Outset Medical Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 11 speakers on the call.

Operator

Please be advised that today's conference is being recorded.

Operator

I would like now to turn the conference over to Jim Mizuho, Head of Investor Relations. Please go ahead.

Speaker 1

Okay. Thank you very much. Good afternoon, everyone, and sorry for starting a few minutes late here. Welcome to our Q2 2024 earnings call. Here with me as always are Leslie Trigg, Chair and Chief Executive Officer and Nabil Ahmed, Chief Financial Officer.

Speaker 1

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's 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 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.

Speaker 1

And for a list and description of risks and uncertainties associated with our business, please refer to the Risk Factors section of Outset's public filings with the SEC, including our latest annual and quarterly reports. Leslie?

Speaker 2

Thanks, Jim. Good afternoon, everyone, and thank you for joining us. I'll begin with our results in the Q2, which on the top line were below our expectations as we work through the re ramp of Tableau Carte and saw new evidence of our sales cycle elongating. Areas of strength in the quarter included treatment sales, which grew 25% year over year console ASP, which increased more than 8% year over year the console installed base, which grew 18% year over year and the number of acute facilities using Tableau, which grew 16% year over year. Non GAAP gross margin came in substantially above our expectations at 37.3% for the quarter with product margin coming in at 44.8%.

Speaker 2

Despite the progress, 2nd quarter revenue of 27 point $4,000,000 was lighter than expected and driven entirely by console sales below our forecast. While the return of Tableau Cart was helpful in advancing some of the acute deals in our pipeline, the shift hold masked what we now recognize, which is the need for commercial execution changes to better position ourselves to capitalize on enterprise opportunities that typically come with a longer sales cycle. Before I get to those changes, I think it may be helpful to reflect on the growth we've experienced since our launch in 2019, which was driven by early market adopters. These innovators and visionaries largely in the acute setting where we have scale and now low double digit market share we're the 1st to leave their long standing outsourced relationships motivated by gaining control over their financial, operational and clinical destiny. The support from early adopters of Tableau and the in sourcing model has been essential to demonstrating the benefits Tableau provides that will fuel our next stage of growth.

Speaker 2

This next stage of growth comes as we extend past the early enterprise adopters and use our foothold to expand into the mainstream enterprise adopters. These customers are deliberate, consensus driven and process oriented. Purchase decisions are contemplated with enterprise conversion in mind. And accordingly, the sales cycle often takes longer as it requires a larger group of stakeholders buying in. We've learned that success with mainstream enterprise adopters requires a change in how we sell, who we sell and the process we use to get there.

Speaker 2

For example, we've identified the need to sell more broadly within the C suite and establish commitment across a larger base of stakeholders deeper within the system to gain buy in. We've also recognized that our team needed to demonstrate exceptional consultative and change management skills as they work with large health systems on potential enterprise conversions. As we advance the in sourcing movement from the early enterprise adopters into mainstream enterprise adoption, it requires changes in how we go to market, which involves 3 big shifts in our commercial approach. 1st, retooling our commercial team by infusing our capital sales team with individuals who have a different profile and skill set and ensuring we have the right talent in each role. 2nd, introducing a new capital sales process with greater specificity, accountability and discipline and 3rd, injecting rigorous sales management inspection at every step along the way to improve capital sales forecasting and the timing of close.

Speaker 2

This work is already underway. For example, we now have in place a sales leadership team with deep capital equipment experience centered around enterprise selling. We have also restructured our sales organization and trained them on our new enterprise sales approach. As we effectuate these changes, the result will be a resize and more nimble sales team and a methodical enterprise sales process commensurate with our expected future growth trajectory. Given the depth and breadth of the sales team and process restructuring, we expect it to take several quarters to fully implement and realize the many benefits that will come from it.

Speaker 2

As we look ahead to the second half of the year, we now know it will not possible to execute this transformation given the expected accompanying disruption while simultaneously delivering on the ramp we previously forecasted. As a result, we expect the second half of twenty twenty four will look similar to the first half with expected revenue for the year of approximately $110,000,000 We will continue to ensure spending is aligned to this new revenue outlook as we drive toward profitability. We expect this optimization to deliver additional annualized savings into 2025. While the transition to enterprise sales is challenging for any company, we believe the benefits are substantial in terms of deal size and revenue growth. While this transition is having a near term negative impact on our business, we have strong conviction that it's the right thing for our business over the long term.

