STIFEL 2026 HEALTHCARE CONFERENCE - OUTSET MEDICAL INC

All righty, good afternoon to our first session of the afternoon, and I'm thrilled to welcome the Outset medical team, Leslie Trigg, Chairman and CEO to my left, Renee Gaeta, Chief Financial Officer to Leslie's left. It's great to have you both back here. I've had the privilege of covering Outsets since the 2020 IPO, and continue to believe even more strongly today, that Outset's Tableau hemodialysis system is uniquely compelling technology that continues to, I started to say the potential to transform, but is transforming traditional care to a much better model and to hear all about that. Thank you both for being here. And I thought that, Leslie, we'd start off by talking about the sort of wonderfully thrilling headline at this press release I have in my hand. It says, HHS launches landmark national plan to transform kidney care in America. This is October 20th, Health and Human Services put this out, and it basically talks about a department-wide strategy focused on revitalizing American kidney care. So I've got a big picture question to start. How radical, how important, how transformative is this initiative by HHS? Yeah, well, we were obviously really delighted to see that as well, and it follows a 2019 executive order that happened in the first Trump administration with a similar commitment, particularly around encouraging the use of home dialysis. Back in 2019, they were also very interested in transplant, I think that interest also continues today. What was new about this particular announcement was also the HHS acknowledgement that there are market forces and market practices that perhaps have made new innovation and access to new innovation or new settings and channels of care more difficult. And so on top of HHS reaffirming its interest in encouraging home dialysis, it also talked about finding ways to encourage the adoption of new technologies of which Tableau is one. And of course also then introduce this concept of maybe there are some structural changes or improvements that should be made and hinted might be made to ultimately give patients better access to care and better patient choice to where they want to receive dialysis. So we were very encouraged by it. Let's see what policies come out of it. step two. What sort of policies are they actually going to effectuate before we get too excited about it? But it certainly aligns very well with our mission and could be a potential tailwind and upside for us moving forward. And as you say, it's not clear what next steps are and when they'll happen, but does the election or the election outcome or the political excitement in the head, shall we say, the next couple of years in Washington, does that make you feel less optimistic that something really will get done? Or how do you, you know, how are you thinking about it? Well, I think there's probably two ways to look at it, probably more than two, two that come to mind. On the one hand, one way to look At it is we may, let's say, we may have an administration change two years from now. And in that sense, it actually could create some urgency hey let's try to actually get policy out there before our turn at the wheel ends on the other hand what we have observed is that transformation in kidney care is a bipartisan has bipartisan appeal and a lot of bipartisan interest I have not particularly ever viewed it as Democratic or Republican I've seen both sides of the aisle examining dialysis care for a long time and wondering why it hasn't changed. And so in that sense, even if the administration changes or doesn't change, we would expect to see continued congressional and White House administration support for creating new options for patients. One other separate, unrelated, big picture question, I know it's hard to ask you about capital spending at hospitals, I mean, you have a very narrow view window into that, But I've had a number of conversations with physicians lately, and I get the sense that hospital budgets are tightening, just at a high level. Is this something that you're concerned about as we think about the rest of the year and into next year? Is this is something that we should be worried about on your behalf, or how are you thinking about that? Dr. Subject to change, right, because we never know what's around the next corner. But as we sit here today, that's not at the top of our worry list, nor is it something that we are hearing a lot about with regard to Tableau and insourcing of dialysis. I do spend a lot of time in the field because I enjoy it, and I always want to make sure we're as close as we can be to the customer, and that hasn't come up for us. Now, that might be particular to what we do. As a reminder, our core value proposition is cost reduction. And so as hospitals are maybe feeling the pinch on the top line, whether it's changes in Medicare, Medicaid, NIH research funding, whatever it might be, what we are hearing a lot about is more hospitals turning to the bottom line. And the certainty around cost-cutting feels better sometimes in climates like this than maybe what do you have to believe around trying to generate more top-line revenue. And so I think because insourcing with Tableau does provide and drive a very, very significant, like, 50-plus percent cost reduction, we might be, you know, an evergreen story that's just become greener in this kind of climate. Turning from the bigger picture to more recent specifics, you had a very good third quarter. Great to see. Sales were up 14% year-over-year, up 6% sequentially. Your console revenues were up 26%. Basically, every revenue line contributed to growth. Walk us through a little bit what were the drivers of that strong performance. What's it mean for momentum as we head into the fourth quarter and looking beyond? Sure. Well, thank you for that acknowledgement. It was a good, solid quarter that followed a good solid Q2. So we're excited to carry