Outset Medical Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

Key Takeaways

  • Q1 results beat expectations with revenue up 10% year-over-year to $33.5 million and gross margin expanding 3 points sequentially, prompting an increase to full-year revenue and margin guidance.
  • Acute market momentum continued as Outset shipped a record number of consoles to major IDNs and added over 30 new hospital sites—the largest quarterly site growth since 2021.
  • Home dialysis adoption accelerated with new partnerships at major midsized operators, first shipments to regional home providers, and more programs now supporting over 10 patients each.
  • This marks the eighth consecutive quarter of gross margin expansion to 20.3%, and management now expects to exit 2023 with margins in the mid-20% range.
  • Non-GAAP net loss widened to $0.72 per share amid higher OpEx for commercial and R&D investments, though the company ended Q1 with $252.5 million in cash and access to $200 million in debt facilities.
AI Generated. May Contain Errors.
Earnings Conference Call
Outset Medical Q1 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Welcome to the Outset Medical First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Automated message advising your hand is raised. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Jim Nazzola, Head of Investor Relations.

Speaker 1

Good afternoon, everyone, and welcome to our Q1 2023 earnings call. Here with me today are Leslie Trigg, Chair and Executive Officer and Nabil Ahmed, Chief Financial Officer. During the call, we will discuss our Q1 2023 operational and financial results and host a question and answer session. We issued a news release after the close of market today and updated our investor presentation, both of which can be found on the Investor Relations pages of outsetmedical.com. This call is being recorded and will be archived in the Investors section of our website.

Speaker 1

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 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 now turn the call over to Leslie.

Speaker 2

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. We had a strong start to 2023 with revenue growing ahead of our original expectations and margins expanding for the 8th consecutive quarter also ahead of our plan. The momentum we had exiting 2022 carried through the Q1 and positions us well for continued revenue growth and margin expansion through the remainder of the year. Specifically, revenues for the Q1 were $33,500,000 representing approximately 10% growth year over year and approximately 5% growth sequentially.

Speaker 2

While we did see some of the Capital equipment purchasing seasonality we had anticipated on our Q4 call, Tableau uptake remains strong, our installed base grew in both the acute care and home markets and we benefited from strong mix and pricing across the board. On the operational front, our ongoing Cost down and efficiency initiatives continued to pay off, resulting in gross margin that expanded sequentially by another 3 percentage points. We maintain our conviction in the fundamentals of our business, supported by a healthy pipeline and backlog with interest in and demand for Tableau strong and growing. Our success in the Q1 lays the groundwork for accelerating growth through the balance of 2023. And as a result, we are raising the midpoint of our revenue guidance and also increasing our gross margin guidance today, both of which Nabeel will elaborate on shortly.

Speaker 2

First, I'd like to begin with a review of our results in the acute market during the Q1, another consecutive quarter of strong growth. In short, our Q1 results came in better than expected and we were pleased with our ability to drive upside over our expectations. Our skilled U. S. Commercial team continued to deploy our proven land and expand strategy during the quarter, closing new sales agreements and expansion sales within existing accounts and we continue to see customers make the decision to in source inpatient dialysis with Tableau.

Speaker 2

We're pleased to see this momentum with a growing number of providers recognizing the cost savings associated with in sourcing initiatives and eager to move forward bringing Tableau in house. We had a record number of consoles shipped to large regional IDNs, including a deployment of more than 50 Tableau consoles to a single IDN. Additionally, we added more than 30 new hospital sites to our roster during the Q1, the largest quarterly growth in new sites since 2021. Our acute progress is a direct testament to the strong economic value proposition of Tableau. In any climate, direct measurable cost reduction is valuable to hospitals, but never more so than

Speaker 3

it is

Speaker 2

today. Because hospitals are not separately reimbursed For inpatient dialysis in most circumstances, it's a pure play cost center for them. And because inpatient dialysis ends up being provided as part of hundreds of different DRGs, The cost of dialysis can impact the hospital's procedural profitability broadly. Because Tableau directly lowers the hospital's dialysis cost by 50% to 75% with a typically rapid payback period, we continue to see hospital administrators prioritize Tableau in their capital spending plan. Our Bridge program continued to be a strong complementary offering for customers who are considering in sourcing their dialysis service As we've discussed before, Bridge provides customers with the confidence to move forward by serving as a staffing backstop in case their own hiring takes longer than As in Q4, we found in Q1 that most customers were able to hire on a timely basis and proceed with in sourcing without needing to use Bridge.

Speaker 2

In situations where we have deployed it, we found that customers are able to staff their programs faster than they expected, which also enables us to operate the program A good example is Deaconess Hospital in the Midwest. Deaconess operated a large outsourced dialysis program for more than 10 years. As they were forced to bear the rising cost of their outsourced provider and accept lower service levels, their team decided to explore in sourcing with Tableau. With the Outset team and the Bridge program, Deaconess was able to hire their own staff and stand up their in house operation in 31 days. According to the program director, the hospital has observed a 99% clinical success rate during the 1st 5 months, dramatically lowered their costs and improved patient outcomes.

