achievement to reach. But for example, we updated physical network cloud connections with new software and hardware changes. We added many, many, many new security controls. We have -- our software now has round-the-clock cyber monitoring. In terms of the device performance itself and some of the reliability improvements, those, again, it's new software, a new operating system, new hardware. And how this translates to the customer benefit was something you also asked me about. Well, number one, we're always focused on improving uptime, which in and of itself improves the user experience. And so when you've got device performance enhancements, reliability enhancements, you are improving uptime. The availability of that device, the more the device is available, the better the patient care experience, patient care can be delivered when it is needed by the patient. And then, of course, the user experience with nurses and biomeds in the hospital, will be beneficiaries of the device performance and the reliability improvements as well. And I think I'll say moving forward, we're not done. We are extremely committed to what I like to call customer-centric innovation. Not inventing things because we can, from an engineering standpoint, but inventing things because we've heard them from users. Feedback, ideas. The improvements in this next-gen are a direct example of kind of this customer-centric orientation and very reflective of many of the suggestions and ideas we've gotten directly from our nurse users and others within the acute care and post-acute environment.

Great. And just to build on that, just in the simplest of terms, is -- and you haven't told us the ASP or whether it's more or less or equal to the current generation of Tablo. But if I assume it's -- there are more features and the cybersecurity is an incremental value and it's higher, what does this all mean for your gross margins once you're fully launched? Is this margin-accretive at that point? Is there a manufacturing learning curve, and so it actually depresses them initially as you launch? And maybe just related -- sorry to ask such a multipart question, but what's in your guidance at this point? A first or second half guide. Then bringing that gross margin question into it, how do we think about the new Tablo impacting margins? Thank you for dealing with all that.

No problem, Rick. This is Renee. I'll help sort of answer some of the gross margin questions and, in particular, how we're thinking about this. So as Leslie mentioned, we're working on the commercial launch strategy and how the Q2 time frame around that where, hopefully, we'll give additional clarity specific to ASPs. But I would say we absolutely think that there is value to product innovation and that this product just continues our innovation pipeline and that customers will see value in that. Specific to gross margin, you could imagine then that could be a potential tailwind specific to revenue throughout the year, but also gross margins. We've strategically thought about this product launch, this product generation, as Leslie just mentioned, the ability for current customers to upgrade their devices if they so choose, what future manufacturing of devices look like, plus also the units that I have on hand in finished goods at the moment. The functionality, we really thought about this when we were designing this next generation. And the ability to have that flexibility to upgrade, to add the components and, of course, add the software. So current state within our gross margin guide, we've factored it in, I would say, similar to how you can think about gross margin. Right now, we currently don't expect it to be sort of a big detriment. I know sometimes companies have that when they're switching generations or versions of their device. We think this will be relatively a mild impact. And of course, the more consoles that we do sell, that has a dampening effect on gross margin, as you know, from our history. So in some ways, I'd love to sell -- have a tailwind from this and sell more consoles, have higher top line revenue growth, that could dampen in the near term gross margin. But as we've thought about it in the current guide, both from a revenue perspective and a gross margin range, we need -- the commercial launch will be sort of late Q2. So it will be back-end -- included in our back-end assessment, and let's see how that launch goes and how it rolls through the summer months.

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

Great. Thanks to everybody for joining today. I'd like to thank -- close by thanking our customers and our team for the very, very meaningful difference that they make every day in the lives of dialysis patients. I hope you all have a great evening.

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