that momentum forward into Q4 and, as you said, beyond into 2027 in future years. When we look at kind of console revenue, we saw really strong performance across really all three of our console drivers. As a reminder, that's number one, refresh sales. Those are customers for us who have consoles that are reaching that six or seven year useful life that are choosing to buy new consoles. That's what we call the refresh revenue line. That's about $150 million opportunity for us over the next couple years. So we saw refresh activity in the quarter. Second, we have expansion sales. Those are customers that already have Tableau operating in one or more of their facilities and are choosing to expand with Tableau. We saw deals close in the corner out of that bucket. And then lastly, we of course, new customer acquisitions. These are hospitals that are maybe still outsourced, not using Tableau yet. And we did close new customer deals in the quarters. So I think it was a good example of execution across the board. In addition to strong treatment utilization, we have near perfect information, which is a big advantage for us because we have the data streaming out of Tableau, every treatment every day. And so yes, we can look at invoice data, how many treatments are customers buying, but we can also look at real actual utilization, which we now have years of history on. And so we know that both Q2, Q3, we saw very good utilization. And it is one of the, I think, strengths of this business model. While we have a capital equipment-esque sales cycle of 9 to 12 months, which isn't always an enjoyably long process, once we're in, we're in. And we tend to see hospitals making kind of a full conversion. So that keeps us very efficient in terms of the size of our sales force and also drives very predictable, visible, and very durable treatment utilization over time. And so we saw those elements working. The last thing I'll say about Q3, in addition to treatment utilization, a relatively recent revenue stream for us is EMR. We are the only system out there on the dialysis side that's directly integrated with Epic and Cerner, and so we now charge an upfront implementation fee to integrate, and then also EMR maintenance fees and a subscription model over the number of years that we're operating with the hospital, and that was up over 20% as well. So we're starting to see kind of EMR become a bigger part of our story. Sort of a new source of revenue. Yeah. And you reiterated your 2026 guidance in the spirit of the kind of thoughtful, prudent conservatism that I know is part of your philosophy for sure this year. You maintained your revenue guidance range at $125 million, $130 million. Help us better understand the decision to hold the range despite the beat. Yeah, I think if you look at the year as a whole, which is what we need to do, and look at our performance for Q1 and Q2, I mean, the back half of the year is going to see nice growth, I Think about 17% growth rate off of the first half. And so we want to be mindful of that, that those are great double digit numbers that that we strive for. And And so we just wanted to be cognizant of how the year panned out in total and where we see the rest of the year coming in. Plus, ultimately, for us, it's not just about the current year results, right? It's what does 27 look like? What does backlog look like and the strength and the foundation that we want to set? And thank you for that. And, Renee, I'm so glad you brought up 2027. I wasn't going to touch on it, of course, today. But since you raised it. Since you raised It. And I'll struggle to ask you, you know, I mean, obviously a lot of good things are happening right now, and we'll get after those in a minute. But the street seems to be modeling, if I'm looking at consensus numbers correctly, at 9.7% or something for next year. I know you're not going to give us a precise number or range, but maybe what needs to fall into place to show that kind of acceleration next year? And maybe if there's something that you think could prevent that from happening, we should also hear about that. Sure. I think it's not anything different than what we just did in Q3. And so I think its continuing to execute on all of the drivers that Leslie just spoke to and thinking about across the board on our revenue stream. So that's, of course, new console placements. We're at the very beginning of this refresh cycle. So engaging with those customers and getting more commitments from them, as well as continuing to make sure that utilization remains strong and service and other. So adding on those incremental layers within our other revenue categories that are very, very sticky and continue to support the business. you know, to have two-thirds of your revenue coming from what is a recurring revenue base is a tremendous opportunity for us as we look forward to what does 2027 look like. We certainly want to be a double-digit growing revenue company. We strive to do that, and I think it's just did what we did for Q3 and continue to do it in Q4 and in 2027. That's great. So you're blessing the consensus number. Great. Moving on. She didn't say that, just moving on, reluctantly. Leslie, you have highlighted, continue to highlight three console growth driving levers, upgrades, refreshes, and expansion in existing systems and signing up new customers. Talk to us maybe about how you're approaching each and where you see the greatest opportunities looking ahead over the next year or so? Yeah, sure. Well, maybe I'll take those piece by piece. I kind of describe this as like the sediment layers of the bedrock with refresh maybe at the bottom only because those are customers that are already actively using Tableau. Many of those customers with our assistance have been measuring their results, financial results, clinical results, operational results now for years. And as they think about that refresh decision, I think us having been able to sign