Speaker 2

And these results are not unique to Deaconess. As we continue to expand our footprint in U. S. Hospitals, We're finding these results are repeatable and sustainable. Another important element of our commercial strategy is to drive utilization across the installed base and we were pleased to see positive trends in treatment volume during the quarter in line with our expectations.

Speaker 2

We also saw ASPs rise both on consoles and consumables, which serves as strong validation of Tableau's clinical and economic value proposition versus our competitors. Our ASPs Pease benefited again from better than expected uptake of Tableau add ons, including good early demand for our Tableau cart new product accessory. More broadly, we see an acute care environment that is much more favorable relative to last year. While hospital nursing shortages continue to affect We've observed stabilization in staffing over the past several quarters and Q1 was no different. Additionally, programs like Bridge have been successful in helping our commercial team address staffing concerns upfront and early, which continues to prove helpful to our sales process.

Speaker 2

I'll now turn to our progress in the home, which represents another very large market opportunity for Outset. Our strategy entails growing the number of home programs offering Tableau, while simultaneously working to drive the patient census in each program higher than historical standards. Key to both planks of this strategy is maintaining our industry leading retention rate, which we believe is a central benefit of Tableau and a primary driver for further profitable expansion in this market segment. Specifically for 2023, our home goals include landing the majority of the largest midsized dialysis operators known as MDOs and initiating home programs with 2 of the top national IDNs. During the quarter, we made good progress against these goals, including establishing with another of the top MDOs and first time shipments to several other regional home providers.

Speaker 2

As we land relationships with new providers, we remain Equally focused on the expand part of our strategy by deepening our penetration in existing accounts. For example, during the quarter, we increased the number of home programs that have a Tableau home census of more than 10 patients. While the number of these larger programs is still relatively small, We are encouraged by the early indicators that Tableau can significantly increase the number of home hemo patients per program. During the quarter, I was again able to spend time with patients dialyzing at home on Tableau. One visit struck me in particular for a couple of reasons.

Speaker 2

First, this individual was in her mid-70s and spoke of how easy and effortless it was for her to master Tableau. Our internal data continues to support that Tableau Mastery is not defined by age. The patient I visited began dialyzing in center, but quickly realized how much more Freedom and flexibility home dialysis would afford. However, her dialysis clinic provider didn't offer Tableau. So This patient chose to switch clinics and switch physicians in order to access it.

Speaker 2

While it's still early, we are beginning to see examples of patients Our recent home progress was validated from a clinical perspective at last month's National Kidney Foundation Spring Clinical Meeting, where 5 new abstracts were presented that highlighted a range of clinical and financial benefits of home hemodialysis with Tableau. For example, one study estimated the 5 year savings for a Medicare Advantage plan generated by prioritizing Tableau Home hemodialysis versus in center hemodialysis. The study found that a Medicare Advantage plan with 500 dialysis members could drive $4,200,000 in estimated savings over 5 years. Another study modeled the monthly per member costs for our health system assuming risk for dialysis population from a Medicare Advantage plan and the 5 year savings from establishing a home dialysis program. The study determined that a health system assuming full risk on Medicare Advantage Dialysis members could generate $10,700,000 in estimated savings over 5 years.

Speaker 2

We're proud of data like this and look forward to continuing to build Tableau's clinical evidence base over time. In short, we continue to see growing demand for Tableau at Home fueled by shorter training times, exceptional clinical outcomes, overwhelmingly positive patient experiences and a differentiated retention rate. Our team also continues to make solid progress operationally, which has resulted in consistent gross margin expansion and enabled us to deliver non GAAP gross margin of 20.3% in Q1, more than 5 percentage points over our Q1 2022 gross margin. The Q1 represented our 8th consecutive quarter of Increasing gross margin as we move toward our next mile marker of 50% gross margin. Our drivers of margin expansion remain unchanged And our performance over the last 8 quarters illustrates our ability to capture this margin expansion opportunity.

Speaker 2

From a product innovation standpoint, we are very pleased with demand for Tableau Cart, a new product accessory we introduced in Q3 of last year that provides additional maneuverability around the hospital and incremental water pre filtration capabilities. Tableau Cart is sold separately at a gross margin accretive ASP and is proving to be a valuable solution to many of our acute care customers. And finally, I'd like to provide an update on our Tableau Cartridge Insourcing initiative that we touched on during our last update in February. To date, cartridge production at OMM has progressed very well against our initial expectation and we're very pleased with the throughput and quality we're seeing. Cartridge insourcing remains an lever of gross margin improvement over the longer term and we look forward to providing future updates in quarters ahead as production continues to ramp.

Speaker 2

And speaking of our operations in Mexico, we were very proud this past quarter to hear that OMN was recognized as a great place to work for 2022, scoring an 88 out of 100 points in its first survey. We believe these results reflect the rewarding, Inclusive and merit based environment, our team has worked hard to cultivate and is one of the reasons our employee retention rate at O and M is consistently among the highest compared to similar companies in the area. In summary, our momentum and performance through the Q1 reinforces the conviction I have in our mission and the high confidence I have in our ability to meaningfully grow both near term and long term. We have a differentiated technology in Tableau that every quarter gains even wider recognition for the clinical, Operational and financial benefits it can provide and we are encouraged by our progress across both of our end markets as well as the continued stability in the macro environment. We're at the front end of penetrating very large and growing end markets.

