Outset Medical, Inc. (OM)·Q3 2020 Earnings Summary

Executive Summary

• Strong first quarter as a public company: revenue $13.8M (+423% YoY) on accelerating acute adoption; non-GAAP gross margin improved to -36.3% (from -201% YoY) on cost downs and mix; GAAP gross margin -37.3% .
• Mix details: Product revenue $10.8M (consoles $9.0M; consumables $1.8M) and Service/Other $2.9M; utilization ~4.5 treatments per console per week; cash and investments $377.5M post-IPO .
• COVID tailwind largely embedded in base demand; of a previously disclosed ~$7M COVID-related Q2 order, ~$3M recognized in Q2 and the “vast majority” of the remainder in Q3; base business showed steady sequential growth independent of COVID .
• Q4 outlook: revenue expected to be “similar” to Q3; gross margin to improve sequentially; console placements total down QoQ due to lapping the large order, but ex-large order flat-to-slightly up; basic shares ~42M in Q4 .
• Catalysts: growing national IDN traction (now engaged with six of the largest systems), HHS/SNS contract (50 consoles; ~$16M over two years), initial home rollout, and new Tablo Hub remote monitoring and Tablo XT (up to 24-hour treatment) features .

What Went Well and What Went Wrong

• What Went Well
  • Acute momentum: contracts with three new national IDNs and three leading regional systems; now engaged with six of the largest national systems and >12 top regional systems .
  • Cost-down execution: substantial YoY gross margin expansion driven by lower console material costs, logistics savings, and improved service utilization; sequential GM improved ~4 pts QoQ on consumables/service mix despite manufacturing start-up costs .
  • HHS/SNS and home milestones: 50 Tablo consoles leased to HHS (~$16M over two years); first patients dialyzing at home post-FDA clearance; two-week home training vs four to six weeks on the incumbent HHD device .
• What Went Wrong
  • Margins still negative: GAAP gross margin -37.3% and non-GAAP -36.3%; console margins slightly lower sequentially due to start-up labor costs for in-sourcing .
  • COVID order creates tough sequential compare: Q4 console placements to be down QoQ in total due to lapping the large COVID-related order; ex-large order, flat to slightly up .
  • Operating expenses elevated: non-GAAP OpEx $21.8M (+$8.9M YoY) on commercial investments and public-company costs; GAAP net loss ($42.3M), ($3.44) per share .

Financial Results

Quarterly trend vs prior two quarters

YoY comparison (Q3 2020 vs Q3 2019)

Segment breakdown (Q3 2020)

KPIs

Notes: “—” indicates not disclosed in the cited sources.

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “We are pleased to report $13.8 million in total revenue for the third quarter… Tablo adoption continues to accelerate within the acute market.” — Leslie Trigg, CEO .
• “Our Q3 non-GAAP gross margin was minus 36.3%, an improvement of 165 percentage points versus the prior year… driven by significantly lower console material costs… and improved service utilization.” — Rebecca Chambers, CFO .
• “We signed agreements with 3 new national IDN customers… now engaged with 6 of the largest national health systems… and more than a dozen of the top regional health systems.” — Leslie Trigg .
• “We’re finding that it consistently takes about 2 weeks to effectively train a Tablo home patient… compared to the 4 to 6 weeks [on] the incumbent HHD technology.” — Leslie Trigg .
• “Dialysis is not an elective procedure… If COVID hotspots continue… that does not impact our confidence or our projections… COVID is really just embedded within all the reasons that customers are deciding to adopt Tablo.” — Leslie Trigg .

Q&A Highlights

• COVID order phasing: ~$7M Q2 order; ~$3M recognized in Q2; “vast majority” of the remainder in Q3; underlying base business grew steadily across Q3 and into Q4 .
• Utilization and consumables: Q3 consumables $1.8M (from ~$1.5M in Q2); utilization ~4.5 treatments per week; COVID-related consoles ramping to normalized trends by Q4 .
• Console placements: 2H > 1H; Q4 total placements down QoQ due to lapping the large order; ex-large order flat to slightly up; full-quarter benefit from HHS order in consoles and services .
• Reimbursement: CMS TPNIES final rule includes capital for new home dialysis machines cleared after Jan 2020; could be a tailwind if awarded, not assumed in outlook .
• Gross margin pathway: sequential improvement expected in Q4 as cost reductions fully flow through and Tablo XT revenue deferral partially releases; console start-up costs offset by cost downs .

Estimates Context

• The company did not provide Q4 formal guidance; qualitative Q4 revenue “similar to Q3” and sequential gross margin improvement suggest stable near-term trajectory .
• Consensus (S&P Global) for Q3 2020 EPS and revenue was not available for comparison within our tools around the IPO period; management stated results exceeded their initial expectations .

Key Takeaways for Investors

• Acute adoption is scaling across large IDNs; national agreements plus demonstrated cost savings are driving outsized growth and underpinning a robust backlog into Q4 .
• Margin trajectory is structurally improving via console cost downs, logistics savings, and manufacturing in-sourcing/nearshoring; sequential GM expansion expected in Q4 .
• COVID-related uplift is cycling out, but base demand remains strong; Q4 revenue set to be similar to Q3 with underlying placements stable ex-large order .
• Home opportunity is building methodically: early patients, shorter training vs incumbent, and policy tailwinds (TPNIES) provide medium-term optionality without dependence in the base case .
• Balance sheet strength ($377.5M in liquidity) supports scaling commercial, service, and manufacturing capabilities to capture both acute and home TAMs .
• Watch items: execution of in-sourcing ramp and cartridge transition, sustainability of service/consumables growth, and potential TPNIES designation timing for incremental reimbursement .

Supporting Press Releases (Q3 2020 context)

• Third Quarter 2020 press release (financials, highlights) .
• HHS deployment and SNS contract background (50 Tablo units) and contract value details (~$16.3M over 24 months) .
• Tablo home clearance (Apr 2, 2020) and first patient at home (Jul 13, 2020) .

Citations

• 8-K press release, financials, statements and exhibits: .
• Q3 2020 earnings call transcript (prepared remarks and Q&A): .
• Prior-quarter press releases with comparatives: Q1 2021 (contains Q1 2020 comps) ; Q2 2021 (contains Q2 2020 comps) .