Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Treatment sales grew 25% year-over-year.
- Console ASP increased more than 8% year-over-year.
- Console installed base grew 18% year-over-year.
- Number of acute facilities using Tablo grew 16% year-over-year.
- Non-GAAP gross margin came in substantially above expectations at 37.3% for the quarter.
Negative Points
- Second quarter revenue of $27.4 million was lighter than expected.
- Console sales were below forecast, driving the revenue shortfall.
- Sales cycle elongation observed, requiring changes in commercial execution.
- Expected revenue for the year reduced to approximately $110 million.
- Restructuring and optimization expected to take several quarters to fully implement.
Q & A Highlights
Q: I want to understand a little bit more of the challenges you're facing. Who are the enterprise customers, and how different are they from the MDOs you had been targeting? Are there structural challenges to the market? Is it competition? What else is making it hard for Tablo to compete for console sales here?
A: (Leslie Trigg, CEO) There are no structural changes or challenges. The changes we need to make are entirely in our control and require shifts in our sales team, sales processes, pipeline management, and deal control. The first phase of our growth was fueled by early adopters who move quickly with fewer steps. Now, we are moving into mainstream enterprise adopters who are more consensus-driven, involving more stakeholders and a longer sales cycle. We need to adjust our sales approach to better prosecute these larger deals.
Q: 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 resizing the team. Is it a smaller sales force that you're looking at? Is the hiring done, and are the right people in place?
A: (Leslie Trigg, CEO) The individuals with the right profile and track record are already inside our organization, both at the leadership level and within our capital sales team. The size of the team focused on selling capital is the same, but with a different talent background and skill set. Our field service and support team, which is vital to our growth, remains unchanged.
Q: Looking back at your comments last quarter, it felt like with TabloCart in hand, orders that had been delayed could now be sold. What didn't materialize that you thought was materializing?
A: (Leslie Trigg, CEO) TabloCart masked additional factors elongating our sales cycle. We were slow to recognize the shift in our pipeline composition towards larger enterprise agreements. These deals require a different sales process and team. While TabloCart did elongate some deals, it didn't alone elongate all of them. We need to adjust our commercial execution to capitalize on the larger deals in our pipeline.
Q: How does the lower-than-anticipated revenue impact cash flow breakeven timing and the 50% gross margins?
A: (Nabeel Ahmed, CFO) Our run rate OpEx for 2025 is about $100 million. At a 50% gross margin, we can break even at a revenue run rate of $200 million, which is lower than our previous guidance. The mix shift towards more recurring revenues, which come with higher gross margins, could accelerate our path to 50% gross margin.
Q: How do we think about 2025 and beyond? Do you hope that starting from the get-go in '25, we will see better execution and some of these $1 million contracts translate into better sales?
A: (Leslie Trigg, CEO) We expect the transformation to take several quarters to fully implement. Over the longer term, the fundamentals of the market and our business model remain intact. Our recurring revenue foundation is a powerful growth engine, and our pipeline indicates strong forward demand. We need to improve our sales execution to convert the pipeline more predictably.
Q: It seems like there's an execution issue at Outset on multiple fronts. Is it commercial, strategy, or something broader? How do you know this is a sales elongation issue?
A: (Leslie Trigg, CEO) We believe it is execution. We have the largest evidence base showing the benefits of in-sourcing with Tablo. Customer feedback indicates high interest in improving margins and reducing expenses with Tablo. Our strategy is on point, and our pipeline is strong. We need to evolve our sales process to reach mainstream enterprise adopters.
Q: Is it more of an issue of internal forecasting versus execution capabilities? Has price sensitivity increased? Are there geographic pockets of weakness? Are these large deals in the pipeline actually signed?
A: (Leslie Trigg, CEO) The magnitude of the impact is due to the disruption from sales force restructuring and the shift towards larger enterprise agreements. Price sensitivity has not been a factor. The pipeline consists of future opportunities at various stages. We need to improve our sales execution to better forecast and convert the pipeline.
Q: What gives you the confidence that you can make these cuts in operating expenses without disrupting the selling organization?
A: (Nabeel Ahmed, CFO) We are rightsizing our OpEx structure with our revenue levels and commitment to profitability. The cuts are focused on aligning our expenses with our expected revenue growth.
Q: Can you dive a little more into the underlying assumptions for the new guidance level?
A: (Nabeel Ahmed, CFO) We start with the recurring revenue base, which we expect to grow or stay stable in the second half. The implied total revenue for the second half is $55 million, with console revenue at about $50 million, similar to the first half.
Q: Are you seeing pipeline orders fall out when they don't convert, or are they just being pushed out?
A: (Leslie Trigg, CEO) We are not seeing deals fall out of the pipeline, but rather being pushed out to another quarter. We need to improve our sales execution to convert the pipeline on the expected timeline.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