Speaker 2

We are confident in our ability to execute through the balance of the year and believe we are very well positioned to capitalize on the many tailwinds supporting our business and fueling Tableau adoption. With that, I will now turn the call over to Nabil to review our financials and provide more detail on our expectations and key drivers for the remainder of 2023.

Speaker 4

Thanks, Leslie. Hello, everyone. Our first quarter revenue increased approximately 4.6% sequentially and 9.5% year over year to $33,500,000 exceeding our expectations. The year over year change was driven by both Higher product revenue and higher service and other revenue. The ongoing increase in recurring consumables and service revenues is one of the benefits of our expanded installed base and continues to be one of the key drivers of gross margin expansion.

Speaker 4

Product revenue was up 5.4% from the prior quarter despite some expected capital equipment purchasing seasonality and increased 8.2% year over year to $27,800,000 Console revenue grew 2.7% from the 4th quarter and increased by 4.5% year over year to $18,900,000 We saw console ASP increase year over year, driven primarily by our disciplined approach to pricing and ongoing demand for Tableau Accessories. Consumable revenue was $8,900,000 up 11.4% from the prior quarter and an increase of 17.1% versus the prior year as our installed base grows. Treatment revenue and cartridge utilization performed well and in line with our expectations. We saw invoice treatments in the acute setting between 45 treatments per week and just above 3 in the home setting, reflecting the mix of mature consoles and newly shipped consoles that are ramping up. Service and other revenue of $5,700,000 was up 0.8% from the prior quarter and higher by 16.4% compared to the prior year.

Speaker 4

Our core service and other revenue increased approximately 65% year over year with the growth of our installed base and was offset by the planned expiry of the HHS agreements. As a reminder, the Q3 of 2022 saw the expiry of the final components of our HHS agreements. 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 release. Our Q1 gross margin was 20.3%, a sequential improvement of 3 15 basis points and an improvement of just above 5 percentage points versus the prior year period.

Speaker 4

Service margin declined in the quarter due to investments we made in people and programs designed to drive service efficiency. With these investments made, we expect service margin to improve sequentially through the rest of the year. As Leslie pointed out, this progress marks 8 consecutive quarters of consistent and substantial gross margin expansion. And once again demonstrates our commitment to reaching our next milestone of 50% gross margin. Primary drivers of margin expansion in the quarter were higher ASPs fees and lower freight costs.

Speaker 4

Additionally, margins have and we expect will continue to benefit from our ongoing console cost down program and our initiative to in source cartridge production at our facility in Mexico. Our internally manufactured cartridges have now started to reach customers and we anticipate that by the end of the year most of the cartridges produced will come from our factory. Operating expenses in the Q1 were $41,700,000 up $5,700,000 versus the prior year period. The drivers of OpEx were in our commercial organization in support of our higher revenue and gross margin and in R and D in support of our innovation driven roadmap. G and A also increased year over year as we have the full year impact of investments we made in 2022.

Speaker 4

We reported 1st quarter GAAP net loss of $44,000,000 resulting in a net loss of $0.90 per share compared to a net loss of $36,900,000 or $0.78 per share for the prior year period. Non GAAP net loss was $35,400,000 or $0.72 per share compared to a non GAAP net loss of $31,900,000 or $0.67 per share for the same period in 2022. We ended the quarter with approximately $252,500,000 in cash, cash equivalents, restricted cash and investments, which includes $100,000,000 of borrowings under our term loan. We continue to have access to up to an additional $200,000,000 of capital under our SLR debt facilities. We burned $38,000,000 during Q1, which we expect to be the highest cash used quarter this year.

Speaker 4

Moving now to our full year 2023 outlook, starting with revenue. Given our strong performance in the Q1 and the visibility afforded by our backlog and pipeline, we have increased confidence in our ability to execute in 2023. As a result, we are raising our expected 2023 revenue guidance. We now project revenue for the full year to range from 144 to $150,000,000 a $4,000,000 increase at the lower end of our prior range of $140,000,000 to $150,000,000 This updated range represents approximately 25% to 30% growth over fiscal year 2022 revenue. Moving to gross margin.

Speaker 3

Our strong

Speaker 4

Q1 results give us increased conviction in the gross margin goals we outlined at the beginning of the year. We are raising our gross margin guidance, which we now expect to be in the low 20% range for the full year 2023, up from the approximately 20% that we shared with you on our last call. And we have even greater confidence in our expectation that we will exit the 4th quarter in the mid-twenty percent range. And finally, on OpEx, We continue to expect OpEx growth for the full year to be significantly lower than our rate of revenue growth, with OpEx growth in the low double digit This combination of operating leverage and our commitment to manage working capital efficiently means that we continue to We will burn less cash in 2023 than we did in 2022. In summary, we are very pleased with our momentum starting this year.