Speaker 2

What we're observing is not a lack of demand or losing opportunities to a competitor. Tableau remains highly differentiated in delivering the clinical, financial and operational improvement healthcare providers need in both the acute and home settings. The quality and depth of demand in our pipeline is stronger than we have ever seen to date with a high percentage of large deal sizes over $1,000,000 each. What we're experiencing is a temporary dislocation of converting the pipeline to revenue on our timeline due to the changes in customer profile and process and the improvements needed in our own sales execution. With our installed base now at roughly 5,700 consoles, the number of treatments performed each month on Tableau continues at record levels, treatment orders remain strong and our recurring revenue business model continues to distinguish itself.

Speaker 2

During the Q2, recurring revenue grew 24% from the Q2 of 2023 with gross margin materially expanding as it has each quarter for more than 3 years. Non GAAP gross margin in the 2nd quarter reached a record 37.3% with product margin at 44.8% and service and other margin at 19.8%. Before turning the call over to Nabil, I'd like to add a few highlights from our end markets. For example, in the acute and subacute settings, we added nearly 30 new accounts during the quarter and continued strategic in sourcing rollout at 2 of the largest health systems in the country. Data from 1 of our ICU customers was also published in a medical journal and showed a 40% reduction in mean length of stay, which resulted in savings during the measurement period of more than $1,000,000 In the home, we continue to see industry leading retention rates and look forward to publishing more data from our home registry later this year.

Speaker 2

At the end of the second quarter, our 90 day retention rate remained at 90% versus the 65% average reported with the incumbent home hemodialysis device. And our cumulative opt off rate remains at just approximately 10%. Our home census continue to grow with multiple midsized dialysis organizations and skilled nursing facilities expanding with Tableau. With that, I'll now turn it over to Nabil.

Speaker 3

Thanks, Leslie. Hello, everyone. Revenue for the Q2 was $27,400,000 a 3% decline from the Q1 and driven solely by softness in console revenue for the reasons Leslie described. Product revenue of $19,200,000 included console revenue of $7,200,000 which declined 22% from the Q1. The other component of product revenue is consumable sales, which performed very well as utilization continued to be strong.

Speaker 3

Consumable revenue rose nearly 8% sequentially and more than 25% from the Q2 of last year to nearly $12,100,000 Service and other revenue also performed well, increasing to $8,200,000 up 5% sequentially and 22% year over year. We were encouraged to see that console ASP remained strong across all end markets as a result of our disciplined pricing and strong uptake of our Tableau Pro Plus offering with acute customers. Now moving to our Q2 gross margin and operating expenses, which as a reminder reflects our non GAAP results. Please refer to the reconciliation of GAAP to non GAAP measures found in today's earnings release. Gross margin of 37.3 percent increased more than 6 percentage points from the Q1 and more than 14 percentage points from the Q2 of last year.

Speaker 3

As Leslie mentioned, we saw strong underlying dynamics within both product gross margin, which was a record 44.8 percent and service and other gross margin at 19.8%. Expanding gross margin remains a hallmark of our story and continues to be driven by our product mix, console cost down programs, strong utilization and service renewals. Because gross margin is sensitive to mix, it may fluctuate a bit on a quarter to quarter basis, but we remain confident in our ability to reach our next milestone of 50%. Operating expenses of $31,200,000 declined 11 percent as compared to the Q1 and 25 percent from the prior year period, driven by our ongoing focus on expense management and the restructuring actions we've taken since the Q4 of 2023. Non GAAP net loss was $24,700,000 or $0.47 per share, materially lower on a sequential and year over year basis.

Speaker 3

Net loss for the 2nd quarter was 16% lower than the Q1 and 27% lower than the Q2 of 2023, reflecting the positive results of our drive to profitability. These results also reflect our ongoing focus on gross margin expansion, which we've achieved consistently for 3 years now and on our commitment to aligning OpEx with our level of revenue growth. I want to step back for a moment here and focus on our ongoing commitment towards reaching profitability. We have in previous quarters underscored our alignment with shareholders on this goal and I wanted to update you on our related actions. First, from a revenue perspective, our business is structurally designed for both revenue growth over the long term and for gross margin expansion.

Speaker 3

Every console we sell today is expected to generate between $15,000 to $20,000 of annual recurring revenues. These revenues have historically proven to be very predictable and come at high gross margins with high marginal operating leverage. Indeed, our recurring revenues grew by 24% in Q2 2024 compared to Q2 of 2023 and by 27% if you compare the first half of twenty twenty four to the first half of twenty twenty three. Once we get our console placement engine ramped, we should expect that these recurring revenues will continue their contribution to growth and gross margin expansion. We believe that recurring revenues on an annual basis should continue to be over half of our total revenues as we move forward.

