Outset Medical, Inc. (OM) is a medical technology company that has pioneered a first-of-its-kind technology to reduce the cost and complexity of dialysis. The company's flagship product, the Tablo Hemodialysis System, has gained significant traction in both the acute and home dialysis markets, positioning Outset for continued growth and profitability.

Business Overview

Outset's Tablo system represents a significant technological advancement in the dialysis industry. Tablo is a compact, all-in-one console that integrates water purification and on-demand dialysate production, enabling it to serve as a "dialysis clinic on wheels." With a simple touchscreen interface, two-way wireless data transmission, and a proprietary data analytics platform, Tablo provides a holistic approach to dialysis care.

Tablo's versatility allows it to be used seamlessly across multiple care settings, from the hospital to the home. This clinical flexibility, combined with Tablo's ability to deliver meaningful cost savings to providers, has driven strong adoption in the acute care market. Outset has also made significant progress in the home dialysis market, partnering with innovative dialysis providers to expand patient access to home-based therapy.

Financials

Outset reported annual revenue of $130.4 million in 2023, down from $172.8 million in the prior year. This decline was primarily driven by a 26% decrease in product revenue, which was partially offset by a 36% increase in service and other revenue. The company's net loss for the year was $172.8 million, while operating cash flow and free cash flow were -$131.4 million and -$134.8 million, respectively.

In the first quarter of 2024, Outset generated revenue of $28.2 million, a 16% decrease compared to the same period in the prior year. This decrease was largely attributable to a $7.4 million, or 26%, decline in product revenue, which was partially offset by a $2.1 million, or 36%, increase in service and other revenue. The company's net loss for the quarter was $39.9 million, with operating cash flow and free cash flow of -$45.9 million and -$59.0 million, respectively.

Margin Expansion and Path to Profitability

Despite the revenue decline, Outset has demonstrated impressive progress in expanding its gross margins. In the first quarter of 2024, the company reported a non-GAAP gross margin of 31.1%, a significant improvement from the 19.2% gross margin in the same period of the prior year. This 12-quarter streak of consecutive gross margin expansion has been driven by a mix shift towards higher-margin consumables and services, as well as ongoing cost reduction initiatives.

Looking ahead, Outset is confident in its ability to continue expanding gross margins, targeting a range of 30-35% for the full year 2024 and exiting the year in the mid-30% range. The company's focus on cost optimization, including a recent restructuring that is expected to reduce cash use by over $100 million through 2027, has put Outset on a path to reach cash flow breakeven several quarters earlier than previously anticipated, without the need for additional capital.

Operational Highlights

Outset has made significant strides in both the acute and home dialysis markets. In the acute setting, the company has continued to expand its installed base, with more than 60% of its acute pipeline consisting of deals greater than $1 million. The company has also seen strong adoption of its Tablo Pro Plus software, which enhances Tablo's capabilities for use in the intensive care unit.

In the home dialysis market, Outset has partnered with leading providers, such as U.S. Renal Care, to drive adoption of Tablo. These partnerships have been bolstered by Tablo's industry-leading patient retention rates, with over 90% of patients remaining on treatment at 90 days, a nearly 40% improvement over the legacy home hemodialysis system.

Outset has also made progress in expanding its channel access, adding new home-only providers and continuing to grow its presence with a large subacute provider, which now has over 200 Tablo consoles deployed across its network.

Risks and Challenges

While Outset has demonstrated impressive operational and financial progress, the company faces several risks, including ongoing macroeconomic headwinds, such as rising interest rates and staffing shortages, which have elongated the sales cycle and delayed installations. Additionally, the company's recent restructuring, while expected to drive cost savings, carries execution risk.

Outlook

Despite these challenges, Outset remains confident in its ability to deliver on its financial guidance for 2024. The company expects revenue to range between $145 million and $153 million, with non-GAAP gross margins in the low 30% range, exiting the year in the mid-30% range. Outset also anticipates reaching cash flow breakeven several quarters earlier than previously expected, without the need for additional capital.

Conclusion

Outset Medical's Tablo system has demonstrated its ability to drive significant cost savings and operational efficiencies for providers, while also delivering a superior experience for patients. The company's focus on margin expansion and cost optimization has put it on a path to profitability, positioning Outset for continued growth and success in the dialysis market.