Speaker 4

Tableau continues to demonstrate its economic, clinical and operational value across both acute and home end markets. And our focus on gross margins continues to pay dividends. We're looking forward to executing through the rest of the year. With that, I think we're ready for Q and A. Operator, please open the lines.

Operator

Thank you very much. At this time, we will conduct the question and answer session. Please standby while we compile the Q and A. Our first question comes from the line of Rick Wise from Stifel. Your line is now open.

Speaker 5

Good afternoon, Leslie. Hi, Nabil. Thanks for the question. Let me start off with the guidance. It's great to see a solid start to the year And you won't be shocked that we always want more, apologies for that, with the guide.

Speaker 5

You all are very thoughtful About providing guidance, but help us maybe think through how to I know you don't give quarterly guidance, but help us think through How the quarterly flow is likely to occur. Last year, we saw a step down in the 2nd quarter, but we saw Steady sequential improvement each quarter. This year, I had started the year thinking that we'd see steady Sequential increase each quarter, but because of the outperformance and the way you raised the low end and not the high end, it sort of implies maybe flat sequential Growth to Q2 and maybe looking back at past years, the $1,000,000 or $2,000,000 sequential increase In each quarter thereafter. I know and apologize for this long opening statement to the jury, but how do we think about it To get in the right place to think about hitting that midpoint guidance. Thank you.

Speaker 2

Yes, thanks. Good to hear your voice, Rick. Maybe I'll share some thoughts and Tara Vergneviel if there's anything to add. I think, well, 1st and foremost, we too were really pleased with the over performance and the strong growth that we saw in Q1 and that the Strength in the business allowed us to raise the midpoint of the range, now to reflect 25% to 30% growth. So I'll say a couple of things.

Speaker 2

1st and foremost, while we do have increased confidence in our ability to execute to the 2023 plan that we outlined at the beginning of the year as a result of the strong Q1, At the same time, I'm always mindful of the fact that it is early in the year, right? We're reporting on about 90 days into 365. So I think as always, we're going to stay focused on executing against a really strong pipeline and taking advantage of the momentum that we did create coming out of these first 90 days. So net net, I feel really good. I think we all feel really good about how we kicked off the year and excited by our growth opportunity both near term and long term.

Speaker 2

Kind of getting to the second part of your question around kind of shape of the curve. I think you hit the nail on the head, steady sequential improvement each quarter. We don't necessarily see any sort of flatness to it. And I think we called out the beginning of the year, which you noted that we did expect to see this steady sequential growth rate improvement Throughout calendar year and we don't see that any differently today.

Speaker 5

Okay. And I appreciate some of the extra color and detail. I feel like you're giving us this color this quarter. Maybe just turning to the home program, Maybe you can give us even a little more color, if I could be greedy. And I'm not sure I'm looking for some granularity that just helps us better gauge the kind of progress you're making.

Speaker 5

Can you give us any color on how many new programs were established And the kind of increased patient utilization you're seeing in some of your More mature patient more mature home programs, just trying to get a sense of the momentum. It sounds like Momentum is building and looking for ways to ask that question.

Speaker 2

Yes, absolutely. And you're never greedy, Rick, so you never have to worry about that. Yes, maybe I'll comment on those in sort of reverse order. So on the what are we seeing in terms of the number of home patients per program? And this is perhaps the one thing I am the most Kind of encouraged by and bullish about I think one of the challenges of the past on some of the incumbent home Hemo devices is that These home programs would start with some of the earlier home devices and just kind of linger and never really exceed 1, 2, 3 patients That has been the history, in the home hemo space for quite some time.

Speaker 2

That so far has not been our experience. And again, I want to caveat this very clearly. It is early. We're working off of a small base. I acknowledge all of that.

Speaker 2

But what gives me a lot of confidence about the art of I'll call it the art of the possible here. And the reason why I believe we will have lots of programs Over time with 10 plus and I don't even know what the ceiling is yet, which is great. Is the ceiling 20? Could it be 30? I mean, we do have programs, Rick, that are well in excess of Ted, I'll tell you that.

Speaker 2

I just don't want to be overly promotional about it, in consideration that it is early and it's a small base. But I like what I'm seeing, and what we continue to see are faster fast training times regardless of age, regardless of race, Regardless of their home status or their education or income, it's very consistent. Patients finding it accessible and not intimidating and Hearing a lot about nurses and physicians seeing patients choose Tableau when they give them the choice and of course the longer retention rate. So again, it's early in a I've launched a lot of medical devices in my career and I'm seeing all the signs of potential for adoption here over time It is very robust and much, much higher than we've seen per program with the incumbent device. So those are my perspectives on that one.

Speaker 2

And then in terms of I think the first part of your question was about maybe a little bit more color on new home programs. This was an important metric for us last year, which we didn't meet. And of course, expanding channel access, a different way to say home program, remains important to us this year as well. We want the maximum number of home programs to be offering Tableau. That's pretty clear.