our first refresher agreement with HCA provides a lot of validation, right? HCA is the largest health system in the country. They did a lot, a lot more than just a refresher. A lot of really good work looking at their results and made the determination that they want to keep going with insourcing and they want to do it with Tableau. So I think having that sort of as a calling card as we're starting to talk to the next set of customers that have consoles coming up for refresh on that useful life expiration in 2027 and 2028, that's going to be very, very helpful. We have about 3,000 consoles, give or take, that would be eligible for refresh, and again, we define that as kind of that seven-year useful life. Some customers may choose to, kind of like your car analogy, if you're driving 50,000 miles a year, you might choose to refresh a little bit earlier. There will be other hospitals and health systems that might choose try to kind of wring a little bit more life out of their Tableau consoles if their utilization of their patient census has been lower. But the great thing about this refresh cycle is it doesn't go away. So consoles that are not refreshed in 2027 don't disappear from our pipeline. They move into 28, so on and so forth. And so this will continue to be kind of a virtuous, not a circle, but a wave that I think will fuel a part of our growth for some time to come. The second part of that is expansion. And expansion is in two forms. One is just same store sales. Many hospitals in our existing customer base only use Tableau in the ICU, let's say, but they don't use it yet outside the ICU. And a lot of customers use it outside the ICU and they don�t yet use it inside the ICU. We have in the last year stood up a clinical excellence team under the direction of our first chief nursing officer to continue to show and remind customers of the clinical results and the financial results that they're creating with Tableau. And through those quarterly conversations, we've recognized an opportunity to talk to those customers about expansion inside the facility. And so if somebody is using it outside the ICU and they choose to carry it into the ICU, of course, that's going to require more consoles. So that'll be more consoles and more treatments. That's the first form of expansion. And then the second form of the expansion is a health system that is maybe using Tableau in, I don't know, 10 or 15 or 20% of their facilities, and is going to leverage those results and that validation to move on to the next facility and the next facility and next facility. So that's what we call the expansion opportunity, which is many hundreds of millions of dollars in and of itself. And then lastly is the white space, all of those hospitals that are maybe still outsourced with one of the third parties and has every opportunity to then look at Tableau and insourcing to pick up the clinical and financial benefits for the first time. So we see kind of all three of these sort of sediment layers present with us for any number of years to come. And under the direction of our new sales leader, I think our sales team and we've made some refinements to our sales force and compensation and territory sizing to really allow our sales teams to kind of go deeper in their territory because we have so many layers of opportunity in any given geography. And I'm glad you brought up the new sales leadership. You hired a new leader in April this year. What were you looking for? You've touched on a little bit, but maybe talk about the impact and the implications of this new leadership and the initiatives that you're undertaking. Yeah, well, as Renee alluded to, one of the really cool things about Our business model is that so much of our revenue already, relative to our youth, we're still a young company, is from recurring revenue. 70 plus percent of our total revenue stack is recurring revenue, we were looking for, of course, better consistency, predictability, and visibility on the 30% that's being driven by consoles and an accessory that we call tableau cart. So when we were really looking at what we really needed from a new commercial leader, was somebody who brought a lot, well, first of all, a really strong track record in capital equipment, which Derek does bring, having spent 17 years at Stryker. Many of us, I think, in this room and beyond consider Strykker to be one of the most commercially adept medical device companies in the industry, and so Derek's brought a lot of that expertise and discipline to Outset. Also somebody that was really astute at solution selling. When we're talking to hospitals, we're really not talking about a machine. We're rarely walking into a hospital and talking to a health system executive about a dialysis machine. We're really talking to them about programmatic change. You're doing this service, dialysis, through a third party. Why don't you change your care delivery model and stand up a new service line, and here is a solution and here's a program through which you can significantly reduce cost and elevate the quality of your care. So we call that solution selling, and Derek, our new commercial leader, also has a long track record in solution selling. I think what he's already brought to our organization in the last whatever, six, seven months, has been number one, the recognition that we do have a huge opportunity with the customer contracts we already have signed. We have kind of an enviable customer roster when I really step back and look at it. It's like, wow, I mean, we've done a lot in a relatively short period of time. I think the opportunity that we haven't really taken advantage of as much as we should have, to be fair, over the last couple of years is expansion. It's hard to get health systems. We have, I think, all 14 of the largest 14. That is not easy to do. I think we were perhaps in past years too focused on the next new and the next new and maybe overlooked what we already