Speaker 3

2nd, we continue to deliver on our gross margin expansion initiatives and have improved gross margin by more than 70 percentage points since Q3 of 2020, our first publicly reported quarter. In addition to the gross margin expansion that is structurally driven by our business, we expect to continue our work to improve gross margin over time as we continue our cost reduction initiatives across product and service. 3rd, we are focused on ensuring that our OpEx scales at a rate that is aligned with our expected rate of revenue growth and within I towards profitability. Since the Q4 of 2023 and inclusive of the actions we discussed today, we have reduced our annualized spending by roughly $70,000,000 putting our run rate non GAAP operating expenses at just over $100,000,000 Our non GAAP operating loss for the 2nd quarter was $21,000,000 the lowest quarterly level it's been at since we achieved commercial scale in 2021, reflecting the work we've done around driving recurring revenue growth, expanding gross margin and managing OpEx. And finally, moving to our balance sheet.

Speaker 3

We are focused on additional opportunities to reduce the working capital impact on cash through supply chain and manufacturing strategies to optimize inventory levels. We expect that inventory will step up over the second half of this year before burning down beyond that period. We remain well financed ending the 2nd quarter with $198,200,000 in cash, cash equivalents, short term investments and restricted cash. Turning to our outlook for full year 2024. We now expect revenue of approximately $110,000,000 Our base assumption is that console revenue in the second half is similar to what we reported for the first half.

Speaker 3

With strong utilization, we would expect recurring revenue to continue to perform well as it has consistently done. Turning to gross margin. With our continued outperformance, we have increased conviction in our guidance for 2024 non GAAP gross margin. For the full year, we are updating this guidance to now be in the low to mid-thirty percent range. Again, gross margin expansion is driven by recurring revenue from a larger installed base, service leverage and console cost down programs.

Speaker 3

Turning now to OpEx for 2024. We expect to realize additional benefit from we expect to realize additional benefit this year from the work we have done. We now anticipate that OpEx for 2024 will be roughly $120,000,000 down from our prior guidance of $125,000,000 to $130,000,000 As I said earlier, since the Q4 of 2023, we have reduced our annualized spending by roughly $70,000,000 putting our run rate non GAAP operating expenses at just over $100,000,000 And finally, with our strong value proposition across 2 large end markets, wide competitive moat and broad integrated offering of products and service, we remain bullish on the long term revenue growth profile. We will revisit our long term outlook once the enterprise sales transition is complete and believe that following this transition, we will return to strong, consistent top line growth. With that, I'll turn the call back over to Leslie.

Speaker 2

Thanks, Naveel. We are clearly dissatisfied with our performance and we are making significant and difficult changes in our people, our processes and our commercial approach as a result. While it has caused disruption and it will continue to disrupt our near term console growth trajectory, we are firmly convinced that these are the right steps to return the company to meaningful, sustainable top line growth. Further, the fundamentals of this market, the business model and our product remain firmly intact. We are penetrating one of the largest healthcare markets in the world with over 80 5,000,000 dialysis treatments performed each year in the United States alone.

Speaker 2

We have a proven business model. During just the past 3 years, we have increased recurring revenue from about 30% to well above 50% of total revenue. When Tableau consoles are sold and installed, they're used. And we have executed very well to expand gross margin consistently since our IPO, again demonstrating the strength of this business model over time. We remain as committed as ever to reaching profitability.

Speaker 2

This is a business that can be profitable and we believe will be profitable due to a proven foundation of predictable recurring revenue, our gross margin profile and inherent operating leverage. What we do well goes far beyond the technology. Our product is not just the device, but change management and customer success expertise that is proprietary and very hard to replicate. We now have data from hundreds of customers that support the business case and the value proposition of in sourcing with Tableau. We help save health care providers money, simplify their operations and improve the quality of living for their patients.

Speaker 2

These fundamental benefits are more important than ever and Tableau brings a highly differentiated difficult to copy product market fit to them. With that, I think we are ready for Q and A. Operator, please open the lines. Thank

Operator

And our first question will come from Marie Thibault with BTIG. Your line is open.

Speaker 4

Hi, good evening. Thanks for taking the questions. I want to start here with just trying to understand customers are, how different that is from the MDOs that you had been targeting? And then are there structural challenges to the market? Is it competition?

Speaker 4

What else is making it hard for Tableau to compete for console sales here?

Speaker 2

Yes. Thanks, Marie, for the question. Yes, a couple of things. So first of all, maybe I'll work backwards here. Short answer, no.