Speaker 2

So I think in this past quarter, I was encouraged by seeing growth on all three of the following dimensions. I want to see growth And the number of new customers and in our scripted remarks, we talked about new customers. 2, I want to see growth in the number of Expansion sites among current customers, I. E, to current home providers start to open up new locations that are offering Tableau. Yes, We saw good growth there.

Speaker 2

And then, I want to see growth in the number of patients to death per program. And as I just talked about, we saw good growth there. So I feel very encouraged across all three dimensions.

Speaker 5

I really appreciate it. Thanks, Leslie.

Operator

Thank you. Our next question comes from Travis Steve from BofA Securities, your line is open.

Speaker 6

Hi, everybody. Congrats on the quarter. Maybe digging a little deeper on Q1 and expectations for the full year. I know coming into the quarter, you're expecting capital to be soft in Q1 with seasonality and then accelerate Over the year. So curious what you saw on the capital side and expectations for the year.

Speaker 6

And then on the utilization, you'd expect to see utilization come in at the lower end. And so kind of curious the updates on that as well.

Speaker 4

Yes. Hey, Travis, it's Nabeel. So With respect to Q1, we did see some of the expected capital equipment purchasing seasonality that we talked about in our last call. So then Travis, we have always talked from a performance perspective. We really have 3 things in any quarter where we can over perform on, if you will.

Speaker 4

1 is the number of Consoles, second is sort of the treatment volume and third is ASP. In Q1, we saw strong demand for Tableau as we expected. We saw strong treatment performance and I'll talk about utilization in a minute. And then ASP was where we really shown. We saw stronger ASP Both as a result of the disciplined pricing that we've always been able to maintain and 2, we saw really good mix From the uptake of our accessories, the 24 hour software treatment and our Tableau cards, right?

Speaker 4

So that's kind of From a Q1 perspective, played as we expected with some nice ASP upside. Now on utilization, Travis, We look at utilization in 2 ways. 1, we have our consoles that are cloud connected. Most of our consoles are Connected. And so for the consoles that are more mature that have been in service, we are seeing utilization, actual treatment utilization Right in line with kind of 5 treatments per week per console in the acute and 3.5 in the home.

Speaker 4

Now with Back to invoice utilization or what we shipped in the quarter, we have grown our installed base pretty significantly over the last few quarters. And so we're seeing as these new consoles ramp up, what we're seeing is invoiced utilization of between 45 In the acute and little over 3 in the home, again, all right in line with our expectations.

Speaker 6

That's super helpful. And then maybe, Nabil, on margins a bit, good gross margin outperformance this quarter. You gave a little color in prepared remarks, but thinking a little bit more on the outperformance this quarter and some of the levers that you could pull this year To maybe even get closer to 30% gross margin for the year, if that is even a possible place to get to? And then on OpEx, I heard the comments on low double digits on for this year. Is that the right way to think about it longer term?

Speaker 6

Is that the kind of leverage we should expect on the operating side, Low double digit OpEx growth kind of long term?

Speaker 4

Yes. So Travis, on gross margins, number 1, this was our 8th Consecutive quarter of gross margin expansion, which we are thrilled with. And sort of for margins, we have long had Three primary levers, all of which continue to work for us over the have worked for us and we expect will continue to work for us. 1 is our active console cost down program. 2 is the treatment pull through.

Speaker 4

And again, I talked about having a sort of good strength in our treatment. And 3 is service leverage. Those continue service, I talked about some of the investments we've made, but sort of those continue. The other thing that gave us benefit in the quarter was the strong ASP that I talked about in response to your last question, right. Now our focus for margins, Travis, are they're unchanged.

Speaker 4

We continue to expect sequential margin expansion. We expect to get margins exiting the year in the mid-twenty percent zone and that's what we are laser focused on. It's all the same things that we've been doing that we We're going to continue to do and drive margins to this mid-twenty percent zone. And then Travis, that's not obviously that's only a mile marker on our journey to 50 Right. Good news, the same thing we've done before.

Speaker 4

Now on OpEx, the thing I would tell you for OpEx Is that we are committed to driving operating leverage. In 2023, OpEx is going to grow low double digit percent may or may not grow at for any period beyond 2023, but what I'll tell you is that we're very focused on operating leverage and very focused on our cash burn.

Speaker 6

Great. Thanks. Thanks a lot.

Operator

Thank you for your question. Our next question comes from Shigang Singh from RBC Capital Markets. Your line is open.

Speaker 7

Great. Thank you so much for taking the question. I was a little intrigued that you added about 30 new And you called out that it's the largest quarterly growth in new sites since 2021. Can you just elaborate on what drove that? And more importantly, Do you expect that momentum to continue as customers get more familiar with Tableau and they realize the cost savings?

Speaker 7

Or is it more one off This quarter, your guidance increase at the midpoint appears to just factor in the Q1 beat and not an improved outlook for the balance of the year. Just if you can elaborate there, that would be great. And perhaps even touch on staffing. I think some of our checks were suggesting that it continues to be challenging. So just what you're seeing there would be great.

Speaker 7

Thank you.