had. There is an immense, as I said, many, many hundreds of millions of dollars just in the expansion opportunity. So I think Derek's gotten us refocused on that with the benefit of smaller territories and some adjustments to compensation to really make sure that our sales folks are focused on and will be rewarded for the total revenue stack of recurring revenue and capital revenue that they have to sell. Annie, I think you had a question. Yeah, I was just going to ask, you brought up the recurring revenue base a few times. You've had a really strong double-digit quarter in this recent quarter. Can you just talk about what are the key drivers of the recurring revenue base? You mentioned EMR integration, so how does that fall into it? And, you know, how do we think about the potential for more double-digit growth for current revenue? Yeah, I would say it's sort of from big numbers down to small. Think about it as, like, our consumables revenue, which is the treatment that happens every single day and is the sort of razor blade to our revenue stream. That is 50% of our revenue, roughly, and is really important in the acute space with regards to what Derek is focused to is the top 250, right? If you have a, number one, a larger hospital that you're placing tableaus into, there's more of them to place, but they're also just servicing a larger census of patients. And so they're just going to simply have more treatments done on a tableau on a daily basis as opposed to a smaller hospital out in a rural network, which is not important. Those are important as well, but he's really trying to focus the capital sales team to those larger opportunities that aren't, you know, as Leslie mentioned, you have to go after and fight for a brand new contract, a new name. We're already in the door. So just continue to penetrate into those customers. So you're going to have higher treatment volume come through. You're also going to therefore have the service revenue on all of those consoles, which is an annual service contract that we charge revenue for and service those devices, but also then you're going to be able to have sort of more rings around revenue. So the EMR connectability, you know, we're also thinking about how our data in the future could be used. And so if you think about software, I mean, our device is one of the only that's in the market that really has sort of usability, you knows, software dynamics, looking at dashboards and provides the hospital with more sight into what's actually happening with their consoles and therefore is adding value to them that we hope to bring. We're bringing more value to then, therefore we can charge more. Great. You're also, to quote the CEO of Outset, advancing through preparations for full release of a next-gen Tableau. Talk to us about what's left to do. what are the implications of this next generation system and any color on pricing and sort of attractiveness to this expansion part of the story? Yeah, I think with this software release, we've had to think a little bit differently about it than we have in the past. We've done, I guess, I don't know, we've done I think five, successfully five, or excuse me, nine 510Ks in the last eight years. So we've, we've down this before and yet this one is very different for us because of the size of the install base. When we are talking about over a thousand sites and high volume, we support a million treatments a year, you absolutely, rule number one, do no harm. And so we have really kind of taken a step back and challenged ourselves to think about the rollout differently and recognize that our responsibility is ever more higher than it ever has been. So operational readiness is kind of the watchword here, thinking about how we can roll out, because it is software, but it's also a new operating system. It's also new boards. There's a lot to this. It is the largest software release that we have ever put into the market since the launch of Tableau. So it's important. And what we owe our patients and our providers more than anything else is getting it right. So I think as we look kind of toward the back, I cannot believe it's almost like the holidays, but looking toward the backup of Q4 and not wanting to rush anything, we are probably looking the next quarter or two into 2027. I am very committed to slow, methodical, deliberate. It's actually how we launched Home many years ago, and that paid off for us in spades. And so we will take a similar approach. I think kind of the quality and the customer experience will come, you know, far ahead of speed. Now, I'm excited and impatient to get it out in the market because I think it's going to be fantastic. And what's in there, it is chock full of cybersecurity protections. We believe we were the first to reach the 2025 cybersecurity requirements that FDA laid out for the industry, a medical device industry. We have a lot of different device performance, reliability, a few features and functions that our hospital customers have been asking us for for quite some time. So we're excited about that. And I'll let Renee speak to pricing and gross margin. Yeah, I mean, I think ultimately, similar to my statements to Annie, we believe that we're going to be bringing more value and therefore should be able to price accordingly. for that. We will work, of course, with all of our customers to sort of see what is the right dynamic for them. But we're excited about what's new to come. It will bring them efficiencies as well. And so we think that we should be able to price at a higher price point. And better margins. I assume this is part of the march to 50%. Yeah, absolutely. I would say the vast majority of the sort of cost structure mix of the Tableau will not change. These are, But as Leslie mentioned, some boards, some software increases, which have very high margins for us. So yes, it should be accretive to gross margin. And if I could quote you again, Leslie, you described this on