Speaker 2

No structural changes or challenges that we're facing here. In a good way and a bad way, we own this. The changes we need to make are entirely in our control and require shifts and adjustments in our sales team, on our sales processes, in our pipeline management and our deal control. We do know how to do this. We have successfully closed large enterprise level deals before.

Speaker 2

We now 1. In terms of the first part of your question, what are the real differences between, the customer segments? I think what we've recognized in hindsight is that the first phase of our growth was fueled by early adopters. And those decision making processes are different. Early adopters tend to move more quickly, tend to move with less consensus, fewer steps in the process and are really willing to kind of move quickly and sometimes without all the evidence in hand.

Speaker 2

We have moved through that segment. We're now in the low double digit market penetration zone, which kind of aligns actually to that classic adoption curve and the early adopters, the visionaries and the innovators that tend to go first within it. Now we have earned the right to penetrate into mainstream enterprise adopters and their decision making processes are different. It is more consensus driven. There are more stakeholders, both vertically up and down within these health systems and across from finance operations to clinical influencers.

Speaker 2

And we need to do a better job of building that support, top to bottom, left to right. So those are some of the differences in the types of deals and the stage that we're seeing shifting from again early adopters, often smaller deals to now a pipeline that has 50 plus consoles, 100 plus consoles. These are 50 plus consoles, 100 plus consoles. These are customers that are considering enterprise wide conversions. And while that's actually good news in the sense that the commitment levels and the interest levels are higher and much deeper, the flip side of that is that it does involve a longer sales cycle and we need to make the adjustments in team and our processes to better prosecute that.

Speaker 4

Understood. That's very helpful, Leslie. I guess my follow-up here would have to do with the work force changes you've been making. On the last call, you discussed reductions in headcount and a commitment to not impact commercial efforts. Now there's a discussion of finding the right people for the seat and sort of resizing the team.

Speaker 4

Is it a smaller sales force that you're looking at? It does sound like a very different type of person that you're targeting. Is that targeting done? Is the hiring done? And are the right people in place and now we're selling?

Speaker 4

Or is there still more evolution to come on the workforce? Thanks for taking the question.

Speaker 2

Sure, of course. Understood. Again, I'll start with probably with the last part of your question. So yes, these individuals and I'll start at the leadership level that have a very different profile and more importantly a track record of kind of being in the end zone and shepherding multimillion dollar deals all the way to the end zone successfully, they are already inside of our organization, not only at the leadership level, but also within our capital sales team. We've seen them demonstrate success here already at Outset.

Speaker 2

Now we need to see it happening more broadly and more consistently across the rest of the organization. In terms of the size of the sales force, I would think about it as probably more kind of spans and layers getting closer to the customer. By and large, the size of the team focused on selling capital is the same. Again, just a very different talent background level profile and skill sets. The other key, key, key area of the commercial team that's probably underappreciated and I really want to underscore is our field service and support team.

Speaker 2

The size of that team isn't changing at all. The composition isn't changing. They really are the face of Healthset. They inform the user experience more than probably anybody else on our team and they're vital to this growth that we continue to see in the recurring revenue base and that part of our organization isn't changing.

Speaker 4

Thank you.

Operator

And the next question comes from Rick Wise with Stifel. Your line is now open.

Speaker 5

Good afternoon, Leslie. Like Marie, I'd like to make sure I'm understanding how this all evolved. It makes total sense that bigger contracts, bigger orders, enterprise wide selling and execution maybe requires evolution. But I guess a 2 part question related to that. Looking back at your comments last quarter, it felt like with Tableau Cart in hand, orders had been delayed could now be sold.

Speaker 5

And there was a cyber attack that disrupted things and we would see an acceleration. Help us transition from what you were thinking and understanding about where you were in early to mid May and where we are now, sort of like what happened, what didn't materialize that you thought was materializing? Is it that you were counting on multiple large orders that didn't happen? Just trying to understand how we got here. I understand what you're saying about where you need to go as an organization next?

Speaker 5

Thank you.

Speaker 2

Yes. Yes. Very fair set of questions there. Well, 1st and foremost, I think certainly in hindsight, with the benefit of hindsight, I think Tableau Carte masked some additional factors that were also helping to elongate our sales cycle. We I think we were pretty clearly slow to recognize it as we focused principally on getting Tableau Carte back on track and back on market.