Speaker 2

Yes, sure. Maybe I'll jump in on that one. I think the and again in reverse order, I'm noticing a pattern here. But so in reverse order, I think that From our vantage point, again, this is just what we're seeing here on the ground, the macro environment has absolutely improved. Now Are we back pre COVID shiny happy people back in 2017, 2018?

Speaker 2

No. However, we have absolutely not seen staffing Get any worse. And what we're hearing from our hospital customers and even reading some of their prints recently, We continue to hear that the availability of nursing labor, particularly let's call it dialysis nursing labor because that's what we're talking about here that's relevant for us, is improved and that wages are coming down. So, I think as we entered the year and thought about our guidance for 2023, we assumed that we would see stabilized staffing because we had started to see it stabilize towards the Q3 and Q4 time period of 2022. So hopefully, so far so good and it looks like we may have forecasted that correctly to be stable through the year.

Speaker 2

Now on the 30 new hospitals, I think you were curious about, hey, was this kind of a one off or is this A durable sign of things to come. I will say I think it's a durable sign of things to come and I'll tell you why I believe that. Cost reduction is an evergreen area of interest for hospitals. But as I said in my prepared remarks, Perhaps never more so than today. I don't think I've ever talked to a hospital executive who's not interested in improving their operating margins.

Speaker 2

And again, because dialysis winds up getting delivered as part of hundreds and hundreds of DRTs, it can have an outsized impact On a hospital P and L, if they can save a lot of money there. So I think what we're seeing in the 30 new and by the way, let me make a side comment. What I also really liked about Q1 was in the 30 new, that is a mix of both new customers and existing customers who because of their results around cost reduction chose to expand their in sourcing programs to new facilities in their networks. And that is all tied into Tableau's ability to reduce operating expense and enhance operating efficiencies. And those are durable solutions to unfortunately a problem that I think is going to be a durable one as well for health systems.

Speaker 3

So that's really helpful. Sure.

Speaker 4

Shagun, just a quick thing on guidance. I mean, Look, we had a really, really strong Q1 performance. Our business executed really well, as we talked about early, And we certainly did what we wanted to do. Now having said all that, it's still early. We did raise our guidance range to 25% to 30%, reflecting the incremental Visibility we have through the rest of the year, but we still have 3 quarters of execution ahead of us.

Speaker 4

We're very excited about this execution. We have the backlog and the pipeline we need to go and get through this guidance range, but it is only Q1 and we wanted to sort of be thoughtful in our guidance strategy.

Speaker 7

Got it. And just to follow-up on gross margins, you expect to deliver in the low 20s for the full year. Where do you think you might exit 2023? And the magnitude of increase in 2023, is that a good proxy of how we should think about 20 24?

Speaker 4

For sure, Shai again. So we expect to exit this year with gross margins in the mid-twenty percent zone. So Q4 gross margin in the mid-twenty percent zone. And if you look at our progress, we have delivered now 8 quarters of sequential and steady margin expansion. That trend we would expect to continue to play in the long run, in the medium run through at least this 50% gross margin mile marker.

Speaker 4

The levers of margin expansion for us, it's the same three, it's console cost down, service leverage, consumable pull through, all of which lend themselves So linear margin expansion as we've done in the past.

Speaker 7

Thank you.

Operator

Thank you very much. Our next question comes from Suraj Kalia with Oppenheimer. Suraj, your line is open.

Speaker 3

Good afternoon, Leslie and Nabil. Can you hear me all right? Yes. Perfect. Hey, so I'll let either one of you tackle this.

Speaker 3

Nabil, in your prepared remarks, you mentioned console growth Consoles were up 2.7% year over year. I just wanted to make sure I got that right.

Speaker 4

Suraj, yes. Console revenue was up 2.7% from the 4th quarter and up 4.5% year over year.

Speaker 3

So 4.5, Nabil, can you split that us to the next layer, I. E, what was the impact of pricing Within consoles, if at all? And also how did that split up between home and Acute.

Speaker 4

Yes, Suraj. So a couple of things. 1, as you know, we print our installed base annually, Which we did entering 2023 and we were exiting this year. Now what I'll tell you is that the number of consoles we placed It was right in line with our expectation, in line with kind of our commentary around capital equipment purchasing seasonality. And we did see higher ASP as we talked about on the call, which kind of helped us from a margin perspective as well.

Speaker 4

With respect to acute and home, Suraj, Both of our businesses performed exactly as we would expect. They're both very well set up for us to execute on our goals for this full year And will help us grow into our 25% to 30% guidance range for the year.

Speaker 1

Thanks. Next question please.

Operator

Thank you. Our next question comes from Josh Jennings with TD Cowen. Your line is open.

Speaker 8

Hi, good afternoon. Thanks for taking the questions. I was hoping to just Follow-up on a discussion we had with a hospital executive that had adopted Tableau and in sourced their inpatient dialysis service line. It seems as if the competition, David and Fresenius mostly are having a tough time With increased expenses and offering their hospital customers just kind of No bargaining power, but jacking up the costs for them to run the inpatient dialysis service line. Is that still ongoing that dynamic where there are many hospitals that are kind of being held ransom To take up their expenses and help you give an opportunity you think that is or what inning of that opportunity In terms of the competitors having some issues, do you think you're in right now?