the call, the next generation tableau is, quote, a new foundation from which we intend to innovate further. You haven't even gotten this one going yet. But what's that mean? And what kind of enhancements should we be thinking about? and which customer needs are shaping those priorities? Well, I think about things like, well, so let me back up. Generally speaking, I see our innovation roadmap largely in the direction of software, data, and EMR more so than I do hardware. I think in a great way the physical form factor of Tableau continues to meet the need really well, and we're way far ahead on those dimensions. But off of this platform, we would have opportunities to add new features and functions to EMR. We have opportunities to connect the data. As a reminder, Tableau uploads about 3.5 million data points out of every treatment. There are some new, more modern ways that we can connect, kind of bolt in Tableau data directly into the customer's universe, be that Tableau, the other Tableau EAU, or Power BI or QuickSight, whatever they're using, to create kind of even more stickiness through the use of the data. And I think there is any number of things that we will be able to do with AI that we are kind of actively ideating around. When you have 10 trillion data points in your cloud, there's probably some value that we can drive for customers clinically through the Use of AI and also for Outset. And we have a couple of active programs that are AI-centric, aimed at driving service, continued service efficiency, which will be critical to our gross margin expansion as well. Right. And back to gross margin, the 50% goal, is it a three- to five-year target at this point? And how realistic is it to think it could be more in the two- or three-year kind of time frame? Or is that just too much to hope for? Yeah, that's a good question. And I would say certainly year three to five year, I would say that is my planning horizon. And it's certainly within that realm. What would happen, sort of what would potentially bring it closer or push it out is really going to be a function of these software revenues. Those are going to have a lot of value. Those are all going to need to be higher gross margin. Our console itself is one of our lowest gross margin products that we sell because we want to get it in the door because we know, ultimately, the treatments downstream and the service downstream and the software downstream is better for our organization long term, right? Those are repeatable every single year. And so, you know, higher console revenue in the near term pulls gross margin down for the short term. But we, of course, look out multiple years. And, you knows, 50% for us is a company-wide goal that we have. It's not the ceiling, though, as you think about gross margin for our total revenue service that we provide. I think that we certainly want to strive for higher than that. It's just the next goal that we have. We only have a minute and a half or so, Leslie. Just to bring us home, let's talk about home. And you highlighted a couple of things on a call about home growth. But is the driver of greater accelerated adoption for Tableau in the home? Is it the next gen system? Is the next next gen? Is there a key that's going to accelerate opening this door for you? A couple, maybe a couple of final thoughts on home being mindful of time. I think one, I would say roughly 85% of our revenue today is acute. In that sense, we are an acute care, critical care company. I would Say with a strong toehold in home and a marker for the future. And we see those two strategies actually in those two end markets actually is connected over time. But we don't probably have time to go into that. So as an acute care player, very focused on margin expansion and very focused on reaching profitability, we have been intentional about what our segment mix is. And I don't see that changing in the near term. Having said that, home remains, I mean, acute is a $2.2 billion TAM. It is very, very large, and home is even bigger. And so our interest, our opportunity, and our fortunes in home haven't changed. The key to growth, getting to your question, is something a little bit different in my view, and it starts with retention. Because it is very hard to grow if you have really high patient churn, because you're just kind of filling from the bottom. And that's been the challenge with some of the earlier home chemo devices that have been introduced in previous decades that has not been our challenge and and so our number one metric the really the only thing that we focus on and care about is our retention rate which remains way above the incumbents industry average at 90 days at six months and at one year and so if you can keep your foundation then you then you really are driving growth above it because every patient is incremental versus a replacement patient so that's part one and part two I would say in In terms of our partner set, we are continuing to see both growth horizontally and vertically, meaning the locations that are offering Tableau are continuing to grow their patient census. Why? Because Tableau is really easy for most patients to learn. Our average training times now match the PD training times, which has kind of been considered the gold standard. Roughly 10 days, two weeks, that is our average time to train the average patient to go home on Tableau. And then horizontal, we are seeing our providers start to offer Tableau, some of them preferentially and exclusively, to the next clinic and the next Clinic and the Next Clinic. And so we remain enthusiastic and bullish about home over the long term. Near term, there are very good reasons why we love the acute space and our growth there in terms of top line revenue margin expansion and getting the company to profitability. Sounds good to me. With that, Leslie, Renee, thank you both for being here. Appreciate it. Thank you. Thank you, Ellen. Appreciate it, thankyou.