Speaker 2

I think the first thing that we missed, which is now very discernible as we sit here today is this shift in the composition of our pipeline and in our customer base, again away from the earlier adopters and toward a very large percentage of deals that are enterprise level with mainstream adopters. Now, what that requires to convert is a much different sales process and sales team than we've had in the past. As I mentioned, the process with these customers is more consensus driven with more stakeholders and more deliberation, which is quite understandable given the level of commitment that they're contemplating and more steps. I think good news, this shift reflects high demand and a high level of commitment. Again, on the flip side, we need to change and we need to make adjustments in our commercial execution just to be able to capitalize on that.

Speaker 2

What I think what most surface did for us, Rick, thinking back to the Q2 is while Tableau Cart itself certainly did elongate some of these larger deals, it didn't alone elongate all of them. And yes, we did expect more of the sort of the tableau carte occluded deals, for lack of better term, to advance and to close in the Q2. And when they didn't, it really became pretty apparent that there probably was something more going on here, something that we needed to examine on a much deeper level, which really led to our realizations that, hey, we're past the early adopters. We've earned the right with our results, with our footprint, with our experience to go after these larger enterprise deals with mainstream customers and go after enterprise wide conversion, but we're going to need to change in order to take full advantage of it. I hope that helps.

Speaker 5

Yes. Thank you. And a couple of other questions about as we go through this transition, as you go through this transition. I guess, there's so many questions here. How does the lower than anticipated revenue impact cash flow breakeven timing, the 50% gross margins?

Speaker 5

I mean, you reiterated all these things basically. But does the timing change? And well, I'll stop there. Go ahead. Thank you.

Speaker 3

Hey, Rick, it's Abhil. So with respect to cash flow breakeven timing, so our run rate OpEx for 2025 and kind of after the actions we've taken is now about $100,000,000 And so that means that at a 50% gross margin, which we continue to have conviction in getting to, we can now get there at a revenue run rate of $200,000,000 which is actually lower than our previous guidance when it came to breaking even. And then Rick, as we move a little bit above 50% gross margin, that revenue run rate is below 200,000,000 dollars Now talking about the gross margin for a minute here, our growth is really underpinned by the recurring revenues that Leslie and I talked about. And these recurring revenues, particularly consumables, come with higher gross margin than consoles. That's been the case and will continue to be the case.

Speaker 3

And so the mix shift associated with more recurring revs actually conceivably accelerates our path to 50%, all else being equal. And so hopefully that gives you a size for sort of look, we actually breakeven at a lower run rate and continue to have conviction in that 50% gross margin milestone. Let me pause to see if I answered your question.

Speaker 5

Yes. That's very helpful, Nabil. And I guess last to me for the moment, you've guided us to a second half, as you've said very clearly, roughly equal to the first half as you go through this sales or execution transition. And again, impossible to answer, I'm sure. But how do we we have to plug something into our models for 2025 and beyond.

Speaker 5

Do we should we imagine, Leslie, do you imagine, do you hope that this is a 6 month transition process. I mean, what are you hoping and dreaming at this point? And that starting from the get go in 2025, we're just we should you hope that we'll be able to see the demand translate into and better execution and some of these $1,000,000 contracts translate into better sales. How do we think about 25% and beyond, frankly?

Speaker 2

Sure. Yes, I'm happy to comment on that and Nadeel will jump in at any time. Suffice it to say in the very immediate short term here, we're obviously focused on executing this transformation. And I do expect it to take several quarters to fully implement. Again, it's underway.

Speaker 2

It's taking root, but that never happens overnight. And along the way, we'll get better and better visibility about the timing, the effects, the results, which obviously will put us in a good position to provide guidance for 2025 as we get here closer to the turn of the year. Over the longer term, 2025 and beyond, I think about it in a couple of ways. 1st and foremost, nothing about the fundamentals, the structure of this opportunity has changed. As I said, we own this.

Speaker 2

We have demonstrated the ability to close large enterprise deals in the past. We just need to do it more consistently across the country in a more standardized fashion and all the steps needed to get there are, in flight. The strength of our recurring revenue foundation really is a powerful growth engine. We've seen that time and again. And in fact, actually interestingly, our cohort analysis shows that console utilization in the acute and sub acute space actually goes up over time as new accounts become more mature accounts.

Speaker 2

So that's obviously very encouraging to see. 2nd, the growth in our pipeline that I alluded to earlier, it indicates very strong forward demand. The overall pipeline actually has never been larger than it is today. And the number of deals with 50 consoles, 100 consoles, several 100 consoles has never been higher. So this is not a demand problem.

Speaker 2

Where we need to get stronger is converting the pipeline. The changes we need to make in order to do that pertain to sales execution, they are in our control and we do know how to do that. We just need to do it consistently. My final remark with regard to longer term growth is, it's kind of a double edged sword actually. With the deals in our pipeline getting larger, it actually doesn't take that many deals to close incrementally to drive growth.