Speaker 2

Hi, Josh. Yes. Let me think about that a little bit. I don't I want to give a clever answer on the inning, but it's not coming to me right now. So It feels like an opportunity for a witty retort, but I don't have it.

Speaker 2

Because I don't know, obviously, not being inside those organizations and knowing what their strategic plans look like. But what I can tell you is we did of course, we did see some of the moves and the behavior that the health systems and hospitals started to experience with their outsourced providers in 2022 And that continued through the end of this year. And so we did certainly contemplate that as we set up guidance for the remainder of the year. And our guidance for 2023 I did assume that, yes, hospitals and health systems, some of them would continue to experience either elevated pricing or a reduction in service level Or both or in some cases, the hospitals have had their outsourced agreements terminated on them unexpectedly. I would not say that that those any of those actions are driving, the uptake of Tableau.

Speaker 2

It does occur. The hospital that you're speaking about is one of them. But by and large, The in sourcing of dialysis with Tableau is really considered by the majority of the hospitals to be a strategic cost reduction initiative regardless of what's going on with their outsourced provider. Hospitals, I think, are ready to control their own destiny, Not only from a cost perspective, but as a reminder, some of these other benefits are very real and very valuable. They when you own your own dialysis, you Control your destiny with regard to compliance.

Speaker 2

The Joint Commission very, very frequently have had health systems tell me it's one of their top three citations from Joint Commission is where are your where are all the maintenance records on your dialysis machine. So you take control of your destiny around compliance, you take control of your destiny around length of stay. If you own your own dialysis and it's being done by your own team members, employee your patients are not in the ICU You are on the floor waiting hours and hours and hours for an outsourced vendor to come in and provide it for you. So I think there are so many Benefits, operational benefits in addition to the cost reduction that are driving the hospitals toward the in sourcing solution regardless of whatever behavior they might be experiencing with their outsourced vendor.

Speaker 8

Thanks for that. That was a very eloquent answer to an eloquent question, but that's very helpful to understand those dynamics. And wanted to also ask about just hospitals and hospital systems that are adopting Tableau, retaking All of their inpatient dialysis service line or just bringing Tableau in to swap out their dialysis systems and already controlling their Inpatient dialysis services service live, but then considering developing a home program. And I just wanted to better understand, I guess, the revenue opportunity and I guess the return For these hospitals and hospital systems for bringing that kind of home patients under the roof or recouping them. I'm sure there's many elements including A halo effect of potentially capturing those patients for all of their care, not just their home dialysis.

Speaker 8

I wanted to just a better understand that dynamic and how attractive it is For hospitals to hospital systems to kind of tackle on this home service line as well. Thank you.

Speaker 2

Of course. Yes, sure. I'd love to talk about that. And I would say a little bit of what's changed in terms of the motivation of a health system to start a home program, actually it has did enhance because early on the motivation was a top line revenue, a new chronic revenue stream, Very predictable, very stable, very complementary, frankly, to maybe a less predictable procedural revenue stream in patients. That still remains True and is attractive.

Speaker 2

What has changed though and been added is now it's a solution for a problem. And the Problem that I've been hearing a growing number of health system executives talk about is we don't have anywhere to discharge our inpatients out into the community because of these dialysis clinic closures that have been talked about publicly by many of the clinic operators. These hospitals increasingly are seeing extended length of stay, needing to keep patients in the hospital just to dialyze them for longer and longer because there Literally are no chairs available in the community. And so clinics are closing and clinics that are not closing, some of them are just reducing their service Days or times, which is exacerbating the challenge. So I think the reason why we're hearing more and more health system Executives talking about standing up home programs being very, very interested in engaging in the discussion is because it is actually solving an acute, no pun intended, but an acute Problem and it's offering a long term revenue upside.

Speaker 2

The long term revenue upside, which is what you originally asked me about, is in a couple of different components. Of course, you've got per treatment revenue. You also have training revenue. Physicians have billing revenue that they take advantage of. And the real advantage for the health system is their lack of overhead.

Speaker 2

If a hospital is going to start their own home program, it takes very little facility space. It does not It doesn't take a village. It does not take very many staff members to just stand this up. And there are variable expenses, but they're variable. And I think that the margin contribution, which you also asked me about, for the hospital is really attractive and pretty significant because they're not burdened by the weight of big time overhead.

Speaker 2

So I think for all of those reasons, we are seeing a lot of traction now from the health system.

Speaker 8

Appreciate it. Thank you, Lily.

Operator

Thank you for your question. Our next question comes from Drew Raniere from Morgan Stanley. Your line is open.

Speaker 9

Hi, Hi, Leslie and Naveel. Thanks for taking the questions. Just maybe to piggyback off Josh's question that he last asked, But as we've talked to nephrologists over since covering the company, there has been kind of an increasing sense of urgency in the specialty But the care paradigm just needs to change and there's been kind of elevated staffing shortage issues, I think compounding that issue. So The mortality issue aside for a second that's happening in dialysis, are you seeing customers being a little bit more front footed in preparing for What's to come as more dialysis patients are eventually going to come back into the funnel? And then just one of the comments that you said earlier, Leslie, was just you're seeing early green shoots of patients really starting to push the decision.

Speaker 9

So How is that going to kind of factor into the next couple of years for the company as there's more of a push from patients versus nephrologists? Just Love to hear your thoughts on that.

Speaker 2

Sure. Absolutely. So yes, I think that the feedback that you've received from nephrologists about maybe an increasing urgency to change the care paradigm, is very, very true. In fact, I was talking to a nephrologist today who made the exact same remarks to me out of frustration, that he was lacking optionality at this point about Finding shares in the clinic. So I do think that that is a tailwind not only for hospitals to kind of again think about strengthening these home programs, but also for nephrologists.

Speaker 2

I think I do think that a sea change is coming. Of course, Change, big change occurs over time. But I do think it's coming and this is just another pressure point pushing us to that moment around the staffing shortages, which I don't anticipate will abate in the dialysis clinic anytime soon. In terms of the health system perspective And do I think that they are more front footed? I not only think that I see it.

Speaker 2

Just in terms of The cumulative number of conversations that our team is now having with health systems that want to look at a full enterprise solution As we call it using Tableau from the ICU all the way to the home, we are having many, many, many more conversations than we had, let's say, this time last year about deploying a home program in tandem with an acute program. And that again is being driven, yes, the upside revenue opportunity is great and appreciated, but it's really about kind of solving a near term problem around length of stay and discharge. So yes, I think It is causing health systems to be much more open minded minimally, and I do think they're trying to be a little bit more front footed as you put it. Lastly, on the patients and the early green shoots there, and that's the right way to characterize it again. I don't want to overpromote.

Speaker 2

I don't want to Overstate, we have evidence that there are an increasing number, while small and it's a small base, There are an increasing number of patients, perhaps also influenced by COVID. We've talked about this in the past that They also view home as an increasingly appreciated safe haven, if you will, and seeing more and more people willing to do the research On their own, activate and advocate for themselves. And if that takes switching clinics, we have many examples now of patients To have switched clinics and also switch physicians in order to be able to access it. I do think it will be a factor for us, Drew, over the next couple of years. And I'm interested in this phenomenon because our DTC spend right now is de minimis.

Speaker 2

We've done a little bit of, I'll call it experimentationpiloting with very, very low cost geotargeted social media, which has been had produced some good results, but We're not even spending money and we're seeing this movement. So, I feel yes, I feel pretty bullish over the next couple of years as patients take matters into their own hands.

Speaker 9

Really helpful. Thank you. And maybe just a last question on innovation. Yes. You've launched TableauCART.

Speaker 9

Just maybe talk to us about what's next on the innovation side. Is it hardware? Is it software? And as you're thinking about developing products, commercializing them, is there more of an emphasis on monetizing these like Tableau card or is it more going to be about maintaining kind of a higher retention rate or stickiness with customers? Just any Thoughts there on how you're thinking about future development?

Speaker 9

Thank you so much.

Speaker 2

Yes. Sure, of course. Well, and the answer may be all of the above, right? So I think I'll tell you what I think we feel really particularly interested and excited about. And we've made some, again, some baby steps to kind of prove to ourselves and our sales team that we can sell, I'll call it core Tableau And that we can successfully sell add ons.

Speaker 2

And I think this commercial team has proved so far that we can be really, really good at that. In some cases, these add ons, it could be hardware. I mean, Capital Cart is an example of that. I think I would predict more of the examples of these add ons for which We will assign very margin friendly margin accretive ASPs to all of them. You will likely see coming out of the software side, both in terms of new features, functions, you may see us also offering premium versions of the Tableau ecosystem Because the Tableau ecosystem is not just the Tableau console, that's only where it starts.

Speaker 2

Once somebody buys into the ecosystem, they're also buying access to all of the data that flows to and out of Tableau. They're buying access to data analytics And dashboards, they're buying access to EMR integration. There might be basic versions of that, premium versions of that. And I am very confident that we have a commercial team that can be exceptional in really selling value around not only the console, at the ecosystem over time. So that's generally the directional PSCO.

Speaker 9

Thanks for taking the questions.

Speaker 3

Of course.

Operator

Thank you for your questions. And now we'd like to turn it back to Leslie Tray for closing remarks.

Speaker 2

Thanks, and thank you all for joining the call today. I really want to thank the entire HealthFair team For creating such a strong start to the year. As I see at the depth of talent and commitment and urgency and intensity that You all display every day is to me second to none in this industry and I could not be prouder of what we continue to achieve together with Very forward leaning, innovation centered provider partners and clinicians and most importantly, patients. And lastly, to our shareholders, thank you for your continued I really look forward to capitalizing on our early momentum and delivering on our promises through the remainder of the year. Have a great evening and thanks again.

Operator

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

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