Speaker 2

Now obviously near term here, we've seen that work the other way. If several deals that are call it, 50 plus consoles don't close on the timeline that you expect them to, it has a sizable impact on revenue, which is what we've seen happening in Q1 and Q2 and what informed our guidance for the back half of the year. But looking forward, getting back to growth can be achieved with better, more predictable execution on a actually on a relatively small number of larger deals.

Speaker 3

Rick, if I may, I'd just love to help provide sort of how we think about our model. We're not providing any guidance for any period beyond 2024 right now, but hopefully this will give you kind of the color as you think about your models. So first of all, we always start with the recurring revenues. Implied in our guidance is that recurring revenues be roughly $80,000,000 or a little bit more for 2024. That's going to grow in 2025 as the installed base grows and matures as it sort of always has done.

Speaker 3

Now as we've previously shared, this recurring revenue growth means that we can grow total revenue even if console placements or console revenues remain flat. And then Rick, any console growth year on year easily gets you into the low double digit growth range for total revenue or beyond. So again, we're not giving guidance, but hopefully that helps you sort of with how we think about the model.

Speaker 1

Okay. Thanks, Rick. Next question, operator?

Operator

Yes. Our next question comes from Shagun Singh with RBC Capital Markets. Your line is open.

Speaker 6

Great. Thank you so much. Yes, Leslie, it does seem like there's an execution issue at outset on multiple fronts. And I'm just wondering, you're calling out commercial, but is it commercial? Is it strategy?

Speaker 6

Is it something broader than that? I'm sure you guys have looked into it in more detail. So can you share what your findings are? And then I'm just curious, how do you know that this is a sales elongation issue? Because to Rick's question, earlier we were thinking it's a Tableau card issue and it not being in the market.

Speaker 6

And perhaps like you can give us some look into the pipeline, where does it stand versus last year? Have you thought of any metrics you're going to share with us going forward that gives us confidence that you have visibility into this? I know there are a lot of questions, but just how can you make us more comfortable with the story that's here going forward?

Speaker 2

Thank you. Sure. Yes, I'm happy to address those questions. On the pipeline front, compared to last year, the pipeline in totality is significantly larger across the board. And that's actually across all of our end markets acute, subacute and home than it was a year ago today, but kind of point 1.

Speaker 2

Another way that we look at our pipeline is by stage, stage of this new sales process that we have introduced and trained everybody to, we have a greater percentage of deals in the late stages of the sales process than we ever have before. So I. E, greater progress through the sales process compared to a year ago this time. And the third thing we look at is deal size. We have a large percentage, approximately 60% a bit above of deals that equate to roughly $1,000,000 or substantially more in deal size sitting in the pipeline.

Speaker 2

So those are the ways that we look at the pipeline. All of those trend lines are up as you compare them to last year. Regarding your question about, hey, is it execution or is it strategy or other? We feel strongly that it is execution and I'll tell you the reasons for that. First and foremost, we now have the largest evidence base we've ever had around the financial cost savings that Tableau has driven for customers, the clinical outcomes that it has provided and the operational efficiencies.

Speaker 2

We have 75 I have I have spent a lot of time in the field, I'll add qualitatively and with our sales team, really pressing on, hey, is there something that's changed in the value proposition or the implementation? And the answer to that has been resoundingly no. The feedback that we continue to get from current customers and prospective customers is their interest level has never been higher around improving their own margins and producing tangible day 1 dollar 1 expense reduction by in sourcing with Tableau. So I think our strategy is on point, with acute. Sub acute has been one of the fastest growing market segments for us for the last year or 2 here with rehab, LTACs and skilled nursing facilities.

Speaker 2

When we look at our expansion with the number of customers and the number of sites using Tableau in the subacute segment that also is all up into the right. We talked about 16% growth year over year in facility expansion and 18% growth year over year in the installed base, which are data points that do point to customer validation in the model and in the technology. We have more demand than I ever could have hoped for a couple of years ago. What we now need to do is evolve and transition the way we get after it. I would say that, again, our sales team, our sales processes were really oriented around the first part of the market, which for any medical device company are those early adopters.

Speaker 2

It's time for us to evolve that so we can reach out to the next shelf and take advantage of the mainstream enterprise adoption that's available to us

Speaker 7

now. Okay. I want

Speaker 1

to make sure we get everyone's questions. So, we should probably move to the next question, operator.

Operator

Yes. Our next question comes from Shriraj Kalia with Oppenheimer. Your line is open.

Speaker 8

Leslie, can you hear me all right?

Speaker 2

Yes.

Speaker 8

Perfect. So Leslie, just one question, but a multipart question. And I have to confess, Leslie, I cannot connect the dots on the reasons for the shortfall, especially given the bullish commentary over the last 3 years, the guidance cuts almost every year. What I'm trying to understand is, I understand Q1 to Q2 maybe something short term. But is it more of an issue of internal forecasting versus execution capabilities?

Speaker 8

I guess that's one of the things that I'm trying to understand. Has price sensitivity increased because you all did implement an 8% consulate price increase? Is that a factor? Was there any geographic pockets of weakness? And finally, I would ask is, you mentioned multiple times about 50, 100 of consoles deals in the pipeline.

Speaker 8

Are these deals actually signed? Is there a PO in hand? Thank you. I know they're multipart question, but hopefully you can help me reconcile. I'm having a very hard time connecting the dots here.

Speaker 8

Thank you.

Speaker 2

Sure. Well, yes, let me kind of take that one piece at a time. So you asked about, sort of the connecting the dots on the magnitude of the impact here for the second half of the year. There were a couple of factors we considered in developing our guidance for the back half of the year. First, we do expect some level of disruption from this sales force restructuring, the process restructuring.

Speaker 2

And so that certainly was an element of our thought process in guidance development, as we implement and continue to implement all the changes. 2nd, I mentioned that the complexion of our pipeline has changed in a good way. It is populated much more heavily with these larger enterprise agreements that can be 50 plus consoles. And so at that level, it really doesn't take all that many deals to arrive at a revenue impact that's pretty significant. Dollars 40,000,000 is roughly a dozen or so deals.

Speaker 2

And so hopefully that provides a little bit of color and a connection point for you there on the first part of your question. 2nd, you asked about price sensitivity. No, we really have not experienced price sensitivity as a factor because in the acute and subacute settings. And again, this has been well demonstrated and documented and published on the magnitude of the cost savings that Tableau drives in the acute and subacute setting is extremely significant, 50% to 70% down on the total cost of a hospital expense line for dialysis after the implementation of in sourcing with Tableau. So no, price sensitivity has not really has not been a factor at all.

Speaker 2

You then asked about is the pipeline. Do you have issues in forecasting and are these deals with a PO in hand? I mean the definition of a pipeline is future forward. These are deals that are at various stages in our sales cycle. We stage them just like any capital equipment company.

Speaker 2

And so when I talk about the strength of the pipeline, the size of the pipeline and the stage of the pipeline, we're referring to our visibility and our future opportunities that are in front of us across the end market. Of course, going lastly to forecasting, one of the reasons why we see the need to adjust and mature our sales process and methodologies and team are because we do believe it will reap benefits in the way that we predictability moving forward.

Speaker 1

Great. Thanks, Suraj. Next question, operator?

Operator

Our next question will come from Kristen Stewart with CL King. Your line is open.

Speaker 2

Hi. Thanks for taking my question. I just wanted to focus on the expenses of the company. I think you had mentioned that operating expenses were going to be about $120,000,000 this year. And if I heard you right, you said $100,000,000 for run rate for 2025.

Speaker 2

What kind of gives you the confidence that you can make these cuts? Where are they coming from? And just the confidence that this isn't going to be more disruptive from a selling organization perspective?

Speaker 3

Yes. Hey, Kristen, with respect to the so first of all, you are right. We guided to about $120,000,000 in OpEx for 2024 and a run rate of about $100,000,000 in 2025. The cuts this time were all around the areas that Leslie about. And it's really for us about rightsizing our OpEx structure with both our revenue levels, number 1.

Speaker 3

And then number 2, with our commitment to making sure that we remain on the path to profitability.

Speaker 1

Great. Thanks, Kristen. Operator, we can move to the next question.

Operator

Yes. Our next question comes from Stephanie Piazzolla with Bank of America Securities. Your line is open.

Speaker 9

Hi. Thanks for taking the question. I just wanted to follow-up about the guidance for this year moving well by $40,000,000 and maybe a little bit more about how you thought about this being the new guidance level. You said it would be similar second half to first half, but maybe

Speaker 6

if you could dive a

Speaker 9

little bit more into the underlying assumptions here and confidence in this being the right spot just with some expected disruption from the commercial execution changes? Thank you.

Speaker 3

Yes. Hey, Stephanie. So first of all, when we think about guidance for any period, we start with kind of the recurring revenue base, which for us is consumables and then the service and other line in our P and L. That for the first half is about $40,000,000 just under $40,000,000 And we would expect that to grow a little bit here in the second half or at least stay stable, all else being equal. So you start out for the second half with $40,000,000 of kind of recurring revenue base.

Speaker 3

The implied 2H total revenue is $55,000,000 which leaves consoles at about $15,000,000 And again, if you look at what we've done in the first half, console revenue was about $16,000,000 So again, it's that same level of console placement in the second half as we expect as we did in the first half of the year. That's how we thought about the guidance.

Speaker 1

Okay. Thanks, Stephanie. Just want to make sure we get everybody in here. So operator, can we go to the next question, please?

Operator

Yes. Our next question is from Josh Jennings with

Speaker 7

TD

Operator

Josh, your line is now open. Okay. Our next question will come from Drew Raniere with Morgan Stanley. Your line is now open.

Speaker 7

Leslie, hi, Naveed. Thanks for taking the questions. Maybe just one and it's on 2025. But when I think about your installed base, where you're kind of ending the Q2, at least kind of like what our numbers are pointing to, And it kind of gets us to recurring revenue on an annualized basis of about $110,000,000 So is that at least a good point to start for 2025? And then we can think about layering on maybe a similar revenue number for quarterly consoles somewhere around that like $7,000,000 per quarter.

Speaker 7

It sounds like you have at least some visibility into the back half numbers, but just thinking about holding that constant for next year. Yes.

Speaker 3

Hey, Drew. So a couple of things. So first of all, we're not guiding to 2025 for any period beyond 2024 right now here. But let me tell you maybe the way we think about the components, right? So if you unpack recurring revenues on the consumable side, we assume between 45 treatments per console per week in the acute setting.

Speaker 3

And again, we have this notion of some consoles need to ramp up, some obviously do more, some do a bit less. But on average, it's between 45 treatments per console per week in the acute. And then at home, it's between 3 and 4 treatments per console per week in the home setting. So that's kind of how you get the consumable number. Service, it's the service contracts and then they renew they've typically renewed in the 90% zone.

Speaker 3

So again, that's kind of the assumption that we have used at least as we think about the second half of the year. And then you're left with the console number. So I don't want to comment on a specific number, but hopefully that helps you with the construct of how to think about 25.

Speaker 1

You also see a 24 run rate for

Speaker 3

recurring rents? Yes, and 24, thank you. And then 24 run rate, yes, it's $80,000,000 from a run rate perspective for recurring rents given our guidance. Okay. Thanks.

Speaker 3

Our

Operator

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

Speaker 10

Hi. Thanks for taking the questions.

Speaker 3

Can you hear me okay?

Speaker 8

Yes.

Speaker 10

Okay, great. Sorry for the technical issue. I wanted to just ask about the pipeline. I mean, it sounds like it's flush. Are you seeing some of these pipeline orders when they don't convert fall out of the pipeline?

Speaker 10

Any help thinking through that dynamic? And if not, should we just be thinking about the delays in pipeline conversion being pushed out to 2025? And so we should we could see a bolus of system revenues and increase in installed base in 2025?

Speaker 2

Yes, I'll take that. Thanks, Josh. Short answer, no. We are not seeing deals fall out of this pipeline. We are seeing deals push out from the quarter in which we expect them to close into another quarter.

Speaker 2

And so I think what we want to try to do better at and get stronger on is converting the pipeline to close and revenue on the timeline that we anticipate. So that's kind of point 1. But no, the pipeline has continued to grow and we have not seen really any movement of these deals falling out of the pipeline. Yes, so second part of your question, as we think about 2025, yes, our expectation is that the deals that are in the pipeline, those that don't close in 2024, will still be available to us in 20 25. And that's really been that's not new for us.

Speaker 2

That is not a new phenomenon. We really have not had deals falling out of our pipeline really at any point in time. I think again, we were overly focused in hindsight on Tableau Carte and late to the party to realize that there was another reason, another factor behind the elongation of the sales cycle and behind why some of these deals were not closing or coming to fruition when we intended them to. And that's those are exactly the sales execution challenges that we're attacking and expect to make significant progress on here in the next couple of quarters.

Operator

I show no further questions in the queue at this time. I would now like to turn the call back to Leslie Trigg for closing remarks.

Speaker 2

Great. Thanks to everybody for joining today. I'd like to close by thanking our entire team for the very meaningful difference that they're making every day in the lives of dialysis patients and their families as well as providers. We look forward to seeing many of you at investor conferences in September, and I hope you have a great evening. Thank you.

Operator

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

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Earnings Conference Call
Outset Medical Q2 2024
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